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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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Commission File Number: 0-18267
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Noise Cancellation Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1025 West Nursery Road, Linthicum, MD. 21090
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(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: Common stock,
$.01 par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $78.6 million as of April 10, 1996.
The number of shares outstanding of the Registrant's common stock is
95,857,074 as of April 10, 1996.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's proxy statement for the 1996 Annual Meeting of
Shareholders are incorporated by reference in Part III.
Items 11 & 12 are to be filed by amendment.
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PART I
ITEM 1. BUSINESS
A. GENERAL DEVELOPMENT OF BUSINESS
Noise Cancellation Technologies, Inc. ("NCT" or the "Company")
believes it is the industry leader in the design, development, licensing,
production and distribution of electronic systems for Active Wave
Management(TM) including systems that electronically reduce noise and
vibration. The Company's systems are designed for integration into a wide
range of products serving multi-billion dollar markets in the transportation,
manufacturing, commercial, consumer products and communications industries.
The Company began commercial application of its technology, with ten products
sold or currently being sold, including the NoiseBuster(TM) consumer headset,
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, an aircraft cabin quieting system
and quieting systems for heating, ventilation and air conditioning ("HVAC")
ducts (NoiseEater(TM)).
In 1995, the Company introduced industrial headsets and its Adaptive
Speech Filter(TM) ("ASF(TM)"), which the Company believes will have wide
application in the communications and automotive industries.
In keeping with the direction established in late 1994, during 1995
the Company began the active practice of marketing its technology through
licensing to third parties for fees and subsequent royalties. In April 1995,
as previously disclosed, the Company licensed its aircraft cabin quieting
technology exclusively to Ultra Electronics, Ltd. ("Ultra") for a license fee
and future royalties. In November 1995, the Company concluded its previously
disclosed negotiations with Walker Manufacturing Company ("Walker"), a division
of Tenneco Automotive, which resulted in the restructuring of the Walker/NCT
joint venture ("WNCT") and the licensing of certain additional automotive
related technology to Walker for a fee and future royalties. See G. "Strategic
Alliances" and Note 3. - "Notes to Consolidated Financial Statements.".
In 1996, the Company plans to introduce additional products for the
communications marketplace, a silicon micro-machined microphone ("SMM"), which
may be used independently or in conjunction with noise reduction, and
additional industrial headset products. The Company is also refining its
NoiseEater(TM) product for introduction into international markets. The
Company has entered into a joint venture with Applied Acoustic Research, L.L.C.
("AAR") called OnActive Technologies, L.L.C. ("OAT") which is developing Flat
Panel Transducers(TM) ("FPT(TM)") systems utilizing TopDown Surround
Sound(TM)(TDSS(TM)) for automotive applications. See C. "Technology."
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In late 1995 the Company redefined its corporate mission to be the
worldwide leader in the advancement and commercialization of Active Wave
Management(TM) technology. Active Wave Management(TM) 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. This redefinition is the
result of the development of new technologies, as previously noted, such as
ASF(TM), TDSS(TM), FPT(TM), and the SMM, which creates products that the
Company believes will be utilized in areas beyond noise attenuation and
control. These technologies and products are consistent with the shift of the
Company's focus to technology licensing fees, royalties and products that
represent near term revenue generation. The redefinition of corporate mission
is reflected in the revised business plan which the Company began to implement
during the first quarter of 1996.
As distribution channels are established and as product sales and
market acceptance and awareness of the commercial applications of Active Wave
Management(TM) build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. The beginning of
this process is reflected in the changed revenue percentages discussed briefly
below and more fully in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Active Wave Management(TM) is an evolving industry. The proportion of
the Company's operating revenues, including technology licensing fees, derived
from engineering and development services, is reflective of this fact. From the
Company's inception through December 31, 1995, approximately 21% of its
operating revenues have come from the sale of products and 27% of its
operating revenues have come from licensing of the Company's technology, while
approximately 52% 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(TM) is the utilization of active noise
attenuation 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.
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NCT believes that it has the leading position in Active Wave
Management(TM) technology, holding more patents and intellectual
property than any other firm in the field. The Company also has an exclusive
license to advanced technology for attenuating noise in a large space, such as
the interior of an aircraft or the passenger compartment of an automobile,
using multiple interactive sensors, such as microphones, and actuators, such as
speakers. Additionally the Company has expanded its portfolio by the
acquisition of various patents, including, in particular the purchase in 1994
of the intellectual property of Active Noise Vibration Technologies, Inc.
("ANVT").
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 majority 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. In
exchange for this funding, the other party generally received 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. Due to the restructuring of various alliances, as described in
G. "Strategic Alliances," there were no preferred distributions due to
strategic allies from future profits of the alliances at December 31, 1995. NCT
has established continuing relationships with Walker Manufacturing Company
("Walker") (a division of Tennessee Gas Pipeline Company, a wholly owned
subsidiary of Tenneco, Inc.), AB Electrolux ("Electrolux"), Foster Electric
Company, Ltd. ("Foster"), Analog Devices, Inc. ("ADI"), Ultra Electronics Ltd.
("Ultra"),Harris Corporation ("Harris"), The Charles Stark Draper Laboratory,
Inc. ("Draper"), Coherent Technologies, Inc. ("Coherent") and
Applied Acoustic Research, L.L.C. ("AAR"), among others, in order to
penetrate major markets more rapidly and efficiently, while minimizing the
Company's own capital expenditures. There have been substantial changes to the
terms governing certain of the foregoing relationships as described below and
in Note 3. - "Notes to the Consolidated Financial Statements".
In February 1995 the Company purchased from Foster Electric, Inc.
("Foster") the exclusive right to manufacture headsets in the Far East. Due to
the acquisition by the Company in 1994 of the sole ownership of Chaplin Patents
Holding Co., Inc. ("CPH"), neither the Company nor Foster believed there was
any necessity to continue their supply joint venture, Foster/NCT Supply Ltd.
("FNS"). The Company and Foster dissolved FNS. The Company and Foster remain
active in the Far East through the Foster/NCT Headsets International ("FNH")
and NCT Far East, Inc. ("NCTFE"), marketing and distribution alliances between
the Company and Foster. Foster produced six products for NCT in 1995.
In March 1995, the Company and Ultra amended their teaming agreement
and concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1 1/2% of sales commencing in 1998. Under the agreement, Ultra
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Company's Cambridge facility and employed
certain of the Company's employees.
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On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker 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 WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT 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 as to future activities.
An important factor for the Company's continuing development is its
ability to recruit and retain key personnel. As of March 18, 1996, the Company
had 73 employees, including 39 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. Consistent with the Company's revised
strategy to focus on near term product commercialization, technology licensing
fees and royalties during 1995, the Company significantly reduced its work
force and consolidated substantially all of its corporate function in Maryland.
The Company was incorporated in Nevada on May 24, 1983. In April
1985, the Company moved its corporate domicile to Florida and assumed its
present name, and in January 1987, following the assumption of control of the
Company by the present management, it changed its state of incorporation to
Delaware. NCT's executive offices, research and product development facility
are located at 1025 West Nursery Road, Linthicum, Maryland 21090; telephone
number (410) 636-8700. NCT maintains sales and marketing offices at 1 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. NCT also maintains a
marketing facility in Tokyo, Japan.
B. BUSINESS STRATEGY
NCT's goal is to reinforce its position as the world's leader in the
design, development and sale of Active Wave Management(TM) technology and
products.
The Company revised its strategy and redefined its mission during 1994
and 1995. The acquisition of certain assets and all of the intellectual
property of ANVT broadened the Company's portfolio of intellectual property and
removed restrictions on the Company regarding licensing of 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 licensing fees and royalties. Further, the Company is working
continuously to lower the cost of its products and improve their technological
performance.
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In late 1995, as previously noted, the Company redefined its corporate
mission to be the worldwide leader in the advancement and commercialization of
Active Wave Management(TM) technology. Active Wave Management(TM) 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
redefinition of corporate mission is reflected in the revised business plan
which the Company began to implement during the first quarter of 1996.
In the area of technology licensing fees and royalties, the Company
successfully concluded negotiations with Ultra in the first quarter of 1995,
which amended the teaming agreement and instituted a licensing and royalty
agreement. In November of 1995, the Company concluded similar negotiations
with Walker. During the course of 1995, the Company successfully concluded
certain other licensing agreements. The Company is pursuing other negotiations
and plans to expand this sector of the business during 1996.
NCT produces and sells MRI headsets and industrial headsets through
various distributors, and also licenses, produces and sells ASF(TM). The
Company is offering its NoiseBuster(TM) headset to consumer markets at a
suggested retail price of $79, and is selling the NoiseBuster(TM) through
various distribution channels, including specialty electronics retail stores,
specialty catalogs and direct sales by advertising a dedicated "800" telephone
number.
In 1996, the Company plans to introduce additional headset products,
the silicon micro-machined microphone, and additional communications systems
products that improve the intelligibility and quality of voice and data
transmission and recognition.
At the core of the Company's strategy is its leadership in Active Wave
Management(TM) technology. NCT secured its basic technology by acquiring its
interest in the Chaplin Patents and the exclusive ownership of 10 patents known
as the "NRDC Patents" described below under Item D. "NCT Proprietary Rights and
Protection". The Company further solidified its position regarding the
Chaplin Patents through the 1994 acquisition of the intellectual property of
ANVT, which also brought a number of other patents to NCT. In addition, the
Company has developed or acquired a number of patents, licenses and proprietary
inventions that improve and enhance the features and capabilities of its basic
technology. NCT's basic and enhanced technologies have enabled the Company to
develop and patent specific product applications in Active Wave Management(TM),
as well as enter new markets such as telecommunications and audio.
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The Company has implemented its business strategy in the past by
forming strategic supply, manufacturing and marketing alliances with leading
global companies in an effort to commercialize its technology. The strategic
alliances established by NCT have historically funded a majority of the
Company's research and development and currently provide reliable sources of
components, manufacturing expertise and capacity, as well as extensive
marketing and distribution capabilities. The Company continues this practice.
However, the acquisition of the intellectual property of ANVT, as previously
noted, allows the Company more flexibility in the type of alliances and license
agreements it concludes.
C. TECHNOLOGY
Active noise attenuation is not a new idea. Creating a mirror image
of an unwanted noise or sound wave and using it to cancel or reduce the
original sound wave dates back to the early part of this century. The first
systems used a simple "delay and invert" approach and showed some promise, but
the prohibitive cost of computing power and the inadequacy of acoustics and
related technologies limited their effectiveness.
In the mid-1970's, a major breakthrough took place with the
application of adaptive filters to generate anti-noise. These filters allowed
for the development of active control systems that could continuously adapt to
changes in noise output both in the external world and from control components.
A second breakthrough in the mid-1970's was made by Professor G.B.B. Chaplin.
He recognized that many noise sources, particularly machines, exhibit 'tonal'
or repetitive noise. Chaplin further recognized that the predictability of
repetitive noise allows for creation of an accurate anti-noise signal and,
therefore, more effective cancellation or attenuation.
Practical application of this technology was still not possible as the
electronic technology available at the time was insufficient for implementation
of active noise reduction systems. Since that time, digital computer
technology has evolved to the point where cost-effective microprocessors, known
as digital signal processors ("DSP") can perform the complex calculations
involved in noise cancellation and reduction. This advance has made it
feasible to apply active noise reduction to previously unsolveable problems
in low frequency noise at a reasonable cost.
ACTIVE NOISE REDUCTION . Active noise reduction systems are
particularly effective at reducing low frequency noise. As opposed to
a passive noise control system that is designed to mask a noise, active noise
removes a significant portion of the noise energy from the environment by
creating sound waves that are equal in frequency but opposite in phase. The
illustration below shows the relationship, in time, of a noise signal, an
anti-noise signal and the residual noise that results when they meet.
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ACTIVE NOISE REDUCTION
[CHART]
Active Wave Management(TM). Active Wave Management(TM) is the
combination of active noise reduction technology and certain other
technologies which results in the electronic and/or mechanical manipulation of
sound or signal waves to reduce noise, improve signal-to-noise ratio and/or
enhance sound quality.
Signal Enhancement. Active Wave Management(TM) technology also can be
used to attenuate unwanted signals that enter into a communications network, as
when background noise enters telecommunications or radio systems from a
telephone receiver, or microphone. The Company has developed patented
technology that will attenuate the background noise "in-wire", so that the
signals carried by the communications network include less of the unwanted
noise, allowing the speaker to be heard more clearly over the network or for
data transmissions to be communicated with fewer errors. An application of
this technology is in-wire attenuation of siren noise over two-way radio
communications between emergency vehicles and dispatchers at hospitals and
police or fire stations.
EarPeace(TM). NCT has been working to integrate its proprietary
active noise control technology into in-flight entertainment systems and
telephone handsets in particularly loud environments. To facilitate the
penetration of this cost-sensitive marketplace, NCT has developed a proprietary
acoustical design approach that minimizes the electronics costs needed to
effectively cancel noise. EarPeace(TM) technology is available today to meet
the low cost and small size requirements of previously inaccessible markets.
NCT is currently working with manufacturers of passenger control units (PCU),
airphones, pay telephones and industrial handsets to reduce the ambient
background noise and improve audio or communications intelligibility.
Silicon Micromachined Microphone (SMM). In 1994, NCT purchased the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone. A small, compact, surface-mountable silicon actuator, the SMM
provides customers
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improved and adjustable sensitivity, a low noise floor and resistance
to environmental extremes. The ability to integrate additional circuitry onto
the SMM chip has also proven attractive to potential users. The SMM's low noise
floor and adjustable sensitivity improves voice recognition in high ambient
noise environments. NCT is working with voice processing computer hardware
companies to utilize the SMM to enhance the performance of their systems. In
addition, NCT is currently in negotiation with hearing aid manufacturers to
provide the SMM as a replacement for the more expensive electret microphones
currently employed in hearing aids.
Adaptive Speech Filter(TM) ("ASF(TM)"). The Adaptive Speech
Filter(TM) algorithm (ASF(TM)) removes background noise from voice and data
transmission and recognition. Available in real-time single and double
precision fixed-point digital signal processing ("DSP"), floating-point DSP,
and Windows 95/Windows NT ACM driver versions, ASF(TM) can be used as a
pre-processor for voice and data compression algorithms, and also contributes
to improved voice and data recognition. ASF(TM) parameters can be adjusted to
optimize performance for a particular noise, or can be set to provide noise
reduction across a wide range of noises. Additional uses include
teleconferencing systems, cellular and airphones, telephone switches, echo
cancellers, and communications systems in which background noise is
predominant. ASF(TM) is currently available for use on three hardware
platforms. The Company is in the process of adding an echo cancellation
algorithm to ASF(TM). This addition should be completed in 1996.
NCT Audio. Consistent with its expertise in Active Wave Management(TM)
and its experience in accurately reproducing acoustical patterns for the
purpose of noise attenuation, the Company has expanded its audio transducer
work to include audio systems for the reproduction of speech and music. The
Company is developing Top Down Surround Sound(TM) ("TDSS(TM)") for the
automobile audio market, in both original equipment manufacturer ("OEM") and
after-market versions. TDSS(TM) employs Flat Panel Transducers(TM) ("FPT(TM)")
to produce sound much closer to the listener's ear than conventional speakers.
This placement allows for a High Impact Sound(TM) listening experience. The
Company is also developing FPT(TM) for personal computers and
telecommunications. In these applications, the slim profile of the FPT(TM)
allows for placement where conventional speakers cannot be accommodated.
D. NCT PROPRIETARY RIGHTS AND PROTECTION
NCT believes it has the leading position in Active Wave
Management(TM), holding a large number of patents and patent applications.
The Company's strategy has been to build upon its base of core technology
patents with newer advanced technology patents developed by or exclusively
licensed to the Company. In many instances, the Company has incorporated the
technology embodied in its core patents into patents covering specific product
applications, including the products' design and packaging. The Company
believes this building-block approach provides greater protection to the
Company than relying solely on the original core patents. As its patent
holdings increase, the Company believes the importance of its core patents will
diminish from a competitive viewpoint.
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During 1994 the Company purchased certain assets of ANVT, which
included all of ANVT's intellectual property rights. See Note 14. - "Notes to
the Consolidated Financial Statements". Among the ANVT intellectual property
rights were ANVT's interest in the 10 basic Chaplin Patents which are now solely
owned by NCT as the sole shareholder of CPH. These patents cover inventions
made by Professor G.B.B. Chaplin in the late 1970s and early 1980s.
The Chaplin Patents form only one group of core patents upon which
NCT's technology is based. In March 1990, the Company acquired exclusive
ownership of 10 patents developed under the auspices of the National Research
Development Corporation ("NRDC"), an organization sponsored by the British
Government. Among other things, the NRDC Patents, of which the Swinbanks and
Ross patents are the most important, utilize the adaptive feed forward approach
to active noise control. The Swinbanks patent covers an improved method of
analyzing the incoming noise or vibration through the use of a "frequency
domain" adaptive filter which splits the incoming noise into different
frequency bands for analysis and recombines the data to generate the anti-noise
signal. The Ross patent covers the use of a "time domain" filter which uses
input and error signals to enhance a system's ability to compensate for
feedback from actuators to sensors. Without this filter, the system will
detect and begin canceling its own self-generated anti-noise.
The Company has built upon these core patents with a number of
advanced patents and patent applications. These include the Digital Virtual
Earth(TM) patent, which covers digital feedback control, and patents on
multi-channel noise control. The Company has also applied for patents on
combined feedforward and feedback control, control using harmonic filters,
filters for signal enhancement and speech filtering, control systems for noise
shaping and others.
As part of the purchase of certain ANVT assets, the Company acquired
all the rights to nine inventions previously belonging to the Topexpress Group
in the United Kingdom. The international patent coverage of these inventions
varies but eight have been granted patent protection with numerous counterpart
foreign applications still pending. Among the other intellectual property
acquired from ANVT are patents relating to active auto mufflers and noise
suppression headrests, several patent applications on advanced algorithms,
and active noise headsets, many related disclosures and various
disclosures in other areas of active attenuation of noise and vibration.
Additionally, the Company acquired the rights to three basic inventions known
as the Warnaka Patents.
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In 1994, the Company purchased the exclusive rights to the silicon
micromachined microphone technology developed by Draper in
Cambridge, Massachusetts. At that time, two patents describing the basic
technology had already been issued and two were pending. On September 19,
1995, one of the patents pending was issued.
In 1995 the Company also acquired several U.S. patents dealing with
adaptive speech filtering which it hopes to license to third parties.
The Company holds or has rights to 202 inventions as of December 31,
1995, including 69 United States patents and over 177 corresponding foreign
patents. The Company has pending over 190 US and foreign patent applications..
NCT's engineers have made 60 invention disclosures for which the Company is in
the process of preparing patent applications.
No assurance can be given as to the range or degree of protection any
patent issued to, or licensed by, the Company will afford or that such patents
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 will afford protection
against competitors with similar technology, 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 will not be challenged by third parties,
invalidated, rendered unenforceable or designed around. Furthermore, there can
be no assurance that any pending patent applications or applications filed in
the future will result in the issuance of a patent. The invalidation,
abandonment or expiration of patents 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.
Annuities and maintenance fees for the Company's extensive patent
portfolio are a significant portion of the Company's annual expenses. If, for
the reasons described in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- "Liquidity and Capital
Resources" below, it becomes necessary for the Company to reduce its level of
operations, the Company will not be able to continue to meet the extensive
monetary outlay for annuities and maintenance fees to keep all the patents and
applications from becoming abandoned and will have to prioritize its portfolio
accordingly.
The Company has conducted only limited patent searches and no
assurances can be given that patents 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 other
rights to protect present and future technology and other property of the
Company.
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.
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E. EXISTING PRODUCTS
HEADSETS
MRI Headphones. Since 1991, the Company has been producing active
noise reduction headsets for use by patients undergoing MRI procedures. NCT's
MRI headphone reduces the noise generated by the gradient coils of the
superconducting MRI magnet. This noise is known to be disturbing to patients
and is a factor in a patient's ability to tolerate the scanning procedure. The
Company's product is an implementation of a patented technology owned by NCT
which permits the delivery of anti-noise signals and music directly to the
patient while the patient is in the bore of the MRI scanner. While undergoing
the MRI examination, a patient can be communicated with by the doctor or scan
operator through NCT's system. The Company is a supplier to Siemens, a leading
manufacturer of MRI machines in the U.S.
NoiseBuster(TM). NCT is currently marketing its NoiseBuster(TM)
personal active noise reduction headphone for consumers at a suggested retail
price of $79. This active headphone selectively reduces unwanted noise
generated by aircraft engines, lawnmowers, street traffic, household appliances
and other annoying noise sources, permitting the user to hear desired sounds,
such as human conversation, warning signals or music. The NoiseBuster(TM) is a
lightweight, portable headphone wired to a small controller that can be clipped
to the user's clothing or belt. The NoiseBuster(TM) contains a port where the
consumer can plug in personal audio devices such as a radio, tape player or
compact disc player so the user can enjoy music while in a noisy setting. The
product can also be used with an aircraft's in-flight entertainment system.
NoiseBuster(TM) is the largest selling consumer product of its kind.
NoiseBuster(TM) was awarded the 1994 Discover Magazine Technological Innovation
Award and the Electronics Industry Association's Innovation 95 Award.
The Company is marketing the NoiseBuster(TM) through distribution
channels, including electronics retail stores, specialty catalogues and
directly through a toll-free "800" number. Initial product shipments
were made in September 1993.
NB-AVC. In August 1994, the Company began shipping an active noise
reduction communications headset specifically designed for use by commercial
aviation pilots. The product is FAA-TSO certified and sold by Telex as the
Airman ANR(TM). At 6.9 oz, one-third the weight of other active noise
reduction headsets, the Airman ANR(TM) is the first ultra-lightweight,
open-back headset of its kind developed for the general aviation market. A
high-performance noise canceling electret microphone is connected to a flexible
boom. The controller pack accepts four AA batteries for a minimum of 40 hours
continuous operations and includes a belt clip.
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ProActive(TM) 1000/1500. In March 1995, the Company began shipping
its ProActive(TM) 1000 headphones and ProActive(TM) 1500 communications
headsets. These products are lightweight, openback in style and can provide up
to 20dB of active noise reduction between 30-1200Hz. When used in work settings
dominated by low-frequency noise, these products improve comfort, reduce
fatigue and improve concentration and productivity for the user. In the case
of the ProActive(TM) 1500 two-way and mobile communications version, the
clarity and intelligibility of communications is improved when the masking
effect of background noise is reduced. These products are powered by a
rechargeable NICAD battery designed for use during a 12-hour work day. The
battery fits into a small, lightweight belt-pack that can be clipped onto the
belt. The battery can be recharged overnight using NCT's personal charger
which is included with the product.
ProActive(TM) 3000/3500. In August 1995, the Company expanded its
industrial headset product line to include the ProActive(TM) 3000 series.
These products combine active noise reduction of low-frequency noise with a
closed-back passive ear muff, appropriate for general industrial use. This is
the first product of its kind in which the active electronics as well as the
power source have been totally integrated into the earmuff, providing the user
with mobility and safety. The electronics are powered by a NICAD rechargeable
battery specifically designed for use during a 12-hour work day. The battery
can be recharged overnight using NCT's personal charger. The ProActive(TM)
3000 active earmuff and ProActive(TM) 3500 active communications earmuff
address the hearing protection requirements of a variety of industries.
ProActive(TM) 3100/3600. In December 1995, the Company shipped a hard
hat version of its ProActive(TM) 3000 line. This will be the first
implementation of active noise reduction earmuffs in a hard hat style and will
address the needs of industries such as construction, utilities and others
requiring both hearing protection and hard hats for workers. Product shipment
is scheduled for mid 1996.
COMMUNICATIONS
Adaptive Speech Filter ("ASF(TM)"). ASF(TM) removes background noise
from voice and data transmission and recognition. Available in real-time
single and double precision fixed-point DSP, floating-point DSP, and Windows
95/Windows NT ACM driver versions, ASF(TM) can be used as a pre-processor for
voice and data compression algorithms, and also contributes to improved voice
and data recognition. Additional uses include teleconferencing systems,
cellular and airphones, telephone switches, echo cancellers and communications
systems in which background noise is predominant.
DUCT QUIETING SYSTEM-NOISEEATER(TM)
The Company has developed low-cost quieting systems for installation
into existing HVAC ducts. The Company is selling kits of its duct quieting
systems for integration into the most common duct sizes and the Company
believes these systems will be easy to install by HVAC workers in office
buildings and factories. The Company began offering this product line
commercially as the NoiseEater(TM) in January 1994 selling through
distributors, and is currently offering these systems for sale in the United
States. In 1995, the Company successfully concluded license and royalty
agreements with distributors in Europe and Japan.
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<PAGE> 14
PRODUCT REVENUES
The following table sets forth the percentage contribution of the
separate classes of the Company's products to the Company's product revenues
for the year ended December 31, 1995.
<TABLE>
<CAPTION>
As a %
Product Amount of Total
-------- ---------- --------
<S> <C> <C>
Headsets $1,561,000 98.2%
Mufflers 17,000 1.1
Other 11,000 .7
---------- ------
Total $1,589,000 100.0%
========== ======
</TABLE>
F. PRODUCTS UNDER DEVELOPMENT
HEADSETS
NB-PCU. The Company is working with a leading manufacturer and
supplier of aircraft cabin products on the integration of NCT's Ear Peace (TM)
active noise control technology into in-flight passenger entertainment systems.
As a component of the system, NCT is also developing a low-cost headset
specifically for in-flight use to be used in conjunction with the integrated
electronics. NCT's technology electronically reduces aircraft engine noise
while enhancing the audibility of desired sounds like speech, music and warning
signals. Lowering the engine drone can help alleviate the anxiety and fatigue
often associated with flying. While the system is in use, passengers inside an
aircraft cabin can carry on conversations at a comfortable level or hear
in-flight movies and music without over amplification and distortion.
Production systems should be available in the latter part of 1996.
Advanced Digital Electronic Headsets. NCT is working to develop
advanced headset models using its proprietary digital technology. Management
believes that there is a broad market for specialty industrial headsets that
will permit factory and assembly workers to operate close to loud machinery in
the marine, steel, textile, paper, construction, road building and metalworking
industries, among others. Conventional ear muffs and protectors are not as
effective as the Company's active headsets, which can selectively block
machinery noise while allowing the worker to listen to ordinary human
communications and, where appropriate, to hear warning signals, tones or bells.
The Company is working to develop headset models that will operate on a
lightweight, rechargeable battery pack, thus allowing the worker to move freely
about the factory.
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<PAGE> 15
COMMUNICATIONS
Active Noise Reduction for Telephone Handsets. NCT is currently
working to integrate its proprietary active noise control technology,
EarPeace(TM), into telephone handsets. The EarPeace(TM) is scheduled for
production in 1996. The most appropriate application for handsets
incorporating this technology is in environments where the loud ambient
background noise impedes communications intelligibility and interferes with the
comfort of the user. Examples of such environments include aircraft cabins,
noisy factory floors, large telemarketing environments and phones located on
street corners and highways.
Silicon Micromachined Microphone ("SMM"). In 1994, NCT purchased the
exclusive rights to manufacture and commercialize a silicon micromachined
microphone. A small, compact, surface-mountable silicon actuator, the SMM
provides customers with improved and adjustable sensitivity, a low noise floor
and resistance to environmental extremes. The ability to integrate additional
circuitry on the SMM chip has also proven attractive to potential users. The
SMM's low noise floor and adjustable sensitivity improve voice recognition in
high ambient noise environments. NCT is working with voice processing and
computer hardware companies to utilize the SMM to enhance the performance of
their systems. In 1995, the Company signed a memorandum of understanding with
a major semiconductor manufacturer to build the SMM. In the first quarter of
1996, the manufacturer released initial prototypes of the devices. This
manufacturer is currently refining the manufacturing process and identifying a
facility for production. Production of two general purpose SMMs is expected to
commence in the first quarter of 1997.
NCT AUDIO
Top Down Surround Sound(TM), TDSS(TM) is a novel automobile audio
speaker system developed by the Company. Initial demonstrations and listener
tests have indicated a high degree of enthusiasm for the High Impact Sound(TM)
which TDSS(TM) generates. The Company is in the process of developing teaming
agreements with major participants in the automobile audio speaker market and
is also exploring applications for High Impact Sound(TM) technology in the home
audio and home theater environments.
Flat Panel Transducers(TM), Using a similar FPT(TM) technology to that
employed in TDSS(TM), multi-media FPT(TM) targets such applications as notebook
computers and video telephones. In these applications the slim profile of the
FPT(TM) offers an audio transducer solution where room may be lacking to
implement a conventional speaker.
SMALL FANS
Household Appliances. NCT has developed fan quieting systems for
multiple applications, including a quiet kitchen hood fan and a quiet vacuum
cleaner. NCT's active fan systems are designed with higher efficiency than
conventional fans and have
15
<PAGE> 16
demonstrated up to a 30% reduction in energy usage. The cost sensitivity of the
consumer appliance marketplace has been a barrier to prior introduction of this
technology. As a result of relationships NCT enjoys with its component supply
joint venture partners, the Company believes that the price sensitivity issues
of consumer product markets can be addressed in the near-term as
miniaturization of the technology continues and the unit cost of NCT's
electronic components continues to decline. Management believes that NCT's
proprietary technology will be incorporated in a wide range of other products,
including air conditioners, dishwashers, clothes washers and dryers, hair
dryers and other types of fans. The Company expects to begin shipping kitchen
hood systems in the last half of 1996.
PANELS AND ENCLOSURES
Electric Utility Transformers. Electric power distribution by
utilities requires the use of large transformers, often placed in residential
and commercial neighborhoods, which emit a low frequency "hum" that irritates
people living and working nearby. Utilities try to mask this noise by passive
means, although usually not very successfully. The Company has developed
active enclosure and active panel systems which reduce the "hum" of transformer
noise by use of flat actuators that cause the enclosure or panels to vibrate in
a manner to reduce the noise. The Company can install its active panel system
directly to the metal sides or "skin" of an installed transformer, thus making
its systems available to retrofit markets as well as to OEMs. As an
alternative, an active enclosure can be built to house the transformer.
In March 1995, the Company entered into an agreement with QuietPower
Systems, Inc., ("QSI") (see Item 13. "Certain Relationships and Related
Transactions" and Note 8. - "Notes to the Consolidated Financial Statements") by
which QSI received the exclusive rights to market, sell and distribute
transformer quieting products and gas turbine quieting products in the utility
industry. Under the agreement QSI funds development of the systems. The
agreement generally provides that the Company manufactures the products and
receives a royalty of 6% from QSI on the sales of the products.
G. STRATEGIC ALLIANCES
The Company's strategy is to obtain technology licensing fees and
royalties, and, in certain areas, to produce, market and sell Active Wave
Management(TM) products.
The Company's transition from a concern primarily engaged in research
and development to one engaged in the licensing production, marketing and sale
of Active Wave Management(TM) systems is predicated upon the establishment of
strategic alliances with major domestic and international business concerns.
In exchange for the benefits to such concerns' own products offered by the
Company's technology, these alliances provide marketing, distribution and
manufacturing capabilities for the Company's products and enable the Company to
limit the expense of its own research and
16
<PAGE> 17
development activities. In order to ensure dependable sources of supply and to
maintain quality control and cost effectiveness for components and integrated
circuits incorporated in the Company's systems, an important element of the
Company's strategy has been to identify and enter into alliances with
integrated circuit manufacturers that will develop and produce custom-made
chips for NCT product applications, and with manufacturers of components that
will supply and integrate components for NCT systems. The following is a
summary of the Company's key alliances:
<TABLE>
<CAPTION>
DATE INITIAL
RELATIONSHIP
KEY STRATEGIC ALLIANCES ESTABLISHED APPLICATIONS
----------------------- ----------- ------------
<S> <C> <C>
Walker Manufacturing Company (a division of Tennessee Nov. 1989 Mufflers, Industrial
Gas Pipeline Company).............................. Silencers and Other
Vehicular Applications
AB Electrolux...................................... Oct. 1990 Consumer Appliances
Foster Electric Company, Ltd....................... Mar. 1991 Headsets and
Electronics
Ultra Electronics, Ltd............................. Jun. 1991 Aircraft Cabin
Quieting Systems
Analog Devices, Inc................................ Jun. 1992 Integrated Circuits
and Related Products
Harris Corporation................................. Sept. 1993 Integrated Circuits
and Electronic
Components
The Charles Stark Draper Laboratory, Inc. ......... July 1994 Microphones
Coherent Communications System Corporation......... June 1995 Telecommunications
Applied Acoustic Research, L.L.C. ................. August 1995 TDSS(TM)
</TABLE>
WALKER MANUFACTURING COMPANY (A DIVISION OF TENNESSEE GAS PIPELINE
COMPANY) (U.S.) WALKER ELECTRONIC MUFFLERS, INC. (A WHOLLY OWNED
SUBSIDIARY OF TENNESSEE GAS PIPELINE COMPANY) (U.S.)
In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture WNCT shared equally between NCT Muffler, Inc. and
Walker Electronic Mufflers, Inc. ("WEM"), a wholly owned subsidiary of
Tennessee Gas Pipeline Company). WNCT conducts research and develops,
manufactures, markets, sells and distributes electronic mufflers principally
for use on non-military, land-based vehicles on an exclusive basis, and for the
industrial (e.g., compressors, diesel generators and gas turbines), marine,
consumer and aerospace sectors on a non-exclusive basis. The agreement between
NCT and Walker was expanded and extended in 1991. WNCT is currently producing
and selling industrial silencers.
17
<PAGE> 18
In December 1993, Tenneco Automotive, another division of Tennessee
Gas Pipeline Company, and the Company entered into an agreement pursuant to
which Tenneco Automotive purchased 1,110,083 shares of the Company's common
stock for $3.0 million in cash. Pursuant to the agreement, the Company
contributed $1.0 million to the capital of the WNCT following which WNCT repaid
$1.0 million of the capital advances previously made to WNCT by WEM and
representatives of WEM and the Company agreed to restructure WNCT. Such
restructuring included giving WNCT worldwide rights for the manufacture and
sale of all muffler products except those manufactured and sold in the consumer
and defense markets. WNCT also was expanded to have, in addition to rights it
has with respect to vehicular mufflers, worldwide non exclusive rights to all
silencing and vibration applications (e.g., mufflers, cabin quieting, engine
mounts, fan quieting and engine block quieting) for all vehicles except trains,
aircraft and watercraft. The Company committed to help fund $4.0 million of
product and technology development work of the Company attributable to WNCT.
Also pursuant to the agreement with Tenneco Automotive, Walker's right to
acquire the Company's interest in WNCT upon the occurrence of certain events
was eliminated and Tenneco Automotive had the right to have a representative
serve on the Company's Board of Directors.
On November 15, 1995, the Company and Walker executed a series of
related agreements (the "Restructuring Agreements") and concluded previously
noted negotiations with Tenneco Automotive and Walker 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 WNCT to Walker. The
Restructuring Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's previously expensed obligation
to fund the remaining $2.4 million of product and technology development work
noted above, 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 as to future activities (see
Note 3. - Notes to the Consolidated Financial Statements).
AB ELECTROLUX (SWEDEN)
The Company's relationship with Electrolux, one of the world's leading
producers of white goods, was initiated in October 1990. The Company signed
its current agreement with Electrolux, a Joint Development and Supply
Agreement, in June 1991. This agreement provides for NCT to design, develop
and supply active systems for quieting Electrolux products. Electrolux has
agreed to purchase the electronic components for its active noise control
products exclusively from NCT, provided the Company and its supply joint
ventures are price and quality competitive. To date, NCT has completed
development of two household appliance products for Electrolux. No date has
been established for product introduction.
18
<PAGE> 19
FOSTER ELECTRIC COMPANY, LTD. (JAPAN)
In March 1991, NCT and Foster, the largest original equipment
manufacturer of speakers in the world and a major producer of stereo headsets
and high-fidelity components for the consumer electronics and automotive
industries, established a joint venture, FNH, to develop, design, manufacture
and sell active noise attenuation headset systems. Foster is responsible for
production of the NoiseBuster(TM) consumer headset, the aviation headset and
the industrial headsets. Ownership was shared equally between Foster and NCT.
In addition to their headset joint venture, in April 1991, NCT and
Foster entered into a supply joint venture, FNS, (owned 30% by NCT) to build
and supply the customized components NCT requires to build its active systems,
including sensors, microphones, amplifiers, transducers and controllers. These
components were sold by FNS to NCT which distributes them to other NCT
production and distribution ventures and customers.
In December 1993, Foster and the Company entered into an agreement
pursuant to which Foster purchased 740,055 shares of the Company's common stock
for $2.0 million (the "Foster Shares"). Under the terms of the agreement,
Foster paid the purchase price by means of a cash payment of one cent ($.01)
per share (the par value of the common stock) and the delivery of a series of
promissory notes (the "Foster Notes") in aggregate principal amount equal to
the balance of the purchase price. The Foster Notes were full recourse notes
of Foster bearing interest at one percent above the rate of three-year United
States Treasury Notes and were to mature on April 17, 1997. The Foster Notes
were collateralized by the Foster Shares until paid or "earned out" as
described in the next paragraph. As of December 31, 1995, the Foster Notes
had been paid in full.
Foster and the Company also agreed that Foster would provide and the
Company would purchase $2.0 million of various product and market development
services deemed necessary by the Company for the commercialization of several
new headset and other products and the further development of the Company's
Japanese markets during the period from December 1993 to April 1997. The
Company would define each project or phase of this work and Foster would
provide related budgets and performance milestones. Upon completion of each
such project or phase, the agreed budgeted amount therefor would be billed to
the Company and will be paid, at the Company's election, either in cash or by
discharge of an equivalent amount of the Foster Notes, in which latter event an
appropriate number of the Foster Shares would be released from the
collateralization restrictions.
19
<PAGE> 20
In February 1995, the Company and Foster agreed to liquidate FNS.
Foster and the Company have agreed that the acquisition of certain assets of
ANVT by NCT (see Note 14, - Notes to the Consolidated Financial Statements)
removed the necessity for the continued existence of FNS. An orderly
liquidation of FNS was completed in April 1995. The agreement provided for the
Company's repurchase from Foster for $0.6 million of the exclusive headset
manufacturing rights in the Far East (see FNH note above) and an immediate
minimum 5% reduction in the price of headset products to be produced by Foster
for the Company. The Company accrued a $0.8 million charge in 1994 relating to
this agreement, of which $0.2 million was reflected as a current liability at
December 31, 1994.
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT
Headsets International ("FNH") and the Company executed a letter agreement
amending the 1991 agreement covering the headset joint venture company, FNH.
Pursuant to that agreement Foster acquired the Company's 50% interest in FNH
and a license to manufacture headsets for FNH and NCT with tooling currently
owned by NCT in consideration for Foster's assumption of FNH's outstanding
liabilities of $303,000. The agreement also grants FNH the right to sell
certain headsets on an exclusive basis in Japan and a non-exclusive basis
throughout the rest of the Far East, in consideration for a royalty on the sale
of such headsets.
The Company and Foster remain active in the Far East through NCTFE, a
sales and marketing joint venture between the Company and Foster. Foster
produced six products for NCT in 1995, primarily industrial headsets
The Company's Far East marketing and product showroom facility is
maintained at Foster's facilities in Tokyo, Japan.
ULTRA ELECTRONICS LTD. (U.K.)
Since 1991, NCT and Ultra and its predecessor, part of the Dowty
Group, have been designing and developing systems to enhance passenger comfort
by quieting aircraft passenger compartments in certain propeller driven
aircraft, which Ultra sells to the worldwide turbo-prop aircraft market. In
May 1993, Ultra and the Company signed a teaming agreement to produce and
install the NCT cabin quieting system on the SAAB 340 aircraft. Deliveries
under this agreement began in 1994. In March 1995, the Company and Ultra
amended the teaming agreement and concluded a licensing and royalty agreement
for $2.6 million. In addition, Ultra will pay the Company a royalty of 1 1/2%
of sales of products incorporating NCT technology beginning in 1998.
ANALOG DEVICES, INC. (U.S.)
In June 1992, NCT and ADI formed an equally owned joint venture to
design, develop, and manufacture computer chips to be incorporated in the
Company's active noise and vibration control systems. ADI is a leading
manufacturer of precision, high-performance integrated circuits used in analog
and digital signal processing applications. Under the terms of the agreement,
ADI, as a subcontractor to the joint venture, will complete the design and
development of specialized chips incorporating NCT's technology.
20
<PAGE> 21
] HARRIS CORPORATION (U.S.)
In September 1993, the Company and Harris entered into an agreement to
form an equally owned limited liability company to design, develop and
manufacture custom electronic components incorporating NCT patents and
technology for use in the Company's active noise and vibration control systems
and to sell such components to NCT and NCT's customers. Harris is a worldwide
designer and supplier of advanced electronic systems, semi-custom and custom
integrated circuits and semiconductors, communications systems and equipment
and electronic office products. Under the terms of the agreement, Harris, as a
subcontractor to the limited liability company, is working with the Company in
the design and development of custom and semi-custom electronic components and
will manufacture the specialized components incorporating the Company's
technology.
THE CHARLES STARK DRAPER LABORATORY, INC. (U.S.)
In July 1994, NCT and Draper Laboratory ("Draper") of Cambridge,
Massachusetts entered into an agreement whereby NCT became the exclusive
licensee to a new silicon micromachined microphone developed by Draper. Under
terms of the agreement and subsequent agreements, Draper will perform
engineering services for NCT to further develop the technology. The
microphone technology has application in a wide variety of applications within
the acoustic and communications fields.
COHERENT COMMUNICATIONS SYSTEMS CORPORATION (U.S.)
In June 1995, NCT and Coherent of Leesburg, Virginia entered into an
agreement whereby NCT granted a license to Coherent to sell and Coherent and
NCT will work together to develop and sell certain telecommunication products.
APPLIED ACOUSTIC RESEARCH, L.L.C. (U.S.)
In December, 1995, NCT and AAR of State College, Pennsylvania formed a
joint venture, OnActive Technologies, L.L.C. ("OAT"), to commercialize advanced
audio applications, such as FPT(TM) and TDSS(TM), into total audio systems and
solutions for the automotive OEM market. Both partners, who own equal shares of
the joint venture, have licensed their proprietary technology to the joint
venture.
21
<PAGE> 22
H. MARKETING AND SALES
In addition to marketing its Active Wave Management(TM) technology and
systems through its strategic alliances as described above, the Company also
uses an internal sales force of eight people, its executive officers and
directors, and four independent sales representatives. The independent sales
representatives may earn commissions of generally up to 6% of revenues
generated from sales of NCT products to customers introduced to NCT by them,
and up to 5% of research and development funding revenues provided by such
customers. The Company intends to continue to expand its internal sales force
on a limited basis as resources become available.
Revenues derived from the Company's contractual relationships with
Walker and Ultra (see Note 3. - "Notes to the Consolidated Financial
Statements") accounted for 38.2% and 30.1% respectively, of the Company's
revenues for the year ended December 31, 1995. No other customer accounted for
more than 10% of revenues during such fiscal period.
The Company's backlog at December 31, 1995, was $950,000 as contrasted
with $1,647,000 at December 31, 1994, and $1,450,000 at December 31, 1993,
respectively. In 1995 and 1994, the backlog was composed primarily of future
product shipments. In 1993 the backlog was composed primarily of engineering
and development service contracts. Since the Company's strategy is to focus on
technology licensing fees, royalties, product revenue and the introduction of
products which management believes have near term commercial potential, backlog
of engineering and development services is not a relevant measure for the
Company at this stage of its commercial development.
Note 12. - "Notes to the Consolidated Financial Statements" sets forth
financial information relating to foreign and domestic operations and sales for
the years ended December 31, 1995 and 1994.
The Company does not have a significant foreign exchange transaction
risk because the majority of its non-U.S. revenue is in U.S. dollars. The
remaining revenue is in British pounds sterling and the Company's underlying
cost is also in pounds sterling creating a natural foreign exchange protection.
I. COMPETITION
The Company is aware of a number of direct competitors in the field of
active noise and vibration attenuation. Indirect competition also exists in
the field of passive sound and vibration attenuation. The Company's principal
known competitors in active control systems are Andrea Electronics Corporation,
Bose Corporation, Digisonix (a division of Nelson Industries, Inc.), Hitachi,
Ltd., Group Lotus PLC and Lotus Cars Limited, Lord Corporation, Matsushita
Electric Industrial Co., Ltd., Sennheiser Electronic Corp., Sony Corporation
and Toshiba Corporation, among others. To the Company's knowledge, each of
such entities is pursuing its own technology in active
22
<PAGE> 23
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 automobile and appliance manufacturers, and aircraft parts suppliers
and manufacturers, have research and development efforts underway in 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 as the industry develops, are well established and have substantially
greater management, technical, financial, marketing and product development
resources than the Company.
J. GOVERNMENT CONTRACTS
The Company has acted as a government subcontractor in connection with
its performance of certain engineering and development services. Government
contracts provide for their cancellation at the government's sole discretion,
in which event the contractor or subcontractor may recover its actual costs up
to the date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business.
K. RESEARCH AND DEVELOPMENT
Company-sponsored research and development expenses aggregated $4.8
million, $9.5 million and $8.0 million for the fiscal years ended
December 31, 1995, 1994 and 1993, respectively.
In addition, the Company's co-venturers and customers have funded
engineering and development expenditures to determine the feasibility of
applying the Company's technology to their requirements and to develop
functional prototypes for their potential applications. These expenditures are
estimated at $2.3 million, $4.2 million and $2.8 million for the fiscal years
ended December 31, 1995, 1994, and 1993, respectively.
L. ENVIRONMENTAL REGULATION COMPLIANCE
Compliance with Federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, does not have any material effect upon the
capital expenditures, earnings or competitive position of the Company.
Compliance by existing and potential customers of the Company with
Federal, state and local laws and regulations pertaining to maximum permissible
noise levels occurring from the operation of machinery or equipment or the
conduct of other activities could be beneficial to sellers of noise reduction
products and enhance demand for certain applications of the Company's
technology as well as products developed or to be developed by the Company.
However, at the present time it is too early to determine what quantitative
effect such laws and regulations will have on the sale of the Company's
products and technology.
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<PAGE> 24
M. EMPLOYEES
The Company had 73 employees on March 18, 1996. None of such
employees is represented by a labor union. The Company considers its
relationships with employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive office is located at the site of its research
and technical support laboratory in Linthicum, Maryland, where it leases
approximately 40,000 square feet of space under leases which expire in July
2000. The leases provide for current monthly rentals of approximately $35,000,
subject to annual inflationary adjustments
The Company's maintains a sales and marketing office in Stamford,
Connecticut where it leases approximately 2500 square feet of space under a
lease which expires in December 2001 and provides for a current monthly rental
of approximately $2,500.
The Company's United Kingdom operations are conducted in Cambridge,
England where it leases 12,500 square feet of space under a lease which expires
in March 1999, and provides for a current monthly rental of approximately
$14,000.
ITEM 3. LEGAL PROCEEDINGS
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 the
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 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
hearing before the Tribunal of Milan is scheduled for May 30, 1996. 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 judgement against the Company, said
judgement could have a severe material effect on quarterly or annual operating
results.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders of the Company was held on November
8, 1995. At the meeting, Jay M. Haft, John J. McCloy II, Michael J. Parrella,
Samuel A. Oolie and Alastair Keith were elected directors, each to serve until
the next annual meeting of stockholders and until their successors are elected
and qualified. The Stockholders also approved the adoption of the Noise
Cancellation Technologies, Inc. Option Plan for Certain Directors and ratified
the appointment of Richard A. Eisner & Company, LLP as the Company's
independent auditors for the year ending December 31, 1995. The vote taken at
such meeting was as follows:
(a) With respect to the election of the directors:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Jay M. Haft 65,307,071 1,489,958
John J. McCloy II 65,284,326 1,512,703
Michael J. Parrella 65,325,731 1,471,298
Samuel A. Oolie 65,342,531 1,454,498
Alastair Keith 65,346,531 1,450,498
</TABLE>
(b) With respect to the proposal to approve the adoption of the
Noise Cancellation Technologies, Inc. Option Plan for Certain
Directors
<TABLE>
<CAPTION>
For Against Abstentions and Broker Non-votes
<S> <C> <C>
60,901,443 5,104,426 791,160
</TABLE>
(c) With respect to the proposal to ratify the selection of
Richard A. Eisner & Company, LLP independent auditors for the
Company's fiscal year ending December 31, 1995.
<TABLE>
<CAPTION>
For Against Abstentions and Broker Non-votes
<S> <C> <C>
65,650,780 768,478 377,771
</TABLE>
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is currently traded on the NASDAQ National
Market System under the symbol "NCTI". High and low last sale information for
1995 and 1994 for the common stock for specified quarterly periods is set forth
below:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------------
HIGH LOW HIGH LOW
---------------- ----------------------
<S> <C> <C> <C> <C>
1st Quarter 1 3/16 $3 1/16 $1 13/16
2nd Quarter 13/16 9/16 2 1 5/16
3rd Quarter 1 9/16 1/2 2 1/8 1 3/32
4th Quarter 1 1/16 9/16 1 1/2 7/16
</TABLE>
(b) At December 31 1995, there were approximately 4,104 record holders of
the Company's common stock.
(c) The Company has neither declared nor paid any dividends on its shares
of common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations.
26
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below are derived
from the historical financial statements of the Company. The data set forth
below is qualified in its entirety by and should be read in conjunction with
the Company's "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are
included elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS AND SHARES)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product Sales $ 610 $ 740 $ 1,728 $ 2,337 $ 1,589
Engineering and development services 3,513 3,779 3,598 4,335 2,297
Technology licensing fees and other 1,742 62 60 452 6,580
----------- ------------ ---------- ---------- ----------
Total revenues $ 5,865 $ 4,581 $ 5,386 $ 7,124 $ 10,466
----------- ------------ ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales $ 312 $ 608 $ 1,309 $ 4,073 $ 1,579
Cost of engineering and development services 2,705 2,748 2,803 4,193 2,340
Selling, general and administrative 3,148 5,151 7,231 9,281 5,416
Research and development 1,445 4,214 7,963 9,522 4,776
Interest (income) expense, net 94 (169) (311) (580) (49)
Compensation expense-removal of vesting conditions - 7,442 (1) - -
Equity in net (income) loss of unconsolidated affiliates - 117 3,582(2) 1,824 (80)
Other (income) expense, net 54 89 - 718 552
----------- ------------ ---------- ---------- ----------
Total costs and expenses $ 7,758 $ 20,200 $ 22,577 $ 29,031 $ 14,534
----------- ------------ ---------- ---------- ----------
Loss before income taxes $ (1,893) $ (15,619) $ (17,191) $ (21,907) $ (4,068)
=========== ============ ========== ========== ==========
Income taxes 100 - - - -
----------- ------------ ---------- ---------- ----------
Net loss $ (1,993) $ (15,619)(1) $ (17,191)(2) $ (21,907) $ (4,068)
Weighted average number of common
shares outstanding(3) 52,694 61,712 70,416 82,906 87,921
=========== ============ ========== ========== ==========
Net loss per share $ (0.04) $ (0.25)(1) $ (0.24)(2) $ (0.26) $ (0.05)
=========== ============ ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 5,484 $ 15,771 $ 29,541 $ 12,371 $ 9,583
Total liabilities 1,457 2,069 6,301 6,903 2,699
Long-term debt 3 - - - 105
Accumulated deficit (14,065) (29,682) (46,873) (68,780) (72,848)
Stockholders equity(4) 4,027 13,702 23,239 5,468 6,884
Working capital 1,971 11,038 19,990 923 1,734
</TABLE>
(1) Includes a one-time non-cash charge of $7,441,875 or $.12 per share for the
year ended December 31, 1992, related to the removal of the vesting
conditions to certain warrants. This charge removed any potential future
charge to earnings related to such warrants.
(2) 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 $3,581,682.
(3) Does not include shares issuable upon the exercise of outstanding stock
options, warrants and, where applicable in 1991, outstanding shares of
Series A and Series B Convertible Preferred Stock, since their effect would
be antidilutive.
(4) The Company has never declared nor paid cash dividends on its Common Stock.
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on
research and development of new technology to a firm focused on the
commercialization of its technology through technology licensing fees,
royalties and product sales. In prior years, the Company derived the majority
of its revenues from engineering and development funding provided by
established companies willing to assist the Company in the development of its
active noise and vibration control technology, and from technology licensing
fees paid by such companies. The Company's strategy generally has been to
obtain technology licensing fees when initiating joint ventures and alliances
with new strategic partners. Revenues from product sales were limited to sales
of specialty products and prototypes. In 1995, the Company received
approximately 22% of its operating revenues from engineering and development
funding, compared with 61% in 1994. Since 1991, revenues from product sales
have been increasing and management expects that technology licensing fees,
royalties and product sales will become the principal source of the Company's
revenue as the commercialization of its technology proceeds.
As a result of the 1994 acquisition of certain ANVT assets, the
Company is now the exclusive licensee of ten seminal patents, the Chaplin
Patents, through its wholly owned subsidiary, CPH. The Company's ability to
license the Chaplin Patents directly to unaffiliated third parties provides the
Company with a greater ability to earn technology licensing fees and royalties
from such patents. Further, the Company believes that its intellectual
property portfolio prevents other competitors and potential competitors in the
field of Active Wave Management(TM) from participating in certain commercial
areas without licenses from the Company.
Notes 1. and 15. to the accompanying Consolidated Financial Statements
and the liquidity and capital resources section which follows describe the
current status of the Company's available cash balances and the uncertainties
which exist that raise substantial doubt as to the Company's ability to
continue as a going concern.
At a Board of Directors Meeting on July 6, 1995, the following
executive changes were implemented: The Company's former Executive
Vice-President was appointed President and the then Co-Chairman of the Board,
Chief Executive Officer and President retained the positions of Co-Chairman of
the Board and Chief Executive Officer.
As previously disclosed, the Company has implemented changes in its
organization and focus, beginning in late 1994. Additionally, in late 1995 the
Company redefined its corporate mission to be the worldwide leader in the
advancement and commercialization of Active Wave Management(TM) technology.
Active Wave Management(TM) 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. This redefinition is the result of the
development of new technologies, as previously noted, such as ASF(TM),
TDSS(TM), FPT(TM), and the SMM, which create products that the Company believes
will be utilized in areas beyond noise and vibration reduction and control.
These technologies and products are consistent with shifting the Company's
focus to technology licensing fees, royalties and products that represent near
term revenue generation. The redefinition of corporate mission is reflected in
the revised business plan which the Company began to implement in the first
quarter of 1996.
28
<PAGE> 29
As distribution channels are established and as product sales and
market acceptance and awareness of the commercial applications of Active Wave
Management(TM) build, revenues from technology licensing fees, royalties and
product sales are forecasted to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding. The beginning of
this process is shown in the shifting percentages of operating revenue,
discussed below.
In December 1994, the Company adopted a plan that management believed
would generate sufficient funds for the Company to continue its operations into
1996. During 1995, the Company generated $6.6 million in license fees and $1.6
million in product sales. While the Company has exceeded its expectations
through December 1995 regarding technology licensing fees, production delays
and market acceptance have slowed new product sales. Operating expenses have
been reduced throughout 1995 and were less than projected in the plan adopted
in December 1994. Success in generating technology licensing fees, royalties
and product sales are significant and critical to the Company's ability to
overcome its present financial difficulties. The Company cannot predict whether
it will be successful in obtaining market acceptance of its new products or in
completing its current negotiations with respect to licenses and royalty
revenues.
From the Company's inception through December 31, 1995, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 21%
product sales, 52% engineering and development services and 27% technology
licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization
of its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.
The Company began shipping ProActive(TM) headsets in 1995. The Company
is now selling products through three of its alliances: Walker is
manufacturing and selling industrial silencers; Siemens is buying and
contracting with the Company to install quieting headsets for patient use in
Siemens' MRI machines; and in the fourth quarter of 1994 Ultra began installing
production model aircraft cabin quieting systems in the SAAB 340 turboprop
aircraft. Management believes these developments and those previously
disclosed help demonstrate the range of commercial potential for the Company's
technology and will contribute to the Company's transition from engineering and
development to technology licensing fees, royalties and product sales.
29
<PAGE> 30
The availability of high-quality, low-cost electronic components for
integration into the Company's products also is critical to the
commercialization of the Company's technology. The Company is working with its
strategic partners and other suppliers to reduce the size and cost of the
Company's systems, so that the Company will be able to offer low-cost
electronics and other components suitable for high-volume production.
The Company has continued to make substantial investments in its
technology and intellectual property and has incurred development costs for
engineering prototypes, pre-production models and field testing of several
products. During 1994, the Company acquired a license to two patents in the
field of micro-machined microphones and concluded the acquisition of all of the
patents, know-how and intellectual property of a former competitor, ANVT.
Management believes that the Company's investment in its technology has
resulted in the expansion of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
The Company has become certified under the International Standards
Organization product quality program known as "ISO 9000", and has successfully
undergone two quality audits. Since the third quarter of 1994, the Company has
reduced its worldwide work force by 58% from 173 to 73 current employees as of
March 18, 1996.
Because the Company will not meet its revenue targets for the first
quarter of 1996, it has entered into two recent transactions, which provide
additional funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.35
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to
$35 per share subject to certain adjustments. The conversion of the notes
and the exercise of the options are both subject to stockholder approval of an
appropriate amendment to the Company's Certificate of Incorporation increasing
its authorized capital to provide for the requisite shares. In conjunction
with the foregoing sale of common stock and convertible term notes, the Company
also agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") covering the applicable shares and to use its best efforts
to have such registration statement declared effective by the SEC as soon as
practicable. The relevant agreements provide for significant monetary
penalties in the event such registration statement is not declared effective
within 90 days of the filing date and in the event its effectiveness is
suspended for other than brief permissible periods. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or an equity feature without the investors' consent
for a period of one year.
30
<PAGE> 31
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million. (Refer to Notes 1. and 15. - "Notes to
the Consolidated Financial Statements.")
Management believes that the funding provided by increased product
sales, technology licensing fees, royalties, and cost savings, if realized,
coupled with the additional capital referred to above, some of which is
dependent upon shareholder approval of an amendment to the Company's
Certificate of Incorporation, should enable the Company to continue operations
into 1997. If the Company is not able to increase technology licensing fees,
royalties and product sales, or generate additional capital, it will have to
further cut its level of operations substantially in order to conserve cash.
(Refer to "Liquidity and Capital Resources" below and to Note 1. - "Notes to the
Consolidated Financial Statements" for a further discussion relating to
continuity of operations.)
RESULTS OF OPERATIONS
Year ended December 31, 1995 compared with year ended December 31, 1994.
Total revenues in 1995 increased by 47% to $10,466,000 from $7,124,000
in 1994. Total expenses during the same period decreased by 50% or
$14,497,000, reflecting the continuing results of cost reduction plans.
Technology licensing fees increased by 1,356% or $6,128,000 to
$6,580,000, reflecting the Company's continuing emphasis on expanding
technology licensing fee revenue. The 1995 amount is principally derived from a
$2.6 million license fee from Ultra, a $ 3.3 million license fee from Walker
and other licenses aggregating $0.7 million. In 1994, technology license fees
amounted to $0.5 million. See Note 3. - "Notes to the Consolidated Financial
Statements".
Product sales decreased by 32% to $1,589,000 reflecting a reduction in
orders for MRI headsets from Siemens, decreased revenue from NoiseBuster(TM)
sales due to reductions in average price and units sold, and a decrease in
industrial silencer sales in connection with the transfer of that business to
Walker.
Engineering and development services decreased by 47% to $ 2,297,000,
primarily due to the elimination of funding from Ultra for aircraft cabin
quieting in connection with the transfer of that business to Ultra in the first
quarter of 1995, a decrease in the amount of muffler development funding from
Walker in connection with the transfer of that business to Walker in the fourth
quarter of 1995 and staff reductions.
Cost of product sales decreased 61% to $1,579,000 from $4,073,000 and
the product margin increased to 1% from (74%) in 1994. The negative margin in
1994 was primarily due to a reserve for slow moving and obsolete inventory in
the amount of $1,855,300. In 1995, the low product margin was primarily due to
the lower sales price of the NoiseBuster(TM).
31
<PAGE> 32
Cost of engineering and development services decreased 44% to
$2,340,000 primarily due to the changes in the Ultra and Walker relationships,
as noted above.
Selling, general and administrative expenses for the year decreased by
42% to $5,416,000 from $9,281,000 for 1994. Of this decrease, $1,202,000 was
directly attributable to salaries and related expenses. Advertising and
marketing expenses decreased by 65% to $677,000. Office and occupancy expenses
decreased by 73% or $537,000. Professional fees increased by 55% to $1,933,000
primarily due to legal fees related to litigation and patent prosecution and
maintenance. Travel and entertainment decreased by 58% or $533,000.
Depreciation and amortization included in selling, general and
administrative expenses decreased by $22,000 or 10%, from $221,000 to $199,000.
Research and development expenditures for 1995 decreased by 50% to
$4,776,000 from $9,522,000 for 1994, primarily due to realizations from the
cost savings plans and staff reductions.
In 1995, interest income decreased to $53,000 from $587,000 in 1994
reflecting the decrease in 1995 of available funds to invest.
Under all of the Company's existing joint venture agreements at the
end of 1995, the Company is not required to fund any capital requirements of
these joint ventures beyond its initial capital contribution. In accordance
with U.S. generally accepted accounting principles, when the Company's share of
cumulative losses equals its investment and the Company has no obligation or
intention to fund such additional losses, the Company suspends applying the
equity method of accounting for its investment. The agreement with Tenneco
Automotive entered into in December 1993 resulted in the recognition of 1994
losses with respect to the joint venture with Walker in the amount of
$1,453,200. The aggregate amount of the Company's share of losses in all of
its joint ventures in excess of the Company's investments which has not been
recorded was approximately $0.9 million at December 31, 1994. Due to the
Company's sale and transfer of its interest in various of its joint ventures in
1995, there was no such unrecorded losses as of December 31, 1995.
The Company has net operating loss carryforwards of $58.7 million and
research and development credit carryforwards of $1.2 million for federal
income tax purposes at December 31, 1995. No tax benefit for these operating
losses has been recorded in the Company's financial statements. The Company's
ability to utilize its net operating loss carryforwards may be subject to an
annual limitation.
32
<PAGE> 33
Year ended December 31, 1994 compared with year ended December 31, 1993.
Total revenues for 1994 increased by 32% to $7,124,000 from
$5,385,900 in 1993.
Product sales advanced 35% to $2,337,000 reflecting sales of the
NoiseBuster(TM) consumer headset into several distribution channels, shipments
of MRI headsets to Siemens and industrial headsets to Telex. Engineering and
development services increased by 20% to $4,336,000 primarily due to the
additional project funding from Ultra for aircraft cabin quieting and from WNCT
for vehicle mufflers.
Licensing fees in 1994 were comprised of a $141,000 net license fee
from Mitsuya for limited NoiseEater(TM) rights in Japan, a $250,000 license fee
from QSI, a related party, (see Item 13. "Certain Relationships and Related
Transactions" and Note 3. - "Notes to the Consolidated Financial Statements")
for rights in the electric utility transformer retro-fit market, and a $60,000
fee from Unikeller Group, Switzerland. During 1993, the only license fee
recorded was a $60,000 fee from a development agreement with Unikeller Group
for sound attenuation in passenger vehicle cabins.
Cost of product sales increased 211% to $4,073,123 and the product
margin decreased to (74%) from 24% in 1993, primarily due to a reserve for slow
moving and obsolete inventory in the amount of $2,032,000. Cost of
engineering and development services increased 50% to $4,192,000 due to
increased contracts, primarily Ultra.
Selling, general and administrative expenses for the year increased by
28% to $9,281,117 from $7,231,000 for 1992. Of this increase $600,000 was due
to the purchase of the manufacturing rights in the Far East from Foster (see
Note 3. - "Notes to the Consolidated Financial Statements"). In 1994, the
Company recorded $375,000 of realized and unrealized losses in its investments,
versus a $258,000 realized gain in its investments in 1993.
Advertising and marketing expenses increased by $671,000 or 52%, from
$1,286,000 to $1,957,000, primarily due to increased expenditures to open
distribution channels for the NoiseBuster(TM), and office and occupancy
expenses increased by $105,000 or 17%, from $626,000 to $731,000, primarily to
support the advertising and marketing efforts above.
Depreciation and amortization included in selling, general and
administrative expenses increased by $67,000 or 44%, from $154,000 to $221,000,
reflecting the increased amortization of intellectual property acquired from
ANVT (see Note 14. - "Notes to the Consolidated Financial Statements").
Research and development expenditures for 1994 increased by 20% to
$9,522,000 from $7,962,900 for 1993.
33
<PAGE> 34
In 1994, interest income increased to $587,510 from $313,200 for 1993.
This increase was due primarily to the income from the investment of the
unexpended proceeds from the 1993 public offering of common stock, which were
invested, along with the Company's other available cash, in U.S. Treasury bills
and high quality bond funds. The Company's net yield on its investments during
1994 averaged 5.7%.
Under most of the Company's joint venture agreements, the Company is
not required to fund any capital requirements of these joint ventures beyond
its initial capital contribution. In accordance with U.S. generally accepted
accounting principles, when the Company's share of cumulative losses equals its
investment and the Company has no obligation or intention to fund such
additional losses, the Company suspends applying the equity method of
accounting for its investment. The agreement with Tenneco Automotive entered
into in December 1993 resulted in the recognition of 1994 losses with respect
to the joint venture with Walker in the amount of $1,453,200. The aggregate
amount of the Company's share of losses in all of its joint ventures in excess
of the Company's investments which has not been recorded was approximately $0.9
million at December 31, 1994. 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.
The Company had net operating loss carryforwards of $58.7 million and
research and development credit carryforwards of $1.2 million for federal
income tax purposes at December 31, 1994. No tax benefit for these operating
losses has been recorded in the Company's financial statements. The Company's
ability to utilize its net operating loss carryforwards may be subject to an
annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company received $0.7 million from the exercise of stock purchase
warrants and options during 1995, $1.0 million in 1994 and $2.1 million in
1993.
On August 4, 1995, the Company sold 2,000,000 shares of its common
stock in a private placement that resulted in $0.7 million net proceeds to the
Company. Additionally, on November 14, 1995, the Company sold 4,800,000 shares
of its common stock in a private placement that resulted in $3.3 million net
proceeds to the Company.
In March 1995, the Company and Ultra amended the teaming agreement
and concluded a licensing and royalty agreement for $2.6 million. In addition,
Ultra will pay the Company a royalty of 1 1/2% of sales of products
incorporating NCT technology beginning in 1998.
On November 15, 1995, the Company and Walker executed a series of
related agreements which provided for the transfer of the Company's interest
in WNCT to Walker, the elimination of the
34
<PAGE> 35
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 as to future
activities.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $72.8 million on a
cumulative basis through December 31, 1995. These losses, which include the
costs for development of products for commercial use, have been funded
primarily from the sale of common stock, including the exercise of warrants or
options to purchase common stock, and by technology licensing and engineering
and development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In December 1994, the Company adopted a plan that management believed
would generate sufficient funds for the Company to continue its operations into
1996. During 1995, the Company generated $6.6 million in license fees and
$1.6 million in product sales. While the Company has exceeded its expectations
to date regarding technology licensing fees, production delays have slowed new
product sales. Operating expenses have been reduced throughout 1995 and were
less than projected in the plan adopted in December of 1994. Success in
generating technology licensing fees, royalties and product sales are
significant and critical to the Company's ability to overcome its present
financial difficulties. The Company cannot predict whether it will be
successful in obtaining market acceptance of its new products or in completing
its current negotiations with respect to licenses and royalty revenues.
In January 1996, the Company adopted a plan that management
believes should generate sufficient funds for the Company to continue its
operations into 1997. Under this plan, the Company needs to generate
approximately $19 million to fund its operations for 1996. The Company
believes that it can generate these funds from operations in 1996, although
there is no certainty that the Company will achieve this goal. Included in
such amount is approximately $8.9 million in sales of new products and
approximately $9.0 million of technology licensing fees and royalties.
Success in generating technology licensing fees, royalties and product sales
are significant and critical to the Company's ability to overcome its present
financial difficulties. The Company cannot predict whether it will be
successful in obtaining market acceptance of its new products or in completing
its current negotiations with respect to licenses and royalty revenues. If,
during the course of 1996, management of the Company determines that it will be
unable to meet or exceed the plan discussed above, the Company will consider
fund raising alternatives. The Company's ability to raise additional capital
through sales of common stock will be severely limited until the Company's
stockholders approve an amendment to the Company's Certificate of
Incorporation authorizing additional capital stock and the termination of the
one year restriction on further equity financing undertaken by the Company in
connection with the sale of common stock and convertible term notes to three
institutional investors described above. The Company will monitor its
performance against the plan on a monthly basis and, if
35
<PAGE> 36
necessary, reduce its level of operations accordingly. The Company believes
that the plan discussed above constitutes a viable plan for the continuation
of the Company's business into 1997.
There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and
development revenue or additional capital. In that event, the Company would
have to further cut back its level of operations substantially in order to
conserve cash. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. The uncertainty 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,
raises substantial doubt about the Company's ability to continue as a going
concern. Further discussion of these uncertainties is presented in Notes 1. and
15. - "Notes to the Consolidated Financial Statements".
Because the Company will not meet its revenue targets for the first
quarter of 1996, it has entered into two recent transactions, which provide
additional funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.3
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to the
price received by the Company for the sale of such 1,000,000 shares
subject to certain adjustments. The conversion of the notes and the exercise
of the options are both subject to stockholder approval of an appropriate
amendment to the Company's certificate of incorporation increasing its
authorized capital to provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective within 90 days of the filing date and in the event its
effectiveness is suspended for other than brief permissible periods. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or an equity feature without the
investors' consent for a period of one year.
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million. (Refer to "Liquidity and Capital
Resources" above and Notes 1. and 15. - "Notes to the Consolidated Financial
Statements" below.)
At December 31, 1995, cash and short-term investments were $1,831,000.
The available resources were invested in interest bearing money market
accounts. The Company's investment objective is preservation of capital while
earning a moderate rate of return.
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<PAGE> 37
The Company's working capital increased from $923,000 at December 31,
1994, to $1,734,000 as of December 31, 1995. This increase was due primarily
to the 1995 private placements noted above reduced by the net loss for the year
and the reduction in the Walker liability (See Note 3. - "Notes to the
Consolidated Financial Statements.")
During 1995, the net cash used in operating activities was $5.0
million. This utilization reflects the emphasis on the commercial development
of its technology into several product applications which were scheduled for
introduction in 1995 and 1996.
Net inventory declined during 1995 by $423,000, primarily reflecting
sales of the NoiseBuster(TM) product.
During the year ended December 31, 1995, accounts receivable reserves
were decreased by $782,000 as the Company wrote off certain accounts (see Note
8. - "Notes to the Consolidated Financial Statements").
The Company's available cash balances at December 31, 1995 are as
projected at the end of 1994, primarily due to cost savings and the private
placements noted above.
The net cash used in investing activities amounted to $272,000 during
the year primarily for acquisition of patent rights. The net cash provided by
financing activities amounted to $4,678,000 primarily from the exercise of
options and warrants and the private placements noted above.
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
The Company believes that the level of financial resources available
to it is an essential competitive factor. The Company may elect to raise
additional capital, from time to time, through equity or debt financing in
order to capitalize on business opportunities and market conditions although
the Company's ability to raise additional capital through sales of common stock
will be severely limited until the Company's stockholders approve
an amendment to the Company's Certificate of Incorporation authorizing
additional capital stock and the termination of the one year restriction on
further equity financing undertaken by the Company in connection with the sale
of common stock and convertible term notes to three institutional investors
described above.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
electronic and other components, which leverages on their purchasing power,
provides important cost savings and accesses the most advanced technologies;
(ii) utilization of the manufacturing capacity of the Company's allies,
enabling the Company to integrate its active technology into products with
limited capital investment; and (iii) access to well-established channels of
distribution and marketing capability of leaders in several market segments.
There were no material commitments for capital expenditures as of
December 31, 1995, and no material commitments are anticipated in the near
future.
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ITEM 8. FINANCIAL STATEMENTS
The Reports of the Independent Accountants Richard A. Eisner &
Company, L.L.P. and Coopers & Lybrand L.L.P. and the financial statements and
accompanying notes are attached.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors and Accountants................................... F-1&2
Consolidated Balance Sheets, as of December 31, 1994, and 1995.................... F-3
Consolidated Statement of Operations, for the years ended
December 31, 1993, 1994 and 1995................................................ F-4
Consolidated Statements of Stockholders' Equity, for the years ended
December 31, 1993, 1994 and 1995................................................ F-5
Consolidated Statements of Cash Flows, for the years ended
December 31, 1993, 1994 and 1995................................................ F-6
Notes to the Consolidated Financial Statements.................................... F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Changes in independent accountants have been previously reported. See
the Company's Current Reports on Form 8-K filed on April 14, 1993 (as amended
on April 22, 1993), December 29, 1994 and January 6, 1995.
There have been no disagreements with independent accountants on
accounting and financial disclosure matters.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The following table sets forth the names, ages, positions and the
offices held by each of the executive officers and directors of the Company as
of March 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<S> <C> <C>
Jay M. Haft 60 Chief Executive Officer and Co-Chairman of the Board of
Directors
John J. McCloy II 58 Co-Chairman of the Board and Director
Michael J. Parrella 48 President and Director
Stephen J. Fogarty, CPA 46 Senior Vice President, Chief Financial Officer
Irene Lebovics 43 Senior Vice President, Marketing and Secretary
Jeffery Zeitlin 47 Senior Vice President, Operations
Cy E. Hammond 41 Vice President, Controller
Michael A. Hayes, Ph.D. 44 Vice President of Research
Samuel A. Oolie 59 Director
Alastair Keith 49 Director
</TABLE>
JAY M. HAFT currently serves as Chief Executive Officer and Co-Chairman
of the Board of Directors of the Company. He served as President of the
Company from November 1994 to July 1995. He is counsel to the law firm of
Parker Duryee Rosoff & Haft in New York, and counsel to the law firm of Ruden,
Barnett, McClosky, Smith, Schuster & Russell, P.A. in Florida, and has been
engaged in the practice of law since 1959. Mr. Haft also serves as a director
of Robotic Vision Systems Inc., Nova Technology, Inc., Extech Corporation, Oryx
Technology, Inc., CAS Medical Systems, Inc., and Viragen, Inc.
JOHN J. MCCLOY II currently serves as Co-Chairman of the Board of
Directors. He served as Chief Executive Officer of the Company from September
1987 to November 1994 and as its Chairman of the Board from September 1986 to
November 1994. Additionally he served as Chief Financial Officer from November
1990 to February 1993 and as its Secretary-Treasurer from October 1986 to
September 1987. Since 1981, he has also been a private investor concentrating
on venture capital and early stage investment projects in a variety of
industries. Mr. McCloy is also a director of American University in Cairo, the
Sound Shore Fund, Inc., and the Atlantic Council.
MICHAEL J. PARRELLA currently serves as President and Director of the
Company. He was elected President and Chief Operating Officer of the Company in
February 1988 and served in that capacity until November 1994. From November
1994 to July 1995 Mr. Parrella served as Executive Vice President of the
Company. He initially became a director
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<PAGE> 40
in 1986 after evaluating the application potential of the Company's noise
cancellation technology. At that time, he formed an investment group to acquire
control of the Board and to raise new capital to restructure the Company and
its research and development efforts. He was also Chairman of the Board of
Environmental Research Information, Inc., an environmental consulting firm,
from December 1987 to March 1991.
STEPHEN J. FOGARTY, CPA currently serves as Senior Vice President and
Chief Financial Officer of the Company. He joined the Company as Vice
President of Production in May 1990, was appointed a Senior Vice President in
January 1993 and subsequently appointed Chief Financial Officer on November
15, 1994. Between 1987 and 1990, he worked for Relay Communications, a
PC-to-PC and PC-to-mainframe communications software company, where he served
as Vice President and Chief Financial Officer and managed operations and
administration. Following that company's acquisition by Microcom Software in
1988, he served as Vice President of Operations. Prior to 1987, he spent over
12 years in public accounting, including 1976-1982 with Larsen Durgy & Fogarty
and 1982 - 1986 as a sole practitioner.
IRENE LEBOVICS currently serves as Senior Vice President, Marketing,
and President of NCT Headsets and as Secretary of the Company. She joined the
Company as Vice President of NCT and President of NCT Medical Systems (NCTM) in
July 1989. In March 1990 NCTM became part of NCT Personal Quieting and Ms.
Lebovics served as President. In January 1993 she was appointed Senior Vice
President of NCT. In November 1994, Ms. Lebovics became President of NCT
Headsets and on August 1, 1995, she became Secretary. Prior to joining NCT, Ms.
Lebovics worked for a software development company, Philon, Inc. where she
worked for six years and ultimately served as President. Prior to that time,
Ms. Lebovics held various positions in product marketing with Bristol-Myers, a
consumer products company, and in advertising with McCaffrey and McCall.
JEFFREY C. ZEITLIN currently serves as Senior Vice President of
Operations. He was initially a consultant to the Company in October 1995 and
became an employee in January 1996. Prior to joining the Company he was an
independent consultant for X-Ray Optical Systems, Inc., a high technology
start-up company, Ambase Corporation, a financial services holding
organization, and Liner Technology, Inc., a start-up manufacturing
organization. He has also served as Vice President and Chief Financial Officer
of CBI Holding Company, Inc., a drug wholesaler representing all major drug
manufacturers. From 1981 to 1992 Mr. Zeitlin served in several accounting and
treasury positions at Hoechst Celanese Corporation, the most recent of which
was Vice President of Venture Funds and Financial Projects. He is a Director
of Integrated Liner Technologies, Inc. of Watervliet, New York.
CY E. HAMMOND currently serves as Vice President and Controller of the
Company. He joined the Company as Controller in January 1990 and was appointed
a Vice President in February 1994. During 1989, he was Treasurer and Director
of Finance
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<PAGE> 41
for Alcolac, Inc., a multinational specialty chemical producer. Prior to 1989
and from 1973, Mr. Hammond served in several senior finance positions at the
Research Division of W.R. Grace & Co., the last of which included management of
the division's worldwide financial operations.
MICHAEL A. HAYES, PH.D. currently serves as Vice President of Research
after joining the Company in 1996. During 1995 and 1994 Dr. Hayes served as
Deputy Project Director of Research support for Antarctic Support Associates as
their representative in Alaska. From 1991 to 1994 he served as Deputy Program
Manager of Special Payloads for Martin Marietta (formerly a division of General
Electric) while directly managing critical spacecraft sub-system and instrument
development for Goddard Space Flight Center. Prior to 1991 Dr. Hayes served in
several Senior Research positions at Texas Instruments and Georgia Institute of
Technology. Dr. Hayes received his Ph.D. in Plasma Physics from the
University of California, Davis in 1981. He received a M.S. in Applied Science
from the University of California, Davis in 1978 and a B.S. in Physics form the
University of California, San Diego in 1974.
SAMUEL A. OOLIE currently serves as a Director of the Company. He is
Chairman and Chief Executive Officer of NoFire Technologies, Inc., a
manufacturer of high performance fire retardant products, and has held those
positions since August 1995. He is also Chairman of Oolie Enterprises, an
investment company, and has held that position since July 1985. Mr. Oolie
currently serves as a director of Avesis, Inc. and Comverse Technology, Inc.
He has also been a director of CFC Associates, a venture capital partnership,
since January 1984 and Chairman of New Thermal Corp., an extruder of plastic
profiles for the window industry, since January 1991.
ALASTAIR KEITH currently serves as a Director of the Company. He has
been a general partner of CA Partners, a general partner in three investment
funds, since March 1992. From January 1992 to April 1995 he acted as an advisor
to the Ministry of Privatization in the Czech Republic. For 20 years prior
thereto, he was employed by Brown Brothers Harriman & Company where he held
senior management positions in a variety of the firm's domestic and
international banking businesses.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish
the Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1995, to December 31, 1995,
all filing requirements applicable to its officers, directors, and greater than
10% stockholders
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<PAGE> 42
were complied with, except that John J. McCloy, II, Co-Chairman of the Board of
Directors, failed to file two Form 4's reporting four transactions. Such
transactions were reported on Form 5 which was filed late.
ITEM 11. EXECUTIVE COMPENSATION
"Incorporated by reference to Registrant's proxy statement for the 1996
Annual Meeting of Shareholders to be filed by April 29, 1996 or to be filed by
amendment."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
"Incorporated by reference to Registrant's proxy statement for the 1996
Annual Meeting of Shareholders to be filed by April 29, 1996 or to be filed by
amendment."
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<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1990, the Company's Board of Directors authorized the
issuance of warrants to acquire 420,000 shares of common stock to each of
Messrs. McCloy, Parrella and Oolie and Ms. Lebovics, exercisable through
September 30, 1994, at $.375 per share, being the market price of the Company's
common stock on the date of such authorization, based upon each such person's
commitment to extend his or her personal guarantee on a joint and several basis
with the others in support of the Company's attempt to secure bank or other
institutional financing, the amount of which to be covered by the guarantee
would not exceed $350,000. No firm commitment for any such financing has been
secured by the Company and at present no such financing is being sought.
However, each of such persons' commitment to furnish said guarantee continues
in full force and effect.
In 1989, the Company established a joint venture with Environmental
Research Information, Inc., ("ERI") to jointly develop, manufacture and sell
(i) products intended for use solely in the process of electric power
generation, transmission and distribution and which reduce noise and/or
vibration resulting from such process, (ii) personal quieting products sold
directly to the electric utility industry and (iii) products that reduce noise
and/or vibration emanating from fans and fan systems (collectively, "Power and
Fan Products"). In 1991, in connection with the termination of this joint
venture, the Company agreed, among other things, during the period ending
February 1996, to make payments to ERI equal to (i) 4.5% of the Company's sales
of Power and Fan Products and (ii) 23.75% of fees derived by the Company from
its license of Power and Fan Products technology, subject to an overall maximum
of $4,500,000. Michael J. Parrella, President of the Company, was Chairman of
ERI at the time of both the establishment and termination of the joint venture
and owns approximately 12% of the outstanding capital of ERI. In addition,
Jay M. Haft, Co-Chairman, and Chief Executive Officer of the Company, shares
investment control over an additional 24% of the outstanding capital of ERI.
The Company believes that the respective terms of both the establishment of
the joint venture with ERI and its termination were comparable to those that
could have been negotiated with other persons or entities. During the fiscal
year ended December 31, 1995, the Company was not required to make any such
payments to ERI under these agreements.
In 1993, the Company entered into three Marketing Agreements with
QuietPower Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical
Solutions, Inc."), a
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<PAGE> 44
company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the terms of
one of these Marketing Agreements, QSI has undertaken to use its best efforts
to seek research and development funding for the Company from electric and
natural gas utilities for applications of the Company's technology to their
industries. In exchange for this undertaking, the Company has issued a warrant
to QSI to purchase 750,000 shares of Common Stock at $3.00 per share. The last
sale price for the Common Stock reported on the NASDAQ National Market System
on May 15, 1993, the date of the Marketing Agreement, was $2.9375. The warrant
becomes exercisable as to specific portions of the total 750,000 shares of
Common Stock upon the occurrence of defined events relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the
Company will record a charge for the amount by which the market price of the
Common Stock on such date exceeds $3.00 per share, if any. The warrant remains
exercisable as to each such portion from the occurrence of the defined event
through October 13, 1998. As of December 31, 1994, contingencies had been
removed against 525,000 warrants resulting in a 1993 non-cash charge of
$120,250. This Marketing Agreement also grants to QSI a non-exclusive right to
market the Company's products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for
non-retrofit applications in North America. QSI is entitled to receive a sales
commission on any sales to a customer of such products for which QSI is a
procuring cause in obtaining the first order from such customer. In the case
of sales to utility company customers, the commission is 6% of the revenues
received by the Company. On sales to original equipment manufacturers for
utilities, the commission is 6% on the gross revenue NCT receives on such sales
from the customer in the first year, 4% in the second year, 2% in the third
year and 1% in the fourth year, and .5% in any future years after the fourth
year. QSI is also entitled to receive a 5% commission on any research and
development funding it obtains for NCT, and on any license fees it obtains for
the Company from the license of the Company's technology. The initial term of
this Agreement is three years renewable automatically thereafter on a
year-to-year basis unless a party elects not to renew.
Under the terms of the second of the three Marketing Agreements, QSI
is granted a non-exclusive right to market the Company's products that are or
will be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is
entitled to receive commissions similar to those payable to end user and
original equipment manufacturer customers described above. QSI is also
entitled to receive the same 5% commission described above on research and
development funding and technology licenses which it obtains for the Company in
the feeder bowl area. The initial term of this Marketing Agreement is three
years with subsequent automatic one-year renewals unless a party elects not to
renew.
Under the terms of the third Marketing Agreement, QSI is granted an
exclusive right to market the Company's products that are or will be designed
and sold for use in or with equipment used by electric and/or natural gas
utilities for retrofit applications in North America. QSI is entitled to
receive a sales commission on any sales to a customer of such products equal to
129% of QSI's marketing expenses attributable to the marketing
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<PAGE> 45
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. QSI is also entitled to receive a 5% commission on
research and development funding similar to that described above. QSI's
exclusive rights continue for an indefinite term provided it meets certain
performance criteria relating to marketing efforts during the first two years
following product availability in commercial quantity and minimum levels of
product sales in subsequent years. In the event QSI's rights become
non-exclusive, depending on the circumstances causing such change, the initial
term then becomes either three or five years from the date of this Marketing
Agreement, with subsequent one-year automatic renewals in each instance unless
either party elects not to renew. During the fiscal year ended December 31,
1995, the Company was not required to pay any commissions to QSI under any of
these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under
which each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1995, the Company
made no payments to QSI for project management services.
In March 1995, the Company entered into an agreement with QSI (see
Note 8, - "Notes to the Consolidated Financial Statements") by which QSI
received the exclusive right to market, sell and distribute transformer
quieting products and gas turbine quieting products in the utility industry.
Under the agreement QSI funds development of the systems. The agreements
generally provide that the Company manufactures the products and receives a
royalty of 6% from QSI on the sales of the product. For the exclusive rights
under the agreement, QSI is to pay a license fee to NCT of $750,000, $250,000
of which QSI paid to NCT in June of 1994, and the balance of which is payable
in equal monthly installments of $16,667, beginning in April of 1995. The
agreement supersedes any other agreements related to the product above. The
agreement is contingent upon full payment by QSI to NCT of trade receivables,
which at December 31, 1994 amounted to $492,100. All amounts due from QSI were
fully reserved at December 31, 1995 (See Note 2, - "Notes to the Consolidated
Financial Statements").
In April 1995, the Company amended the March 1995 agreement with QSI
as follows. QSI forfeited warrants to purchase 750,000 shares of the Company's
common stock which had been issued pursuant to the May 15, 1993 Marketing
Agreement (Non-retrofit Utility Products) and the $500,000 balance due the
Company for the exclusivity fee was reduced to $250,000. In addition, accounts
receivable due the Company from QSI were converted to a note receivable from
QSI, bearing annual interest at 6% due May 15, 1996 or earlier contingent upon
the occurrence of certain events. The note receivable from QSI was fully
reserved at December 31, 1995.
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<PAGE> 46
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS.
Reports of Independent Auditors and Accountants.
Consolidated Balance Sheets, as of December 31, 1994, and 1995
Consolidated Statements of Operations, for the years ended December 31, 1993,
1994 and 1995.
Consolidated Statements of Stockholders' Equity, for the years ended December
31, 1993, 1994 and 1995.
Consolidated Statements of Cash Flows, for the years ended December 31, 1993,
1994 and 1995.
Notes to the Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES.
Report of Independent Auditors and Accountants with Respect to Schedule.
Schedule:
II. Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.
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<PAGE> 47
(3) EXHIBITS.
Exhibit Number Description of Exhibit
- -------------- ----------------------
3(a) Certificate of Incorporation, as amended, of
the Company, incorporated herein by reference to Exhibit 3(a) to Amendment No.
1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
3(b) By-laws of the Company, incorporated herein
by reference to Exhibit 3(b) to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
4(a) Warrant to purchase 125,000 shares of Common
Stock of the Company at a purchase price of $.20 per share issued to John J.
McCloy II, incorporated herein by reference to Exhibit 4(a) to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
4(b) Warrant #BW-1-R to purchase 862,500 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
John J. McCloy II.
4(c) Warrant #BW-2-R to purchase 862,500 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
Michael J. Parrella.
4(d) Warrant #BW-4-R to purchase 201,250 shares of
Common Stock of the Company at a purchase price of $.75 per share issued to
Irene Lebovics.
4(e) Warrant #BW-9-R and #BW-46-R to purchase
218,500 shares of Common Stock of the Company at a purchase price of
$.75 per share issued to Jay M. Haft.
4(f) Warrant Agreement, dated as of January 20,
1988, between the Company and American Stock Transfer Company, as Warrant
Agent, relating to certain warrants to purchase Common Stock of the Company at
a price of $.40 per share issued to Sam Oolie, Oolie Enterprises, John J.
McCloy II, and Michael J. Parrella, incorporated herein by reference to Exhibit
4(gg) to Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
*10(a) 1987 Incentive Stock Option Plan,
incorporated herein by reference to Exhibit 10(b) to Amendment No. 1 on Form
S-1 to the Company's Registration Statement on Form S-18 (Registration No.
33-19926).
*10(b) Stock Option Agreement, dated as of February
26, 1987, between the Company and John J. McCloy II, incorporated herein by
reference to Exhibit 10(b) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
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<PAGE> 48
*10(c) Stock Option Agreement, dated as of February
26, 1987, between the Company and Michael J. Parrella, incorporated herein by
reference to Exhibit 10(c) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(d) Stock Option Agreement, dated as of February
26, 1987, between the Company and Sam Oolie, incorporated herein by reference
to Exhibit 10(d) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
*10(e) Stock Option Agreement, dated as of June 17,
1987, between the Company and John J. McCloy II, incorporated herein by
reference to Exhibit 10(f) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
*10(f) Stock Option Agreement, dated as of March 29,
1990, between the Company and Jay M. Haft, incorporated herein by reference to
Exhibit 10(m) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(g) Lease, dated December 20, 1991, between West
Nursery Land Holding Limited Partnership ("West Nursery") and the Company, as
amended by a letter amendment, dated December 20, 1991, between West Nursery
and the Company, incorporated herein by reference to Exhibit 10(u) to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(h) Lease, dated February 26, 1991, between West
Nursery and the Company, as amended by a letter amendment, dated February 26,
1991, between West Nursery and the Company, incorporated herein by reference to
Exhibit 10(v) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10(i) Lease (undated), between West Nursery and the
Company, as amended by a letter amendment, dated April 23, 1990, between West
Nursery and the Company, incorporated herein by reference to Exhibit 10(w) to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10(j) Agreement, dated March 4, 1991, between West
Nursery and the Company as amended by the First Amendment of Agreement, dated
December 20, 1991, between West Nursery and the Company, incorporated herein by
reference to Exhibit 10(x) to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10(k) Patent Assignment Agreement, dated as of June
21, 1989, among George B.B. Chaplin, Sound Alternators Limited, the Company,
Active Noise and
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Vibration Technologies, Inc. and Chaplin Patents Holding Co., Inc.,
incorporated herein by reference to Exhibit 10(aa) to Amendment No. 2 on Form
S-1 to the Company's Registration Statement on Form S-18 (Registration No.
33-19926).
10(l) Joint Venture and Partnership Agreement,
dated as of November 8, 1989, among the Company, Walker Manufacturing Company,
a division of Tenneco, Walker Electronic Mufflers, Inc. and NCT Muffler, Inc.,
incorporated herein by reference to Exhibit (c)(1) to the Company's Current
Report on Form 8-K, dated November 8, 1989, as amended on Form 8, dated January
24, 1990.
10(l)(1) Letter Agreement between Tenneco Automotive,
a division of Tennessee Gas Pipeline Company, and the Company dated November
22, 1993, incorporated herein by reference to Exhibit 10(a) to the Company's
Current Report on Form 8-K dated November 22, 1993.
10(l)(2) Stock Purchase Agreement between Tenneco
Automotive, a division of Tennessee Gas Pipeline Company, and the Company dated
December 14, 1993, incorporated herein by reference to Exhibit 10(b) to the
Company's Current Report on Form 8-K dated November 24, 1993.
10(l)(3) Transfer Agreement among Walker Manufacturing
Company a division of Tennessee Gas Pipeline Company, Walker Electronic
Mufflers, Inc., the Company, NCT Muffler, Inc., Chaplin Patents Holding Co.,
Inc. and Walker Noise Cancellation Technologies dated November 15, 1995. **
10(l)(4) License Agreement between Chaplin Patents
Holding Co., Inc. and Walker Electronic Mufflers, Inc. dated November 15,
1995. **
10(l)(5) License Agreement between the Company and
Walker Electronic Mufflers, Inc. dated November 15, 1995. **
10(l)(6) Support, Research and Development Agreement
among Walker Electronic Mufflers, Inc., the Company, NCT Muffler, Inc. and
Chaplin Patents Holding Co., Inc. dated November 15, 1995. **
10(l)(7) Mutual Limited Release by (i) the Company,
NCT Muffler, Inc. and Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas
Pipeline Company and Walker Electronic Mufflers, Inc. dated November 15, 1995.
10(m) Technical Assistance and License Agreement,
dated March 25, 1991, among the Company, Foster Electric Co., Ltd. and
Foster/NCT Headsets International Ltd., incorporated herein by reference to
Exhibit 10(nn) to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.**
49
<PAGE> 50
10(m)(1) Amendment, dated April 16, 1991, to Technical
Assistance and License Agreement, dated March 25, 1991, among the Company,
Foster Electric Co., Ltd. and Foster/NCT Headsets International Ltd.,
incorporated herein by reference to Exhibit 10(nn)(1) to Amendment No. 5 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(m)(2) Letter Agreement between Foster Electric Co.,
Ltd. and the Company dated November 22, 1993, incorporated herein by reference
to Exhibit 10(b) to the Company's Current Report on Form 8-K dated November
22,1993.
10(m)(3) Letter agreement among Foster Electric Co.,
Ltd., Foster NCT Headsets International, Ltd. and the Company dated July 28,
1995, incorporated herein by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
10(n) Joint Development Cooperation Agreement,
dated June 28, 1991, between AB Electrolux and the Company, incorporated herein
by reference to Exhibit 10(oo) to Amendment No. 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.**
10(n)(1) Amendments to the Joint Development
Cooperation Agreement, dated June 28, 1991, between AB Electrolux and the
Company as set forth in the First Amendment to Joint Development Cooperation
Agreement, dated September 1, 1993, between AB Electrolux and the Company,
incorporated herein by reference to Exhibit 10(z)(1) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.**
10(n)(2) Second Amendment to Joint Development
Cooperation Agreement, dated January, 1994 between AB Electrolux and the
Company, incorporated herein by reference to the Exhibit 10(z)(2) to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10(o) Letter Agreement, dated March 19, 1992,
between Siemens Medical Systems, Inc. and NCT Medical Systems, Inc.,
incorporated herein by reference to Exhibit 10(pp) to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10(o)(1) OEM Agreement between the Company and Siemens
AG dated November 24, 1993, incorporated herein by reference to Exhibit 10(a)
to the Company's Current Report on Form 8-K dated November 24, 1993.
*10(p) Stock Incentive Plan, as adopted on October
6, 1992, amended on April 14, 1993, and approved at the Annual Meeting of
Stockholders May 27, 1993, incorporated herein by reference to Exhibit 10(rr)
to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
50
<PAGE> 51
10(q) Marketing Agreement, dated January 4, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(ee) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(1) Marketing Agreement (Non-retrofit Utility
Products), dated May 15, 1993, between Active Acoustical Solutions, Inc. and
the Company, incorporated herein by reference to Exhibit 10(ff) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
10(q)(2) Marketing, Engineering Services and
Distribution Agreement (Retrofit Transformer Products), dated May 15, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(gg) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(3) Marketing Agreement (Feeder Bowls), dated May
15, 1993, between Active Acoustical Solutions, Inc. and the Company,
incorporated herein by reference to Exhibit 10(hh) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10(q)(4) Teaming Agreement, dated September 29, 1993,
between Active Acoustical Solutions, Inc. and the Company, incorporated herein
by reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10(q)(5) Master Agreement between Noise Cancellation
Technologies, Inc. and Quiet Power Systems, Inc. dated March 27, 1995,
incorporated herein by reference to Exhibit 10(a) of the Company's Current
Report on Form 8-K filed with the Securities and Exchange commission on August
4, 1995.
10(q)(6) Letter Agreement between Noise Cancellation
Technologies, Inc. and Quiet Power Systems, Inc. dated April 21, 1995,
incorporated herein by reference to Exhibit 10(b) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(r) Asset Purchase Agreement, dated September 16,
1994, between Active Noise and Vibration Technologies, Inc. and the Company,
incorporated herein by reference to Exhibit 2 to the Company's Current Report
on Form 8-K filed September 19, 1994.
*10(s) Noise Cancellation Technologies, Inc. Option
Plan for Certain Directors, incorporated herein by reference to Exhibit 10 to
Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
51
<PAGE> 52
10(t) Variation of Teaming Agreement between Noise
Cancellation Technologies, Inc. and Ultra Electronics Limited dated April 6,
1995, incorporated herein by reference to Exhibit 10(c) of the Company's
Current Report on Form 8-K filed August 4, 1995.)
10(t)(1) Agreement for Sale and Purchase of
Part of the Business and Certain Assets among Noise Cancellation Technologies,
Inc., Noise Cancellation Technologies (UK) Limited and Ultra Electronics
Limited dated April 6, 1995, incorporated herein by reference to Exhibit 10(d)
of the Company's Current Report on Form 8-K filed August 4, 1995.
10(t)(2) Patent License Agreement among Noise
Cancellation Technologies, Inc., Noise Cancellation Technologies (UK) Limited
and Ultra Electronics Limited dated April 6, 1995, incorporated herein by
reference to Exhibit 10(e) of the Company's Current Report on Form 8-K filed
August 4, 1995)
10(t)(3) License Agreement between Chaplin
Patents Holding Co., Inc. and Ultra Electronics Limited dated April 6, 1995,
incorporated herein by reference to Exhibit 10(f) of the Company's Current
Report on Form 8-K filed August 4, 1995.
10(t)(4) Patent Sub-License Agreement among
Noise Cancellation Technologies, Inc., Noise Cancellation Technologies (UK)
Limited and Ultra Electronics Limited dated May 15, 1995, incorporated herein
by reference to Exhibit 10(g) of the Company's Current Report on Form 8-K filed
August 4, 1995.
*10(u) Agreement among Noise Cancellation
Technologies, Inc., Noise Cancellation Technologies (UK) Limited, Dr. Andrew
John Langley, Dr. Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
1995, incorporated herein by reference to Exhibit 10(h) of the Company's
Current Report on Form 8-K filed August 4, 1995.)
11 Computation of net (loss) per share.***
21 Subsidiaries.
23(a) Consent of Richard A. Eisner & Company, L.L.P.
23(b) Consent of Coopers & Lybrand L.L.P.
52
<PAGE> 53
27 Financial Data Schedule.
99(a) Letter from Coopers & Lybrand, Chartered Accountants, to
Richard A. Eisner & Company regarding audited financial
statements of the Company's U.K. subsidiaries and reports of
Coopers & Lybrand, Chartered Accountants, on their audits of
such financial statements, incorporated herein by reference
to Exhibit 99 to the Company's Annual Report on 10-K for the
fiscal year ended December 31, 1994.
99(b) Letter from Peters Elworthy & Moore, Chartered Accountants,
to Richard A. Eisner & Company regarding audited financial
statements of the Company's U.K. subsidiaries and reports of
Peters Elworthy & Moore, Chartered Accountants, on their
audits of such financial statements.
- -----------
* Pertains to a management contract or compensation plan or
arrangement.
** Confidential treatment requested for portions of this document.
*** To be filed by amendment.
(b) The following report on Form 8-K was filed during the last quarter of
the period covered by this Report.
A report on Form 8-K was filed on December 19, 1995 reporting (i) the
sale of 4.8 million shares of the Common Stock of the Company in a private
placement on November 14, 1995, (ii) the execution of a series of related
agreements with Walker Manufacturing Company "Walker" on November 15, 1995
providing for the transfer of the Company's 50% interest in Walker Noise
Cancellation Technologies ("WNCT") to Walker, the elimination of the Company's
obligation to fund certain development work, the transfer to Walker of certain
tangible assets of the Company related to the business of WNCT, the expansion
of certain existing technology licenses from the Company and an affiliate of
the Company, and other related matters, and (iii) condensed consolidated
balance sheets (unaudited) of the Company and its subsidiaries as of September
30, 1995 and as of November 30, 1995, reflecting the transactions noted in the
foregoing clauses (i) and (ii).
53
<PAGE> 54
NOISE CANCELLATION TECHNOLOGIES (UK) LIMITED
AUDITORS REPORT TO THE MEMBERS
We have audited the financial statements on pages 6 to 17 which have been
prepared under the historical cost convention.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the Company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the Company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether cause by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Fundamental Uncertainty
In forming our opinion we have considered the adequacy of the disclosures made
in the financial statements concerning the basis of preparation. The financial
statements have been prepared on a going concern basis and the validity of this
depends on the Company's ability to meet its liabilities as they fall due. The
financial statements do not include any adjustments that would result from a
failure to continue to meet its liabilities. Details of the circumstances
relating to this fundamental uncertainty are described in note 1. Our opinion
is not qualified in this respect.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs at 31 December 1995 and of its profit and cashflows
for the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
/s/ PETERS ELWORTHY & MOORE
Chartered Accountants and
Registered Auditor
CAMBRIDGE
7 March 1996
54
<PAGE> 55
Exhibit 21
NOISE CANCELLATION TECHNOLOGIES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION
- ---- OF INCORPORATION
OWNERSHIP OR ORGANIZATION EQUITY
- --------- --------------- ------
<S> <C> <C>
NCT Muffler, Inc. Delaware 100%
NCT Far East, Inc. Delaware 100%
NCT Medical Systems, Inc. Delaware 90%
Noise Cancellation Technologies, (UK) Limited UK 100%
2020 Science Limited UK 100%
Analog/NCT Supply Ltd. Delaware 50%
Chaplin Patents Holding Co., Inc. Delaware 100%
Harris NCT Supply L.L.C. Delaware 50%
OnActive Technologies, L.L.C. Delaware 50%
</TABLE>
55
<PAGE> 56
Exhibit 99(b)
[PETERS ELWORTHY & MOORE LETTERHEAD]
YOUR REF OUR REF PRC/J/5799 DATE 7 March 1996
Mr R Soreff
Richard A Eisner & Company
575 Madison Avenue
New York
NY10022 -2597
Dear Sirs
We enclose the audited financial statements for Noise Cancellation Technologies
(UK) Limited for the year ended 31 December 1995.
These statements have been prepared in accordance with applicable Accounting
Standards in the United Kingdom and audited in accordance with Auditing
Standards issued by the Auditing Practices Board.
As a result of our review of the financial statements we are not aware of any
significant deviations from United States generally accepted accounting
principles.
Yours faithfully
/s/ PETERS ELWORTHY & MOORE
- ---------------------------
56
<PAGE> 57
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements of Noise Cancellation Technologies, Inc. on Form S-3 (File Nos.
33-47611, 33-51468, 33-74442 and 33-84694), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File No. 33-64792) of our report dated
March 8, 1996 (with respect to Note 15, April 10, 1996), on our audits of the
financial statements and financial statements and schedules of the Company as
of December 31, 1995 and December 31, 1994 and for the years ended December
31, 1995 and December 31, 1994 which report is included in this Annual Report
on Form 10-K.
/s/ Richard A. Eisner & Company, L.L.P.
- ---------------------------------------
Richard A. Eisner & Company, L.L.P.
New York, New York
April 10, 1996
57
<PAGE> 58
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Noise Cancellation Technologies, Inc. (the "Company") on Form S-3 (File Nos.
33-47611, 33-51468, 33-74442 and 33-84694), on Form S-1 (File Nos. 33-19926,
33-38584 and 33-44790) and on Form S-8 (File No. 33-64792) of our report dated
March 24, 1994, except as to the third paragraph therein related to certain
subsequent uncertainties for which the date is December 19, 1994, on our audit
of the financial statements and financial statement schedule of the Company for
the year ended December 31, 1993, which report is included in this Annual
Report on Form 10-K.
Such report contains a paragraph which emphasizes certain uncertainties
(unaudited) arising subsequent to the date of our original report that indicate
that at December 19, 1994 the Company may be unable to continue as a going
concern through 1995.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
April 11, 1996
58
<PAGE> 59
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Jay M. Haft Date: April 15, 1996
------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- -----
<S> <C> <C>
/s/ John J. McCloy II Co-Chairman of the Board of Directors April 15, 1996
- ---------------------
John J. McCloy II
/s/ Michael J. Parrella President and Director April 15, 1996
- -----------------------
Michael J. Parrella
/s/ Stephen J. Fogarty Senior Vice President and
- ---------------------- Chief Financial Officer April 15, 1996
Stephen J. Fogarty (Principal Financial and
Accounting Officer)
/s/ Samuel A. Oolie Director April 15, 1996
- -------------------
Samuel A. Oolie
/s/ Jay M. Haft Chief Executive Officer, and Co-Chairman of
- ---------------- the Board of Directors April 15, 1996
Jay M. Haft (Principal Executive Officer)
/s/Alastair Keith Director April 15, 1996
- -----------------
Alastair Keith
</TABLE>
59
<PAGE> 60
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Noise Cancellation Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Noise
Cancellation Technologies, Inc. and subsidiaries as at December 31, 1994 and
December 31, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1994 and 1995 financial statements of the
Company's two foreign subsidiaries. These subsidiaries accounted for revenues
of approximately $1,800,000 and $1,200,000 for the years ended December 31,
1994 and December 31, 1995, respectively, and assets of approximately
$1,900,000 and $586,000 at December 31, 1994 and December 31, 1995,
respectively. These statements were audited by other auditors whose reports
have been furnished to us, one of which contained a reference to the
uncertainty relating to the Company's ability to continue as a going concern.
Our opinion, insofar as it relates to the amounts included for these entities,
is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of the other
auditors, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Noise Cancellation
Technologies, Inc. and subsidiaries as at December 31, 1994 and December 31,
1995 and the results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has incurred recurring
operating losses and will require additional financing. These factors raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/S/ RICHARD A. EISNER & CO., LLP
- -----------------------------------
Richard A. Eisner & Co., LLP
New York, New York
March 8, 1996
With respect to Note 15
April 10, 1996
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Noise Cancellation Technologies, Inc. and Subsidiaries for
the year ended December 31, 1993, and the related financial statement schedule
for the year ended December 31, 1993, listed in the index on page 38 of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statements and financial
statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The aforementioned consolidated financial statements and financial statement
schedule have been prepared assuming that the Company would continue as a going
concern. Our report on our audit of such consolidated financial statements and
financial statement schedule was issued originally under date of March 24,
1994. Such report was based upon the facts and circumstances as the existed at
that time, including that substantial doubt did not exist as to the Company's
ability to continue as a going concern through December 31, 1994. Subsequent
to the date of issuance of our original report, certain uncertainties have
arisen as described in "Risk Factors - Current Financial Condition; Cash
Position" appearing in the Company's Current Report on Form 8-K, Item 5, filed
on December 19, 1994. Such subsequent uncertainties with respect to the
availability of funds to sustain the Company's activities indicate at December
19, 1994, that the Company may be unable to continue as a going concern through
1995.
In our opinion, the financial statements of Noise Cancellation Technologies,
Inc. and Subsidiaries referred to above present fairly, in all material
respects, the consolidated results of their operations and their cash flows for
the year ended December 31, 1993, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Stamford Connecticut
March 24, 1994, except as to the
third paragraph above for which
the date is December 19, 1994
F-2
<PAGE> 62
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands of dollars)
December 31,
-------------------------------------------
ASSETS 1994 1995
------------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Notes 1, 2 and 3) $ 2,423 $ 1,831
Short-term investments (Notes 2 and 13) 18 -
Accounts receivable:
Trade (Note 2):
Technology licensing fees 105 -
Joint ventures and affiliates 1,123 241
Other 874 189
Unbilled 333 260
Allowance for doubtful accounts (901) (119)
------------------- ------------------
Total accounts receivable $ 1,534 $ 571
Inventories, net of reserves (Note 4) 2,124 1,701
Other current assets 314 225
------------------- ------------------
Total current assets $ 6,413 $ 4,328
Property and equipment, net (Note 5) 3,331 2,897
Patent rights and other intangibles, net (Notes 2 and 14) 2,336 2,194
Other assets 291 164
------------------- ------------------
$ 12,371 $ 9,583
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,490 $ 1,836
Accrued expenses 672 571
Losses in excess of investment in joint ventures (Note 3) 1,680 -
Accrued payroll, taxes and related expenses 602 144
Customers' advances 46 43
------------------- ------------------
Total current liabilities $ 5,490 $ 2,594
------------------- ------------------
Losses in excess of investment in joint ventures (Note 3) $ 1,413 $ -
Long term obligations - 105
------------------- ------------------
Total other liabilities $ 1,413 $ 105
------------------- ------------------
Commitments and contingencies (Notes 3, 10 and 11)
STOCKHOLDERS' EQUITY (Note 6)
Common stock, $.01 par value, 100,000,000 shares authorized; issued
and outstanding 86,088,644 and 92,828,407 shares, respectively $ 861 $ 928
Additional paid-in-capital 75,177 78,667
Accumulated deficit (68,780) (72,848)
Cumulative translation adjustment 152 150
Common stock subscriptions receivable (1,196) (13)
Expenses to be paid with common stock (746) -
------------------- ------------------
Total stockholders' equity $ 5,468 $ 6,884
------------------- ------------------
$ 12,371 $ 9,583
=================== ==================
</TABLE>
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
F-3
<PAGE> 63
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1993 1994 1995
------------------------------------------
<S> <C> <C> <C>
REVENUES:
Technology licensing fees (Notes 2 & 3) $ 60 $ 452 $ 6,580
Product sales, net 1,728 2,337 1,589
Engineering and development services 3,598 4,335 2,297
--------- --------- ------------
Total revenues $ 5,386 $ 7,124 $ 10,466
--------- --------- ------------
COSTS AND EXPENSES:
Costs of sales $ 1,309 $ 4,073 $ 1,579
Costs of engineering and development services 2,803 4,193 2,340
Selling, general and administrative 7,231 9,281 5,416
Research and development (including $500,000 of
purchased research and development in 1994) 7,963 9,522 4,776
Equity in net loss (income) of unconsolidated affiliates 3,582 1,824 (80)
Provision for doubtful accounts - 718 552
Interest expense 2 7 4
Interest (income) (313) (587) (53)
--------- --------- ------------
Total costs and expenses $ 22,577 $ 29,031 $ 14,534
--------- --------- ------------
NET (LOSS) $ (17,191) $ (21,907) $ (4,068)
========= ========= ============
Weighted average number of common
shares outstanding 70,416 82,906 87,921
========= ========= ============
NET LOSS PER COMMON SHARE $ (.24) $ (.26) $ (.05)
========= ========= ============
</TABLE>
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
F-4
<PAGE> 64
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands of dollars and shares)
Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital Deficit
--------- ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 68,165 $ 682 $ 42,980 $ (29,682)
Sale of common stock, less expenses of $1,959 9,900 99 26,085 -
Marketing expenses attributable to warrants - - 120 -
Shares issued upon exercise of warrants & options 3,186 32 2,079 -
Proceeds from payment of subscription receivable - - - -
Net loss - - - (17,191)
Translation adjustment - - - -
Expenses paid with common stock - - 36 -
Expenses related to prior sale of common stock - - (56) -
--------- ------ ---------- -----------
Balance at December 31, 1993 81,251 $ 813 $ 71,244 $ (46,873)
Shares issued for acquisition of certain assets 2,025 20 2,206 -
Consulting expense attributable to warrants - - 10 -
Shares issued upon exercise of warrants & options 2,208 22 944 -
Receipt of services in payment of stock subscription - - - -
Settlement of obligations 560 6 694 -
Net loss - - - (21,907)
Translation adjustment - - - -
Restricted shares issued for Director's compensation 45 - 99 -
Expenses related to prior sale of common stock - - (20) -
--------- ------ ---------- -----------
Balance at December 31, 1994 86,089 $ 861 $ 75,177 $ (68,780)
Sale of common stock, less expenses of $271 6,800 68 3,921 -
Consulting expense attributable to warrants - - 8 -
Shares issued upon exercise of warrants & options 1,050 10 692 -
Receipt of services in payment of stock subscription - - - -
Settlement of obligations - - (344) -
Net loss - - - (4,068)
Translation adjustment - - - -
Retirement of shares attributable to license revenue (Note 3) (1,110) (11) (787) -
--------- ------ ---------- -----------
Balance at December 31, 1995 92,829 $ 928 $ 78,667 $ (72,848)
========= ====== ========== ===========
<CAPTION>
(In thousands of dollars and shares)
Expenses
Cumulative Stock to be
Translation Subscription Paid With
Adjustment Receivable Common Stock Total
-------- ----------- -------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ 117 $ (117) $ (277) $ 13,703
Sale of common stock, less expenses of $1,959 - (1,993) - 24,191
Marketing expenses attributable to warrants - - - 120
Shares issued upon exercise of warrants & options - - - 2,111
Proceeds from payment of subscription receivable - 117 - 117
Net loss - - - (17,191)
Translation adjustment (23) - - (23)
Expenses paid with common stock - - 231 267
Expenses related to prior sale of common stock - - - (56)
-------- ----------- -------------- ----------------
Balance at December 31, 1993 94 $ (1,993) $ (46) $ 23,239
Shares issued for acquisition of certain assets - - - 2,226
Consulting expense attributable to warrants - - - 10
Shares issued upon exercise of warrants & options - - - 966
Receipt of services in payment of stock subscription - 797 - 797
Settlement of obligations - - (700) -
Net loss - - - (21,907)
Translation adjustment 58 - - 58
Restricted shares issued for Director's compensation - - - 99
Expenses related to prior sale of common stock - - - (20)
-------- ----------- -------------- ----------------
Balance at December 31, 1994 $ 152 $ (1,196) $ (746) $ 5,468
Sale of common stock, less expenses of $271 - - - 3,989
Consulting expense attributable to warrants - - - 8
Shares issued upon exercise of warrants & options - (13) - 689
Receipt of services in payment of stock subscription - 1,196 - 1,196
Settlement of obligations - - 746 402
Net loss - - - (4,068)
Translation adjustment (2) - - (2)
Retirement of shares attributable to license revenue (Note 3) - - - (798)
-------- ----------- -------------- ---------------
Balance at December 31, 1995 $ 150 $ (13) $ - $ 6,884
======== =========== ============== ===============
</TABLE>
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
F-5
<PAGE> 65
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands of dollars)
Years
Ended December 31,
------------------------------------
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (17,191) $ (21,907) $ (4,068)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 566 994 1,127
Common stock and warrants issued as consideration for:
Compensation - 109 8
Rent and marketing expenses 523 - 355
Research and development - 500 -
Receipt of license fee in exchange for inventory and release of obligation - - (3,266)
Receipt of services in payment of stock subscription - 165 -
Provision for slow moving and obsolete inventory - 2,032 -
Provision for tooling costs and write-off - 100 94
Provision for doubtful accounts 190 718 552
Realized loss on sale of short-term investments - 375 -
Equity in net loss (income) of unconsolidated affiliates 3,582 1,824 (80)
Unrealized foreign currency loss (13) 16 32
Loss on disposition of fixed assets - - 107
Disposition of short-term investments - 18,527 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (819) (921) 302
(Increase) in license fees receivable 185 180 -
(Increase) decrease in inventories (1,584) (1,518) 212
(Increase) decrease in other assets (390) (283) 299
Increase (decrease) in accounts payable and accrued expenses 787 283 (190)
Increase (decrease) in other liabilities 866 (1,324) (482)
----------- ----------- ----------
Net cash used in operating activities $ (13,298) $ (130) $ (4,998)
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures $ (858) $ (1,286) $ (80)
Acquisition of patent rights - (70) (210)
Investment in joint ventures (1,000) (191) -
Purchases of short-term investments (20,713) - -
Sales of short term investments 6,293 - 18
----------- ----------- ----------
Net cash used in investing activities $ (16,278) $ (1,547) $ (272)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ 24,192 $ - $ 3,989
Expenses related to prior sale of common stock (56) (20) -
Exercise of stock purchase warrants and options 2,111 966 689
Subscriptions receivable 117 - -
Repayments for patent rights (3) - -
----------- ----------- ----------
Net cash provided by financing activities $ 26,361 $ 946 $ 4,678
----------- ----------- ----------
Net decrease in cash and cash equivalents $ (3,215) $ (731) $ (592)
Cash and cash equivalents - beginning of period 6,369 3,154 2,423
----------- ----------- ----------
Cash and cash equivalents - end of period $ 3,154 $ 2,423 $ 1,831
=========== =========== ==========
Cash paid for interest $ 1 $ 7 $ 4
=========== =========== ==========
Non-cash investing and financing activity:
Issuance of common stock in exchange for certain assets of ANVT $ - $ 2,200 $ -
=========== =========== ==========
</TABLE>
See Notes 6, 8 and 11 with respect to settlement of certain obligations by
issuance of securities and see Note 3 with respect to issuance of common stock
in exchange for notes receivable.
Attention is directed to the foregoing accountant's reports and to the
accompanying notes to the consolidated financial statements.
F-6
<PAGE> 66
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BACKGROUND:
Noise Cancellation Technologies, Inc. (the "Company") is engaged in
the design, development, licensing, production and distribution of electronic
systems that actively reduce noise and vibration, principally through joint
ventures and other forms of strategic alliances. The Company's activities to
date have principally involved the developing of its electronic systems for
commercial use and providing engineering and development services under
contracts with strategic partners and third parties.
The technology supporting the Company's electronic systems was
developed using technology maintained under various patents (the "Chaplin
Patents") held by Chaplin-Patents Holding Co., Inc. ("CPH") as well as patented
technology acquired or developed by the Company. CPH, formerly a joint venture
with Active Noise Vibration Technologies, Inc. ("ANVT") was established to
maintain and defend these patent rights. The former joint venture agreement
relating to the Chaplin Patents required that the Company only license or share
the related technology with entities who are affiliates of the Company. As a
result, the Company established various joint ventures and formed other
strategic alliances (see Note 3) to further develop the technology and
electronic systems and components based on the Chaplin Patents, to develop such
technology into commercial applications, to integrate the electronic systems
into existing products and to distribute such systems and products into various
industrial, commercial and consumer markets.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $72.8 million on a
cumulative basis through December 31, 1995. These losses, which include the
costs for development of products for commercial use, have been funded
primarily from the sale of common stock, including the exercise of warrants or
options to purchase common stock, and by technology licensing fees and
engineering and development funds received from joint venture and other
strategic partners. As discussed in Note 3, agreements with joint venture and
other strategic partners generally require that a portion of the initial cash
flows, if any, generated by the ventures or the alliances be paid on a
preferential basis to the Company's co-venturers until the technology licensing
fees and engineering and development funds provided to the venture or the
Company are recovered.
Cash, cash equivalents and short-term investments amount to $1.8
million at December 31, 1995, decreasing from $2.4 million at December 31,
1994. Management does not believe that available funds at December 31, 1995 are
sufficient to sustain the Company for the next twelve months. Management
believes that cash and the cash anticipated from the exercise of warrants and
options, the funding derived from forecasted technology license fees,
royalties, and product sales, and engineering and development revenue, the
operating cost savings from the reduction in employees and
F - 7
<PAGE> 67
reduced capital expenditures should be sufficient to sustain the Company's
anticipated future level of operations into 1997. However, the period during
1997 through which it can be sustained is dependent upon the level of
realization of funding from technology license fees, royalties and product
sales, and engineering and development revenue and the achievement of the
operating cost savings from the events described above, all of which are
presently uncertain.
There can be no assurance that additional 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 further and
substantially cut back its level of operations in order to conserve cash.
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 (see Note 15 with
respect to recent financing).
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the 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. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1995, about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating
to the recoverability of the carrying amount of recorded assets or the amount
of liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of the Company and its
wholly owned subsidiaries. All material inter-company transactions and account
balances have been eliminated in consolidation.
Unconsolidated affiliates include joint ventures and other entities
not controlled by the Company, but over which the Company maintains significant
influence and in which the Company's ownership interest is 50% or less. The
Company's investments in these entities are accounted for on the equity method.
When the Company's equity in cumulative losses exceeds its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends applying the equity method (see Note 3). 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.
F - 8
<PAGE> 68
REVENUE RECOGNITION:
Products Sales:
Revenue is recognized as the product is shipped.
Engineering and development services:
Revenue from engineering and development contracts is recognized and
billed as the services are performed. However, revenue from certain
engineering and development contracts are recognized as services are performed
under the percentage of completion method after 10% of the total estimated
costs have been incurred. Under the percentage of completion method, revenues
and gross profit are recognized as work is performed based on the relationship
between actual costs incurred and total estimated costs at completion.
Estimated losses are recorded when identified.
Revenues recorded under the percentage of completion method amounted
to $249,000, $249,700 and $605,500 for the years ended December 31, 1995, 1994
and 1993, respectively. Retainage balances were $8,200 at December 31, 1995
and 1994. The 1995 balance is expected to be collected within one year.
Technology Licensing Fees:
Technology licensing fees paid by joint venturers, co-venturers,
strategic partners or other licensees which are nonrefundable, are recognized
in income upon execution of the license agreement or upon completion of any
performance criteria specified within the agreement. See Note 3, with respect
to the license fee recorded by the Company in connection with the Walker Noise
Cancellation Technologies and Ultra Electronics, Ltd. transactions.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers all money market accounts and investments with
original maturities of three months or less at the time of purchase to be cash
equivalents.
Short-term investments principally comprise high quality investments
in fixed-income securities funds and mid-term, high quality bond funds.
F - 9
<PAGE> 69
INVENTORIES:
Inventories are stated at the lower of cost (first in, first out) or
market.
With regard to the Company's assessment of the realizability of
inventory, the Company periodically conducts a complete physical inventory;
currently this is done on a quarterly basis. At the same time, the Company
reviews the movement of inventory on an item by item basis to determine the
value of items which are either slow moving or have become obsolete since the
last quarterly review. After applying the above noted measurement criteria, as
well as looking forward to assess the potential for near term product
engineering changes and/or technological obsolescence, the Company determines
the current need for inventory reserves. After applying the above noted
measurement criteria at December 31, 1995, the Company determined that a
reserve of $355,000 was adequate.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciation is recorded
on the straight-line method over the estimated useful lives of the respective
assets. Leasehold improvements are amortized over the shorter of their useful
lives or the related lease term.
PATENT RIGHTS:
Patent rights are stated at cost and are amortized on a straight line
basis over the remaining average life of the patents (ranging from 1 to 15
years). Amortization expense was $96,900, $166,700 and $398,100 for 1993, 1994
and 1995, respectively. Accumulated amortization was $676,700 and $1,074,800
at December 31, 1994 and 1995, respectively.
It is the Company's policy to review its individual patents on a
regular basis to determine whether any event has occurred which could impair
the valuation of any such patent.
FOREIGN CURRENCY TRANSLATION:
The financial statements for the United Kingdom operations are
translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for revenues and expenses. The
effects of foreign currency translation adjustments are included as a component
of stockholders' equity and gains and losses resulting from foreign currency
transactions are included in income.
LOSS PER COMMON SHARE:
The net loss per common share has been determined on the basis of the
weighted average number of shares of common stock outstanding during the
period. Common
F - 10
<PAGE> 70
stock equivalents (including stock options and warrants) have not been
considered since their effect would be antidilutive.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
short-term investments and trade receivables. The Company primarily holds its
cash and cash equivalents in two banks. Deposits in excess of federally insured
limits were $1.6 million at December 31, 1995. Short-term investments are
primarily held in liquid fixed income funds which are invested principally in
high quality government securities. The Company sells its products and
services to original equipment manufacturers, distributors and end users in
various industries worldwide. As shown below, the Company's five largest
customers accounted for approximately 82.4% of revenues during 1995 and 50.8%
of gross accounts receivable at December 31, 1995. The Company does not
require collateral or other security to support customer receivables.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
AND FOR THE YEAR
THEN ENDED
-----------------------------
ACCOUNTS
CUSTOMER RECEIVABLE REVENUE
-------------------------------------------------- ---------- ------------
<S> <C> <C>
Walker Noise Cancellation Technologies $2,700 $3,993,500
Ultra Electronics, Ltd. 122,100 3,153,400
Telex Communications, Inc. --- 531,000
Coherent Communications 124,500 524,500
ELESA 100,900 424,000
All Other 339,300 1,839,900
---------- ------------
Total $689,500 $10,466,300
========== ============
</TABLE>
The Company regularly assesses the realizability of its accounts
receivable and performs a detailed analysis of its aged accounts receivable on
no less than a quarterly basis. When quantifying the realizability of accounts
receivable, the Company takes into consideration the value of receivables in
the 90+ day category, the nature of disputes, if any, and the progression of
conversations and/or correspondence between the Company and customers regarding
the underlying cause for the age of such receivables. After applying the above
noted measurement criteria as of December 31, 1995, the Company determined that
a reserve of $119,000 was adequate.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1993 and 1994
financial statements to conform with the 1995 presentation.
F - 11
<PAGE> 71
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123,. "Accounting for Stock-Based Compensation" which is effective for the
Company's 1996 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123
or under the provisions of APB No. 25, but requires pro forma disclosure in
the footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. At this time, the Company intends to continue
accounting for its stock-based compensation in accordance with the provisions
of APB No. 25. As such, the adoption of SFAS No. 123 will not impact the
financial position or results of operations of the Company.
3. JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:
The following is a summary of the Company's joint ventures and other
strategic alliances as of December 31, 1995.
The Company and certain of its wholly-owned subsidiaries have entered
into agreements to establish joint ventures and other 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 technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding
generally includes amounts paid or services rendered for engineering and
development. In exchange for this funding, the other party generally receives
a preference in the distribution of cash and/or profits from the joint ventures
or royalties from these alliances until such time that the support funding
(plus an "interest" factor in some instances) is recovered. At December 31,
1995, there were no preferred distributions due to joint venture partners from
future profits of the joint ventures.
Technology licensing fees and engineering and development fees paid by
joint ventures to the Company are recorded as income since there is no recourse
to the Company for these amounts or any commitment by the Company to fund the
obligations of the venture.
F - 12
<PAGE> 72
When the Company's share of cumulative losses equals its investment
and the Company has no obligation or intention to fund such additional losses,
the Company suspends applying the equity method. The aggregate amount of the
Company's share of losses in these joint ventures in excess of the Company's
investments which has not been recorded was zero at December 31, 1995. 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.
Certain of the joint ventures will be suppliers to the Company and to
other of the joint ventures and will transfer products to the related entities
based upon pricing formulas established in the agreements. The formula is
generally based upon fully burdened cost, as defined in the agreements, plus a
nominal profit.
Total revenues recorded by the Company relating to the joint ventures
and alliances, or their principals, for technology licensing fees, engineering
and development services and product sales were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
JOINT VENTURE/ALLIANCE 1993 1994 1995
------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Walker Noise Cancellation Technologies $1,069,200 $1,701,700 $3,993,500
Ultra Electronics, Ltd. 683,500 1,072,400 3,153,400
ELESA -- -- 424,000
Siemens Medical Systems, Inc. 1,140,000 533,000 259,900
Foster/NCT Supply, Ltd. 51,100 144,700 133,200
AB Electrolux 503,600 162,500 129,000
Interkeller AG 107,700 105,600 --
Bosch-Siemens Hausgerate GmbH 260,000 -- --
Philips NCT Noise Cancellation N.V. 150,000 -- --
Boet Systeme Actif S.A. 14,000 -- --
=========== =========== ===========
Total $3,979,100 $3,719,900 $8,093,000
=========== =========== ===========
</TABLE>
Outlined below is a summary of the nature and terms of these ventures
or alliances:
JOINT VENTURES
Chaplin Patents Holding Company ("CPH") was co-owned on a 50/50 basis
by the Company and ANVT, a former competitor. On September 16, 1994, the
Company acquired the patents, technology, other intellectual property and
certain related tangible assets of ANVT. The Company also acquired all rights
under certain joint venture and customer agreements subject to the consent of
the other parties to those agreements. Included in the acquisition was ANVT's
50% interest in CPH at which time the Company became the sole shareholder of
CPH. CPH acquired certain patent rights relating to the reduction and
elimination of noise and vibration from the Company, ANVT and a third party.
The Company and ANVT had licensed co-exclusive rights to the Chaplin Patents
F - 13
<PAGE> 73
from CPH. The joint venture agreement related to the Chaplin Patents required
that the Company may only license or share the related technology with entities
who are affiliates of the Company. As a result, the Company has established
several joint ventures and formed other strategic alliances to further develop
the technology and electronic systems and components based on the Chaplin
Patents, to develop such technology into commercial applications, to integrate
the electronic systems into existing products and to distribute such systems
and products into various industrial, commercial and consumer markets. Initial
capital contributions by the Company and ANVT of $150,000 each to CPH were used
to acquire certain rights owned by the third party. Pursuant to the patent
license agreement, and until September 16, 1994 the Company and ANVT
contributed cash equally to CPH to fund administrative costs and provide for
maintenance and protection of the related patents. After September 16, 1994,
the Company, as sole shareholder of CPH, was responsible for 100% of CPH's
funding requirements. This funding charged to operations by the Company was
$244,000, $345,000 and $596,000 for each of the years in the three year period
ended December 31, 1995, respectively, and is included in general and
administrative expenses in the accompanying Statements of Operations.
Walker Noise Cancellation Technologies ("WNCT") was a 50/50 general
partnership between NCT Muffler, Inc., a wholly-owned subsidiary of the Company
and Walker Electronic Mufflers, Inc. ("WEM"), a wholly-owned subsidiary of
Tennessee Gas Pipeline Company. On November 15, 1995, the Company and Walker
executed a series of related agreements (the "Restructuring Agreements") and
concluded previously noted negotiations with Tenneco Automotive and Walker
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
WNCT to Walker. The Restructuring Agreements provided for the transfer of the
Company's interest in WNCT to Walker, the elimination of the Company's
previously expensed obligation to fund the remaining $2.4 million of product
and technology development work noted above, 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 as to future
activities. In consideration for the above, Walker paid the Company $0.3
million, delivered to the Company 1,110,083 shares of the Company's common
stock which Tenneco Automotive had purchased from the Company in December 1993
and has undertaken to pay the Company certain royalties from the exploitation
of the intellectual property rights granted to Walker under the expansion of
existing technology licenses. The shares delivered to the Company were retired
on November 16, 1995.
F - 14
<PAGE> 74
Accordingly, the Company recorded $3.6 million as a technology licensing fee
relating to the net effect of the above noted Restructuring Agreements in the
fourth quarter of 1995.
WNCT was established in 1989 to develop, manufacture and distribute
active mufflers for use in automobiles and other vehicles and other industrial
applications. The agreement between NCT and Walker was expanded and extended
in 1991.
Initial capital contributions by the Company and WEM were $750,000
each, and such amounts were paid by WNCT to the Company as a license fee in
1989. The joint venture agreement provided that WEM will make preferred
contributions to WNCT for the purpose of funding engineering and development
performed by the Company and engineering performed by WEM. Aggregate preferred
contributions made by WEM to WNCT (net of return of capital advances to WEM)
through December 31, 1994, amounted to $7.6 million, of which $4.2 million was
paid to the Company and $3.4 million was credited by WNCT to WEM's capital
account for the cost of engineering services performed. Interest on the
engineering preferred contributions and certain portions of the engineering and
development contributions was compounded monthly at 1% less than the bank prime
rate until repaid through preferred distributions. WEM's obligation to fund
engineering and development expired at the end of the first quarter of 1994.
The Company recorded income of $750,000 from the license fee in 1989.
The Company has also recorded as income its engineering and development
payments from WNCT, amounting to $1.1 million, $1.1 million and $0.7 million
for each of the years in the three year period ended December 31, 1995,
respectively. There is no recourse to the Company for these payments. Other
than certain future Walker funded research and development activities noted
above, the Company has no current plans, obligation or intention to provide
additional funding to WNCT.
In December, 1993, Tenneco Automotive, a division of Tennessee Gas
Pipeline Company, purchased shares of common stock of the Company for $3.0
million in cash, at a price per share of approximately $2.70, which was equal
to 94% of the price to the public of the shares of the Company's common stock
then offered. Immediately thereafter, the Company contributed $1.0 million to
the capital of WNCT, following which WNCT repaid $1.0 million of the capital
advances made to WNCT by WEM and representatives of WEM. The Company agreed to
restructure WNCT. Such restructuring would include giving WNCT worldwide
rights for the manufacture and sale of all muffler products except those
manufactured and sold in the consumer and defense markets. WNCT also would be
expanded to have, in addition to rights it has with respect to vehicular
mufflers, worldwide rights to all silencing and vibration applications (e.g.,
mufflers, cabin quieting, engine mounts, fan quieting and engine block
quieting) for all vehicles except trains, aircraft and watercraft. In
addition, the Company committed to help fund $4.0 million of product and
technology development work of the Company attributable to WNCT. Also pursuant
to the agreement with Tenneco Automotive, Walker's right to acquire the
Company's interest in WNCT upon the occurrence of
F - 15
<PAGE> 75
certain events was eliminated and Tenneco Automotive had the right to have a
representative serve on the Company's Board of Directors. The agreement with
Tenneco Automotive and the Company's related funding commitment resulted in
1993 recognition of $3.6 million of previously unrecognized losses and 1994
recognition of $1.4 million of current year losses with respect to the joint
venture with WEM. Such losses exceeding the Company's remaining investment in
WNCT amounted to $2.9 million at December 31, 1994. Of the $2.9 million, $1.5
million recorded as a current liability. The balance of $1.4 million was
classified as a long term liability. The above noted November 15, 1995
Restructuring Agreements significantly altered the foregoing terms of the
December 1993 agreement.
Prior to December 31, 1994, the Company's share of cumulative losses
equaled its investment and commitment to the joint venture. The Company had no
further obligation or intention to fund any additional losses therefore, the
Company suspended applying the equity method.
Foster/NCT Headsets International, Ltd. ("FNH") was a 50/50 joint
venture between Foster Electric Company, Ltd. ("Foster") and the Company. FNH
was established as a limited liability company in Japan in March 1991 to
develop, design, manufacture and sell active noise cancellation headset
systems. FNH had exclusive manufacturing rights for the headsets in the Far
East and non-exclusive marketing rights worldwide. Additionally, another joint
venture with Foster/NCT Supply, Ltd., ("FNS" as described below) served as a
supply joint venture for FNH.
On July 28, 1995, Foster Electric Co., Ltd. ("Foster"), Foster NCT
Headsets International ("FNH") and the Company executed a letter agreement
amending the 1991 agreement covering the headset joint venture company, FNH.
Pursuant to that agreement Foster acquired the Company's 50% interest in FNH
and a license to manufacture headsets for FNH and NCT with tooling currently
owned by NCT in consideration for Foster's assumption of FNH's outstanding
liabilities of $303,000. The agreement also grants FNH the right to sell
certain headsets on an exclusive basis in Japan and a non-exclusive basis
throughout the rest of the Far East, in consideration for a royalty on the sale
of such headsets.
Initial capital contributions made by the Company and Foster under the
FNH joint venture agreement were 6.5 million yen (historical cost of
approximately $47,000) each. In March, 1994 the Company and Foster agreed to
jointly and equally increase the capitalization of FNH to a total of 52 million
yen resulting in the Company's additional investment of $191,000. The increase
in capitalization enabled FNH to launch an expanded marketing effort in the
Company's products in the Far East.
Under related agreements, Foster paid a license fee to the Company of
$1 million, which was recognized as income in 1991, and agreed to pay an
additional $700,000 to the Company at a rate of two percent of sales after
cumulative sales by FNH reach $50
F - 16
<PAGE> 76
million and the accumulated deficit in FNH is reduced to zero. The license
fees paid to date in the amount of $1.0 million are not subject to repayment.
As part of the February 10, 1995 agreement to desolve the FNS joint
venture, (see FNS Note below) NCT has repurchased the exclusive manufacturing
rights for headsets in the Far East from Foster. The Company recorded a charge
of $780,000 in 1994 relating to these transactions.
In return for technical and management assistance provided by Foster,
FNH has agreed to pay Foster up to an aggregate amount of $1.4 million based on
three percent of sales; the first $700,000 of which are to be paid without
restriction based upon sales amount, the remaining $700,000 begin to be paid to
Foster when the FNH accumulated deficit is reduced to zero. Through December
31, 1994, the accumulated deficit of FNH was $543,000.
The Company's above noted incremental investment resulted in the
recognition of $42,000 of previously unrecognized losses and $149,000 of
current losses with respect to the FNH joint venture in 1994.
The Company has purchased certain tooling for use by FNH which it has
recorded on its books. The tooling will be amortized against products sold by
NCT.
Analog/NCT Supply Ltd. ("ADI/NCT") is a 50/50 joint venture between
Analog Devices, Inc. ("ADI") and the Company which was established in June
1992. ADI/NCT was formed to design, develop and manufacture computer chips to
be incorporated into the Company's electronic systems. Initial capital
contributions by the Company and ADI were nominal. The joint venture and
related agreements provide that each party will bear their respective cost of
design and development of the computer chips. ADI will manufacture and sell
the computer chips to ADI/NCT, based on orders provided to ADI/NCT by the
Company, at prices to be agreed upon by the Company and ADI. Administrative
services required by ADI/NCT will be provided by ADI, the costs of which will
be funded by the joint venture. No such services have been charged to or
incurred by the joint venture as of December 31, 1995.
Harris/NCT Supply, L.L.C. ("HARNCT") is a 50/50 limited liability
company owned equally by Harris Corporation ("Harris") and the Company under a
Limited Liability Company Agreement concluded in September, 1993 (the "LLC
Agreement"). HARNCT will develop and manufacture silicon chips to be
incorporated into the Company's electronic systems. Initial capital
contributions by the Company and Harris were nominal. The LLC Agreement
provides that each party will bear their respective cost of design and
development of the silicon chips. Harris will manufacture and sell the silicon
chips to HARNCT, based on orders provided to HARNCT by the Company, at prices
to be agreed upon by the Company and Harris. Administrative services required
by HARNCT will be provided by Harris, the costs of which will be funded by
HARNCT.
F - 17
<PAGE> 77
No such services have been charged to or incurred by HARNCT as of December 31,
1995.
OnActive Technologies, L.L.C. ("OAT") is a 50/50 limited liability
company owned equally by Applied Acoustic Research, L.L.C. ("AAR") and the
Company ("Members") under an Operating Agreement concluded in December, 1995.
OAT will design, develop, manufacture, market, distribute and sell flat panel
transducers and related components for use in audio applications and audio
systems installed in ground based vehicles. Initial capital contributions by
the Company and AAR were nominal and neither Member is required to make any
additional contribution to OAT. The Operating Agreement provides that services
and subcontracts provided to OAT by the Members are to be compensated by OAT at
115% of the Members fully burdened cost. Administrative services required by
OAT will be provided by the Company, the costs of which will be funded by OAT.
Such services for the period ended December 31, 1995 were nominal and not
charged to OAT. As of December 31, 1995 the Company recognized $80,000 of
income relating to its share of 1995 profit in OAT.
Foster/NCT Supply, Ltd., ("FNS") was a 30/70 joint venture between the
Company and Foster which was established in June 1991 to serve as a supply
joint venture for the Company's worldwide activities.
Foster and the Company have agreed that the acquisition of certain
assets of ANVT by NCT (see Note 14) has removed the necessity for the continued
existence of FNS. An orderly liquidation of FNS was completed in April 1995.
The agreement provided for the Company's repurchase from Foster for $0.6
million of the exclusive headset manufacturing rights in the Far East (see FNH
note above) and an immediate minimum 5% reduction in the price of headset
products to be produced by Foster for the Company. The Company accrued a $0.8
million charge in 1994 relating to this agreement, of which $0.2 million was
reflected as a current liability at December 31, 1994.
Capital contributions required under the joint venture agreement were
3 million yen from the Company and 7 million yen from Foster (approximately
$22,000 and $51,000, respectively). Foster was also required to provide
assistance to FNS for research and development activities amounting to $50,000
per month up to an aggregate of $1.2 million, which FNS was to repay to Foster
at the rate of one percent of the amount of each month's sales. There was no
recourse to the Company should FNS not record sufficient sales for Foster to
recover such research and development costs.
Boet Systeme Actif S.A. ("BSA") was a 49/51 joint venture between NCT
Muffler, Inc., a wholly-owned subsidiary of the Company, and S.A. Andre Boet
("Boet"), respectively. BSA was established in 1991 to develop, manufacture in
France, and sell worldwide NCT electronic silencers for use on non-automotive
internal combustion engines. BSA was responsible for the customization,
marketing and sales of the silencers. The Company was to assist BSA with
product development and employee
F - 18
<PAGE> 78
training. All supplies were to be purchased by BSA from either Boet or NCT
Muffler. Initial capital contributions by NCT Muffler and Boet were not
significant.
As a result of the April 1994 transfer to WNCT of the rights to market
the Company's industrial silencer products and anticipation of the Company's
November 15, 1995 agreement with Tenneco Automotive and Walker (see WNCT Note
above), in October, 1995 Boet assumed all liabilities of BSA and the Board of
Directors of BSA approved the dissolution of the joint venture.
BSA funded the Company's cost of research and engineering, at a
predetermined rate, and reimbursed materials, equipment, tools, supplies and
out-of-pocket expenses to Boet and the Company. The joint venture agreement
provided that Boet would advance funding for the development, operation and
working capital needs of BSA. BSA was to repay Boet through preferential
distributions from its excess cash in amounts not to exceed 20% of BSA's net
income in each year. Boet contributed an aggregate of approximately $496,000
to BSA through December 31, 1994, none of which was repaid.
Payments from BSA to the Company for research and engineering
aggregated approximately $120,000 through December 31, 1994. License fees from
BSA to NCT Muffler aggregated $240,000 through December 31, 1994. The above
amounts were recognized as income by the Company since there was no commitment
or intention for NCT Muffler to fund any obligations of BSA, nor was there any
recourse to NCT Muffler for these payments.
Philips NCT Noise Cancellation N.V. ("PNNC") was established in
August, 1992 to develop and manufacture components for active noise and
vibration control systems and sell such components to the Company or the
Company's customers. In July 1993, the Company and its co-venturer, Philips
Industrial Activities N.V. ("PIA") decided to suspend business operations of
the joint venture until such time as the nature, specifications and volume of
components required by the Company from PNNC become more clearly defined.
Subsequently, in December 1993, the Company sold its entire interest in PNNC to
PIA for a nominal fee, and PIA assumed all obligations of PNNC. The Company
and PIA continue to pursue mutual business interests.
F - 19
<PAGE> 79
OTHER STRATEGIC ALLIANCES:
Foster and the Company entered into an agreement in December 1993,
pursuant to which Foster purchased shares of common stock at a value of $2.0
million (the "Foster Shares"), at a price per share of approximately $2.70
equal to 94% of the price to the public of the shares of common stock in the
December 1993 offering. Foster paid the purchase price by means of a cash
payment of one cent ($.01) per share (the par value of the common stock) and
the delivery of a series of promissory notes (the "Foster Notes") in an
aggregate principal amount equal to the balance of the purchase price. The
Foster Notes were full recourse notes of Foster bearing interest at one percent
above the rate of three-year United States Treasury Notes and were to mature on
April 17, 1997. The Foster Notes were secured by the Foster Shares until paid
or "earned out" as described in the next paragraph. The Foster Notes were
recorded as a Common Stock subscription receivable by the Company.
Foster and the Company entered into an agreement under which Foster
provided and the Company will purchased $2.0 million of various product and
market development services deemed necessary by the Company for
commercialization of several new headset and other products and the further
development of the Company's Japanese markets. Upon completion of each such
project or phase, the agreed budgeted amount therefore was billed to the
Company and paid, at the Company's election, either in cash or by discharge of
an equivalent amount of the Foster Notes, in which an appropriate number of the
Foster Shares were released from the collaterlization restrictions and the
Common Stock subscription receivable was reduced. During 1995, $1.3 million of
such services and assets were purchased by the Company and, at the Company's
election was satisfied through the discharge of an equivalent amount of the
Foster Notes. As of December 31, 1995, the Foster Notes have been
paid-in-full.
Foster and the Company's wholly owned subsidiary, NCT Far East
("NCTFE") entered into a marketing agreement in November 1991 under which
Foster agreed to fund up to $500,000 for the establishment of a marketing
office in Tokyo. This funding was reimbursed through the issuance of 150,000
shares of common stock of the Company to Foster in 1992 and future payments to
Foster by NCTFE equal to 25% of NCTFE pretax profits, as defined, until Foster
has recovered 100% of funding in excess of $300,000. The market value of the
Company's common stock issued to Foster ($300,000) was charged to operations in
1992. Through December 31, 1995, $185,200 has been funded by Foster under the
marketing agreement. Further, commissions payable by NCTFE to Foster under
this agreement are based upon sales by customer and 5% of any engineering and
development or working capital funding acquired through Foster's efforts.
F - 20
<PAGE> 80
Interkeller AG ("Interkeller"), a member of Rieter Holding Limited,
and the Company entered into a strategic alliance in June 1992 to improve the
noise reduction in vehicles through the combination of NCT's active cabin
quieting system ("ACQS") and Interkeller technology. Under the agreement,
Interkeller performed acoustic studies in the field of electronic cabin
quieting in vehicles, and the Company sold Interkeller a prototype ACQS and
licensed Interkeller the right to use related software in connection with
acoustic studies under the agreement, for which Interkeller has paid a license
fee and contributed $240,000 to the Company over a two year period, ending June
1994. As of December 31, 1994, the Company has recognized cumulative license
fee income of $180,000 and $97,000 for consultation and development under the
June 1992 agreement. The contract has not been renewed.
AB Electrolux ("Electrolux") and the Company entered into a Joint
Development Cooperation Agreement in June 1991 which provides for the Company
to design, develop and supply active systems for quieting certain Electrolux
products. Electrolux agreed to pay the Company $65,000 per month for two
years, which the Company has recorded as engineering and development income.
These development costs may be recovered by Electrolux through royalties on net
sales to other manufacturers of competing products up to 250% of the
engineering and development costs funded by Electrolux. Electrolux agreed to
purchase components for the manufacture of related systems for its products
from the Company. If Electrolux purchases such components from other sources,
a royalty of 6% of the net invoice price will be due to the Company.
Further, the Company granted Electrolux a worldwide non-exclusive
license to utilize related proprietary technology for the life of such patents
for a fee of $500,000 payable in monthly installments of $20,000, and agreed to
limit the Company's licensing of such technology to five white goods
manufacturers for a period of five years. In January 1994 such limitations on
the Company's technology licensing were terminated by an amendment to the
original agreement. The $500,000 license fee was recognized as income in 1991,
all of which was paid as of December 31, 1993.
Ultra Electronics Ltd. (formerly Dowty Maritime Limited) ("Ultra") and
the Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra.
In March 1995, the Company and Ultra amended the teaming agreement and
concluded a licensing and royalty agreement for $2.6 million and a future
royalty of 1 1/2 % of sales commencing in 1998. Under the agreement, Ultra has
also acquired the
F - 21
<PAGE> 81
Company's active aircraft quieting business based in Cambridge, England, leased
a portion of the Cambridge facility and has employed certain of the Company's
employees.
Accordingly, the Company recorded $2.6 million as a technology
licensing fee relating to the net amount received from above noted amended
teaming agreement and the licensing and royalty agreement in the first quarter
of 1995.
Siemens Medical Systems, Inc. ("Siemens") and NCT Medical Systems,
Inc. ("NCTM"), a 90%-owned subsidiary of the Company, entered into an agreement
in March 1992 to supply Siemens with NCTM/MRI systems, a noise cancellation and
audio system for Magnetic Resonance Imaging systems ("MRI"), on an exclusive
basis at specified quantities over two years. In return, Siemens has agreed to
utilize only NCTM/MRI systems in their MRI's during the two year period.
During 1993, 1994 and 1995 NCTM has sold 118, 48 and 26 units, respectively, to
Siemens. In late November 1993, the Company and Siemens signed a new
agreement, superseding the 1992 agreement, which provides for the purchase by
Siemens from the Company of European and U.S. versions of the Company's MRI
headsets suitable for use with Siemens' MRI machines.
Bosch-Siemens Hausgerate GmbH ("BSHG") and the Company entered into a
one year agreement in April 1992 for the Company to perform research and
development work to enhance BSHG products with NCT technology. As of December
31, 1993, the Company had completed the required work. In accordance with the
agreement, BSHG has paid a total of $780,000, of which $260,000 was recorded as
income in 1993.
4. INVENTORIES:
Inventories comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995
----------- -----------
<S> <C> <C>
Components $2,452,000 $716,200
Finished goods 1,696,900 1,339,900
----------- -----------
Gross inventory $4,148,900 $2,056,100
Reserve for obsolete & slow moving inventory (2,025,300) (355,000)
----------- -----------
Inventory, net of reserves $2,123,600 $1,701,100
=========== ===========
</TABLE>
F - 22
<PAGE> 82
5. PROPERTY AND EQUIPMENT:
Property and equipment comprise the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ---------------------------------
(YEARS) 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Machinery and equipment 5 $2,373,900 $1,852,800
Furniture and fixtures 5 761,600 777,600
Leasehold improvements 7-10 1,178,500 1,155,600
Tooling 1-3 994,900 1,430,300
Other 5-10 57,000 118,400
----------- ------------
Gross $5,365,900 $5,334,700
Less, accumulated depreciation (2,035,200) (2,437,600)
----------- ------------
Net $3,330,700 $2,897,100
=========== ============
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and
1995 was $449,000, $531,000 and $588,000, respectively.
6. COMMON STOCK:
In December 1993, the Company completed a public offering of 8,050,000
shares of common stock. In contemporaneous transactions, the Company sold an
additional 1,850,138 shares to two of its strategic partners, Tenneco
Automotive and Foster Electric Co., Ltd. These transactions generated net cash
proceeds of $24.2 million. The shares issued to Tenneco Automotive and Foster
were registered on January 31, 1994.
F - 23
<PAGE> 83
PRIVATE PLACEMENTS:
On November 8, 1995 the Company entered into a stock purchase
agreement for the sale of 4.8 million shares of its common stock in a private
placement to a foreign investor in consideration for $3.3 million in net
proceeds to the Company. The closing of the transaction occurred on November
14, 1995. The purchaser of the common stock is subject to certain resale and
transfer restrictions including those under Regulation S of the United States
Securities Act of 1933, as amended.
The Company completed a private placement of 2.0 million shares of its
common stock on August 4, 1995 receiving approximately $0.7 million in net
proceeds. The purchaser of the common stock is subject to certain resale and
transfer restrictions including those under Regulation D of the United States
Securities Act of 1933, as amended. As provided for in the Stock Purchase
Agreement, within nine months of the closing date, the Company is obligated to
file a registration statement with the Securities and Exchange Commission
covering the registration of the shares for resale by the purchaser.
Please see Note 15. "Subsequent Events" with respect to two private
placements of the Company's common stock subsequent to December 31, 1995.
EXPENSES PAID WITH COMMON STOCK:
During 1994, the Company entered into agreements with third parties to
issue common stock in satisfaction of certain obligations which amounted to
$700,000.
STOCK SUBSCRIPTIONS RECEIVABLE:
Stock subscriptions receivable due from an officer and a director were
paid in full during 1993. The $13,000 stock subscription receivable at
December 31, 1995 is due from a former director and has been subsequently paid.
In December 1993, Foster and the Company entered into a definitive
agreement pursuant to which Foster purchased shares of common stock for a cash
payment of one cent ($.01) per share (the par value of the common stock) and
the delivery of a series of promissory notes (the "Foster Notes") in an
aggregate principal amount equal to the balance of the purchase price. The
Foster Notes were full recourse notes of Foster bearing interest at one percent
above the rate of three-year United States Treasury Notes and were to mature on
April 17, 1997. The Foster Notes were collateralized by the Foster Shares
until paid or "earned out" (see Note 3). No shares could be sold by Foster,
irrespective of the payment of any of the Foster Notes, until June 23, 1994.
As of December 31, 1995 the Foster Notes have been paid-in-full.
SHARES RESERVED FOR COMMON STOCK OPTIONS AND WARRANTS:
At December 31, 1995, aggregate shares reserved for issuance under
common stock option plans and warrants amounted to 12.8 million shares of which
common stock options and warrants for 10.8 million shares are outstanding (See
Note 7) and 5.5 million shares are exercisable.
F - 24
<PAGE> 84
7. COMMON STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS:
The Company's 1987 Stock Option Plan (the "1987 Plan") provides for
the granting of up to 4,000,000 shares of common stock as either incentive
stock options or nonstatutory stock options. Options to purchase shares may be
granted under the 1987 Plan to persons who, in the case of incentive stock
options, are full-time employees (including officers and directors) of the
Company; or, in the case of nonstatutory stock options, are employees or
non-employee directors of the Company. The exercise price of all incentive
stock options must be at least equal to the fair market value of such shares on
the date of the grant and may be exercisable over a ten-year period. The
exercise price and duration of the nonstatutory stock options are to be
determined by the Board of Directors.
Transactions in the 1987 Plan related to incentive Stock Options were
as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
------------- ------------------ --------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 2,785,627 $.28125-$2.97 2,780,627
==============
Exercised (695,886) $.28125-$1.595
-------------
Outstanding at December 31, 1993 2,089,741 $.28125-$2.97 2,087,241
==============
Exercised (289,269) $.28125-$.75
Forfeited (10,000) 1.49
-------------
Outstanding at December 31, 1994 1,790,472 $.28125-$2.97 1,790,472
==============
Exercised (232,651) $.28125-$.75
Forfeited (17,821) $.78-$2.97
-------------
Outstanding at December 31, 1995 1,540,000 $.50-$1.4375 1,540,000
============= ==============
</TABLE>
As of December 31, 1995, options for the purchase of 27,821 shares
were available for future grant under the 1987 Plan.
F - 25
<PAGE> 85
Transactions in nonstatutory stock options were as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
------------- ------------------ -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 2,392,089 $.50-$5.36 2,147,423
=============
Granted 544,500 $2.82-$3.82
Exercised (546,167) $.50-$2.97
Cancelled (441,631) $4.91-$5.09
-------------
Outstanding at December 31, 1993 1,948,791 $.50-$5.36 1,527,625
=============
Exercised (113,000) $.50-$.59
Cancelled (6,000) $3.69
Forfeited (187,796) $2.88-$5.36
-------------
Outstanding at December 31, 1994 1,641,995 $.50-$5.36 1,458,495
=============
Granted 1,245,490 $.75-$1.50
Exercised (369,787) $.50-$1.00
Forfeited (1,270,360) $.1.00-$5.09
-------------
Outstanding at December 31, 1995 1,247,338 $.50-$5.36 625,838
============= =============
</TABLE>
On October 6, 1992, the Company adopted a stock option plan (the "1992 Plan")
for the granting of options to purchase up to 1,639,865 shares of common stock
to officers, employees and certain directors and on that date granted options
on 1,357,989 shares at a price of $2.375 under the plan. On April 14, 1993, the
Company amended the plan to provide for the granting of options and restricted
stock awards covering up to an additional 4,360,135 shares of common stock to
officers, employees and non-employee directors. The exercise price of all
options granted under the plan may not be less than the market value of a share
of common stock on the date of grant. On May 27, 1993, the plan and the grants
received stockholder approval at the 1993 Annual Meeting of Stockholders. At
December 31, 1995, options for 3,235,026 shares are outstanding, of which
1,534,355 are exercisable under this plan at prices ranging from $.656 to
$4.00.
F - 26
<PAGE> 86
Transactions in the 1992 Plan were as follows:
<TABLE>
<CAPTION>
Number
Number of Option Price of Shares
Shares Per Share Exercisable
------------ -------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 1,357,989 $2.38 --
==============
Granted 1,379,369 $2.375-$4.00
Exercised (67,881) $2.38
Cancelled (4,550) $4.00
------------
Outstanding at December 31, 1993 2,664,927 $2.375-$4.00 2,664,927
==============
Granted 1,718,004 $.75-$2.875
Exercised (6,210) $2.38
Cancelled (40,000) $2.875-$4.00
Forfeited (278,179) $2.375-$4.00
------------
Outstanding at December 31, 1994 4,058,542 $.75-$4.00 3,851,042
==============
Granted 4,140,932 $.656-$1.85
Exercised (120,303) $.6875-$1.00
Cancelled (1,300,000) $1.00-$4.00
Forfeited (3,544,145) $.75-$4.00
------------
Outstanding at December 31, 1995 3,235,026 $.656-$4.00 1,534,335
============ ==============
</TABLE>
On November 15, 1994 the Board of Directors adopted the Noise
Cancellation Technologies, Inc. Option Plan for Certain Directors (the
"Directors Plan"), as amended. Under the Directors Plan 821,000 shares have
been approved by the Board of Directors for issuance of which 96,000 are subject
to stockholder approval. The options granted under the Directors Plan have
exercise prices equal to the fair market value of the Common Stock on the
grant dates, and expire five years from date of grant.
Transactions in the Directors Plan for 1994 were as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF OPTION PRICE OF SHARES
SHARES PER SHARE EXERCISABLE
------------- ----------------- -------------
<S> <C> <C> <C>
Granted 240,000 $.75-$1.06
-------------
Outstanding at December 31, 1994 240,000 $.75-$1.06 --
==============
Granted 1,001,000 $.6562-$1.2187
Forfeited (495,000) $.75-$1.2187
-------------
Outstanding at December 31, 1995 746,000 $.6562-$.75 230,000
============= ==============
</TABLE>
F - 27
<PAGE> 87
WARRANTS:
The Company had shares of its common stock reserved at December 31,
1994, and December 31, 1995, for warrants outstanding, all of which are
exercisable at prices as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
EXERCISE PRICE ------------------------------
PER SHARE EXPIRATION DATE 1994 1995
- ------------------- ------------------ --------------- ------------
<S> <C> <C> <C>
0.2000 December 1997 125,000 125,000
0.4000 December 1997 750,293 750,293
0.6875 December 2001 40,000 40,000
0.7500 December 1997 2,803,103 2,755,748
0.7500 August 1999 - 24,000
0.7500 September 2000 - 250,000
1.3125 August 1999 49,000 25,000
3.0000 September 1999 800,000 50,000
3.3750 September 2000 250,000 -
4.0000 February 1998 12,500 12,500
------------ ------------
Total Warrants 4,829,896 4,032,541
============ ============
</TABLE>
In 1993, the Company issued warrants to purchase 750,000 of the
Company's common stock to a company as part of a marketing agreement (see Note
8) and 250,000 warrants to an outside consultant as part of a consulting
agreement. In 1994, the Company issued warrants to purchase 89,000 shares of
the Company's common stock to outside consultants as part of their consulting
agreements.
In 1995, the Company issued 2,144,750 at market value currently
unexercisable warrants to certain directors and officers. These new
unexercisable warrants were equal to 115% of 1,865,000 warrants forfeited to
enable the Company to assemble sufficient shares of common stock to complete
the 1995 private placements (see Note 6). The 15% increase in the number of
replacement vs. forfeited warrants was in consideration for the
unexercisability of the in-the-money replacement shares until such time there
are a sufficient quantity of shares available to cover the exercise of the
subject warrants. Also in 1995, the Company similarly issued 274,000 at market
value currently unexercisable warrants to purchase shares of the Company's
common stock to two outside consultants who forfeited an equivalent number of
out-of-the money warrants for the purpose noted above.
8. RELATED PARTIES:
In 1989, the Company established a joint venture with Environmental
Research Information, Inc., ("ERI") to jointly develop, manufacture and sell
(i) products intended for use solely in the process of electric power
generation, transmission and distribution and which reduce noise and/or
vibration resulting from such process, (ii) personal quieting products sold
directly to the electric utility industry and (iii) products that reduce noise
and/or vibration emanating from fans and fan systems (collectively, "Power and
Fan Products"). In 1991, in connection with the termination of this joint
venture, the Company agreed, among other things, during the period ending
February 1996, to make payments to ERI equal to (i) 4.5% of the Company's sales
of Power and Fan Products and
F - 28
<PAGE> 88
(ii) 23.75% of fees derived by the Company from its license of Power and Fan
Products technology, subject to an overall maximum of $4,500,000. Michael J.
Parrella, President of the Company, was Chairman of ERI at the time of both the
establishment and termination of the joint venture and owns approximately 12%
of the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and
Chief Executive Officer of the Company, shares investment control over an
additional 24% of the outstanding capital of ERI. The Company believes that
the respective terms of both the establishment of the joint venture with ERI
and its termination were comparable to those that could have been negotiated
with other persons or entities. During the fiscal year ended December 31,
1995, the Company was not required to make any such payments to ERI under these
agreements.
In 1993, the Company entered into three Marketing Agreements with
QuietPower Systems, Inc. ("QSI") (until March 2, 1994, "Active Acoustical
Solutions, Inc."), a company which is 33% owned by ERI and 2% owned by Mr.
Haft. Under the terms of one of these Marketing Agreements, QSI has undertaken
to use its best efforts to seek research and development funding for the
Company from electric and natural gas utilities for applications of the
Company's technology to their industries. In exchange for this undertaking, the
Company has issued a warrant to QSI to purchase 750,000 shares of Common Stock
at $3.00 per share. The last sale price for the Common Stock reported on the
NASDAQ National Market System on May 15, 1993, the date of the Marketing
Agreement, was $2.9375. The warrant becomes exercisable as to specific
portions of the total 750,000 shares of Common Stock upon the occurrence of
defined events relating to QSI's efforts to obtain such funding for the
Company. When such defined events occur, the Company will record a charge for
the amount by which the market price of the Common Stock on such date exceeds
$3.00 per share, if any. The warrant remains exercisable as to each such
portion from the occurrence of the defined event through October 13, 1998. As
of December 31, 1993, contingencies had been removed against 525,000 warrants
resulting in a 1993 non-cash charge of $120,250. This Marketing Agreement also
grants to QSI a non-exclusive right to market the Company's products that are
or will be designed and sold for use in or with equipment used by electric
and/or natural gas utilities for non-retrofit applications in North America.
QSI is entitled to receive a sales commission on any sales to a customer of
such products for which QSI is a procuring cause in obtaining the first order
from such customer. In the case of sales to utility company customers, the
commission is 6% of the revenues received by the Company. On sales to original
equipment manufacturers for utilities, the commission is 6% on the gross
revenue NCT receives on such sales from the customer in the first year, 4% in
the second year, 2% in the third year and 1% in the fourth year, and .5% in any
future years after the fourth year. QSI is also entitled to receive a 5%
commission on any research and development funding it obtains for NCT, and on
any license fees it obtains for the Company from the license of the Company's
technology. The initial term of this Agreement is three years renewable
automatically thereafter on a year-to-year basis unless a party elects not to
renew.
F - 29
<PAGE> 89
Under the terms of the second of the three Marketing Agreements, QSI
is granted a non-exclusive right to market the Company's products that are or
will be designed and sold for use in or with feeder bowls throughout the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is
entitled to receive commissions similar to those payable to end user and
original equipment manufacturer customers described above. QSI is also
entitled to receive the same 5% commission described above on research and
development funding and technology licenses which it obtains for the Company in
the feeder bowl area. The initial term of this Marketing Agreement is three
years with subsequent automatic one-year renewals unless a party elects not to
renew.
Under the terms of the third Marketing Agreement, QSI is granted an
exclusive right to market the Company's products that are or will be designed
and sold for use in or with equipment used by electric and/or natural gas
utilities for retrofit applications in North America. QSI is entitled to
receive a sales commission on any sales to a customer of such products 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. QSI is also entitled to receive a 5% commission on research and
development funding similar to that described above. QSI's exclusive rights
continue for an indefinite term provided it meets certain performance criteria
relating to marketing efforts during the first two years following product
availability in commercial quantity and minimum levels of product sales in
subsequent years. In the event QSI's rights become non-exclusive, depending on
the circumstances causing such change, the initial term then becomes either
three or five years from the date of this Marketing Agreement, with subsequent
one-year automatic renewals in each instance unless either party elects not to
renew. During the fiscal year ended December 31, 1995, the Company was not
required to pay any commissions to QSI under any of these Marketing Agreements.
The Company has also entered into a Teaming Agreement with QSI under
which each party agrees to be responsible for certain activities relating to
transformer quieting system development projects to be undertaken with utility
companies. Under this Teaming Agreement, QSI is entitled to receive 19% of the
amounts to be received from participating utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1995, the Company
made no payments to QSI.
In March, 1995, the Company entered into an agreement with QSI by
which QSI received the exclusive right to market, sell and distribute
transformer quieting products and gas turbine quieting products in the utility
industry. Under the agreement QSI funds development of the systems. The
agreements generally provide that the Company manufactures the products and
receives a royalty of 6% from QSI on the sales of the product. For the
exclusive rights under the agreement, QSI is to pay a license fee to NCT of
$750,000, $250,000 of which QSI paid to NCT in June of 1994, and the balance of
which is payable in equal monthly installments of $16,667, beginning in April
of 1995. The agreement supersedes any other agreements related to the product
above. The agreement is contingent upon full payment by QSI to NCT of trade
receivables, which at December 31, 1994 amounted to $492,100. All amounts due
from QSI were fully reserved at December 31, 1995 (See Note 2).
F - 30
<PAGE> 90
In April, 1995, the Company amended the March, 1995 agreement with QSI
as follows. QSI forfeited warrants to purchase 750,000 shares of the Company's
common stock which had been issued pursuant to the May 15, 1993 Marketing
Agreement (Non-retrofit Utility Products) and the $500,000 balance due the
Company for the exclusivity fee was reduced to $250,000. In addition, accounts
receivable due the Company from QSI were converted to a note receivable from
QSI, bearing annual interest at 6% due May 15, 1996 or earlier contingent upon
the occurrence of certain events. The note receivable from QSI was fully
reserved at December 31, 1995.
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.
During 1993, 1994 and 1995, the Company purchased $2.1 million, $2.2
million and $0.5 million respectively, of products from its various
manufacturing joint venture entities of which $0.3 million was included in
accounts payable at December 31, 1994. There were no accounts payable related
to manufacturing joint venture entities at December 31, 1995 reflecting the
termination or transfer of ownership of the subject ventures in 1995 (see Note
3).
As discussed in Note 6, the Company had stock subscription receivables
from an officer and a director in 1993, a joint venture partner in 1993 and
1994 and a former director in 1995.
9. INCOME TAXES:
On January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Accordingly,
deferred tax assets and liabilities are established for temporary differences
between tax and financial reporting bases of assets and liabilities. A
valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The Company's
temporary differences primarily result from depreciation related to machinery
and equipment, compensation expense related to warrants, reserves and equity in
losses of unconsolidated affiliates. The adoption of the aforementioned
accounting standard had no effect on previously reported results of operations.
F-31
<PAGE> 91
At December 31, 1995, the Company had available net operating loss
carryforwards of approximately $58.7 million and research and development
credit carryforwards of $1.2 million for federal income tax purposes which
expire as follows:
<TABLE>
<CAPTION>
NET RESEARCH AND
OPERATING DEVELOPMENT
YEAR LOSSES CREDITS
----------------------------------------------- ----------- ------------
<S> <C> <C>
1999........................................... $151,500 $---
2000........................................... 129,300 ---
2001........................................... 787,200 ---
2002........................................... 2,119,000 ---
2003........................................... 1,974,100 ---
2004........................................... 1,620,500 ---
2005........................................... 3,869,900 141,000
2006........................................... 1,822,500 191,900
2007........................................... 6,865,800 117,800
2008........................................... 13,455,500 320,500
2009........................................... 16,667,700 413,200
2010........................................... 9,256,100 ---
------------ -----------
Total........................................ $58,719,100 $1,184,400
============ ===========
</TABLE>
The Company's ability to utilize its net operating loss carryforwards
may be subject to an annual limitation. The difference between the statutory
tax rate of 34% and the Company's effective tax rate of 0% is due to the
increase in the valuation allowance of $5,883,600 and $1,395,000 in 1994 and
1995, respectively.
The types of temporary differences that give rise to significant
portions of the deferred tax assets and the federal and state tax effect of
those differences as well as federal net operating loss and research and
development credit at December 31, 1994, and 1995 were as follows:
F - 32
<PAGE> 92
<TABLE>
<CAPTION>
1994 1995
------------- ---------------
<S> <C> <C>
Accounts receivable $306,400 $280,900
Inventory 735,100 155,700
Property and equipment 153,900 102,000
Accrued expenses 265,100 36,600
Investments in joint ventures 1,051,600 -
Stock compensation 2,651,400 2,651,400
Other 374,000 349,100
------------- ---------------
Total temporary differences $5,537,500 $3,575,700
Federal net operating losses 17,020,900 19,964,500
Federal research and development credits 771,200 1,184,400
------------- ---------------
$23,329,600 $24,724,600
Less: Valuation allowance (23,329,600) (24,724,600)
------------- ---------------
Deferred taxes $ - $ -
============= ===============
</TABLE>
10. LITIGATION:
On September 17, 1992, Harris Landgarten, a former officer and
director of the Company filed suit against the Company in the United States
District Court for the Southern District of New York claiming that the Company
breached contractual promises with him and that the Company fraudulently
deprived him of certain securities. The operative amended complaint demanded
actual damages of approximately $3 million and punitive damages of $5 million.
At the conclusion of the trial on May 1, 1995, the jury returned a verdict in
favor of the Company with respect to two claims, for fraud and breach of
contract, for which Landgarten sought the most damages. On a claim of
non-payment of a consulting fee, the jury awarded Landgarten $104,000. The jury
also rendered an advisory verdict in favor of Landgarten for $35,000 on a claim
of unjust enrichment. On July 26, 1995, the Company and Landgarten executed a
settlement agreement pursuant to which the company paid Landgarten $125,000 and
the suit was dismissed with prejudice.
As previously disclosed, Chaplin Patents Holding Company, Inc.("CPH"),
a wholly owned subsidiary of the Company, had sued Lotus Cars Limited and Group
Lotus Limited (collectively "Lotus") in Patents County Court in the United
Kingdom for infringement of certain of the Chaplin Patents. On July 13, 1995,
CPH, the Company and Lotus executed a settlement agreement pursuant to which
the action against Lotus and the counterclaims against CPH and the Company were
withdrawn and not to be re-commenced, Lotus was granted a non-exclusive license
for various applications in the land and water based vehicular field, subject
to prior rights, with respect to the three Chaplin Patents that were the
subject of the suit, and CPH paid pound sterling 125,000 (approximately
$190,000) to Lotus, which amount had previously been transferred to the Court
and was being held as security for costs.
F - 33
<PAGE> 93
On June 22, 1995, Wilhelm & Dauster, a German law firm, commenced a
suit against the Company in the United States District Court for the District
of Maryland, Southern Division, to recover $125,000 claimed to be owed by the
Company to that firm for legal services, disbursements and costs rendered to
and incurred on behalf of the Company with respect to intellectual property
matters in Europe. On December 13, 1995, all amounts due Wilhelm & Dauster
relating to the $125,000 claim were paid in full and the suit was subsequently
withdrawn.
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 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.
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 judgement against the Company, said
judgement could have a severe material effect on quarterly or annual operating
results.
F - 34
<PAGE> 94
11. COMMITMENTS:
The Company is obligated for minimum annual rentals (net of sublease
income) under operating leases for offices and laboratory space, expiring
through December 2000 with various renewal options, as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------- ----------
<S> <C>
1996.................................................... $446,000
1997.................................................... 448,000
1998.................................................... 451,000
1999.................................................... 360,000
2000.................................................... 178,000
----------
Total................................................... $1,883,000
==========
</TABLE>
Rent expense was $701,200, $760,400 and 794,200 for each of the three
years ended December 31, 1993, 1994 and 1995, respectively. During 1993 and
1995, rent expense was paid, in part, through the issuance of common stock (see
Note 6).
F - 35
<PAGE> 95
12. INFORMATION ON BUSINESS SEGMENTS:
The Company operates in only one business segment, specifically
engaged in the design, development, production and distribution of electronic
systems that actively reduce noise and vibration. The Company's worldwide
activities consist of operations in the United States, Europe and Japan.
Revenue, (income) loss and identifiable assets by geographic area are as
follows:
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
-------------------------------------------
1993 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues
United States............... $ 3,236,000 $ 4,610,600 $ 6,095,300
Europe...................... 2,099,000 2,130,900 4,065,200
Far East.................... 51,000 382,400 305,800
------------- ------------ ------------
Total.................. $ 5,386,000 $ 7,123,900 $ 10,466,300
============= ============ ============
Net (Income) Loss
United States.............. $ 16,692,000 $ 21,446,600 $ 3,761,100
Europe..................... 36,000 (12,100) (36,000)
Far East................... 463,000 472,200 343,400
------------- ------------ ------------
Total................... $ 17,191,000 $ 21,906,700 $ 4,068,500
============= ============ ============
Identifiable Assets
United States............. $ 28,856,000 $ 10,493,900 $ 8,997,400
Europe.................... 685,000 1,877,500 586,000
------------- ------------ ------------
Total................. $ 29,541,000 $ 12,371,400 $ 9,583,400
============= ============ ============
</TABLE>
F - 36
<PAGE> 96
13. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES:
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, (SFAS No. 115) "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 prescribes the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. The
Company has classified its investments, consisting of a portfolio of short term
U.S. Treasury Bills and related investments, as trading securities which are
reported at fair market value. The cumulative effect of adoption of the new
standard as of January 1, 1994, is not material. During the twelve month
period ended December 31, 1994, the Company recorded charges totaling $375,200
relating to realized and unrealized losses in its investments. No such charge
was incurred in 1995. Interest income from investments was $587,500 and
$53,000 for the twelve months ended December 31, 1994 and 1995 respectively.
14. ACQUISITION OF CERTAIN ANVT ASSETS:
On September 16, 1994, the Company acquired the patents, technology,
other intellectual property and certain related tangible assets of ANVT. The
Company also acquired all rights under certain joint venture and customer
agreements subject to the consent of the other parties to those agreements.
Under the acquisition agreement, the Company paid $200,000 plus
2,000,000 shares of its common stock resulting in a total purchase price of
$2,400,000. In addition, ANVT is entitled to a future contingent earn-out
based on revenues generated by the ANVT contracts assigned to the Company as
well as certain types of agreements to be entered into by the Company with
parties previously having a business relationship with ANVT. Future contingent
payments, if any, will be charged against the associated revenues. Companies
that were parties to agreements with ANVT on the closing date include Fiat CIEI
S.p.A. (a Fiat/Gilardini affiliate), Alpine Electronics, Inc., Applied Acoustic
Research, Inc., GEC-Marconi Avionics Limited and Arvin Industries, Inc. As of
the period ended December 31, 1995, no such contingent earn-out or
payments were due ANVT.
The shares of common stock issued to ANVT were valued at the average
of the published price (less a discount to reflect the time required to
register the subject shares) of the Company's common stock during the period
commencing with the announcement of the transaction and ending on September 16,
1994. The purchase price has been allocated to the following assets, under the
purchase method of accounting, based upon their estimated fair value at the
date of acquisition as follows:
<TABLE>
<S> <C>
Patents and Other Intangibles $1,700,000
Research and Development In-Process 500,000
Property and Equipment 200,000
----------
Total $2,400,000
==========
</TABLE>
F - 37
<PAGE> 97
The Company allocated $500,000 to in-process research and development
projects, resulting in a corresponding charge to the Company's operations in
1994.
The patents are being amortized over their respective remaining lives,
which at the time of acquisition ranged from one to seventeen years.
15. SUBSEQUENT EVENTS
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.3
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to the
price received by the Company for the sale of such 1,000,000 shares
subject to certain adjustments. The conversion of the notes and the exercise
of the options are both subject to stockholder approval of an appropriate
amendment to the Company's certificate of incorporation increasing its
authorized capital to provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective within 90 days of the filing date and in the event its
effectiveness is suspended for other than brief permissible periods. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or an equity feature without the
investors' consent for a period of one year.
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million. (Refer to "Liquidity of Capital
Resources" above and Notes 1. and 15. - "Notes to the Consolidated Financial
Statements" below.)
F - 38
<PAGE> 98
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
Board of Directors and Stockholders
Noise Cancellation Technologies, Inc.
The audits referred to in our report dated March 8, 1996, included Schedule
II for the years ended December 31, 1995 and December 31, 1994. In our
opinion, such schedule presents fairly the information set forth therein in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
/s/Richard A. Eisner & Company, L.L.P.
- --------------------------------------
Richard A. Eisner & Compnay, L.L.P.
New York, New York
March 8, 1996
S-1
<PAGE> 99
SCHEDULE II
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------
(1) (2)
-----------------------------------
Balance at Charged to Charged to
beginning of costs and other accounts - Deductions Balance at
Description Period expenses describe describe end of period
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts $ $ 30,000 $ 153,727 $ 183,727
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1994:
Allowance for doubtful accounts $ 183,727 $ 871,395 $ 153,727 $ 901,395
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1995:
Allowance for doubtful accounts $ 901,395 $ 551,812 1,333,827(2) $ 119,380
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1993:
Allowance for inventory obsolence $ $ 170,000 $ 170,000
=========== ========== ================ =========== ==========
Year ended December 31, 1994:
Allowance for inventory obsolence $ 170,000 $1,855,289 $2,025,289
----------- ---------- ---------------- ----------- ----------
Year ended December 31, 1995:
Allowance for inventory obsolence $ 2,025,289 $ 452,004 $2,122,293(1) $ 355,000
----------- ---------- ---------------- ----------- ----------
</TABLE>
Attention is directed to the foregoing accountant's report's and to the
accompanying notes to the consolidated financial statements S-2
(1) To write off reserves applied to December 31, 1994 inventory.
(2) To write off fully reserved accounts receivable deemed uncollectible at
December 31, 1995.
<PAGE> 1
EXHIBIT 4(b)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT
OR AN OPINION OF COUNSEL TO THE COMPANY IS OBTAINED STATING THAT SUCH
DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION.
----------------------------
NOISE CANCELLATION TECHNOLOGIES, INC.
(Incorporated under the laws of the State of Delaware)
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 31, 1997
Warrant to Purchase 862,500
Shares of Common Stock
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. BW-1-R
FOR VALUE RECEIVED, NOISE CANCELLATION TECHNOLOGIES, INC. (the "Company"),
a Delaware corporation, hereby certifies that JOHN J. MCCLOY II (the "Holder")
is entitled, subject to the provisions of this Warrant (the "Warrant"), to
purchase from the Company, at any time, or from time to time, during the period
commencing at 9:00 a.m., New York City local time, on the First Exercise Date
(as hereinafter defined), and expiring, unless earlier terminated as
hereinafter provided, at 5:00 p.m., New York City local time on the Last
Exercise Date (as hereinafter defined), up to 862,500 fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company at a price
of $0.75 per share (such exercise price per share, as so adjusted, being
hereinafter referred to as the "Exercise Price") provided the Holder has
surrendered and forfeited to the Company a warrant or warrants having an
exercise price or prices of $0.75 or higher owned by Holder and entitling the
Holder to purchase 750,000 shares of Common Stock of the Company.
The term "Common Stock" means the shares of Common Stock, $.01 par value,
of the Company as constituted on November 8, 1995, the date of grant of this
Warrant (the "Base Date"), together with any other equity securities that may
be issued by the Company in addition thereto or in substitution therefor. The
number of shares of Common Stock to be received upon the exercise of this
Warrant may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Stock".
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed or mutilated shall be at any time enforceable by anyone.
<PAGE> 2
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held, subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time, or from time to time, during the period commencing at 9:00
a.m., New York City local time, on the First Exercise Date (as hereinafter
defined), and expiring at 5:00 p.m., New York City local time, on the Last
Exercise Date (as hereinafter defined), or, if such day is a day on which
banking institutions in the City of New York are authorized by law to close,
then on the next succeeding day that shall not be such a day.
The First Exercise Date shall be the date on which both of the following
events have occurred:
(a) an amendment to the Company's Certificate of Incorporation increasing
by at least 5,000,000 shares the number of shares of Common Stock of the
Company that the Company is authorized to issue is approved by the Company's
stockholders and filed in the office of the Secretary of the State of Delaware;
and
(b) appropriate corporate action is taken by the Company to reserve
shares of Common Stock of the Company for issuance upon the exercise of this
Warrant.
The Last Exercise Date shall be December 31, 1997 or ninety (90) days
after the First Exercise Date, whichever shall last occur.
Subject to the foregoing limitations, this warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Warrant Exercise Form
attached hereto duly executed and accompanied by payment (either in cash or by
certified or official bank check, payable to the order of the Company) of the
Exercise Price for the number of shares specified in such Form and instruments
of transfer, if appropriate, duly executed by the Holder or his or her duly
authorized attorney. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company
of this Warrant, together with the Exercise Price, at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of Common
Stock on exercise of this Warrant.
2. RESERVATION OF SHARES. Until the First Exercise Date, no shares of
Common Stock will be reserved for issuance upon the exercise of this Warrant.
Thereafter, the Company will at all times reserve for issuance and delivery
upon exercise of this Warrant all shares of Common Stock or other shares of
capital stock of the Company (and other securities and property) from time to
time receivable upon exercise of this Warrant. All such shares (and other
securities and property) shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable and free of all
preemptive rights.
3. WARRANT STOCK TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The Warrant Stock may not be sold or otherwise disposed of except as follows:
(1) prior to registration under the Securities Act of 1933, as amended (the
"Act") to a person who, in the opinion of counsel to the Company, is a person
to whom such Warrant Stock may legally be transferred without registration and
without the
2
<PAGE> 3
delivery of a current prospectus under the Act with respect thereto or other
disposition of such securities; or (2) upon registration, if ever, under the
Act of the Warrant Stock, to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the
offering thereof for such sale or disposition, and thereafter to all successive
assignees unless in the opinion of Counsel to the Company the delivery of such
a prospectus is not required.
4. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall issue one additional share of its Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
5. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
not registered under the Act nor under any applicable state securities law or
regulation. This Warrant cannot be exchanged, transferred or assigned
otherwise than by will or the laws of descent and distribution, or due to the
Holder's mental or physical incapacity and appointment of a legal guardian as a
result thereof. Upon such event and upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the heir, devisee or assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent, if any, together with written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
or his executor, administrator or guardian.
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
7. REDEMPTION. This Warrant is not redeemable by the Company.
8. ANTI-DILUTION PROVISIONS.
8.1 ADJUSTMENT FOR DIVIDENDS IN OTHER SECURITIES, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the Base
Date the holders of Common Stock (or any other securities at the time
receivable upon the exercise of this Warrant) shall have received, or on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive without payment therefor: (a) other or
additional securities or property (other than cash) by way of dividend, (b) any
cash paid or payable except out of earned surplus of the Company at the Base
Date as increased (decreased) by subsequent credits (charges) thereto (other
than credits in respect of any capital or paid-in surplus or surplus created as
a result of a revaluation of property) or (c) other or additional (or less)
securities or property (including cash) by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar corporate
rearrangement, then, and in each such case, the Holder of this Warrant, upon
the exercise thereof as provided in Section 1, shall be entitled to receive the
amount of securities and property (including cash in the cases referred to in
clauses (b) and (c) above) which such Holder would hold on the date of such
exercise if on the Base Date it had been the holder of record of the number of
shares of Common Stock (as constituted on the Base Date) subscribed for upon
such exercise as provided in Section 1 and had thereafter, during the period
from the Base Date to and including the date of such exercise, retained such
shares and/or all other additional (or less) securities and property (including
cash in the cases referred to in clauses (b) and (c) above) receivable by it as
aforesaid during such period, giving effect to all adjustments called for
during such period by Section 8.2.
3
<PAGE> 4
8.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the Base Date or in case after such date the Company (or any such other
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation, then, and in
each such case, the Holder of this Warrant upon the exercise thereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the securities and property receivable upon the exercise of
this Warrant prior to such consummation, the securities or property to which
such Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Section 8.1; in each such case, the terms of this
Warrant shall be applicable to the securities or property receivable upon the
exercise of this Warrant after such consummation.
8.3 CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock (or other securities or property)
receivable on the exercise of the Warrant, the Company at its expense will
promptly compute such adjustment in accordance with the terms of the Warrant
and prepare a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any additional
shares of Common Stock issued or sold or deemed to have been issued or sold,
(b) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (c) the pro forma adjusted Exercise Price. The Company will
forthwith mail a copy of each such certificate to each holder of the Warrant.
8.4 NOTICES OF RECORD DATE, ETC.
In case:
(a) the Company shall take a record of the holders of its Common
Stock (or other securities at the time receivable upon the exercise of the
Warrant) for the purpose of entitling them to receive any dividend (other than
a cash dividend) or other distribution, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities,
or to receive any other right; or
(b) of any capital reorganization of the Company (other than a
stock split or reverse stock split), any reclassification of the capital stock
of the Company, any consolidation or merger of the Company with or into another
corporation (other than a merger for purposes of change of domicile) or any
conveyance of all or substantially all of the assets of the Company to another
corporation; or
(c) of any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then, and in each such case, the Company shall mail
or cause to be mailed to each holder of the Warrant at the time outstanding a
notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, or (ii) the date
on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
(or such other securities at the time receivable upon the exercise of the
Warrant) shall be entitled to exchange their shares of Common Stock (or such
other securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice
4
<PAGE> 5
shall be mailed at least twenty (20) days prior to the date therein specified
and the Warrant may be exercised prior to said date during the term of the
Warrant no later than five (5) days prior to said date.
9. LEGEND. In the event of the exercise of any of the Warrants and the
issuance of any of the shares thereunder, prior to the registration of such
shares under the Act, all certificates representing shares shall bear on the
face thereof substantially the following legends, insofar as is consistent with
Delaware law:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT
TO THE PROVISIONS OF THAT ACT OR AN OPINION OF
COUNSEL TO THE CORPORATION IS OBTAINED STATING
THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM SUCH REGISTRATION."
10. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the laws of the State
of New York.
11. NOTICE. Notices and other communications to be given to the Holder
of the Warrant evidenced by this certificate shall be deemed to have been
sufficiently given, if delivered or mailed, addressed in the name and at the
address of such owner appearing on the records of the Company, and if mailed,
sent registered or certified mail, postage prepaid. Notices or other
communications to the Company shall be deemed to have been sufficiently given
if delivered by hand or mailed, by registered or certified mail, postage
prepaid, to the Company at 1025 West Nursery Road, Suite 120, Linthicum,
Maryland 21090, Attn: President, or at such other address as the Company shall
have designated by written notice to such registered owner as herein provided.
Notice by mail shall be deemed given when deposited in the United States mail
as herein provided.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of
the 8th day of November 1995.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella
------------------------
Michael J. Parrella, President
5
<PAGE> 6
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ___________ shares of Common Stock of Noise
Cancellation Technologies, Inc. and hereby makes payment at the rate of $0.75
per share, or an aggregate of $_________, in payment therefor.
--------------------------------
Name of Registered Holder
--------------------------------
Signature
--------------------------------
Signature, if held jointly
--------------------------------
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(if other than to the registered Holder of the within Warrant)
Name
------------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
Social Security or Taxpayer Identification Number
------------------
ASSIGNMENT FORM
(See Section 5 for terms of Assignment)
The Holder hereby assigns and transfers unto
Name
------------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
the right to purchase Common Stock of Noise Cancellation Technologies, Inc.
represented by this Warrant to the extent of ______ shares as to which such
right is exercisable and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
DATED: , 19
- ----------------------------- ------------------------- ---
Name of Registered Holder
- ----------------------------- -----------------------------
Signature Signature, if held jointly
6
<PAGE> 1
EXHIBIT 4(c)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT
OR AN OPINION OF COUNSEL TO THE COMPANY IS OBTAINED STATING THAT SUCH
DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION.
----------------------------
NOISE CANCELLATION TECHNOLOGIES, INC.
(Incorporated under the laws of the State of Delaware)
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 31, 1997
Warrant to Purchase 862,500
Shares of Common Stock
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. BW-2-R
FOR VALUE RECEIVED, NOISE CANCELLATION TECHNOLOGIES, INC. (the "Company"),
a Delaware corporation, hereby certifies that MICHAEL J. PARRELLA (the
"Holder") is entitled, subject to the provisions of this Warrant (the
"Warrant"), to purchase from the Company, at any time, or from time to time,
during the period commencing at 9:00 a.m., New York City local time, on the
First Exercise Date (as hereinafter defined), and expiring, unless earlier
terminated as hereinafter provided, at 5:00 p.m., New York City local time on
the Last Exercise Date (as hereinafter defined), up to 862,500 fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company at a price
of $0.75 per share (such exercise price per share, as so adjusted, being
hereinafter referred to as the "Exercise Price") provided the Holder has
surrendered and forfeited to the Company a warrant or warrants having an
exercise price or prices of $0.75 or higher owned by Holder and entitling the
Holder to purchase 750,000 shares of Common Stock of the Company.
The term "Common Stock" means the shares of Common Stock, $.01 par value,
of the Company as constituted on November 8, 1995, the date of grant of this
Warrant (the "Base Date"), together with any other equity securities that may
be issued by the Company in addition thereto or in substitution therefor. The
number of shares of Common Stock to be received upon the exercise of this
Warrant may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Stock".
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed or mutilated shall be at any time enforceable by anyone.
<PAGE> 2
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held, subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time, or from time to time, during the period commencing at 9:00
a.m., New York City local time, on the First Exercise Date (as hereinafter
defined), and expiring at 5:00 p.m., New York City local time, on the Last
Exercise Date (as hereinafter defined), or, if such day is a day on which
banking institutions in the City of New York are authorized by law to close,
then on the next succeeding day that shall not be such a day.
The First Exercise Date shall be the date on which both of the following
events have occurred:
(a) an amendment to the Company's Certificate of Incorporation increasing
by at least 5,000,000 shares the number of shares of Common Stock of the
Company that the Company is authorized to issue is approved by the Company's
stockholders and filed in the office of the Secretary of the State of Delaware;
and
(b) appropriate corporate action is taken by the Company to reserve
shares of Common Stock of the Company for issuance upon the exercise of this
Warrant.
The Last Exercise Date shall be December 31, 1997 or ninety (90) days
after the First Exercise Date, whichever shall last occur.
Subject to the foregoing limitations, this warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Warrant Exercise Form
attached hereto duly executed and accompanied by payment (either in cash or by
certified or official bank check, payable to the order of the Company) of the
Exercise Price for the number of shares specified in such Form and instruments
of transfer, if appropriate, duly executed by the Holder or his or her duly
authorized attorney. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company
of this Warrant, together with the Exercise Price, at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of Common
Stock on exercise of this Warrant.
2. RESERVATION OF SHARES. Until the First Exercise Date, no shares of
Common Stock will be reserved for issuance upon the exercise of this Warrant.
Thereafter, the Company will at all times reserve for issuance and delivery
upon exercise of this Warrant all shares of Common Stock or other shares of
capital stock of the Company (and other securities and property) from time to
time receivable upon exercise of this Warrant. All such shares (and other
securities and property) shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable and free of all
preemptive rights.
3. WARRANT STOCK TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The Warrant Stock may not be sold or otherwise disposed of except as follows:
(1) prior to registration under the Securities Act of 1933, as amended (the
"Act") to a person who, in the opinion of counsel to the Company, is a person
to whom such Warrant Stock may legally be transferred without registration and
without the
2
<PAGE> 3
delivery of a current prospectus under the Act with respect thereto or other
disposition of such securities; or (2) upon registration, if ever, under the
Act of the Warrant Stock, to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the
offering thereof for such sale or disposition, and thereafter to all successive
assignees unless in the opinion of Counsel to the Company the delivery of such
a prospectus is not required.
4. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall issue one additional share of its Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
5. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
not registered under the Act nor under any applicable state securities law or
regulation. This Warrant cannot be exchanged, transferred or assigned
otherwise than by will or the laws of descent and distribution, or due to the
Holder's mental or physical incapacity and appointment of a legal guardian as a
result thereof. Upon such event and upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the heir, devisee or assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent, if any, together with written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
or his executor, administrator or guardian.
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
7. REDEMPTION. This Warrant is not redeemable by the Company.
8. ANTI-DILUTION PROVISIONS.
8.1 ADJUSTMENT FOR DIVIDENDS IN OTHER SECURITIES, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the Base
Date the holders of Common Stock (or any other securities at the time
receivable upon the exercise of this Warrant) shall have received, or on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive without payment therefor: (a) other or
additional securities or property (other than cash) by way of dividend, (b) any
cash paid or payable except out of earned surplus of the Company at the Base
Date as increased (decreased) by subsequent credits (charges) thereto (other
than credits in respect of any capital or paid-in surplus or surplus created as
a result of a revaluation of property) or (c) other or additional (or less)
securities or property (including cash) by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar corporate
rearrangement, then, and in each such case, the Holder of this Warrant, upon
the exercise thereof as provided in Section 1, shall be entitled to receive the
amount of securities and property (including cash in the cases referred to in
clauses (b) and (c) above) which such Holder would hold on the date of such
exercise if on the Base Date it had been the holder of record of the number of
shares of Common Stock (as constituted on the Base Date) subscribed for upon
such exercise as provided in Section 1 and had thereafter, during the period
from the Base Date to and including the date of such exercise, retained such
shares and/or all other additional (or less) securities and property (including
cash in the cases referred to in clauses (b) and (c) above) receivable by it as
aforesaid during such period, giving effect to all adjustments called for
during such period by Section 8.2.
3
<PAGE> 4
8.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the Base Date or in case after such date the Company (or any such other
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation, then, and in
each such case, the Holder of this Warrant upon the exercise thereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the securities and property receivable upon the exercise of
this Warrant prior to such consummation, the securities or property to which
such Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Section 8.1; in each such case, the terms of this
Warrant shall be applicable to the securities or property receivable upon the
exercise of this Warrant after such consummation.
8.3 CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock (or other securities or property)
receivable on the exercise of the Warrant, the Company at its expense will
promptly compute such adjustment in accordance with the terms of the Warrant
and prepare a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any additional
shares of Common Stock issued or sold or deemed to have been issued or sold,
(b) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (c) the pro forma adjusted Exercise Price. The Company will
forthwith mail a copy of each such certificate to each holder of the Warrant.
8.4 NOTICES OF RECORD DATE, ETC.
In case:
(a) the Company shall take a record of the holders of its Common
Stock (or other securities at the time receivable upon the exercise of the
Warrant) for the purpose of entitling them to receive any dividend (other than
a cash dividend) or other distribution, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities,
or to receive any other right; or
(b) of any capital reorganization of the Company (other than a
stock split or reverse stock split), any reclassification of the capital stock
of the Company, any consolidation or merger of the Company with or into another
corporation (other than a merger for purposes of change of domicile) or any
conveyance of all or substantially all of the assets of the Company to another
corporation; or
(c) of any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then, and in each such case, the Company shall mail
or cause to be mailed to each holder of the Warrant at the time outstanding a
notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, or (ii) the date
on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
(or such other securities at the time receivable upon the exercise of the
Warrant) shall be entitled to exchange their shares of Common Stock (or such
other securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice
4
<PAGE> 5
shall be mailed at least twenty (20) days prior to the date therein specified
and the Warrant may be exercised prior to said date during the term of the
Warrant no later than five (5) days prior to said date.
9. LEGEND. In the event of the exercise of any of the Warrants and the
issuance of any of the shares thereunder, prior to the registration of such
shares under the Act, all certificates representing shares shall bear on the
face thereof substantially the following legends, insofar as is consistent with
Delaware law:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT
TO THE PROVISIONS OF THAT ACT OR AN OPINION OF
COUNSEL TO THE CORPORATION IS OBTAINED STATING
THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM SUCH REGISTRATION."
10. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the laws of the State
of New York.
11. NOTICE. Notices and other communications to be given to the Holder
of the Warrant evidenced by this certificate shall be deemed to have been
sufficiently given, if delivered or mailed, addressed in the name and at the
address of such owner appearing on the records of the Company, and if mailed,
sent registered or certified mail, postage prepaid. Notices or other
communications to the Company shall be deemed to have been sufficiently given
if delivered by hand or mailed, by registered or certified mail, postage
prepaid, to the Company at 1025 West Nursery Road, Suite 120, Linthicum,
Maryland 21090, Attn: President, or at such other address as the Company shall
have designated by written notice to such registered owner as herein provided.
Notice by mail shall be deemed given when deposited in the United States mail
as herein provided.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of
the 8th day of November 1995.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Jay M. Haft
----------------
Jay M. Haft, Chief Executive Officer
5
<PAGE> 6
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ___________ shares of Common Stock of Noise
Cancellation Technologies, Inc. and hereby makes payment at the rate of $0.75
per share, or an aggregate of $_________, in payment therefor.
--------------------------------
Name of Registered Holder
--------------------------------
Signature
--------------------------------
Signature, if held jointly
--------------------------------
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(if other than to the registered Holder of the within Warrant)
Name
---------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
Social Security or Taxpayer Identification Number
-------------------
ASSIGNMENT FORM
(See Section 5 for terms of Assignment)
The Holder hereby assigns and transfers unto
Name
---------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
the right to purchase Common Stock of Noise Cancellation Technologies, Inc.
represented by this Warrant to the extent of ______ shares as to which such
right is exercisable and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
DATED: , 19
- ----------------------------- ------------------------- ---
Name of Registered Holder
- ----------------------------- -----------------------------
Signature Signature, if held jointly
6
<PAGE> 1
EXHIBIT 4(d)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT
OR AN OPINION OF COUNSEL TO THE COMPANY IS OBTAINED STATING THAT SUCH
DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION.
----------------------------
NOISE CANCELLATION TECHNOLOGIES, INC.
(Incorporated under the laws of the State of Delaware)
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 31, 1997
Warrant to Purchase 201,250
shares of Common Stock
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. BW-4-R
FOR VALUE RECEIVED, NOISE CANCELLATION TECHNOLOGIES, INC. (the "Company"),
a Delaware corporation, hereby certifies that IRENE LEBOVICS (the "Holder") is
entitled, subject to the provisions of this Warrant (the "Warrant"), to
purchase from the Company, at any time, or from time to time, during the period
commencing at 9:00 a.m., New York City local time, on the First Exercise Date
(as hereinafter defined), and expiring, unless earlier terminated as
hereinafter provided, at 5:00 p.m., New York City local time on the Last
Exercise Date (as hereinafter defined), up to 201,250 fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company at a price
of $0.75 per share (such exercise price per share, as so adjusted, being
hereinafter referred to as the "Exercise Price") provided the Holder has
surrendered and forfeited to the Company a warrant or warrants having an
exercise price or prices of $0.75 or higher owned by Holder and entitling the
Holder to purchase 175,000 shares of Common Stock of the Company.
The term "Common Stock" means the shares of Common Stock, $.01 par value,
of the Company as constituted on November 8, 1995, the date of grant of this
Warrant (the "Base Date"), together with any other equity securities that may
be issued by the Company in addition thereto or in substitution therefor. The
number of shares of Common Stock to be received upon the exercise of this
Warrant may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Stock".
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed or mutilated shall be at any time enforceable by anyone.
<PAGE> 2
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held, subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time, or from time to time, during the period commencing at 9:00
a.m., New York City local time, on the First Exercise Date (as hereinafter
defined), and expiring at 5:00 p.m., New York City local time, on the Last
Exercise Date (as hereinafter defined), or, if such day is a day on which
banking institutions in the City of New York are authorized by law to close,
then on the next succeeding day that shall not be such a day.
The First Exercise Date shall be the date on which both of the following
events have occurred:
(a) an amendment to the Company's Certificate of Incorporation increasing
by at least 5,000,000 shares the number of shares of Common Stock of the
Company that the Company is authorized to issue is approved by the Company's
stockholders and filed in the office of the Secretary of the State of Delaware;
and
(b) appropriate corporate action is taken by the Company to reserve
shares of Common Stock of the Company for issuance upon the exercise of this
Warrant.
The Last Exercise Date shall be December 31, 1997 or ninety (90) days
after the First Exercise Date, whichever shall last occur.
Subject to the foregoing limitations, this warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Warrant Exercise Form
attached hereto duly executed and accompanied by payment (either in cash or by
certified or official bank check, payable to the order of the Company) of the
Exercise Price for the number of shares specified in such Form and instruments
of transfer, if appropriate, duly executed by the Holder or his or her duly
authorized attorney. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company
of this Warrant, together with the Exercise Price, at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of Common
Stock on exercise of this Warrant.
2. RESERVATION OF SHARES. Until the First Exercise Date, no shares of
Common Stock will be reserved for issuance upon the exercise of this Warrant.
Thereafter, the Company will at all times reserve for issuance and delivery
upon exercise of this Warrant all shares of Common Stock or other shares of
capital stock of the Company (and other securities and property) from time to
time receivable upon exercise of this Warrant. All such shares (and other
securities and property) shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable and free of all
preemptive rights.
3. WARRANT STOCK TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The Warrant Stock may not be sold or otherwise disposed of except as follows:
(1) prior to registration under the Securities Act of 1933, as amended (the
"Act") to a person who, in the opinion of counsel to the Company, is a person
to whom such Warrant Stock may legally be transferred without registration and
without the
2
<PAGE> 3
delivery of a current prospectus under the Act with respect thereto or other
disposition of such securities; or (2) upon registration, if ever, under the
Act of the Warrant Stock, to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the
offering thereof for such sale or disposition, and thereafter to all successive
assignees unless in the opinion of Counsel to the Company the delivery of such
a prospectus is not required.
4. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall issue one additional share of its Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
5. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
not registered under the Act nor under any applicable state securities law or
regulation. This Warrant cannot be exchanged, transferred or assigned
otherwise than by will or the laws of descent and distribution, or due to the
Holder's mental or physical incapacity and appointment of a legal guardian as a
result thereof. Upon such event and upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the heir, devisee or assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent, if any, together with written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
or his executor, administrator or guardian.
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
7. REDEMPTION. This Warrant is not redeemable by the Company.
8. ANTI-DILUTION PROVISIONS.
8.1 ADJUSTMENT FOR DIVIDENDS IN OTHER SECURITIES, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the Base
Date the holders of Common Stock (or any other securities at the time
receivable upon the exercise of this Warrant) shall have received, or on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive without payment therefor: (a) other or
additional securities or property (other than cash) by way of dividend, (b) any
cash paid or payable except out of earned surplus of the Company at the Base
Date as increased (decreased) by subsequent credits (charges) thereto (other
than credits in respect of any capital or paid-in surplus or surplus created as
a result of a revaluation of property) or (c) other or additional (or less)
securities or property (including cash) by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar corporate
rearrangement, then, and in each such case, the Holder of this Warrant, upon
the exercise thereof as provided in Section 1, shall be entitled to receive the
amount of securities and property (including cash in the cases referred to in
clauses (b) and (c) above) which such Holder would hold on the date of such
exercise if on the Base Date it had been the holder of record of the number of
shares of Common Stock (as constituted on the Base Date) subscribed for upon
such exercise as provided in Section 1 and had thereafter, during the period
from the Base Date to and including the date of such exercise, retained such
shares and/or all other additional (or less) securities and property (including
cash in the cases referred to in clauses (b) and (c) above) receivable by it as
aforesaid during such period, giving effect to all adjustments called for
during such period by Section 8.2.
3
<PAGE> 4
8.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the Base Date or in case after such date the Company (or any such other
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation, then, and in
each such case, the Holder of this Warrant upon the exercise thereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the securities and property receivable upon the exercise of
this Warrant prior to such consummation, the securities or property to which
such Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Section 8.1; in each such case, the terms of this
Warrant shall be applicable to the securities or property receivable upon the
exercise of this Warrant after such consummation.
8.3 CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock (or other securities or property)
receivable on the exercise of the Warrant, the Company at its expense will
promptly compute such adjustment in accordance with the terms of the Warrant
and prepare a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any additional
shares of Common Stock issued or sold or deemed to have been issued or sold,
(b) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (c) the pro forma adjusted Exercise Price. The Company will
forthwith mail a copy of each such certificate to each holder of the Warrant.
8.4 NOTICES OF RECORD DATE, ETC.
In case:
(a) the Company shall take a record of the holders of its Common
Stock (or other securities at the time receivable upon the exercise of the
Warrant) for the purpose of entitling them to receive any dividend (other than
a cash dividend) or other distribution, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities,
or to receive any other right; or
(b) of any capital reorganization of the Company (other than a
stock split or reverse stock split), any reclassification of the capital stock
of the Company, any consolidation or merger of the Company with or into another
corporation (other than a merger for purposes of change of domicile) or any
conveyance of all or substantially all of the assets of the Company to another
corporation; or
(c) of any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then, and in each such case, the Company shall mail
or cause to be mailed to each holder of the Warrant at the time outstanding a
notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, or (ii) the date
on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
(or such other securities at the time receivable upon the exercise of the
Warrant) shall be entitled to exchange their shares of Common Stock (or such
other securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice
4
<PAGE> 5
shall be mailed at least twenty (20) days prior to the date therein specified
and the Warrant may be exercised prior to said date during the term of the
Warrant no later than five (5) days prior to said date.
9. LEGEND. In the event of the exercise of any of the Warrants and the
issuance of any of the shares thereunder, prior to the registration of such
shares under the Act, all certificates representing shares shall bear on the
face thereof substantially the following legends, insofar as is consistent with
Delaware law:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT
TO THE PROVISIONS OF THAT ACT OR AN OPINION OF
COUNSEL TO THE CORPORATION IS OBTAINED STATING
THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM SUCH REGISTRATION."
10. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the laws of the State
of New York.
11. NOTICE. Notices and other communications to be given to the Holder
of the Warrant evidenced by this certificate shall be deemed to have been
sufficiently given, if delivered or mailed, addressed in the name and at the
address of such owner appearing on the records of the Company, and if mailed,
sent registered or certified mail, postage prepaid. Notices or other
communications to the Company shall be deemed to have been sufficiently given
if delivered by hand or mailed, by registered or certified mail, postage
prepaid, to the Company at 1025 West Nursery Road, Suite 120, Linthicum,
Maryland 21090, Attn: President, or at such other address as the Company shall
have designated by written notice to such registered owner as herein provided.
Notice by mail shall be deemed given when deposited in the United States mail
as herein provided.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of
the 8th day of November 1995.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella
-----------------------
Michael J. Parrella, President
5
<PAGE> 6
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ___________ shares of Common Stock of Noise
Cancellation Technologies, Inc. and hereby makes payment at the rate of $0.75
per share, or an aggregate of $_________, in payment therefor.
--------------------------------
Name of Registered Holder
--------------------------------
Signature
--------------------------------
Signature, if held jointly
--------------------------------
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(if other than to the registered Holder of the within Warrant)
Name
---------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
Social Security or Taxpayer Identification Number
-----------------
ASSIGNMENT FORM
(See Section 5 for terms of Assignment)
The Holder hereby assigns and transfers unto
Name
---------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
the right to purchase Common Stock of Noise Cancellation Technologies, Inc.
represented by this Warrant to the extent of ______ shares as to which such
right is exercisable and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
DATED: , 19
- ----------------------------- ------------------------- ---
Name of Registered Holder
- ----------------------------- -----------------------------
Signature Signature, if held jointly
6
<PAGE> 1
EXHIBIT 4(e)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT
OR AN OPINION OF COUNSEL TO THE COMPANY IS OBTAINED STATING THAT SUCH
DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH
REGISTRATION.
----------------------------
NOISE CANCELLATION TECHNOLOGIES, INC.
(Incorporated under the laws of the State of Delaware)
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 31, 1997
Warrant to Purchase 218,500
Shares of Common Stock
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. BW-9 and BW-46 - R
FOR VALUE RECEIVED, NOISE CANCELLATION TECHNOLOGIES, INC. (the "Company"),
a Delaware corporation, hereby certifies that JAY M. HAFT (the "Holder") is
entitled, subject to the provisions of this Warrant (the "Warrant"), to
purchase from the Company, at any time, or from time to time, during the period
commencing at 9:00 a.m., New York City local time, on the First Exercise Date
(as hereinafter defined), and expiring, unless earlier terminated as
hereinafter provided, at 5:00 p.m., New York City local time on the Last
Exercise Date (as hereinafter defined), up to 218,500 fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company at a price
of $0.75 per share (such exercise price per share, as so adjusted, being
hereinafter referred to as the "Exercise Price") provided the Holder has
surrendered and forfeited to the Company a warrant or warrants having an
exercise price or prices of $0.75 or higher owned by Holder and entitling the
Holder to purchase 190,000 shares of Common Stock of the Company.
The term "Common Stock" means the shares of Common Stock, $.01 par value,
of the Company as constituted on November 8, 1995, the date of grant of this
Warrant (the "Base Date"), together with any other equity securities that may
be issued by the Company in addition thereto or in substitution therefor. The
number of shares of Common Stock to be received upon the exercise of this
Warrant may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Stock".
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date. Any such new
Warrant executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed or mutilated shall be at any time enforceable by anyone.
<PAGE> 2
The Holder agrees with the Company that this Warrant is issued, and all
the rights hereunder shall be held, subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time, or from time to time, during the period commencing at 9:00
a.m., New York City local time, on the First Exercise Date (as hereinafter
defined), and expiring at 5:00 p.m., New York City local time, on the Last
Exercise Date (as hereinafter defined), or, if such day is a day on which
banking institutions in the City of New York are authorized by law to close,
then on the next succeeding day that shall not be such a day.
The First Exercise Date shall be the date on which both of the following
events have occurred:
(a) an amendment to the Company's Certificate of Incorporation increasing
by at least 5,000,000 shares the number of shares of Common Stock of the
Company that the Company is authorized to issue is approved by the Company's
stockholders and filed in the office of the Secretary of the State of Delaware;
and
(b) appropriate corporate action is taken by the Company to reserve
shares of Common Stock of the Company for issuance upon the exercise of this
Warrant.
The Last Exercise Date shall be December 31, 1997 or ninety (90) days
after the First Exercise Date, whichever shall last occur.
Subject to the foregoing limitations, this warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Warrant Exercise Form
attached hereto duly executed and accompanied by payment (either in cash or by
certified or official bank check, payable to the order of the Company) of the
Exercise Price for the number of shares specified in such Form and instruments
of transfer, if appropriate, duly executed by the Holder or his or her duly
authorized attorney. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company
of this Warrant, together with the Exercise Price, at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
The Company shall pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of Common
Stock on exercise of this Warrant.
2. RESERVATION OF SHARES. Until the First Exercise Date, no shares of
Common Stock will be reserved for issuance upon the exercise of this Warrant.
Thereafter, the Company will at all times reserve for issuance and delivery
upon exercise of this Warrant all shares of Common Stock or other shares of
capital stock of the Company (and other securities and property) from time to
time receivable upon exercise of this Warrant. All such shares (and other
securities and property) shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable and free of all
preemptive rights.
3. WARRANT STOCK TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The Warrant Stock may not be sold or otherwise disposed of except as follows:
(1) prior to registration under the Securities Act of 1933, as amended (the
"Act") to a person who, in the opinion of counsel to the Company, is a person
to whom such Warrant Stock may legally be transferred without registration and
without the
2
<PAGE> 3
delivery of a current prospectus under the Act with respect thereto or other
disposition of such securities; or (2) upon registration, if ever, under the
Act of the Warrant Stock, to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the
offering thereof for such sale or disposition, and thereafter to all successive
assignees unless in the opinion of Counsel to the Company the delivery of such
a prospectus is not required.
4. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant, but the
Company shall issue one additional share of its Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
5. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
not registered under the Act nor under any applicable state securities law or
regulation. This Warrant cannot be exchanged, transferred or assigned
otherwise than by will or the laws of descent and distribution, or due to the
Holder's mental or physical incapacity and appointment of a legal guardian as a
result thereof. Upon such event and upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the heir, devisee or assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent, if any, together with written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
or his executor, administrator or guardian.
6. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
7. REDEMPTION. This Warrant is not redeemable by the Company.
8. ANTI-DILUTION PROVISIONS.
8.1 ADJUSTMENT FOR DIVIDENDS IN OTHER SECURITIES, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time after the Base
Date the holders of Common Stock (or any other securities at the time
receivable upon the exercise of this Warrant) shall have received, or on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive without payment therefor: (a) other or
additional securities or property (other than cash) by way of dividend, (b) any
cash paid or payable except out of earned surplus of the Company at the Base
Date as increased (decreased) by subsequent credits (charges) thereto (other
than credits in respect of any capital or paid-in surplus or surplus created as
a result of a revaluation of property) or (c) other or additional (or less)
securities or property (including cash) by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar corporate
rearrangement, then, and in each such case, the Holder of this Warrant, upon
the exercise thereof as provided in Section 1, shall be entitled to receive the
amount of securities and property (including cash in the cases referred to in
clauses (b) and (c) above) which such Holder would hold on the date of such
exercise if on the Base Date it had been the holder of record of the number of
shares of Common Stock (as constituted on the Base Date) subscribed for upon
such exercise as provided in Section 1 and had thereafter, during the period
from the Base Date to and including the date of such exercise, retained such
shares and/or all other additional (or less) securities and property (including
cash in the cases referred to in clauses (b) and (c) above) receivable by it as
aforesaid during such period, giving effect to all adjustments called for
during such period by Section 8.2.
3
<PAGE> 4
8.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the Base Date or in case after such date the Company (or any such other
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation, then, and in
each such case, the Holder of this Warrant upon the exercise thereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the securities and property receivable upon the exercise of
this Warrant prior to such consummation, the securities or property to which
such Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Section 8.1; in each such case, the terms of this
Warrant shall be applicable to the securities or property receivable upon the
exercise of this Warrant after such consummation.
8.3 CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock (or other securities or property)
receivable on the exercise of the Warrant, the Company at its expense will
promptly compute such adjustment in accordance with the terms of the Warrant
and prepare a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any additional
shares of Common Stock issued or sold or deemed to have been issued or sold,
(b) the number of shares of Common Stock outstanding or deemed to be
outstanding, and (c) the pro forma adjusted Exercise Price. The Company will
forthwith mail a copy of each such certificate to each holder of the Warrant.
8.4 NOTICES OF RECORD DATE, ETC.
In case:
(a) the Company shall take a record of the holders of its Common
Stock (or other securities at the time receivable upon the exercise of the
Warrant) for the purpose of entitling them to receive any dividend (other than
a cash dividend) or other distribution, or any right to subscribe for, purchase
or otherwise acquire any shares of stock of any class or any other securities,
or to receive any other right; or
(b) of any capital reorganization of the Company (other than a
stock split or reverse stock split), any reclassification of the capital stock
of the Company, any consolidation or merger of the Company with or into another
corporation (other than a merger for purposes of change of domicile) or any
conveyance of all or substantially all of the assets of the Company to another
corporation; or
(c) of any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then, and in each such case, the Company shall mail
or cause to be mailed to each holder of the Warrant at the time outstanding a
notice specifying, as the case may be, (i) the date on which a record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, or (ii) the date
on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as to which the holders of record of Common Stock
(or such other securities at the time receivable upon the exercise of the
Warrant) shall be entitled to exchange their shares of Common Stock (or such
other securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice
4
<PAGE> 5
shall be mailed at least twenty (20) days prior to the date therein specified
and the Warrant may be exercised prior to said date during the term of the
Warrant no later than five (5) days prior to said date.
9. LEGEND. In the event of the exercise of any of the Warrants and the
issuance of any of the shares thereunder, prior to the registration of such
shares under the Act, all certificates representing shares shall bear on the
face thereof substantially the following legends, insofar as is consistent with
Delaware law:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT
TO THE PROVISIONS OF THAT ACT OR AN OPINION OF
COUNSEL TO THE CORPORATION IS OBTAINED STATING
THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN
AVAILABLE EXEMPTION FROM SUCH REGISTRATION."
10. APPLICABLE LAW. The Warrant is issued under and shall for all
purposes be governed by and construed in accordance with the laws of the State
of New York.
11. NOTICE. Notices and other communications to be given to the Holder
of the Warrant evidenced by this certificate shall be deemed to have been
sufficiently given, if delivered or mailed, addressed in the name and at the
address of such owner appearing on the records of the Company, and if mailed,
sent registered or certified mail, postage prepaid. Notices or other
communications to the Company shall be deemed to have been sufficiently given
if delivered by hand or mailed, by registered or certified mail, postage
prepaid, to the Company at 1025 West Nursery Road, Suite 120, Linthicum,
Maryland 21090, Attn: President, or at such other address as the Company shall
have designated by written notice to such registered owner as herein provided.
Notice by mail shall be deemed given when deposited in the United States mail
as herein provided.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on
its behalf, in its corporate name, by its duly authorized officer, all as of
the 8th day of November 1995.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella
------------------------
Michael J. Parrella, President
5
<PAGE> 6
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ___________ shares of Common Stock of Noise
Cancellation Technologies, Inc. and hereby makes payment at the rate of $0.75
per share, or an aggregate of $_________, in payment therefor.
--------------------------------
Name of Registered Holder
--------------------------------
Signature
--------------------------------
Signature, if held jointly
--------------------------------
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK
(if other than to the registered Holder of the within Warrant)
Name
--------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
Social Security or Taxpayer Identification Number
-------------------
ASSIGNMENT FORM
(See Section 5 for terms of Assignment)
The Holder hereby assigns and transfers unto
Name
--------------------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------------------------------
----------------------------------------------------------
the right to purchase Common Stock of Noise Cancellation Technologies, Inc.
represented by this Warrant to the extent of ______ shares as to which such
right is exercisable and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
DATED: , 19
- ----------------------------- ------------------------- ---
Name of Registered Holder
- ----------------------------- -----------------------------
Signature Signature, if held jointly
6
<PAGE> 1
EXHIBIT 10(l)(3)
TRANSFER AGREEMENT
DATED NOVEMBER 15, 1995
AMONG
WALKER MANUFACTURING COMPANY,
A DIVISION OF TENNESSEE GAS PIPELINE COMPANY,
A DELAWARE CORPORATION ("WALKER");
WALKER ELECTRONIC MUFFLERS, INC.,
A DELAWARE CORPORATION ("WEM");
NOISE CANCELLATION TECHNOLOGIES, INC.,
A DELAWARE CORPORATION ("NCT");
NCT MUFFLER, INC.,
A DELAWARE CORPORATION ("NCT-M");
CHAPLIN PATENTS HOLDING CO., INC.,
A DELAWARE CORPORATION ("CPH"); AND
WALKER NOISE CANCELLATION TECHNOLOGIES,
A NEW YORK GENERAL PARTNERSHIP ("WNCT")
<PAGE> 2
TRANSFER AGREEMENT
DATED NOVEMBER 15, 1995
AMONG
WALKER MANUFACTURING COMPANY,
A DIVISION OF TENNESSEE GAS PIPELINE COMPANY,
A DELAWARE CORPORATION ("WALKER");
WALKER ELECTRONIC MUFFLERS, INC.,
A DELAWARE CORPORATION ("WEM");
NOISE CANCELLATION TECHNOLOGIES, INC.,
A DELAWARE CORPORATION ("NCT");
NCT MUFFLER, INC.,
A DELAWARE CORPORATION ("NCT-M");
CHAPLIN PATENTS HOLDING CO., INC.,
A DELAWARE CORPORATION ("CPH"); AND
WALKER NOISE CANCELLATION TECHNOLOGIES,
A NEW YORK GENERAL PARTNERSHIP ("WNCT")
TABLE OF CONTENTS
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INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.01 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.03 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.04 Bulk Transfer Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.05 Cash Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.06 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.07 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.08 Closing Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.09 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.11 CPH License Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.12 Knowledge of the NCT Parties . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 License Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.15 NCT Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.16 NCT Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 NCT License Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 NCT-M Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . 4
1.19 Original Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.20 Original Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.21 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.22 Replacement Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.23 Restructuring Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.24 Stock Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.25 Straddle Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.26 Subject Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.27 Sublease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
</TABLE>
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<TABLE>
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1.28 Support, Research and Development Agreement . . . . . . . . . . . . . . . . 4
1.29 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.30 Transferred Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.31 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.32 WNCT Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II TRANSFERS BY NCT PARTIES; LIABILITIES . . . . . . . . . . . . . . . . . . . 5
2.01 Transfer of NCT-M Partnership Interest . . . . . . . . . . . . . . . . . . 5
2.02 Transfer of Inventory and Equipment . . . . . . . . . . . . . . . . . . . . 5
2.03 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.01 License and Royalty Agreements . . . . . . . . . . . . . . . . . . . . . . 6
3.02 Sublease Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.03 Mutual Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.01 Cash Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.02 Stock Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.03 Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.01 Time and Place of Closing . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.02 NCT Parties' Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.03 Deliveries by WEM to NCT Parties . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI WARRANTIES AND REPRESENTATIONS
OF NCT PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.01 Organization and Qualification of CPH . . . . . . . . . . . . . . . . . . 12
6.02 Organization and Qualification of NCT . . . . . . . . . . . . . . . . . . 12
6.03 Organization and Qualification of NCT-M . . . . . . . . . . . . . . . . . 12
6.04 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . 12
6.05 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.06 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.07 Ownership of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.09 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.10 No Infringements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.11 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.12 Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.13 Condition of Certain Assets . . . . . . . . . . . . . . . . . . . . . . . 15
6.14 Absence of Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.15 Accuracy of Representations and Warranties . . . . . . . . . . . . . . . 15
ARTICLE VII REPRESENTATIONS AND WARRANTIES
OF WALKER AND WEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.01 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.02 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . 15
</TABLE>
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ARTICLE VIII EMPLOYMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.01 Limited Restrictive Covenant Release . . . . . . . . . . . . . . . . . . 16
ARTICLE IX OTHER COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.01 Development Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.02 Termination of Original Agreements . . . . . . . . . . . . . . . . . . . 16
9.03 Boet System Actif . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.04 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.05 Liability for Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.06 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.07 Bulk Transfer Law Requirements . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.01 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.02 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.03 Non-Exclusive Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.04 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.05 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.06 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.07 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.09 Assignment Restriction . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.10 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.11 Equitable Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
SCHEDULES AND EXHIBITS
<TABLE>
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Exhibit 1.08 Closing Statement
Exhibit 1.11 CPH License Agreement
Schedule 1.15 NCT Equipment
Schedule 1.16 NCT Inventory
Exhibit 1.17 NCT License Agreement
Schedule 1.19 Original Agreements
Exhibit 1.24 Replacement Lease Agreement
Exhibit 1.27 Form of Sublease
Exhibit 1.28 Support, Research and
Development Agreement
Exhibit 3.03 Mutual Release Agreement
Schedule 4.01 Wire Transfer Instructions
Exhibit 5.02(a) Assignment of Partnership
Interest
Exhibit 5.02(b) Bill of Sale
Exhibit 5.02(k) Certificate of President of CPH
Exhibit 5.02(l) Certificate of President of NCT
Exhibit 5.02(m) Certificate of President of
NCT-M
Exhibit 5.03(g)-1 Certificate of Walker
Exhibit 5.03(g)-2 Certificate of WEM
</TABLE>
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<TABLE>
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Schedule 6.05 Consents and Approvals
Schedule 6.07 Ownership of Assets
Schedule 6.08 Litigation
Schedule 6.10(a) NCT Infringements
Schedule 6.10(b) Third-Party Infringements
Exhibit 9.03 S.A. Andre Boet Arrangements
Schedule 9.05 Allocations
</TABLE>
iv
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TRANSFER AGREEMENT
This Agreement is made and entered into this 15th day of November, 1995, by and
among the following parties: Walker Manufacturing Company, a division of
Tennessee Gas Pipeline Company, a Delaware corporation ("Walker"); Walker
Electronic Mufflers, Inc., a Delaware corporation ("WEM"), Noise Cancellation
Technologies, Inc., a Delaware corporation ("NCT"), NCT Muffler, Inc., a
Delaware corporation ("NCT-M"), Chaplin Patents Holding Co., Inc., a Delaware
corporation ("CPH"), and Walker Noise Cancellation Technologies, a New York
general partnership ("WNCT"). Walker and WEM are hereinafter sometimes
collectively referred to as the "Walker Parties" (and singly a "Walker Party")
NCT, NCT-M and CPH are hereinafter sometimes collectively referred to as the
"NCT Parties" (and singly as an "NCT Party").
INTRODUCTION
Walker, WEM, NCT and NCT-M entered into a Joint Venture and Partnership
Agreement dated November 8, 1989 (which Agreement, as originally entered into
and subsequently amended, is hereinafter referred to as the "Partnership
Agreement"), for purposes of forming and operating WNCT. Pursuant to the
Partnership Agreement, NCT granted certain licenses and sublicenses to WNCT
concerning certain patents and other intellectual property. The marketability
of the products being developed, manufactured and sold by WNCT is uncertain.
NCT-M and NCT desire to withdraw from active participation in the business of
WNCT and also desire to sell certain items of inventory and equipment owned by
them. NCT-M and NCT also desire to modify the rights and obligations under the
aforementioned license and sublicense arrangements. WEM desires to continue to
engage in the business which has heretofore been conducted by WNCT and desires
to modify the rights and obligations created pursuant to the aforementioned
licensed and sublicensed arrangements. This Agreement sets forth the
agreements and understandings of the parties concerning the restructuring of
their respective rights and obligations concerning WNCT and the aforementioned
license and sublicense arrangements.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
understandings set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which
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<PAGE> 7
are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I -- DEFINITIONS
1.01 Affiliate. The term "Affiliate" means, with respect
to any Person, any other Person that directly, or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with the Person specified, together with their respective officers, directors
and shareholders.
1.02 Agreement. The term "Agreement" shall mean this
Agreement, including the introduction, and the schedules and exhibits attached
hereto.
1.03 Assets. The term "Assets" means, collectively, (i)
the NCT Equipment, (ii) the NCT Inventory, (iii) the NCT-M Partnership
Interest, and the rights granted under the CPH License Agreement and the NCT
License Agreement.
1.04 Bulk Transfer Laws. The term "Bulk Transfer Laws"
means the statutes, ordinances, regulations or other laws or rules of any
country or political jurisdiction thereof pursuant to which any notice or must
be given or other action taken by reason of the sale, assignment, transfer of
title or transfer of possession of the Assets in order to avoid the creation or
continuation of any Lien with respect to the Assets or any imposition of
liability upon either of the Walker Parties in connection with the transactions
which are contemplated by this Agreement to be consummated at the Closing.
1.05 Cash Payment. The term "Cash Payment" shall have the
meaning ascribed to it in Section 4.01 below.
1.06 Closing. The term "Closing" refers to the event at
which the parties enter into the Restructuring Agreements and otherwise take all
action necessary to consummate the transactions contemplated by this Agreement
to be consummated on the Closing Date.
1.07 Closing Date. The term "Closing Date" means the date
on which the Closing occurs in accordance with Section 5.01 below.
1.08 Closing Statement. The term "Closing Statement" refers
to a closing statement in the form attached hereto as EXHIBIT 1.08.
1.09 Code. The term "Code" shall mean the Internal
Revenue Code of 1986, as amended, or any successor law.
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1.10 Consent. The term "Consent" (and collectively
"Consents") means the written permission, approval or authorization of any
person or entity from whom or which such permission, approval or authorization
is required for the execution, delivery or performance of one or more of the
Restructuring Agreements.
1.11 CPH License Agreement. The term "CPH License Agreement"
means a license and royalty agreement in the form attached hereto as EXHIBIT
1.11.
1.12 Knowledge of the NCT Parties. The term "Knowledge of the
NCT Parties" means, with respect to each of the NCT Parties, all matters as to
which any of such parties has received notice and also that knowledge which a
reasonable and prudent business person would acquire and maintain regarding the
operation and conduct of such person's own business and assets, and includes
without limitation the knowledge of the following persons with respect to each
of the NCT Parties: the chairman, president, any vice president, the secretary,
or any other employee or agent of such corporation having responsibility for an
operational or staff function who in the normal course of such officer's or
other person's responsibility would reasonably be expected to have knowledge of
such matter.
1.13 License Agreements. The term "License Agreements"
means, collectively, the CPH License Agreement and the NCT License Agreement.
1.14 Lien. The term "Lien" means any mortgage, pledge,
security interest, lease, claim, charge, lien or other encumbrance of any kind,
whether of record or arising by operation of law or otherwise, including
without limitation liens for unpaid taxes, however arising, and any
unconditional sale contract, option, right of first refusal, easement,
servitude, title retention contract, transfer restriction or similar
arrangement.
1.15 NCT Equipment. The term "NCT Equipment" means
certain items of equipment owned by NCT, which items are identified on the
attached SCHEDULE 1.15.
1.16 NCT Inventory. The term "NCT Inventory" means
certain items of inventory owned NCT, which items are identified on the
attached SCHEDULE 1.16.
1.17 NCT License Agreement. The term "NCT License
Agreement" means a license and royalty agreement in the form attached hereto as
EXHIBIT 1.17.
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1.18 NCT-M Partnership Interest. The term "NCT-M
Partnership Interest" means all partnership interests in WNCT other than the
general partnership interest of WEM in WNCT.
1.19 Original Agreements. The term "Original Agreements"
refers collectively to the Agreements identified on the attached SCHEDULE 1.19.
1.20 Original Certificate. The term "Original Certificate"
shall have the meaning ascribed to it in Section 4.02 below.
1.21 Person. The term "Person" means any natural person,
corporation, general partnership, limited partnership, association, court,
agency, government, tribunal, instrumentality, commission, arbitrator, board,
bureau, or other entity or authority.
1.22 Replacement Certificate. The term "Replacement
Certificate" shall have the meaning ascribed to it in Section 4.02 below.
1.23 Restructuring Agreements. The term "Restructuring
Agreements" means collectively this Agreement and all other agreements
contemplated in, or required to be executed and delivered pursuant to, this
Agreement.
1.24 Stock Purchase Agreement. The term "Stock Purchase
Agreement" means the Stock Purchase Agreement dated December 14, 1993 between
NCT, as the issuer, and Tenneco Automotive, a division of Tennessee Gas
Pipeline Company, as the purchaser.
1.25 Straddle Period. The term "Straddle Period" means
taxable years or periods which commence on or before, and end after, the
Closing Date.
1.26 Subject Shares. The term "Subject Shares" shall have the
meaning ascribed to it in Section 4.02 below.
1.27 Sublease. The term "Sublease" means a sublease agreement
between NCT and WEM in the form attached hereto as EXHIBIT 1.27.
1.28 Support, Research and Development Agreement. The
term "Support, Research and Development Agreement" means an agreement in the
form attached hereto as EXHIBIT 1.28.
1.29 Taxes. The term "Taxes" (and singularly a "Tax")
shall mean all federal, state, local or foreign taxes, fees or governmental
charges, including without limitation income, gross receipts, profits,
franchise, sales, use, occupation, real or
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<PAGE> 10
personal property, capital, wealth, environmental, severance, production,
excise, stamp, transfer, unemployment compensation or workers' compensation,
social security, withholding, value added, import duties, payroll and
employment related taxes, and all other taxes and charges, of any nature
whatsoever, however denominated, including interest thereon, additions, and
penalties with respect thereto, imposed by any country or political
subdivision thereof.
1.30 Transferred Employees. The term "Transferred Employees"
means Clay Shipps and Greg Mendoza, who were formerly employed by NCT and who
became employees of Walker Manufacturing Company on or about August 1, 1995 at
the request of and with the approval of NCT, and Lance Bischoff, who was also
formerly employed by NCT and who became an independent contractor of Walker
Manufacturing Company on or about August 1, 1995 at the request of and with the
approval of NCT.
1.31 Transfer Taxes. The term "Transfer Taxes" shall mean
all Taxes (other than Taxes measured by net income) incurred or imposed by
reason of the sale, assignment, transfer of title or possession of the Assets,
regardless upon whom such Taxes are levied or imposed by law, including without
limitation sales, excise, use, stamp, documentary, filing, recording, permit,
license, authorization, intangible and similar taxes.
1.32 WNCT Premises. The term "WNCT Premises" means the
premises which are subject to the Sublease.
ARTICLE II -- TRANSFERS BY NCT PARTIES; LIABILITIES
2.01 Transfer of NCT-M Partnership Interest. Subject to
the terms and conditions of this Agreement, at the Closing, NCT-M shall, and
NCT shall cause NCT-M to, sell, transfer, assign and convey to WEM, and WEM
shall purchase and accept from NCT-M, all right, title and interest in and to
the NCT-M Partnership Interest, free and clear of all Liens. From and after
such transfer of the NCT-M Partnership Interest, neither NCT-M nor any other of
the NCT Parties shall be liable to WEM or Walker for **
2.02 Transfer of Inventory and Equipment. Subject to the
terms and conditions of this Agreement, at the Closing, NCT shall sell,
transfer, assign and convey to WEM, and WEM shall purchase and accept from NCT,
the NCT Inventory and the NCT Equipment, free and clear of all Liens.
** Material for which confidential treatment has been requested
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2.03 Liabilities. Without affecting liabilities for which
WEM and NCT-M are already responsible by virtue of their respective positions
as the existing general partners in WNCT prior to the Closing, neither WEM nor
Walker shall assume any claim, debt, liability or obligation, whether absolute
or contingent, known or unknown, of any kind or nature, contractual or
otherwise, of any of the NCT Parties pursuant to or as a result of the
transactions contemplated by any of the Restructuring Agreements.
ARTICLE III -- ADDITIONAL AGREEMENTS
3.01 License and Royalty Agreements. At the Closing,
subject to the terms and conditions of this Agreement, the following agreements
will be executed and delivered on behalf of WEM, on the one hand, and on behalf
of the NCT Party specified therein, on the other hand:
a. the CPH License Agreement;
b. the NCT License Agreement; and
c. the Support, Research and Development Agreement.
3.02 Sublease Arrangements. At the Closing, subject to the
terms and conditions of this Agreement, NCT and WEM shall execute the Sublease.
In addition, NCT shall deliver to WEM, in form and substance satisfactory to
WEM and its counsel, the written consent to the Sublease of West Nursery Land
Holding Limited Partnership, the owner and lessor of the real property subject
to the Sublease.
3.03 Mutual Release. At the Closing, subject to the terms
and conditions of this Agreement, the parties hereto shall enter into a mutual
release agreement in the form attached hereto as EXHIBIT 3.03.
ARTICLE IV -- CONSIDERATION
4.01 Cash Payment. As a component of the consideration to
be furnished to the NCT Parties by the Walker Parties for the covenants,
warranties and representations made in favor of one or both of the Walker
Parties pursuant to this Agreement, WEM shall, subject to Section 9.04 below,
pay or cause to be paid to the NCT Parties the aggregate sum of $300,000 (the
"Cash Payment"), which amount includes:
(a) reimbursement for amounts expended or incurred by NCT
between March 1, 1995 and the Closing Date for (i)
rental payments in connection with the WNCT Premises
and (ii) salary and benefits
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compensation paid to the Transferred Employees and to
Scott Miller and Joe Donovan;
(b) all amounts owed by Walker, WEM or WNCT to any of the
NCT Parties with respect to any matters arising prior
to the Closing Date; and
(c) consideration for the covenants and undertakings of
the NCT Parties in the Restructuring Agreements.
The aforementioned payment shall be made by or on behalf of WEM by a wire
transfer on the Closing Date to the account identified in SCHEDULE 4.01 of
immediately available funds. Neither of the Walker Parties shall have any duty
to ascertain or confirm any allocation or distribution among or to any of the
NCT Parties of the Cash Payment.
4.02 Stock Transfer. As an additional component of the
consideration to be furnished hereunder by the Walker Parties to the NCT
Parties, Walker shall cause Tenneco Automotive ("Tenneco Automotive", a
division of Tennessee Gas Pipeline Company) to transfer to NCT the 1,110,083
shares (the "Subject Shares") of the NCT common stock originally acquired by
Tenneco Automotive pursuant to the Stock Purchase Agreement. Neither of the
Walker Parties shall have any duty to ascertain or confirm any allocation or
distribution of the Subject Shares to any of the NCT Parties other than such
transfer and delivery to NCT. To effect the transfer of the Subject Shares
described in this Section 4.02, Walker shall cause Tenneco Automotive to
deliver to NCT at the Closing the stock certificate (the "Original
Certificate") issued to and held by Tenneco Automotive evidencing the 1,110,083
shares of stock acquired pursuant to the Stock Purchase Agreement, duly
endorsed in favor of NCT.
4.03 Acknowledgment. The NCT Parties hereby expressly
acknowledge that the marketability of the proposed products of WNCT is
uncertain. For this and other reasons, the NCT Parties hereby expressly
acknowledge that the Cash Payment and the transfer of the Subject Shares made
pursuant to this Article IV, together with the value of the royalty rights
created pursuant to the License Agreements and the other obligations undertaken
by the Walker Parties pursuant to the Restructuring Agreements, constitute fair
and adequate consideration to the NCT Parties having not less than a reasonably
equivalent value to the assets and rights transferred to the Walker Parties
pursuant to the Restructuring Agreements.
ARTICLE V -- CLOSING
5.01 Time and Place of Closing. The Closing shall take
place contemporaneously with the execution and delivery of
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this Agreement on behalf of all parties hereto at the office of WEM, 111
Pfingsten Road, Deerfield, Illinois.
5.02 NCT Parties' Deliveries. At the Closing, the NCT
Parties shall deliver or cause to be delivered to WEM, duly executed on behalf
of each party thereto other than WEM:
(a) An Assignment of Partnership Interest in the form
attached hereto as EXHIBIT 5.02(a);
(b) A Bill of Sale, in the form of EXHIBIT 5.02(b), and
other appropriate instruments of assignment and
conveyance in form and substance reasonably
satisfactory to WEM and WEM's counsel for the purpose
of transferring, assigning and conveying the NCT
Inventory and the NCT Equipment to and vesting in WEM
all of Seller's right, title and interest (as
warranted in this Agreement) in and to the NCT
Inventory and the NCT Equipment;
(c) The CPH License Agreement;
(d) The NCT License Agreement;
(e) The Support, Research and Development Agreement;
(f) The Sublease, together with the written consent
thereto of West Nursery Land Holding Limited
Partnership in form and substance satisfactory to
WEM;
(g) A negotiable warehouse receipt in the form attached
hereto as EXHIBIT 5.02(g) covering the items
comprising part of the Inventory which are described
therein, duly endorsed in favor of WEM, or if no such
warehouse receipt exists, other documentation in lieu
thereof in form and substance satisfactory to WEM and
its counsel;
(h) A certificate of good standing of CPH, issued and
dated by the Secretary of State of Delaware dated not
more than thirty (30) days prior to the Closing Date;
(i) A certificate of good standing of NCT, issued and
dated by the Secretary of State of Delaware dated not
more than thirty (30) days prior to the Closing Date;
(j) A certificate of good standing of NCT-M, issued and
dated by the Secretary of State of Delaware
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dated not more than thirty (30) days prior to the
Closing Date;
(k) A certificate executed by an authorized officer of
CPH, dated the Closing Date, in the form attached
hereto as EXHIBIT 5.02(k);
(l) A certificate executed by an authorized officer of
NCT, dated the Closing Date, in the form attached
hereto as EXHIBIT 5.02(l);
(m) A certificate executed by an authorized officer of
NCT-M, dated the Closing Date, in the form attached
hereto as EXHIBIT 5.02(m);
(n) A true and correct copy of the following with respect
to CPH, duly certified as of the Closing Date by the
Secretary of CPH: (i) its articles of incorporation,
(ii) its by-laws, (iii) all resolutions duly adopted
by the Board of Directors of CPH authorizing the
execution and delivery of such of the Restructuring
Agreements as are to be executed and delivered by CPH
and the consummation of the transactions contemplated
thereby, and (iv) an incumbency statement identifying
the officer(s) authorized to execute and deliver such
of the Restructuring Agreements and such other items
as are to be delivered by CPH;
(o) A true and correct copy of the following with respect
to NCT, duly certified as of the Closing Date by the
Secretary of NCT: (i) its articles of incorporation,
(ii) its by-laws, (iii) all resolutions duly adopted
by the Board of Directors of NCT authorizing the
execution and delivery of such of the Restructuring
Agreements as are to be executed and delivered by NCT
and the consummation of the transactions contemplated
thereby, and (iv) an incumbency statement identifying
the officer(s) authorized to execute and deliver such
of the Restructuring Agreements and such other items
as are to be delivered by NCT;
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(p) A true and correct copy of the following with respect
to NCT-M, duly certified as of the Closing Date by
the Secretary of NCT-M: (i) its articles of
incorporation, (ii) its by-laws, (iii) all
resolutions duly adopted by the Board of Directors of
NCT-M authorizing the execution and delivery of such
of the Restructuring Agreements as are to be executed
and delivered by NCT-M and the consummation of the
transactions contemplated thereby, and (iv) an
incumbency statement identifying the officer(s)
authorized to execute and deliver such of the
Restructuring Agreements and such other items as are
to be delivered by NCT-M;
(q) Evidence reasonably acceptable to WEM that all (i)
Liens encumbering or otherwise pertaining to the
Assets have been fully satisfied and discharged, and
(ii) NCT has paid to Gardner-Denver, Inc. all amounts
owed by any of the NCT Parties to Gardner-Denver,
Inc.
(r) Evidence reasonably acceptable to WEM that each of
the NCT Parties has prepared and filed, or caused to
be prepared and filed, all tax returns and reports
related to the Assets which (i) are required to be
filed on or before the Closing Date, (ii) pertain to
Taxes that are required by law to be paid or filed by
the NCT Party in question, or (iii) are returns and
reports for Transfer Taxes;
(s) the Consents;
(t) A Mutual Release Agreement in the form attached
hereto as EXHIBIT 3.03;
(u) the Closing Statement; and
(v) such other instruments and documents as are required
by any other provisions of this Agreement or reasonably necessary to effect the
performance of the Restructuring Agreements by the NCT Parties. oo(v)osuch
other instruments and documents as are required by any other provisions of this
Agreement or reasonably necessary to effect the performance of the
Restructuring Agreements by the NCT Parties.
5.03 Deliveries by WEM to NCT Parties. At the Closing, WEM
shall deliver or cause to be delivered to the NCT
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Parties, duly executed on behalf of WEM or Walker in the case of items to be
executed by WEM or Walker, as the case may be:
(a) Subject to Section 4.01 above and Section 9.04 below,
the Cash Payment;
(b) The CPH License Agreement;
(c) The NCT License Agreement;
(d) The Support, Research and Development Agreement;
(e) An original counterpart of the Sublease Agreement;
(f) A good standing certificate of WEM dated and issued
by the Secretary of State of Delaware not more than
thirty (30) days prior to the Closing Conference
Date;
(g) Certificates substantially in the form attached
hereto as EXHIBIT 5.03(g)-1 AND 5.03(g)-2 certifying
to the satisfaction of all corporate authorization
requirements of Walker and WEM to enter into the
Restructuring Agreements and to consummate the
transactions contemplated thereby;
(h) A Mutual Release Agreement in the form attached
hereto as EXHIBIT 3.03;
(i) The Original Certificate; and
(j) The Closing Statement.
ARTICLE VI -- WARRANTIES AND REPRESENTATIONS OF NCT PARTIES
The NCT Parties, jointly and severally, make the following
representations and warranties to WEM as of the date of this Agreement and as
of the effective time of the Closing, all of which shall survive the Closing
for a period of two years from and after the Closing, except that (i) the
representations and warranties set forth in Section 6.10 shall survive for a
period of four years from and after the Closing, and (ii) no temporal
limitation shall apply with respect to the warranties and representations in
Sections 6.05, 6.06, 6.07, 6.11, 6.12 and 6.16 (to the extent that such Section
6.16 is applicable with respect to any other warranties and representations
which survive beyond the aforementioned two-year survival period) below:
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<PAGE> 17
6.01 Organization and Qualification of CPH. CPH is a
corporation duly organized and validly existing under the laws of the State of
Delaware and has the requisite power and authority to own and operate such of
the Assets which are owned or operated by CPH and to carry on its business.
CPH is qualified to do business in all jurisdictions in which the character or
location of the Assets or the nature of CPH's business makes such qualification
necessary.
6.02 Organization and Qualification of NCT. NCT is a
corporation duly organized and validly existing under the laws of the State of
Delaware and has the requisite power and authority to own and operate such of
the Assets which are owned or operated by NCT and to carry on its business.
NCT is qualified to do business in all jurisdictions in which the character or
location of the Assets or the nature of NCT's business makes such qualification
necessary.
6.03 Organization and Qualification of NCT-M. NCT-M is a
corporation duly organized and validly existing under the laws of the State of
Delaware and has the requisite power and authority to own and operate such of
the Assets which are owned or operated by it and to carry on its business.
NCT-M is qualified to do business in all jurisdictions in which the character
or location of the Assets or the nature of NCT-M's business makes such
qualification necessary.
6.04 Authority Relative to this Agreement. Each of the
NCT Parties has the requisite power and authority to execute and deliver such
of the Restructuring Agreements and the other documents to be executed and
delivered by the NCT Party in question at the Closing in accordance with this
Agreement, and to consummate the transactions contemplated thereby. The
execution and delivery by each NCT Party of the Restructuring Agreements and
such other documents to be delivered by such NCT Party hereunder, and the
consummation of the transactions contemplated thereby, have been duly
authorized by all necessary action on the part of the NCT Party in question and
each of the Restructuring Agreements, when fully executed and delivered, shall
constitute legal, valid and binding obligations of each NCT Party which is a
party thereto, enforceable against each such NCT Party in accordance with the
terms thereof, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights and
remedies generally and to the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding at law or in
equity).
6.05 Consents and Approvals. Except as disclosed on
SCHEDULE 6.05, the execution and delivery by the NCT Parties of the
Restructuring Agreements do not, and compliance by each of the NCT Parties
which is a party thereto with the terms thereof
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and consummation of the transactions contemplated thereby will not, require any
of the NCT Parties to obtain any consent, approval, exemption, authorization or
other action of, or make any filing with or give any notice to, any court,
administrative agency or other governmental authority or any other Person.
6.06 No Violation. The execution and delivery by the NCT
Parties of the Restructuring Agreements do not, and the performance thereunder
by each of the NCT Parties which is a party thereto will not, (i) conflict with
or result in a breach of the certificate of incorporation or by-laws of any NCT
Party, or (ii) upon the Closing, violate, or conflict with, or constitute a
default under, or give to any person or entity a right of termination,
amendment, acceleration or cancellation of, or result in the creation or
imposition of any Lien upon the Assets under, any laws applicable to any of the
NCT Parties or any of the Assets, or any mortgage, indenture, agreement,
judgment, decree or court order to which any of the NCT Parties is a party or
by which any of the Assets are bound.
6.07 Ownership of Assets. Except as otherwise disclosed on
SCHEDULE 6.07, (i) each of the NCT Parties has good and merchantable title to
the Assets which are subject to the transactions engaged in by the NCT Party
pursuant to this Agreement, and the Assets are owned free and clear of any
Liens.
6.08 Litigation. Except as otherwise disclosed on
SCHEDULE 6.08, (i) there are no actions, suits, claims, arbitration
proceedings, charges, complaints or governmental investigations or inquiries
pending or, to the Knowledge of the NCT Parties, threatened against any of the
NCT Parties or WNCT, and (ii) the Assets are not subject to any order,
judgment, or decree of any court or governmental agency.
6.09 Tax Matters. Each of the NCT Parties has (i) filed
when due all income, excise and other tax returns and reports which it is
required to file with respect to the Assets or its operations or business, and
(ii) paid all Taxes which have become due with respect to the Assets or its
operations or business, including any Taxes which it was obligated to withhold
from amounts owing to any employee, creditor or other person or entity. There
are no pending, or to the Knowledge of the NCT Parties, threatened or proposed
tax audits, tax assessments or claims from taxing authorities for deficiencies,
penalties or interest against an NCT Party. None of the Assets are (i) owned
for tax purposes by Persons other than the NCT Party which is engaged in each
transaction contemplated hereunder with respect to each of the Assets, or (ii)
subject to the "alternative depreciation system" (within the meaning of Section
168(g) of the Code).None of the Assets is property that WEM or its Affiliates
will be required to treat as "tax-exempt use property" (within the meaning of
Section 168(h)(1) of the Code).
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No "industrial development bonds" (within the meaning of Section 103 of the
Internal Revenue Code of 1954, as amended and in effect prior to the enactment
of the Tax Reform Act of 1986), "private activity bonds" (within the meaning of
Section 141 of the Code), or other tax exempt financing are outstanding that
have been used to finance the Assets, whether leased or owned. The basis of
the Assets will not be affected by prior transactions between any of the NCT
Parties and any of their Affiliates and Walker or WEM and their Affiliates
under Section 338 of the Code.
6.10 No Infringements. Except as set forth on SCHEDULE
6.10(a) attached hereto, to the Knowledge of the NCT Parties, none of the
patents or other intellectual property which comprises a part of or are the
subject of any rights comprising a part of the Assets infringes upon any patent
or other rights of any other Person, nor are there any actions, suits, claims,
proceedings, investigations or claims pending, or to the Knowledge of the NCT
Parties, threatened against any of the NCT Parties with respect to any actual
or alleged infringement. Except as set forth in SCHEDULE 6.10(b), there is not
to the Knowledge of the NCT Parties any actual or potential infringement of any
of the patents or other intellectual property which comprises a part of or
which is the subject of any of the rights comprising a part of the Assets by
any other Person, nor is any of the NCT Parties prosecuting any proceeding or
investigation concerning any such actual or potential infringement.
6.11 Solvency. Each of the NCT Parties is paying its
debts as they become due, the value of the assets of each NCT Party is greater
than the sum of its debts, and each NCT Party is solvent. The consummation of
the transactions contemplated by this Agreement will not render any of the NCT
Parties insolvent. None of the NCT Parties is engaged or about to engage in a
business or transaction for which its remaining assets will be unreasonably
small in relation to such business or transaction, and none of the NCT Parties
intends to incur, nor does it believe or have any reason to believe that it
will incur, any debts beyond its ability to pay as such debts become due. None
of the NCT Parties has any intention to seek, nor to the Knowledge of the NCT
Parties is there any intention by any other Person to cause such NCT Party to
be the subject of any proceedings seeking, relief under any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws effecting
creditor's rights and remedies.
6.12 Restrictive Covenants. None of the Transferred
Employees is bound by or otherwise subject to any confidentiality covenant or
other restrictive covenant in favor of any of the NCT Parties which would bar
any such employee from employment with WEM or any Affiliate of WEM or from
using or
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disclosing to WEM or any Affiliate thereof (but only to WEM or such Affiliate
or, with respect to information pertaining to technology or other intellectual
property which is subject to one or both of the License Agreements, to a third
party to the extent permitted under the License Agreements) knowledge gained
while employed by any NCT Party or affiliate thereof to the extent that this
knowledge pertains to any patents or other intellectual property which may be
used by WEM pursuant to any of the License Agreements.
6.13 Condition of Certain Assets. THE NCT INVENTORY AND THE
NCT EQUIPMENT IS BEING TRANSFERRED "AS IS, WHERE IS." NONE OF THE NCT PARTIES
MAKES ANY WARRANTY OR REPRESENTATION CONCERNING THE CONDITION OF THE NCT
INVENTORY OR THE NCT EQUIPMENT, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6.14 Absence of Liabilities. Except as set forth in the
books and records of WNCT, there are no liabilities, absolute or contingent, of
WNCT or which otherwise pertain to the NCT-M Partnership Interest.
6.15 Accuracy of Representations and Warranties Accuracy
of Representations and Warranties . No representation or warranty made by any
of the NCT Parties herein contains any untrue statement of a material fact or
omits to state a material fact necessary to make such representation or
warranty not misleading in light of the circumstances under which it is made.
ARTICLE VII -- REPRESENTATIONS AND WARRANTIES OF
WALKER AND WEM
Walker and WEM, jointly and severally, make the following
representations and warranties to the NCT Parties as of the date of this
Agreement and as of the effective time of the Closing, all of which shall
survive the Closing for a period of two years.
7.01 Organization. Walker and WEM are corporations duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
7.02 Authority Relative to this Agreement. Walker and
WEM each have the requisite corporate power and authority to execute and
deliver such of the Restructuring Agreements as are to be executed and
delivered by them and each of the other documents to be executed and delivered
by them at the Closing in accordance with this Agreement, and to consummate the
transactions contemplated thereby. The execution and delivery by Walker and
WEM of the Restructuring Agreements and the consummation of the transactions
contemplated thereby have been duly authorized by all necessary corporate
action on the part
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of Walker and WEM. This Agreement and each of the other Restructuring
Agreements, when executed and delivered by Walker or WEM, shall constitute a
legal, valid and binding obligation of Walker or WEM, as the case may be,
enforceable against it in accordance with the terms thereof, subject to the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights and remedies generally and to the
effect of general principles of equity, regardless of whether enforcement is
considered in a proceeding at law or in equity.
ARTICLE VIII -- EMPLOYMENT MATTERS
8.01 Limited Restrictive Covenant Release. The NCT Parties
hereby acknowledge that the Transferred Employees became employees (or, in the
case of Lance Bischoff, an independent contractor) of Walker at the request of
and with the approval of the NCT Parties. The NCT Parties hereby release each
of the Transferred Employees from any confidentiality or other restrictive
covenants that would otherwise apply during the time that these persons are
employed by, or act as independent contractors of, WEM or any Affiliate of WEM
to the extent necessary to ensure the accuracy of the warranties and
representations set forth in Section 6.12 above.
ARTICLE IX -- OTHER COVENANTS
9.01 Development Rights. The NCT Parties hereby
acknowledge and agree that except to the extent otherwise expressly provided in
the License Agreements, WEM shall have the right to enter into any partnership,
joint venture or other arrangement or enterprise for purposes of using,
exploiting or further developing any or all of the Assets. Without limiting
the generality of the foregoing, WEM shall have the right to enter into
arrangements with any third party pursuant to which WEM may use or incorporate
any intellectual property or other developments of the third party in
connection with the use, exploitation or development of any of the Assets by
WEM which is not inconsistent with the provisions of the License Agreements.
WEM hereby acknowledges and agrees that any warranty or indemnification
obligations of the NCT Parties applicable to any of the Assets shall not apply
with respect to, and to the extent of, any alterations or modifications to the
Assets in question made by WEM itself or on behalf of WEM by any party other
than one or more of the NCT Parties.
9.02 Termination of Original Agreements. Except as otherwise
expressly provided to the contrary in any of the Restructuring Agreements or in
this Section 9.02, each of the Original Agreements shall be deemed to have been
terminated as of the Closing and upon such termination none of the parties
thereto shall have any further obligation or liability
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thereunder. Notwithstanding the foregoing, if any rights or obligations
provided for pursuant to any of the license agreements which comprise part of
the Restructuring Agreements are adjudicated to be unenforceable, the
corresponding rights and obligations, if any, provided pursuant to the license
agreement which constitutes a part of the Original Agreements shall apply, with
WEM as a permitted successor to WNCT, and for such purpose shall thereafter
remain in effect perpetually except to the extent that the same would terminate
as provided in the corresponding license agreement which constitutes a part of
the Restructuring Agreements, and such license agreements are hereby amended in
all respects necessary to give effect to the provisions of this Section 9.02
and no further action shall required by any party thereto to effect such
amendments.
9.03 Transfer Taxes. All Transfer Taxes payable in
connection with any of the transactions which are contemplated by this
Agreement to be consummated at the Closing shall be borne and paid solely by
the NCT Parties, which shall be jointly and severally liable therefor, and paid
at the Closing and any such amounts not paid prior to or at the Closing may, at
WEM's option, be withheld by WEM from the Cash Payment and paid directly by WEM
to the taxing authority in question. Provided that WEM is furnished with
appropriate tax exemption certificates and evidence satisfactory to WEM that
the NCT Parties have satisfied or otherwise complied with all requirements
under any applicable law with respect to any claimed exemption, WEM shall not
deduct or withhold any such Transfer Taxes from the Cash Payment to the extent
such exemption is satisfied.
9.04 Liability for Taxes. Without affecting liabilities for
which WEM is already responsible by virtue of its position as an existing
general partner in WNCT and without limiting the generality of Section 2.03
above, WEM is not assuming any liability for any Taxes imposed on or in
connection with the Assets for taxable periods or portions thereof ending on or
before the Closing Date. The apportionment of liabilities for Taxes for
Straddle Periods, other than Transfer Taxes (as provided in Section 9.04),
shall be based on actual taxable events and activities, except for (if any)
property Taxes, payments in lieu of such Taxes, and similar Taxes or fees which
shall be apportioned between the NCT Parties and WEM on a pro-rata daily basis
over the relevant tax period, based on the tax period or portions thereof for
which each is responsible (with the day immediately following the Closing Date
being the first day WEM owns the Assets for purposes of this Section 9.05).
Notwithstanding anything provided herein to the contrary, the NCT Parties shall
be responsible for all income Taxes incurred, arising from or imposed as a
result of the sale and transfer of the Assets pursuant to this Agreement. The
amount of (if any) property Taxes, payments in lieu of such Taxes or similar
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Taxes or fees, if any, used for settlement at the Closing and owed by any of
the NCT Parties shall be credited against the Cash Payment payable by WEM at
the Closing.
9.05 Allocations. The Cash Payment and other items
constituting consideration paid by WEM or received by any of the NCT Parties in
connection with the transactions to be consummated at the Closing shall be
allocated among the Assets and other acquired rights as set forth in SCHEDULE
9.05 attached hereto. Each of the NCT Parties (on the one hand) and WEM (on
the other hand) shall file any reports required to be filed under applicable
laws or regulations, including without limitation I.R.S. Form 8594, consistent
with such allocation.
9.06 Bulk Transfer Law Requirements. Each of the parties
hereto hereby waives compliance by all parties hereto with the requirements of
any applicable Bulk Transfer Laws; provided, that such waiver shall not
constitute a waiver of, or affect the generality of or limit the effect of any
of, the provisions of any of the Restructuring Agreements (including without
limitation the indemnification obligations set forth in Section 7.01 of the
Support, Research and Development Agreement).
ARTICLE X -- GENERAL PROVISIONS
10.01 Entire Agreement. This Agreement and the schedules and
exhibits attached hereto constitute the entire agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior agreements,
arrangements and communications of the parties dealing with such subject
matter, whether oral or written. No other promise, agreement, understanding,
or representation with respect to such subject matter will be binding unless
made in writing and signed by the parties hereto. All amendments to this
Agreement must be in writing and signed by all of the parties hereto.
10.02 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by and construed in
accordance with the internal laws of the State of Delaware, without giving
affect to the conflicts of law principles thereof, in every respect, including
but not limited to validity, interpretation and performance, notwithstanding
that one or more of the parties to this Agreement may now be or hereafter
become domiciled in or a resident of another state or a foreign country.
10.03 Non-Exclusive Forum. The parties hereto agree that the
Circuit Court of Lake County, Illinois and the Federal District Court for the
Northern District of Illinois located in Chicago, Illinois, shall each have
non-exclusive jurisdiction
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to adjudicate any dispute between the parties hereto which arises out of or in
connection with this Agreement.
10.04 Severability. In the event that any provision of this
Agreement is held illegal or invalid for any reason, such illegality or
invalidity shall at the option of the party against whom the same is asserted
not affect the remaining parts of this Agreement, but this Agreement shall be
construed and enforced as if that illegal and invalid provision had never been
inserted herein.
10.05 Notices. All notices and other communications under
this Agreement shall be in writing and may be given by any of the following
methods: (a) personal delivery; (b) facsimile transmission; (c) registered or
certified mail, postage prepaid, return receipt requested; or (d) overnight
delivery service. Notices shall be sent to the appropriate party at its
address or facsimile number given below (or at such other address or facsimile
number for such party as shall be specified by notice given hereunder):
If to CPH:
c/o Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636 - 5989
Attention: President
If to NCT:
Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636 - 5989
Attention: President
If to NCT-M:
c/o Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636 - 5989
Attention: President
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If to Walker:
Walker Manufacturing Company,
a division of Tennessee Gas Pipeline Company
Attention: President
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
with a copy to:
Virginia L. Kearns
General Counsel
Tenneco Automotive
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
If to WEM:
Walker Electronic Mufflers, Inc.
Attention: President
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
with a copy to:
Virginia L. Kearns
General Counsel
Tenneco Automotive
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
All such notices and communications shall be deemed received upon the earlier
of (a) actual receipt thereof by the addressee, or (b) actual delivery thereof
to the appropriate address, or (c) in the case of a facsimile transmission,
upon transmission thereof by the sender and issuance by the transmitting
machine of a confirmation slip confirming that the number of pages constituting
the notice have been transmitted without error. In the case of notices sent by
facsimile transmission, the sender shall contemporaneously mail a copy of the
notice to the addressee at the address provided for above. However, such
mailing shall in no way alter the time at which the facsimile notice is deemed
received.
10.06 Captions. Section headings and numbers herein are
included for convenience of reference only, and if there shall be any conflict
between any such numbers and headings and the text of this Agreement, the text
shall control.
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10.07 Waiver. The failure (with or without intent) of any
party to insist upon the strict performance by any other party of any provision
of this Agreement shall not be deemed to constitute a modification of any of
the provisions hereof, or a waiver of the right to insist at any time
thereafter upon performance strictly in accordance with the provisions of this
Agreement. No waiver of any term, condition or provision shall operate as a
waiver of any other term, condition or provision of the Agreement, and no
waiver of any term, condition or provision shall operate as a continuing
waiver.
10.08 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be considered an original, and all of
which taken together shall constitute one and the same instrument.
10.09 Assignment Restriction. None of the NCT Parties may
assign or delegate any of the benefits or duties under this Agreement without
the prior written consent of each other party.
10.10 Binding Effect. This Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective legal
representatives, permitted transferees, successors and assigns, including any
entity with which any corporate party may merge or consolidate or to which it
may transfer substantially all of its assets. This Agreement and all
conditions and provisions hereof are intended for the sole and exclusive
benefit of the parties hereto and their respective permitted assignees
hereunder. Nothing in this Agreement shall give any other person any legal or
equitable right, remedy or claim under or in respect of the matters covered by
this Agreement.
10.11 Equitable Relief. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, it is agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
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IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
executed by their respective duly authorized officers on the date first above
written.
NOISE CANCELLATION NCT MUFFLER, INC.
TECHNOLOGIES, INC.
By:/s/ Michael J. Parrella By:/s/ Michael J. Parrella
----------------------- -----------------------
Michael Parrella -----------------------
Its President Its President
CHAPLIN PATENTS
HOLDING CO., INC.
By:/s/ Michael J. Parrella
-----------------------
-----------------------
Its President
-------------------
WALKER MANUFACTURING COMPANY, WALKER NOISE CANCELLATION
A DIVISION OF TENNESSEE TECHNOLOGIES, a New York
PIPELINE COMPANY General Partnership
By:/s/ Lyle S. Lohmeyer By: WALKER ELECTRONIC
----------------------- MUFFLERS, INC., a
General Partner
-----------------------
Its Vice President
-------------------
By:/s/ Lyle S. Lohmeyer
---------------------
Its Vice President
---------------------
WALKER ELECTRONIC By: NCT MUFFLER, INC., a
MUFFLERS, INC. General Partner
By:/s/ Lyle S. Lohmeyer By:/s/ Michael J. Parrella
----------------------- -----------------------
Its Vice President Its President
-------------------- ------------------
<PAGE> 1
EXHIBIT 10(l)(4)
CPH TECHNOLOGY LICENSE AGREEMENT
DATED NOVEMBER 15, 1995
BETWEEN
CHAPLIN PATENTS HOLDING CO., INC.
A DELAWARE CORPORATION ("CPH")
AND
WALKER ELECTRONIC MUFFLERS, INC.,
A DELAWARE CORPORATION ("WEM")
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Other Defined Terms . . . . . . . . . . . . . . . . . . . . . . 7
1.03 Effect of Definitions . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II GRANT OF LICENSE . . . . . . . . . . . . . . . . . . . . . . . . 7
2.01 Grant of License . . . . . . . . . . . . . . . . . . . . . . . . 7
2.02 Scope of License . . . . . . . . . . . . . . . . . . . . . . . . 8
2.03 Exclusive Rights . . . . . . . . . . . . . . . . . . . . . . . . 9
2.04 Non-Exclusive Rights . . . . . . . . . . . . . . . . . . . . . .10
2.05 Sublicense Rights . . . . . . . . . . . . . . . . . . . . . . .13
2.06 Sublicense Audit Rights . . . . . . . . . . . . . . . . . . . .13
2.07 Product Exclusions . . . . . . . . . . . . . . . . . . . . . . .14
2.08 Grant-Back . . . . . . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE III ROYALTIES . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3.01 Sales of Electronic Mufflers by WEM . . . . . . . . . . . . . .15
3.02 Other Sales or Leases by WEM . . . . . . . . . . . . . . . . . .15
3.03 Sublicensing by WEM . . . . . . . . . . . . . . . . . . . . . .16
3.04 Sales or Leases by CPH . . . . . . . . . . . . . . . . . . . . .17
3.05 Licensing and Sublicensing by CPH . . . . . . . . . . . . . . .17
3.06 Additional Royalties . . . . . . . . . . . . . . . . . . . . . .18
3.07 Accrual of Royalty Obligations . . . . . . . . . . . . . . . . .19
3.08 Royalty Payment Dates . . . . . . . . . . . . . . . . . . . . .19
3.09 Books and Records . . . . . . . . . . . . . . . . . . . . . . .19
3.10 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
3.11 Royalty Exceptions . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
ARTICLE IV DELIVERY OF INTELLECTUAL PROPERTY
MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . .21
4.01 Delivery at Closing . . . . . . . . . . . . . . . . . . . . . .21
4.02 Delivery of Improvements . . . . . . . . . . . . . . . . . . . .21
ARTICLE V OTHER COVENANTS . . . . . . . . . . . . . . . . . . . . . . . .21
5.01 Restrictions Concerning Exclusive Field . . . . . . . . . . . .21
5.02 Notice of Licenses . . . . . . . . . . . . . . . . . . . . . . .22
5.03 Third Party Beneficiary 22
5.04 Maintenance and Enforcement . . . . . . . . . . . . . . . . . .22
5.05 Warranties and Representations . . . . . . . . . . . . . . . . .23
ARTICLE VI TRADEMARKS, SERVICE MARKS AND
TRADE NAMES . . . . . . . . . . . . . . . . . . . . . . . . . .23
6.01 CPH Marks . . . . . . . . . . . . . . . . . . . . . . . . . . .23
6.02 WNCT Marks . . . . . . . . . . . . . . . . . . . . . . . . . . .24
ARTICLE VII CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . .24
7.01 Confidentiality Covenants . . . . . . . . . . . . . . . . . . .24
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . .25
8.01 Indemnification by CPH . . . . . . . . . . . . . . . . . . . . .25
8.02 Indemnification by WEM . . . . . . . . . . . . . . . . . . . . .25
8.03 Control of Contest . . . . . . . . . . . . . . . . . . . . . . .26
8.04 Notice and Cooperation . . . . . . . . . . . . . . . . . . . . .26
ARTICLE IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . .26
9.01 Equitable Relief, Specific Performance . . . . . . . . . . . . .26
9.02 Further Assurances . . . . . . . . . . . . . . . . . . . . . . .27
9.03 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . .27
9.04 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .27
9.05 Non-Exclusive Forum . . . . . . . . . . . . . . . . . . . . . .27
9.06 Relationship of Parties . . . . . . . . . . . . . . . . . . . .27
9.07 Severability . . . . . . . . . . . . . . . . . . . . . . . . . .27
9.08 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
9.09 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
9.10 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.12 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . .29
9.13 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . .29
</TABLE>
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<PAGE> 3
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01.02 ANVT Licenses
Schedule 1.01.03 ANVT Patents
Schedule 1.01.06 CPH Patents
Schedule 2.02 Patents Subject to Lotus
Agreement
Schedule 4.01(a) CPH Technology Closing
Delivery
Schedule 4.01(b) CPH Technology
Post-Closing Delivery
Schedule 5.05(a) Ownership Disclosures
Schedule 5.05(b) Third Party Rights
</TABLE>
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<PAGE> 4
CPH TECHNOLOGY LICENSE AGREEMENT
This License Agreement ("Agreement") is made and entered into
this 15th day of November, 1995 by and between Chaplin Patents Holding Co.,
Inc., a Delaware corporation ("CPH"), and Walker Electronic Mufflers, Inc., a
Delaware corporation ("WEM").
INTRODUCTION
CPH is the owner of certain patents and technology relating to
the reduction and elimination of noise and vibration (as more particularly
described below in Section 1.01.07 of this Agreement and defined as the "CPH
Technology"), including without limitation the patents identified in SCHEDULE
1.01.06 attached hereto (which patents are more particularly described below in
Section 1.01.06 and defined as the "CPH Patents"). CPH and Noise Cancellation
Technologies, Inc. ""NCT") entered into a license agreement dated June 21,
1989, pursuant to which CPH granted to NCT a license of the CPH Technology.
NCT, WEM, Walker Manufacturing Company, a division of Tennessee Gas Pipeline
Company, and NCT Muffler, Inc. entered into a joint venture and partnership
agreement dated November 8, 1989 which formed a New York general partnership
known as Walker Noise Cancellation Technologies ("WNCT"). NCT and WNCT entered
into a license agreement dated as of November 8, 1989 (as amended, the "WNCT
License") pursuant to which NCT granted to WNCT a sublicense of the CPH
Technology. NCT, WEM, Walker Manufacturing Company, a division of Tennessee
Gas Pipeline Company, NCT Muffler, Inc., CPH and WNCT entered into a Transfer
Agreement of even date which restructures rights and obligations with respect
to WNCT and, among other things, the aforementioned WNCT License. This license
agreement is entered into pursuant to the Transfer Agreement.
TERMS AND CONDITIONS
In consideration of the foregoing, the mutual covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
ARTICLE I: DEFINITIONS
1.01 Defined Terms. As used herein, the following
terms have the following meanings:
1.01.01 Affiliate. The term "Affiliate" shall mean,
with respect to any person or entity, any other person or entity that
directly, or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with the person or entity
specified, together with their respective officers, directors and
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<PAGE> 5
shareholders. For purposes of this Section 1.01.01, "control" of an
entity shall be deemed to exist by virtue of having the right to
influence the operation and affairs thereof by holding directly or
indirectly 50% or more of the equity interests in such entity.
1.01.02 ANVT Licenses. The term "ANVT Licenses" (and singly
an "ANVT License") shall mean the license agreements more particularly
described on the attached SCHEDULE 1.01.02.
1.01.03 ANVT Technology. The term "ANVT Technology" shall
mean such of the following as to which CPH or any of its Affiliates
have any rights: any and all existing and future technology related to
the control, attenuation and/or cancellation of noise and/or
vibration, now, hereafter or previously owned by or licensed to ANVT
or any of its Affiliates (other than any of the CPH Patents and
technology owned by CPH), including without limitation all know-how,
trade secrets, methods, operating techniques, processes, software,
materials, technical data, engineering information, drawings,
machinery and apparatus, patents (including without limitation the
patents identified on the attached SCHEDULE 1.01.03 and any
continuations, continuations-in-part, divisions or reissues thereof
and any patents covering any Improvements thereto), patent
applications, copyrights and other intellectual property relating
thereto; provided, that any Improvements made by any Person other than
the licensee of an ANVT License or ANVT itself which are applicable to
the ANVT Technology shall not constitute part of the ANVT Technology.
1.01.04 Controller or Chip. The terms "Controller"
or "Chip" as used herein with respect to the electronic products which
attenuate noise and/or vibrations shall mean the component which
receives input concerning noise and vibration levels and in turn
directly or indirectly adjusts either or both (i) the frequency and/or
amplitude of countervailing soundwaves or vibrations and/or (ii) the
air pressure used to interfere with the noise or vibration (or both).
To the extent that such component consists of multiple chips which
function together rather than independently to effect any of the
aforementioned adjustments, all elements of such component, including
such chips, taken together shall be deemed for purposes of this
Agreement to constitute a single Controller or Chip.
1.01.05 CPH Marks. "CPH Marks" shall have the meaning
ascribed to it in Section 6.01 below.
1.01.06 CPH Patents. "CPH Patents" shall mean the patents
owned by CPH and listed in SCHEDULE 1.01.06 attached hereto, and any
continuations, continuations-in-
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<PAGE> 6
part, divisions or reissues thereof, and any patents obtained by CPH on
Improvements.
1.01.07 CPH Technology. "CPH Technology" shall mean any and
all existing and future technology relating to the control,
attenuation and/or cancellation of noise and/or vibration now or
hereafter owned by or licensed to CPH, including without limitation
all know-how, trade secrets, methods, operating techniques, processes,
software, materials, technical data, engineering information,
drawings, machinery and apparatus, patents (including without
limitation the CPH Patents and any patents covering any Improvements
thereto and including without limitation any continuations,
continuations-in-part, divisions or reissues of patents), patent
applications, copyrights and other intellectual properties relating
thereto.
1.01.08 Electronic Muffler. "Electronic Muffler" shall mean
an apparatus, machine, product or equipment (including replacement
parts) which incorporates CPH Technology and which achieves the
reduction of noise by generating interfering noise and/or changes in
air pressure, and controlling the interfering noise and/or changes in
air pressure electronically in accordance with variations in the
noise, and which is used to reduce noise emanating as part of or in
connection with an intake stream into and/or an exhaust stream from an
Internal Combustion Engine. The term "Electronic Muffler" shall not
include any pipe, duct or tube containing an intake or exhaust stream
unless the pipe, duct or tube is designed specifically to serve an
integral function in electronically controlling the interfering noise
and/or changes in air pressure.
1.01.09 Europe. "Europe" shall mean the geographic area
contained within the political boundaries of the following countries
as of the date of this Agreement: Albania, Austria, Belgium,
Bulgaria, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Luxembourg, Monaco, the Netherlands, Norway, Poland,
Portugal, Rumania, Spain, Switzerland, Turkey, the United Kingdom,
Russia, Sweden, and the geographic area encompassed within the
boundaries of the former States commonly referred to as Yugoslavia and
Czechoslovakia, respectively.
1.01.10 Exclusive Field. "Exclusive Field" shall have the
meaning ascribed to it in Section 2.03 below.
1.01.11 Fully Burdened Costs. "Fully Burdened Costs" shall
mean all direct and indirect costs and expenses, determined in
accordance with generally accepted accounting principles consistently
applied, incurred by
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the person or entity in question to the extent attributable to the
actual manufacture and sale of the product in question.
1.01.12 Improvements. "Improvements" shall mean any
improvement, modifications, further invention, derivative work,
technology, trade secret, software, hardware, patent or patent
application (including without limitation continuations,
continuations- in-part, divisions and reissues) based upon any part of
the CPH Technology.
1.01.13 Industrial Sector and Industrial Equipment.
"Industrial Sector" shall mean all markets for Electronic Mufflers,
Multiple Application Systems in which one application is an Electronic
Muffler, or Single Application Products, in each case which are
designed, manufactured or sold for, or used in or attached to, any of
the following: (a) rotary positive displacement vacuums and blowers;
(b) liquid ring pumps; or (c) any other items of industrial equipment
used in an industrial setting which either comprises (in whole or in
part) an Internal Combustion Engine or which uses an Internal
Combustion Engine for power other than for propulsion purposes,
including without limitation generators, diesel engines not installed
in an automobile, truck, train or other land vehicle (all of the
foregoing are, singly or collectively, referred to herein as
"Industrial Equipment"). For purposes of clarity, the term
"Industrial Equipment" includes equipment for military or defense
purposes but does not include Vehicles, office equipment used in an
office, or consumer equipment and appliances, and the term "Industrial
Sector" does not include duct or fan quieting except to the extent
that the duct or fan in question constitutes part of an item of
Industrial Equipment.
1.01.14 Internal Combustion Engine. "Internal Combustion
Engine" shall mean all internal combustion engines, including without
limitation turbines attached to or comprising a part of turbochargers
or superchargers which are attached to or which comprise a part of
such engine, which operate on any of the following fuels (or
derivatives thereof): gasoline, diesel, propane, butane, natural gas
(including without limitation liquified natural gas and compressed
natural gas), fuel oil, kerosine and alcohol (including without
limitation ethanol and methanol). Notwithstanding the foregoing, the
term "Internal Combustion Engine" shall not include a turbo prop or
jet engine which is used for propulsion purposes in an aircraft.
1.01.15 Multiple Application System. "Multiple Application
System" shall mean an application involving a product or system of
products, in either case which
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<PAGE> 8
incorporate CPH Technology and which are designed or used to address
multiple noise or vibration problems utilizing a single Chip or
Controller, and shall in all cases be deemed to include the sensors,
wiring, controllers, amplifiers, transducers or actuators, housing and
enclosures required to electronically attenuate the noise or vibration
problems. A Multiple Application System will exist with respect to a
Vehicle only if more than one application within or among the
classifications and applications in (a) through (i) below are used on
or in connection with the Vehicle in any system utilizing a single
Chip or Controller, as follows:
(a) exhaust noise attenuation;
(b) intake noise attenuation;
(c) vibration isolation or attenuation (including
without limitation any application to shock
absorbers, suspension components, engine
mounts, mufflers, or other exhaust
components, steering linkage components,
power train components, hangars, panels,
windows, brakes or tires);
(d) cabin quieting (meaning a product other than
a headset which attenuates noise in the cabin
of a Vehicle by introducing countervailing
soundwaves adjusted by a single Controller);
(e) noise attenuation for windows or panels;
(f) noise attenuation for any engine components
(including without limitation air intake
parts, cooling fans, engine blocks and engine
fans) or any power train component (including
without limitation transfer cases);
(g) noise attenuation for axles;
(h) noise attenuation for tires; and
(i) noise attenuation for brakes.
1.01.16 NCT License Agreement. "NCT License Agreement" shall
have the meaning ascribed to it in Section 3.11 below.
1.01.17 Net Revenues. "Net Revenues" shall have the meaning
ascribed to it in Section 3.02 below.
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1.01.18 Non-Exclusive Field. "Non-Exclusive Field" shall have
the meaning ascribed to it in Section 2.04 below.
1.01.19 Passive Component. The term "Passive Component"
shall mean, with respect to the product in question, any component or
subcomponent, as the case may be, which does not itself contain any of
the CPH Technology (notwithstanding that such component or
subcomponent may be connected to or itself controlled by a component
or subcomponent containing CPH Technology), including without
limitation any component or subcomponent which does not itself control
noise or vibration or, to the extent that it is designed to serve a
function in controlling noise or vibration, is not dependent for such
function upon the electronic control of noise or vibration.
1.01.20 Single Application Product. "Single Application
Product" shall mean a product other than an Electronic Muffler or a
system of products (which does not include an Electronic Muffler), in
either case which incorporates CPH Technology and which is designed or
used to address electronically a single noise or vibration problem
caused by or inhering in the operation of a Vehicle or an item of
Industrial Equipment, and shall in all cases be deemed to include the
sensors, wiring, controllers, amplifiers, transducers or actuators,
housings and enclosures required to attenuate the noise or vibration
problem.
1.01.21 Transfer Agreement. "Transfer Agreement" shall mean
the agreement of even date herewith entered into by and among NCT,
WEM, Walker Manufacturing Company, a division of Tennessee Gas
Pipeline Company, NCT Muffler, Inc., CPH and WNCT.
1.01.22 Vehicle. "Vehicle" shall mean all civil and all
military vehicles, including without limitation automobiles, jeeps and
other vehicles competitive with jeeps, trucks and vans of any class,
motorcycles, emergency vehicles, buses, all agricultural and farm
vehicles, all construction vehicles (including without limitation
cranes, lifts and earthmoving equipment), trolleys, trains or other
vehicles that travel on or are guided by one or more rails, and marine
vessels of any nature (including without limitation hovercraft
designed for transport across water), but the term "Vehicle" shall not
mean an aircraft of any nature or any craft capable of sustained
flight other than hovercraft.
1.01.23 Vehicular Quieting Multiple Application System.
"Vehicular Quieting Multiple Application System" shall mean a Multiple
Application System installed in a
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<PAGE> 10
Vehicle. For purposes of clarity, a Vehicular Quieting Multiple
Application System shall not include any product or component which
does not pertain to noise and/or vibration caused by or inhering in
the operation of a Vehicle, such as a product or component which
attenuates unwanted noise in or on a radio or other audio system, a
headset, a telephone or other communications device used by a person
while in a Vehicle, or any other product described in Section 2.07
below.
1.01.24 Vehicular Quieting Single Application Product.
"Vehicular Quieting Single Application Product" shall mean a Single
Application Product installed in a Vehicle. For purposes of clarity,
a Vehicular Quieting Single Application Product is one which addresses
a noise or vibration problem caused by or inhering in the operation of
a Vehicle, including without limitation the applications described in
Section 1.01.15(a) through (i), above, but does not include noise
and/or vibration attenuation products for radios or other audio
systems, headsets, telephones or other communications devices, or any
other product described in Section 2.07 below.
1.01.25 Vehicular Sector. "Vehicular Sector" shall mean all
markets or products designed, manufactured or sold for, or installed
in or attached to a Vehicle.
1.01.26 Western Hemisphere. "Western Hemisphere" shall
mean the United States, Canada, Mexico and all countries of Central
America and South America.
1.01.27 WEM Indemnitees. "WEM Indemnitees" (and in the
singular, "WEM Indemnitee") shall have the meaning ascribed to it in
Section 8.01 below.
1.01.28 WNCT License. "WNCT License" shall have the meaning
ascribed to it in the Introduction of this Agreement.
1.02 Other Defined Terms. As used herein, capitalized
terms not otherwise expressly defined herein shall have the meaning ascribed to
them in the Transfer Agreement.
1.03 Effect of Definitions. Nothing set forth in this
Article I or in the definition of other defined terms used herein shall limit
the generality of the provisions set forth in this Agreement governing the scope
of exclusive and non-exclusive rights.
ARTICLE II: GRANT OF LICENSE
2.01 Grant of License. Subject to the provisions of this
Agreement, CPH hereby grants to WEM a perpetual, worldwide license to make, have
made, use, sell or lease the
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following products or systems for the Vehicular Sector and the Industrial
Sector which incorporate or are based upon CPH Technology, including without
limitation such of these products which are covered by any of the claims of the
CPH Patents and/or any other patents comprising part of the CPH Technology:
(a) Electronic Mufflers;
(b) Vehicular Quieting Multiple Application
Systems;
(c) Vehicular Quieting Single Application
Products;
(d) Single Application Products in the Industrial
Sector; and
(e) Multiple Application Systems in the
Industrial Sector which include an
Electronic Muffler.
2.02 Scope of License. It is the intent of the parties
that the scope of the technology governed by the license granted in Section
2.01, above, shall be as broad as, and include all rights granted in, the
sublicense of the CPH Technology granted by NCT to WNCT in the WNCT License, as
amended (including as modified by the Stock Purchase Agreement), provided, that
(i) nothing contained herein shall vitiate the release contained in Section 2.01
of the Transfer Agreement of the remaining unfulfilled obligation to make
Preferred Contributions (as such term is used in Section 10 of Exhibit B of the
Stock Purchase Agreement) pursuant to Exhibit B of the Stock Purchase Agreement,
and (ii) for purposes of clarification, the parties hereto hereby acknowledge
that the scope of the technology and rights set out in Exhibit B of the Stock
Purchase Agreement does not extend beyond the scope of the rights described in
the text of the License Agreements which comprise a part of the Restructuring
Agreements. The license granted to WEM pursuant to this Agreement shall also
cover (i) all additional fields of use licensed herein, (ii) all Improvements to
the CPH Technology, and (iii) the right to make, have made, use, sell and lease
custom semiconductor devices (including without limitation Controllers and
Chips) incorporating the CPH Technology in connection with and for use as a
component in or of products and systems which incorporate or which are based
upon CPH Technology and which are made, used, sold or leased by WEM or a
sublicensee of WEM for the Vehicular Sector and the Industrial Sector.
Notwithstanding the foregoing, the parties hereby agree that nothing provided
herein shall grant any rights to WEM (i) to use, prior to the expiration or
termination of the license agreements referred to in Section 2.04(b)(i) below
and more particularly described in SCHEDULES 1.01.02 and 5.05(b), in connection
with the manufacture, use, sale or lease in the Western Hemisphere of
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Electronic Mufflers addressing only the exhaust stream of an Internal
Combustion Engine, such ANVT Technology as came into existence prior to
December 31, 1995, together with any Improvements thereto subsequently made
only by Arvin Industries, Inc. or Arvin ANVT Manufacturing Company, LLC, which
are the subject of the grant of the ANVT Licenses to Arvin Industries, Inc. and
Arvin-ANVT Manufacturing Company, LLC more particularly described in SCHEDULES
1.01.02 and 5.05(b), or (ii) to use, prior to the expiration or termination of
the license agreement referred to in Section 2.04(b)(ii) below and more
particularly described in SCHEDULES 1.01.02 and 5.05(b) under which Elesa,
S.p.A. is the licensee, in connection with the manufacture, use, sale or lease
in Europe of Electronic Mufflers, Vehicular Quieting Single Application
Products and Vehicular Quieting Multiple Application Systems, used in each case
only for ground-based transportation, such ANVT Technology which came into
existence prior to September 30, 1993, together with any Improvements thereto
subsequently made only by Elesa, S.p.A., which are the subject of the ANVT
License to ELESA, S.p.A. (a company organized under the laws of Italy) more
particularly described in SCHEDULES 1.01.02 and 5.05(b), or (iii) to use, prior
to the expiration or termination of the license agreement referred to in
Section 2.04(b)(v) below and more particularly identified and described in
SCHEDULES 1.01.02 and 5.05(b) under which Societe Di Electronica per
L'Automazione, S.p.A. ("SEPA, S.p.A.") is the licensee, in connection with the
use or sale in Italy of an apparatus, machine, device or equipment or any
subsystem thereof (including replacement parts) which is uniquely designed and
manufactured to military specifications and which is sold to an identified
military branch or defense agency of Italy or which is sold to a company to be
further manufactured or integrated in Italy into equipment or systems which are
uniquely designed or manufactured to military specifications for sale to an
identified military branch or defense agency of Italy, such ANVT Technology
which came into existence prior to September 30, 1993, together with any
Improvements thereto subsequently made only by SEPA, S.p.A., which are the
subject of the ANVT License to SEPA, S.p.A. (a company organized under the laws
of Italy) more particularly described in SCHEDULES 1.01.02 and 5.05(b), or (iv)
to the extent, if any, that such use is not contemplated and permitted by the
terms and conditions governing the license granted by CPH and NCT to Lotus Cars
Limited and Group Lotus Limited pursuant to the Settlement Agreement dated July
13, 1995 referred to in Section 2.04(d) below and more particularly described
in SCHEDULE 5.05(b), to use, prior to the expiration or termination of such
license to Lotus Cars Limited and Group Lotus Limited, in connection with the
manufacture, use, sale or lease of products for cabin quieting (as such term is
used and defined in Section 1.01.15(d) above) in the Vehicular Sector or to
attenuate noise or vibration only in engine mounts in the Vehicular Sector, the
technology covered by the claims of the three patents of CPH more particularly
identified in SCHEDULE 2.02 except to the extent that the same technology is
covered
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by the claims of any other patents comprising any of the CPH Technology.
2.03 Exclusive Rights. Except as otherwise expressly
provided in Sections 2.04(b), 2.04(c), and 2.04(d), below, the license granted
to WEM pursuant to this Agreement shall be exclusive worldwide with respect to
the manufacture, use and sale and lease of the following:
(a) Electronic Mufflers in the Vehicular Sector;
(b) Vehicular Quieting Multiple Application Systems;
(c) Electronic Mufflers in the Industrial Sector; and
(d) Multiple Application Systems in the Industrial Sector
in which one application is an Electronic Muffler.
The applications described in this Section 2.03 as to which the aforementioned
rights of exclusivity apply are referred to collectively in this Agreement as
the "Exclusive Field." In addition, without limiting the generality of the
foregoing, but for purposes of clarification, the right more particularly
described in Section 2.02 above to make, have made, use, sell and lease custom
semiconductor devices of the type more particularly described in Section 2.02
above shall be exclusive with respect to semiconductor devices designed to
function as, and which are capable of functioning only as, a component of a
product comprising part of the Exclusive Field, and such right shall be
nonexclusive with respect to all other semiconductor devices of the type more
particularly described in Section 2.02 above.
2.04 Non-Exclusive Rights. The license granted to
WEM pursuant to this Agreement shall be non-exclusive worldwide (except to the
extent otherwise expressly provided in this Section 2.04) as to the following
(collectively the "Non-Exclusive Field"):
(a) Except to the extent otherwise provided in and without
limiting the effect of Sections 2.04(b)(ii),
2.04(b)(iii), 2.04(b)(v), 2.04(c) and 2.04(d) below,
the manufacture, use, sale and lease of Single
Application Products in the Industrial Sector and the
manufacture, use, sale and lease of Vehicular Quieting
Single Application Products.
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<PAGE> 14
(b) With respect to, but only to the extent of, the use as
to the following of the CPH Patents owned as of the
date hereof by CPH and ANVT Technology:
(i) the manufacture, use and sale in the Western
Hemisphere by Arvin Industries, Inc. or Arvin-ANVT
Manufacturing Company, LLC of Electronic Mufflers in
the Vehicular Sector (provided that such Electronic
Mufflers address only the exhaust stream of an
Internal Combustion Engine) and, with respect to ANVT
Technology, using only such ANVT Technology as came
into existence prior to December 31, 1995 and any
Improvements thereto subsequently made only by Arvin
Industries, Inc. or Arvin ANVT Manufacturing Company,
LLC, all pursuant to and as limited by an ANVT License
more particularly described in SCHEDULE 5.05(b);
(ii) the manufacture, use and sale in Europe,
together with replacement parts sales on a worldwide
basis, by ELESA, S.p.A., a company organized under the
laws of Italy, of Electronic Mufflers, Vehicular
Quieting Single Application Products and Vehicular
Quieting Multiple Application Systems, used in each
case only for ground-based transportation and, with
respect to ANVT Technology, using only such ANVT
Technology which came into existence prior to
September 30, 1993, together with any Improvements
thereto subsequently made only by Elesa, S.p.A., all
pursuant to and as limited by an ANVT License more
particularly described in SCHEDULE 5.05(b);
(iii) the manufacture, use and sale by Alpine
Electronics, Inc. or Alpine-ANVT, Inc. of Electronic
Mufflers in the Vehicular Sector and Vehicular
Quieting Single Application Products, in each case
which are manufactured or designed to be integrated,
or are capable of being integrated, into any single
stereo or other sound reproduction system installed or
capable of being installed in a single Vehicle and
which are sold to manufacturers for installation as
original equipment in Vehicles only as part of the new
manufacture of such Vehicles by their manufacturer or
sold by such Vehicle manufacturers to their own
new-Vehicle
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<PAGE> 15
dealers for optional installation by such dealers in
connection with the sale of new Vehicles manufactured
by such manufacturers or sold by such manufacturers to
such dealers only as warranty replacement parts, all
pursuant to and as limited by an ANVT License more
particularly described in SCHEDULE 5.05(b);
(iv) the manufacture, use and sale by Alpine
Electronics, Inc. or Alpine-ANVT, Inc. of Vehicular
Quieting Multiple Application Systems which are
manufactured or designed to be integrated, or are
capable of being integrated, into any single stereo or
other sound reproduction system installed or capable
of being installed in a single Vehicle and which are
sold to manufacturers for installation as original
equipment in Vehicles only as part of the new
manufacture of such Vehicles by their manufacturer or
sold by such Vehicle manufacturers to their own
new-Vehicle dealers for optional installation by such
dealers in connection with the sale of new Vehicles
manufactured by such manufacturers or sold by such
manufacturers to such dealers only as warranty
replacement parts, all pursuant to and as limited by
an ANVT License more particularly described in
SCHEDULE 5.05(b); and
(v) the use and sale in Austria, Belgium, Denmark,
France, Finland, Germany, Greece, Italy, Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland or Turkey
by SEPA, S.p.A. of an apparatus, machine, device or
equipment or any subsystem thereof (including
replacement parts) which is uniquely designed and
manufactured to military specifications and which is
sold to an identified military branch or defense
agency of one of the aforementioned nations or which
is sold to a company to be further manufactured or
integrated in one of the aforementioned nations into
equipment or systems which are uniquely designed or
manufactured to military specifications for sale to an
identified military branch or defense agency of one of
the aforementioned nations, and, with respect to ANVT
Technology, using only such ANVT Technology which came
into existence prior to September 30, 1993, together
with any
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<PAGE> 16
Improvements thereto subsequently made only by SEPA,
S.p.A., all pursuant to and as limited by an ANVT
License more particularly described in SCHEDULE
5.05(b).
(c) The manufacture, use, sale and lease of Vehicular
Quieting Single Application Products by
Magneti-Marelli, S.p.A. (a company formed under the
laws of Italy) pursuant to a sublicense agreement with
NCT (with NCT as the sublicensor) more particularly
described in SCHEDULE 5.05(b) and which includes
"grant back" rights in favor of NCT, and in turn to
CPH pursuant to a license agreement between CPH (with
CPH as the licensor) and NCT, governed by provisions
not less restrictive than the provisions set forth in
Section 2.08 below.
(d) With respect to, but only to the extent of, the use by
Lotus Cars Limited and Group Lotus Limited of the
technology covered by the claims of the three patents
owned by CPH which are identified on SCHEDULE 2.02
hereto for use in engaging in the "Core Business" (as
such term is defined and described in Paragraph 8 of
SCHEDULE 5.05(b) hereto pursuant to and as limited by
the license granted as a part of the Settlement
Agreement more particularly described in Paragraph 8
of SCHEDULE 5.05(b) hereto.
2.05 Sublicense Rights. WEM shall have the right to grant
sublicenses to make, use, sell or lease:
(a) Electronic Mufflers in the Vehicular Sector;
(b) Vehicular Quieting Multiple Application Systems;
(c) Vehicular Quieting Single Application Products;
(d) Electronic Mufflers in the Industrial Sector; and
(e) Multiple Applications Systems in the Industrial
Sector in which one of the applications is an
Electronic Muffler.
In addition, upon first obtaining the prior written consent of CPH, which
consent shall not be unreasonably withheld, WEM shall
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<PAGE> 17
have the right to grant sublicenses to make, use, sell or lease Single
Application Products in the Industrial Sector. None of the sublicenses
described above in this Section 2.05 shall include any right on the part of the
sublicensee to grant further sublicenses except to the extent of rights to use,
sell or lease products sold or leased.
2.06 Sublicense Audit Rights. Any sublicense
granted in accordance with the terms of this Agreement shall include audit
rights as against the sublicensee with respect to its revenues and direct
costs, as applicable, on the sale, lease or manufacture of products
incorporating the sublicensed technology in question for purposes of
determining royalties payable pursuant to Article III below. Each sublicense
shall also expressly identify as a third party beneficiary of such audit rights
either WEM or CPH, whichever is not the sublicensor with respect to the
sublicense in question.
2.07 Product Exclusions. WEM hereby acknowledges
and agrees that the license granted to WEM pursuant to Section 2.01 above shall
not extend to the manufacture, use or sale of telephones (whether wire lined,
cellular, radio or other non-wire line telephones), hands-free microphones,
headsets, radios, voice recognition systems, audio or entertainment systems,
consumer products other than Vehicles, personal computers (except to the extent
comprising a part of a product to which such license otherwise applies),
personal care products, household appliances, electronic entertainment products
such as VCR's and electronic games, in-wire noise cancellation products for
communication devices, or any other communication device or systems.
2.08 Grant-Back. Subject to payment of the
royalties described in Sections 3.04, 3.05 and 3.06 below, WEM hereby grants to
CPH a non-exclusive license to make, have made, use and sell products
incorporating Improvements to the CPH Technology made or invented, or caused to
made or invented, by WEM or its Affiliates; provided, that (i) CPH shall not
exercise any such rights to such Improvements in connection with the Exclusive
Field, and (ii) CPH shall not grant a sublicense to any third party concerning
any such Improvements unless the agreement governing such sublicense includes a
"grant-back" provision pursuant to which CPH and licensees and sublicensees of
CPH (including without limitation WEM) shall have rights to make, have made,
use, sell and lease products incorporating Improvements made by or on behalf of
any such third party sublicensee. CPH hereby acknowledges and agrees to the
inclusion of a similar grant-back provision in favor of NCT in the license
agreement entered into between NCT and WEM of even date, notwithstanding that
such grant-back may pertain in part to CPH Technology.
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<PAGE> 18
ARTICLE III: ROYALTIES
3.01 Sales of Electronic Mufflers by WEM. WEM
shall pay royalties to CPH with respect to the sale or lease of products
comprising only Electronic Mufflers, in each case in which the Controller of
the product incorporates CPH Technology, by WEM in the Vehicular Sector or the
Industrial Sector. Such royalties shall be calculated on the basis **
3.02 Other Sales or Leases by WEM. WEM shall pay
royalties to CPH with respect to the sale or lease by WEM of Vehicular Quieting
Single Application Products, Vehicular Quieting Multiple Application Systems,
Single Application Products in the Industrial Sector and Multiple Application
Systems in the Industrial Sector, in each case in which the product in question
incorporates CPH Technology. The amount of the royalties payable under this
Section 3.02 shall be calculated as a percentage, as set forth below with
respect to each of the aforementioned categories of products, of the Net
Revenues (as hereinafter defined) received by WEM in connection with the sale
or lease of such products:
(a) Vehicular Quieting Single
Application Products
-- **
(b) Vehicular Quieting Multiple
Application Systems
-- **
(c) Single Application Products
in the Industrial Sector
-- **
** Material for which Confidential Treatment has been requested.
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<PAGE> 19
(d) Multiple Application Systems
in the Industrial Sector which
include an Electronic Muffler
-- **
For purposes of this Agreement, "Net Revenues" (and in the singular "Net
Revenue") refers to gross revenues received less (i) all taxes imposed in
connection therewith other than income taxes, and (ii) less all freight costs
charged to a customer and comprising a part of such revenues, and (iii) less
any royalties payable to third parties in connection with any intellectual
property incorporated into the product in question, and (iv) less the amount of
such revenues attributable, on the basis of bona fide costs and profit margins,
to the Passive Components of the product in question; provided, that in no
event shall the aforementioned deduction for the Passive Components exceed **
3.03 Sublicensing by WEM. WEM shall pay a royalty
to CPH with respect to sublicenses granted by WEM for sales or leases of the
following items which incorporate CPH Technology: Electronic Mufflers,
Vehicular Quieting Multiple Application Systems, Vehicular Quieting Single
Application Products, Single Application Products in the Industrial Sector, and
Multiple Application Systems in the Industrial Sector which include an
Electronic Muffler. The amount of the royalties payable under this Section
3.03 shall, with respect to each sublicense in question, constitute the larger
of the two amounts determined pursuant to subparts (a) and (b) of this Section
3.03.
(a) For purposes of this Section 3.03, the amount
determined in this subpart (a) shall constitute one
of the following three amounts, as selected by WEM:
(i) ** of the Net
Revenues received by the sublicensee
in question from sales or leases of
products pursuant to such
sublicense;
(ii) ** of the Fully
Burdened Costs incurred by the
sublicensee in connection with the
products sold or leased pursuant to
the sublicense in question; or
(iii) ** for each vehicle
(with respect to sales or leases by
the sublicensee of Vehicular
Quieting Single Application Products
or Vehicular Quieting Multiple
** Material for which Confidential Treatment has been requested.
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<PAGE> 20
Application Systems) or each
installation upon industrial
equipment (with respect to sales or
leases by the sublicensee of Single
Application Products in the
Industrial Sector or Multiple
Application Systems in the
Industrial Sector which include an
Electronic Muffler), as the case may
be.
(b) ** of the Net Revenues received by WEM from the
sublicensee pursuant to the sublicense in question.
3.04 Sales or Leases by CPH. Without affecting
the effect or generality of Section 2.03 above, CPH shall pay royalties to WEM
with respect to the sale or lease by CPH of (i) Vehicular Quieting Single
Application Products, or (ii) any product which incorporates any Improvement
which is subject to the license to CPH described in Section 2.08 above. The
amount of the royalties payable under this Section 3.04 shall be calculated as
a percentage, as set forth below with respect to each of the aforementioned
categories of products, of the Net Revenues (as hereinafter defined) received
by WEM in connection with the sale or lease of such products:
(a) Vehicular Quieting Single
Application Products -- **
(b) Products which incorporate any
Improvement which is subject to
the license to CPH described in
Section 2.08 above: -- **
3.05 Licensing and Sublicensing by CPH. Without
affecting the effect or generality of Section 2.03 above, CPH shall pay a
royalty to WEM with respect to licenses or sublicenses, as the case may be,
granted at any time by CPH or as to which CPH is now or hereafter becomes the
owner or holder of the licensor's or sublicensor's rights, for sales or leases
of (i) Vehicular Quieting Single Application Products, or (ii) any product
which incorporates any Improvement which is subject to the license to CPH
described in Section 2.08 above, and CPH shall also pay a royalty to WEM with
respect to any of the licenses described in Sections 2.04(b), 2.04(c) or
2.04(d) above as to which CPH becomes the owner or holder of any of the
licensor's or sublicensor's rights thereunder. The amount of the royalties
payable under this Section 3.05 shall, with respect to each license or
sublicense in question, constitute the larger of the two amounts determined
pursuant to subparts (a) and (b) of this Section 3.05.
(a) For purposes of this Section 3.05, the amount
determined in this subpart (a) shall constitute one
of the following three amounts, as selected by CPH:
** Material for which Confidential Treatment has been requested.
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<PAGE> 21
(i) ** of the Net Revenues received
by the licensee or sublicensee in
question from sales or leases of
products pursuant to such license or
sublicense;
(ii) ** of the Fully Burdened Costs
incurred by the licensee or
sublicensee in connection with the
products sold or leased pursuant to
the license or sublicense in
question; or
(iii) ** for each vehicle (with
respect to sales or leases by the
licensee or sublicensee of
Electronic Mufflers in the Vehicular
Sector, Vehicular Quieting Single
Application Products or Vehicular
Quieting Multiple Application
Systems) or each installation upon
industrial equipment (with respect
to sales or leases by the licensee
or sublicensee of Single Application
Products in the Industrial Sector or
Multiple Application Systems in the
Industrial Sector which include an
Electronic Muffler), as the case may
be.
(b) ** of the Net Revenues received by CPH from the
licensee or sublicensee pursuant to the license or
sublicense in question; provided, that with respect
to any such Net Revenues which are received by CPH
pursuant to or in connection with the ANVT Licenses
referred to in Section 2.04(b)(i), above, such
percentage shall be **, and with respect to any
such Net Revenues which are received by CPH pursuant
to or in connection with any other license agreement
described in any of Sections 2.04(b) through Section
2.04(d) above which are derived from a product
comprising or including an Electronic Muffler, such
percentage shall be **.
3.06 Additional Royalties. CPH shall pay a royalty to WEM
of (i) ** of the Net Revenues arising from royalties or other payments
received by CPH or due (but not yet paid) or which become due to CPH or any of
its Affiliates, as the case may be, for any period up to and including the date
of this Agreement pursuant to or in connection with the ANVT Licenses referred
to in Section 2.04(b)(i) and the other license rights referred to in any of
Sections 2.04(b) through 2.04(d), above (but with respect to such Sections
2.04(b)(ii) through 2.04(b)(v), 2.04(c) and 2.04(d) above, only if the product
or products in question constitute or include an Electronic Muffler). Except to
the extent otherwise provided in the immediately preceding sentence of this
Section 3.06, with respect to any license rights referred to in any of Sections
** Material for which Confidential Treatment has been requested.
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<PAGE> 22
2.04(b) (ii) through (v), 2.04(c) and 2.04(d) above, CPH shall pay a royalty to
WEM on the same basis as is provided with respect to the licenses and
sublicenses which are described in Section 3.05 above; provided, that with
respect to the licenses referred to in Section 2.04(b), such royalty obligation
shall not apply with respect to either (i) the sale or lease of any products
thereunder prior to the date of the assignment by ANVT to NCT of the licensor's
(or sublicensor's) rights thereunder, or (ii) that period of time for which
complete royalties were paid thereunder prior to the aforementioned assignment
by ANVT to NCT of the licensor's (or sublicensor's) rights thereunder and for
which no payment was actually received by CPH. Royalties payable by CPH to WEM
pursuant to Section 3.05 above shall be credited to the royalties payable under
this Section 3.06 to the extent (but only to the extent) that the Net Revenues
or other amounts referred to in this Section 3.06 are attributable to the sale
or lease of a product, or the grant of a license or sublicense, for which a
royalty is payable by CPH to WEM pursuant to Section 3.05 above.
3.07 Accrual of Royalty Obligations. The
obligation to pay a royalty due under this Agreement in connection with the
sale of a product shall arise upon consummation of the sale in question. The
obligation to pay a royalty due under this Agreement in connection with a
lease, sublicense or license to a third party shall arise upon the receipt by
the royalty obligor of the payment to it under such lease, license or
sublicense agreement to which the royalty relates.
3.08 Royalty Payment Dates. The royalties
described in this Article III shall be paid in arrears on a quarterly basis,
and all royalty payments shall be accompanied by a statement showing the costs
incurred or Net Revenues received, as applicable, and a calculation of the
royalties due for the applicable calendar quarter. Royalty payments shall be
due not later than the thirtieth (30th) day following the end of each calendar
quarter from and after the date of this Agreement.
3.09 Books and Records. WEM and CPH shall have
the right to inspect and audit the relevant books and records of the other, and
each shall cause its Affiliates to also permit the relevant books and records
of each Affiliate to be inspected and audited, upon reasonable advance notice
and during normal business hours for the sole purpose of verifying amounts of
royalties due pursuant to this Agreement; provided, that each party shall have
the right to conduct any such audit and inspection not more often than two
times during each calendar year. The cost of any such audit shall be borne by
the requesting party unless the audit reveals an underpayment of two percent or
more with respect to any specific royalty or with respect to the aggregate
amount of all types of royalties payable by such party for any calendar quarter
or for one year in total, in which case the cost of the audit shall be borne by
the audited party.
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3.10 Interest. Any amounts for royalties not paid
when due shall bear interest for each day on which any such amounts remain due
and unpaid at the lesser of (i) an annual rate of four percentage points in
excess of the interest rate identified as the prime rate of interest in the
Wall Street Journal, or (ii) the maximum interest rate permitted by applicable
law.
3.11 Royalty Exceptions. Notwithstanding anything
provided herein to the contrary, a party obligated to pay royalties to the
other party to this Agreement shall not be obligated to pay such royalties to
such other party for, or during, any period during which such other party or an
Affiliate of such other party is in material breach of any provision of the
Transfer Agreement or any other of the Restructuring Agreements. In addition,
no royalties shall be due with respect to any product which, or any license or
any sublicense pursuant to which a product is manufactured, sold, leased or
used if the product in question is one which, incorporates or is based only
upon (i) technology covered by the claim of a patent which has expired, (ii)
any portion of the CPH Technology, with the exception of issued patents, which
does not continue to constitute confidential and proprietary information of CPH
as to which the exclusive rights granted hereunder can be enforced, or (iii)
both; provided, that the foregoing provisions of this sentence shall not apply
with respect to, and during the period that WEM continues to receive revenues
pursuant to, licenses or sublicenses granted by WEM prior to the expiration of
the patent or patents in question or prior to the time that the enforceability
of the exclusive rights granted hereunder became unenforceable with respect to
the portion of the CPH Technology in question. Notwithstanding anything else
contained herein, royalties otherwise due hereunder shall not be payable to the
extent expressly provided in the Support, Research and Development Agreement
constituting one of the Restructuring Agreements and, further, WEM shall not be
obligated to pay any royalties to CPH with respect to (i) the manufacture, use,
sale or lease of any products or systems incorporating CPH Technology, or (ii)
licenses or sublicenses which include rights to the CPH Technology, in either
case for which WEM is obligated to pay and has actually paid royalties to NCT
under the license agreement of even date herewith between NCT (as the licensor)
and WEM (the "NCT License Agreement"). Notwithstanding anything else contained
herein, CPH shall not be obligated to pay any royalties to WEM with respect to
(i) the manufacture, use, sale or lease of any products or systems
incorporating CPH Technology, or (ii) licenses or sublicenses which include
rights to the CPH Technology, in either case for which NCT is obligated to pay
and has actually paid royalties to WEM under the NCT License Agreement.
ARTICLE IV: DELIVERY OF INTELLECTUAL PROPERTY MATERIALS
4.01 Delivery at Closing. Contemporaneously with
the execution of this Agreement, CPH shall deliver or cause to be delivered to
WEM the items identified in SCHEDULE 4.01(a). Not later than 14 days following
the execution of this Agreement, CPH shall deliver or cause to be delivered to
WEM copies of all documents and materials (whether written or in
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<PAGE> 24
machine-readable format on magnetic or other media) and things which contain,
set forth, explain or otherwise relate to that part of the CPH Technology
identified in SCHEDULE 4.01(b), and CPH shall deliver to WEM, from time to time
upon request, all such items with respect to any other part of the CPH
Technology. Without limiting the generality of the foregoing, CPH shall
furnish to WEM at the Closing copies of all source codes for all software
included within the CPH Technology identified in SCHEDULES 4.01(a) AND 4.01(b).
4.02 Delivery of Improvements. Contemporaneously
with the delivery of the royalty calculation reports described in Section 3.08,
above, each party hereto shall furnish a written report to the other describing
in reasonable detail all Improvements to the CPH Technology made or caused to
be made by such party or any of its Affiliates during the immediately preceding
calendar quarter or, if none, reciting that no such Improvements have been made
or acquired by such party or its Affiliates during such quarter. With respect
to all Improvements disclosed in each such report, the party submitting the
report shall also deliver to the recipient of the report, as soon as is
reasonably practicable following a written request, copies of all documents and
materials (whether written or in machine-readable format on magnetic or other
media) and things which contain, set forth, explain or otherwise relate to the
intellectual property comprising each of the Improvements in question
(including without limitation copies of source codes).
ARTICLE V: OTHER COVENANTS
5.01 Restrictions Concerning Exclusive Field. CPH
shall not, and shall not permit its Affiliates or any third parties to, grant
any licenses or sublicenses of the CPH Technology for use in the Exclusive
Field to any third party subsequent to the date of this Agreement. In
addition, with the exception of amendments to economic terms and conditions for
the limited purpose of increasing royalty rates and with the additional
exception of the affirming license agreement between NCT and Arvin Industries,
Inc. more particularly described in SCHEDULE 5.05(b), CPH shall not, and shall
not permit any of its Affiliates or any third party to, amend or alter any of
the ANVT Licenses or any other pre-existing licenses or sublicenses of the CPH
Technology that involve rights within or pertaining to the Exclusive Field.
5.02 Notice of Licenses. CPH shall itself, and
shall cause its Affiliates to, notify WEM in writing at least twenty (20)
business days in advance of granting to any third party any subsequent licenses
or sublicenses of any type with respect to any of the CPH Technology. Such
written notice shall include or be accompanied by a certificate of an officer
of CPH, or other evidence reasonably satisfactory to WEM, reflecting that, and
CPH hereby covenants that, the proposed license or sublicense (i) will not
infringe upon WEM's exclusive rights in the Exclusive Field, (ii) will either
include a grant-back provision to the licensor that will permit WEM and its
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Affiliates to use, as a part of the license granted hereunder, all Improvements
made by the licensee or, if such a grant-back provision is not included, that
such proposed license or sublicense will not include any rights to any of the
Improvements described in Section 2.08 above, and (iii) to the extent that any
grant-back provisions will be included in such proposed license or sublicense,
will include provisions of the type described in Section 5.03 below. CPH shall
use its reasonable best efforts to cause any subsequent license or sublicense
(or permitted amendment of any existing license or sublicense) to include a
grant-back provision to the licensor that will permit WEM and its Affiliates to
use, as a part of the license granted hereunder, all Improvements made by the
licensee.
5.03 Third Party Beneficiary. CPH shall cause any
subsequent license or sublicense of the CPH Technology to include a provision
expressly designating WEM as a third party beneficiary of the obligations of
the licensor and licensee under such license to ensure WEM's access to
Improvements and its ability to enforce the provisions of Sections 5.01 and
5.02, above.
5.04 Maintenance and Enforcement. CPH shall pay
or cause to be paid when due all maintenance fees and annuities for each of the
patents covering any of the CPH Technology, and shall furnish to WEM, not less
often than quarterly, a report reflecting in reasonable detail the status of
such maintenance fees and annuities payments. CPH also shall take all action
reasonably required to enforce the patents covering the CPH Technology against
infringement by third parties or other challenge (including without limitation
claims of invalidity or unenforceability), and shall promptly furnish WEM with
written notice of any actual or threatened action or proceeding concerning the
same. In addition, CPH shall furnish to WEM, upon request from time to time,
written reports describing in reasonable detail the status of any such matters.
In the event that CPH is unable or otherwise does not intend to (i) pay any
such patent maintenance fees or annuities, or (ii) take any action concerning
any such infringement or other challenge, CPH shall promptly notify WEM to that
effect, which notice shall in any event be given not later than the last day of
such period of time as would allow WEM sufficient time to make any such payment
or take action concerning any such infringement or other challenge prior to the
expiration of any rights to do so. If CPH fails to (i) pay any such patent
maintenance fees or annuities, or (ii) take any action concerning any such
infringement or other challenge, WEM shall have the right, but not the
obligation, to make such payment or to take such action, in its own name or (in
WEM's discretion) in the name and on behalf of CPH, as it deems appropriate to
defend the CPH Technology from such infringement or other challenge, and CPH
shall take all such action, at its own expense, as may be reasonably requested
by WEM to cooperate with such action by WEM.
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<PAGE> 26
5.05 Warranties and Representations. CPH hereby warrants
and represents to WEM as follows: (i) CPH is the owner of the CPH Patents,
free and clear of any liens, encumbrances or claims (but subject to the
licenses identified in SCHEDULE 5.05(A), none of which contain any provisions
which could result in a loss of ownership or any impairment of the rights
granted hereunder or of CPH's right to grant the rights hereunder), and except
as otherwise expressly set out in SCHEDULE 5.05(A) hereto, is the owner of the
CPH Technology or possesses nonterminable (except to the extent that any
patents covering such technology are adjudicated to be invalid or
unenforceable, and CPH hereby represents and warrants that it has no knowledge
of any pending or threatened proceedings, or any basis therefor, which could
have such result), perpetual worldwide license rights thereto which include the
right to grant the license thereto pursuant to this Agreement, in each case
free and clear of any liens, encumbrances or claims; (ii) SCHEDULE 5.05(b)
hereto contains a complete description of each of the rights of third parties
to ANVT Technology with respect to the fields of application referred to in
Section 2.02 above as to which such Section 2.02 recites that WEM is not
granted a license hereunder to use ANVT Technology; (iii) SCHEDULE 5.05(b)
hereto contains a complete description of each of the rights of the third
parties referred to in Section 2.04 as constituting exceptions to the otherwise
exclusive rights of WEM granted pursuant to this Agreement and no other rights
have been granted by any of the NCT Parties or, to the Knowledge of the NCT
Parties, upon due inquiry by or on behalf of CPH, by ANVT which could infringe
upon such exclusivity; and (iv) no representation or warranty made herein by
CPH, and no schedule attached hereto, contains any untrue statement of a
material fact or omits to state a material fact or to include any information
necessary to make such representation, warranty or schedule not misleading or
incomplete in light of the circumstances under which it is made or prepared, as
the case may be.
ARTICLE VI: TRADEMARKS, SERVICE MARKS AND TRADE NAMES
6.01 CPH Marks. CPH hereby grants to WEM a
non-exclusive license to use the Names and Marks CHAPLIN PATENTS, CHAPLIN, and
CPH (the "CPH Marks") in connection with its business and products which
incorporate the CPH Technology. CPH hereby agrees that it shall not oppose or
object to WEM's use of the CPH Marks. In addition, CPH shall cause such of its
Affiliates as may be designated by WEM from time to time to execute, either
contemporaneously with CPH's execution of this Agreement or thereafter, an
acknowledgment in form reasonably satisfactory to WEM confirming the rights of
WEM under this Section 6.01 and Section 6.02 below.
6.02 WNCT Marks. CPH hereby acknowledges and
agrees that pursuant to the NCT License Agreement, WEM shall have the right to
use the names and marks of WALKER NOISE CANCELLATION TECHNOLOGIES, WNCT, WALKER
ELECTRONIC SILENCERS, WALKER ELECTRONIC SILENCING and WALKER INDUSTRIAL
SILENCERS (the "WNCT Marks") in connection with its business and products which
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<PAGE> 27
incorporate technology licensed to WEM under such other license agreement. CPH
hereby agrees that it shall not oppose or object to WEM's use or registration
of the WNCT Marks.
ARTICLE VII: CONFIDENTIALITY
7.01 Confidentiality Covenants. Except as expressly
otherwise provided herein, each of the parties agrees that it shall not
disclose, nor shall it induce or permit others to disclose, to any third party
any of the terms and conditions of this Agreement or information learned in
course of inspecting the books and records of the other party or pertaining to
any intellectual property or other technology licensed to it by the other party
hereto; provided, that such information may be disclosed to the extent necessary
to give effect to any license or sublicense contemplated or otherwise permitted
by this Agreement. Each party shall, prior to disclosing any such information
in accordance with this Section 7.01, cause each person or entity given access
to such information to enter into a binding and enforceable agreement pursuant
to which the recipient of such information agrees to be bound by the covenants
of this Article VII for the benefit of the licensor (or sublicensor, as the case
may be) and for the benefit of WEM or CPH (whichever is not the licensor or
sublicensor in question, as the case may be). Notwithstanding anything provided
herein to the contrary, the covenants restricting disclosure set forth in this
Section 7.01 shall not apply with respect to information or other items that the
recipient thereof can show (i) was known or becomes known to the general public
without disclosure by such recipient (or any Affiliate of such recipient), (ii)
was already known by the recipient thereof before its disclosure by a party
hereto, or (iii) was legally acquired by the recipient thereof from another
party and in good faith, provided that such disclosure by the other party was
not a breach of any agreement or in derogation of any confidential relationship
between such other party and any other party hereto. In addition, and
notwithstanding the foregoing, if legal counsel for either CPH, WEM or any of
their respective Affiliates is of the opinion that a statement, announcement or
filing involving the disclosure of any of the terms or conditions hereof is
required by law or regulation or by the rules of any stock exchange on which its
securities are traded, then such entity may issue a statement or announcement or
make a filing, in each instance limited solely to that which legal counsel for
such party advises is required under law or such rules. A party as to which any
such statement, announcement or filing is proposed on its own behalf or on
behalf of an Affiliate thereof shall provide a copy thereof to the other party
for its prior review, and shall use its reasonable best efforts to cause any
such filing to be accomplished on a basis that includes the redaction of all
economic terms and conditions (including without limitation the amounts of
royalties) and any other terms and conditions as to which redaction is
reasonably requested by such other party, and shall cooperate with and permit
such other party to participate in the process of seeking such redaction.
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<PAGE> 28
ARTICLE VIII: INDEMNIFICATION
8.01 Indemnification by CPH. CPH hereby agrees to
indemnify and to hold WEM and its Affiliates, and the officers, directors,
shareholders, agents and employees of each of them (collectively the "WEM
Indemnitees" and singly a "WEM Indemnitee") harmless from and against any and
all liability, loss, damage or injury, together with all reasonable costs and
expenses relating thereto (including but not limited to legal and accounting
fees) arising out of or resulting from any claim which is asserted against any
of the WEM Indemnitees which includes any allegation of any product liability
claim concerning design based upon any defective design of the CPH Technology
(except with respect to but only to the extent of, allegations of defective
design pertaining only to Improvements made by or on behalf of WEM other than
those made on behalf of WEM by CPH).
8.02 Indemnification by WEM. WEM hereby agrees to
indemnify and hold CPH, its Affiliates, and the shareholders, directors,
officers, employees and agents of each of them (collectively the "CPH
Indemnitees" and singly a "CPH Indemnitee") harmless from and against any and
all liability, loss, damage or injury, together with all reasonable costs and
expenses relating thereto (including but not limited to legal and accounting
fees) arising out of or resulting from any claim which is asserted against an
CPH Indemnitee involving any allegation of any products liability in connection
with a product manufactured by or on behalf of WEM or any of its Affiliates
which incorporated any of the CPH Technology; provided that with respect to any
such product which incorporates any of the CPH Technology, the obligation to
provide indemnification under this Section 8.02 shall not apply to the extent
such claim includes or is asserted in connection with any allegation of
defective design in the CPH Technology (except with respect to but only to the
extent of, allegations of defective design pertaining only to Improvements made
by or on behalf of WEM other than those made on behalf of WEM by CPH).
8.03 Control of Contest. For purposes of this
Section 8, the party entitled to indemnification is referred to as the
"Indemnitee" and the party obligated to provide indemnification is referred to
as the "Indemnitor." The Indemnitor shall have the right, at its own expense,
to control any claim or matter as to which such Indemnitor is obligated to
provide indemnification pursuant to any provision of this Agreement. This
shall include the right to designate the attorneys and other professionals who
shall defend or pursue any such claim or matter and to make the decision
whether to pursue any such claim or matter to a judgment, to settle any such
claim or matter, or to agree to any such claim or matter without any contest
thereof; provided, that (i) the Indemnitor shall obtain the prior approval of
the Indemnitee(s) to legal counsel engaged to defend or pursue any such claim
or matter, which approval shall not be unreasonably withheld, and (ii) no
Indemnitor shall have the right to agree to settle any claim or matter in a
manner that would adversely affect the interest of any
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<PAGE> 29
Indemnitee without the written consent of the adversely affected Indemnitee or
Indemnitees, as the case may be, which consent shall not be unreasonably
withheld. From and after the date on which the Indemnitor assumes control of
the defense of any manner as to which indemnification is required hereunder,
the Indemnitor shall not be obligated to pay any attorneys' fees incurred by
the Indemnitee(s) for additional counsel retained directly by the Indemnitee(s)
without the consent of the Indemnitor; provided, that in the event that any
Indemnitor is unable or unwilling to satisfy its indemnification obligation
hereunder, the Indemnitee(s) shall be entitled to engage at that Indemnitor's
expense the attorneys and other professionals who shall defend or pursue such
claim or matter and shall also be entitled to make any decision whether to
defend, pursue or settle such claim or matter.
8.04 Notice and Cooperation. The Indemnitee shall promptly
notify the Indemnitor upon learning of any claim or matter as to which
indemnification is required pursuant to this Section 8; provided, that the
failure to provide any such notice to an Indemnitor shall not relieve that
Indemnitor of its obligations with respect to the subject matter of any such
indemnification, except to the extent and only to the extent that the
Indemnitor suffers prejudice as a result of such failure. Each Indemnitee
shall, without compensation, afford such reasonable cooperation as may be
requested by the Indemnitor in the defense, pursuit or settlement of any claim
or matter as to which indemnification is required hereunder, including without
limitation by making available to the Indemnitor all pertinent non-privileged
information and non-privileged documents under the control of the Indemnitee.
ARTICLE IX: GENERAL PROVISIONS
9.01 Equitable Relief; Specific Performance. Each
party hereto acknowledges that with the exception of covenants which provide
only for the payment of money, a violation of any of the covenants contained in
this Agreement may cause irreparable damage to the other for which damages or
other monetary relief may be inadequate. Accordingly, each party hereto agrees
that in the event of a breach by it of any of the covenants contained in this
Agreement (other than covenants providing only for the payment of money), the
other party shall, in addition to all other available remedies, have the right
to obtain specific performance or such other injunctive relief or other
equitable relief from a court of competent jurisdiction as may be necessary or
appropriate.
9.02 Further Assurances. The parties hereto agree
to execute all documents and do all of those things reasonably necessary to
give effect to the terms and intent of this license agreement.
9.03 Entire Agreement. Except as otherwise provided in
the Transfer Agreement, this Agreement and the schedules attached hereto
constitute the entire agreement of the parties hereto with respect to the
subject matter hereof and
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<PAGE> 30
supersede all prior agreements, arrangements and communications of the parties
dealing with such subject matter, whether oral or written. No other promise,
agreement, understanding, or representation will be binding unless made in
writing and signed by the parties hereto. All amendments to this Agreement
must be in writing and signed by all of the parties hereto.
9.04 Governing Law. This Agreement and the rights
and obligations of the parties hereto shall be governed by and construed in
accordance with the internal laws of the State of Delaware, without giving
affect to the conflicts of law principles thereof, in every respect, including
but not limited to validity, interpretation and performance, notwithstanding
that one or more of the parties to this Agreement may now be or hereafter
become domiciled in or a resident of another state or a foreign country.
9.05 Non-Exclusive Forum. The parties hereto
agree that the state court located in Cook County, Illinois and the Federal
District Court for the Northern District of Illinois located in Chicago,
Illinois shall each have non-exclusive jurisdiction to adjudicate any dispute
between the parties hereto which arises out of or in connection with this
Agreement.
9.06 Relationship of Parties. Nothing provided in
this Agreement or in the schedules attached hereto shall be deemed to create
any relationship between the parties of employment, agency, partnership or
joint venture.
9.07 Severability. In the event that any
provision of this Agreement is held illegal or invalid for any reason, such
illegality or invalidity shall at the option of the party against whom the same
is asserted not affect the remaining parts of this Agreement, but this
Agreement shall be construed and enforced as if that illegal and invalid
provision had never been inserted herein.
9.08 Notices. All notices and other communications under
this Agreement shall be in writing and may be given by any of the following
methods: (a) personal delivery; (b) facsimile transmission; (c) registered or
certified mail, postage prepaid, return receipt requested; or (d) overnight
delivery service. Notices shall be sent to the appropriate party at its address
or facsimile number given below (or at such other address or facsimile number
for such party as shall be specified by notice given hereunder):
If to WEM:
Walker Electronic
Mufflers, Inc.
Attention: President
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
with a copy to:
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<PAGE> 31
Virginia L. Kearns
General Counsel
Tenneco Automotive
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
If to CPH:
c/o Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636-5989
Attention: President
All such notices and communications shall be deemed received upon the earlier
of (a) actual receipt thereof by the addressee, or (b) actual delivery thereof
to the appropriate address, or (c) in the case of a facsimile transmission,
upon transmission thereof by the sender and issuance by the transmitting
machine of a confirmation slip confirming that the number of pages constituting
the notice have been transmitted without error. In the case of notices sent by
facsimile transmission, the sender shall contemporaneously mail a copy of the
notice to the addressee at the address provided for above. However, such
mailing shall in no way alter the time at which the facsimile notice is deemed
received.
9.09 Captions. Section headings and numbers
herein are included for convenience of reference only, and if there shall be
any conflict between any such numbers and headings and the text of this
Agreement, the text shall control.
9.10 Waiver. The failure (with or without intent)
of any party to insist upon the strict performance by any other party of any
provision of this Agreement shall not be deemed to constitute a modification of
any of the provisions hereof, or a waiver of the right to insist at any time
thereafter upon performance strictly in accordance with the provisions of this
Agreement. No waiver of any term, condition or provision shall operate as a
waiver of any other term, condition or provision of the Agreement, and no
waiver of any term, condition or provision shall operate as a continuing
waiver.
9.11 Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be considered an original, and
all of which taken together shall constitute one and the same instrument.
9.12 No Assignment. Except as otherwise expressly
provided herein, no party may assign or delegate any of the benefits or duties
under this Agreement without the prior written consent of the other party.
Either of the parties may assign or delegate its benefits and duties under this
Agreement in connection with a transfer of all or substantially all assets of
the party which seeks to effect such assignment or in
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<PAGE> 32
connection with a merger or consolidation of that party with another entity.
In addition, WEM shall have the right to assign its benefits and duties under
this Agreement to an Affiliate of WEM.
[Continued on next page.]
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<PAGE> 33
9.13 Binding Effect. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
legal representatives, heirs (if any), permitted transferees, successors and
assigns, including any entity with which any party may merge or consolidate or
to which it may transfer substantially all of its assets.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective duly authorized representatives on
the date first written above.
CHAPLIN PATENTS WALKER ELECTRONICS MUFFLER, INC.
HOLDING CO., INC.
By: /s/ Michael J. Parrella By: /s/ Lyle S. Lohmeyer
------------------------- -------------------------
Its President Its Vice President
------------------------- -------------------------
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01.02 ANVT Licenses
Schedule 1.01.03 ANVT Patents
Schedule 1.01.06 CPH Patents
Schedule 2.02 Patents Subject to Lotus
Agreement
Schedule 4.01(a) CPH Technology Closing
Delivery
Schedule 4.01(b) CPH Technology
Post-Closing Delivery
Schedule 5.05(a) Ownership Disclosures
Schedule 5.05(b) Third Party Rights
</TABLE>
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<PAGE> 1
EXHIBIT 10(l)(5)
LICENSE AGREEMENT
DATED NOVEMBER 15, 1995
BETWEEN
NOISE CANCELLATION TECHNOLOGIES, INC.,
A DELAWARE CORPORATION ("NCT")
AND
WALKER ELECTRONIC MUFFLERS, INC.,
A DELAWARE CORPORATION ("WEM")
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Defined Terms . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Other Defined Terms . . . . . . . . . . . . . . . . . . . 7
1.03 Effect of Definitions . . . . . . . . . . . . . . . . . . 7
ARTICLE II GRANT OF LICENSE . . . . . . . . . . . . . . . . . . . . . 7
2.01 Grant of License . . . . . . . . . . . . . . . . . . . . . 7
2.02 Scope of License . . . . . . . . . . . . . . . . . . . . . 8
2.03 Exclusive Rights . . . . . . . . . . . . . . . . . . . . . 9
2.04 Non-Exclusive Rights . . . . . . . . . . . . . . . . . . . 10
2.05 Sublicense Rights . . . . . . . . . . . . . . . . . . . . 13
2.06 Sublicense Audit Rights . . . . . . . . . . . . . . . . . 13
2.07 Product Exclusions . . . . . . . . . . . . . . . . . . . . 13
2.08 Grant-Back . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE III ROYALTIES . . . . . . . . . . . . . . . . . . . . . . . . 14
3.01 Sales of Electronic Mufflers by WEM . . . . . . . . . . . 14
3.02 Other Sales or Leases by WEM . . . . . . . . . . . . . . . 14
3.03 Sublicensing by WEM . . . . . . . . . . . . . . . . . . . 15
3.04 Sales or Leases by CPH . . . . . . . . . . . . . . . . . . 16
3.05 Licensing and Sublicensing by CPH . . . . . . . . . . . . 17
3.06 Additional Royalties . . . . . . . . . . . . . . . . . . . 18
3.07 Accrual of Royalty Obligations . . . . . . . . . . . . . . 18
3.08 Royalty Payment Dates . . . . . . . . . . . . . . . . . . 18
3.09 Books and Records . . . . . . . . . . . . . . . . . . . . 19
3.10 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.11 Royalty Exceptions . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
ARTICLE IV DELIVERY OF INTELLECTUAL PROPERTY
MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . 19
4.01 Delivery at Closing . . . . . . . . . . . . . . . . . . . 19
4.02 Delivery of Improvements . . . . . . . . . . . . . . . . . 20
ARTICLE V OTHER COVENANTS . . . . . . . . . . . . . . . . . . . . . 20
5.01 Restrictions Concerning Exclusive Field . . . . . . . . . 20
5.02 Notice of Licenses . . . . . . . . . . . . . . . . . . . . 20
5.03 Third Party Beneficiary 21
5.04 Maintenance and Enforcement . . . . . . . . . . . . . . . 21
5.05 Warranties and Representations . . . . . . . . . . . . . . 22
ARTICLE VI TRADEMARKS, SERVICE MARKS AND
TRADE NAMES . . . . . . . . . . . . . . . . . . . . . . . 22
6.01 WNCT Marks . . . . . . . . . . . . . . . . . . . . . . . . 22
6.02 CPH Marks . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE VII CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . 23
7.01 Confidentiality Covenants . . . . . . . . . . . . . . . . 23
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 24
8.01 Indemnification by CPH . . . . . . . . . . . . . . . . . . 24
8.02 Indemnification by WEM . . . . . . . . . . . . . . . . . . 24
8.03 Control of Contest . . . . . . . . . . . . . . . . . . . . 25
8.04 Notice and Cooperation . . . . . . . . . . . . . . . . . . 25
ARTICLE IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 25
9.01 Equitable Relief, Specific Performance . . . . . . . . . . 25
9.02 Further Assurances . . . . . . . . . . . . . . . . . . . . 26
9.03 Entire Agreement . . . . . . . . . . . . . . . . . . . . . 26
9.04 Governing Law . . . . . . . . . . . . . . . . . . . . . . 26
9.05 Non-Exclusive Forum . . . . . . . . . . . . . . . . . . . 26
9.06 Relationship of Parties . . . . . . . . . . . . . . . . . 26
9.07 Severability . . . . . . . . . . . . . . . . . . . . . . . 26
9.08 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.09 Captions . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.10 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 28
9.12 No Assignment . . . . . . . . . . . . . . . . . . . . . . 28
9.13 Binding Effect . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
-ii-
<PAGE> 3
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01.02 ANVT Licenses
Schedule 1.01.03 ANVT Patents
Schedule 1.01.15 NCT Patents
Schedule 4.01(a) NCT Technology Closing
Delivery
Schedule 4.01(b) NCT Technology
Post-Closing Delivery
Schedule 5.05(a) Ownership Disclosures
Schedule 5.05(b) Third Party Rights
</TABLE>
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<PAGE> 4
LICENSE AGREEMENT
This License Agreement ("Agreement") is made and entered into
this 15th day of November, 1995 by and between Noise Cancellation Technologies,
Inc., a Delaware corporation ("NCT") and Walker Electronic Mufflers, Inc., a
Delaware corporation ("WEM").
INTRODUCTION
NCT is the owner or licensee of certain patents and technology
relating to the reduction and elimination of noise and vibration (as more
particularly described below in Section 1.01.16 of this Agreement and defined
as the "NCT Technology"), including without limitation the patents identified
in SCHEDULE 1.01.15 attached hereto (which patents are more particularly
described below in Section 1.01.15 and defined as the "NCT Patents") and the
patents identified in SCHEDULE 1.01.03 attached hereto (which patents are more
particularly described in Section 1.01.03, below and defined as a part of the
"ANVT Technology"). NCT, WEM, Walker Manufacturing Company, a division of
Tennessee Gas Pipeline Company, and NCT Muffler, Inc. entered into a joint
venture and partnership agreement dated November 8, 1989 which formed a New
York general partnership known as Walker Noise Cancellation Technologies
("WNCT"). NCT and WNCT entered into a license agreement dated as of November
8, 1989 (subsequently amended) pursuant to which NCT granted to WNCT a license
of the NCT Technology. NCT, WEM, Walker Manufacturing Company, a division of
Tennessee Gas Pipeline Company, NCT Muffler, Inc., Chaplin Patents Holding Co.,
Inc. and WNCT entered into a Transfer Agreement of even date which restructures
rights and obligations with respect to WNCT and, among other things, the
aforementioned license agreement. This license agreement is entered into
pursuant to the Transfer Agreement.
TERMS AND CONDITIONS
In consideration of the foregoing, the mutual covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
ARTICLE I: DEFINITIONS
1.01 Defined Terms. As used herein, the following
terms have the following meanings:
1.01.01 Affiliate. The term "Affiliate" shall mean,
with respect to any person or entity, any other person or entity that
directly, or indirectly through
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<PAGE> 5
one or more intermediaries, controls, is controlled by, or is under
common control with the person or entity specified, together with
their respective officers, directors and shareholders. For purposes
of this Section 1.01.01, "control" of an entity shall be deemed to
exist by virtue of having the right to influence the operation and
affairs thereof by holding directly or indirectly 50% or more of the
equity interests in such entity.
1.01.02 ANVT Licenses. The term "ANVT Licenses" (and
singly an "ANVT License") shall mean the license agreements more
particularly described on the attached SCHEDULE 1.01.02.
1.01.03 ANVT Technology. The term "ANVT Technology"
shall mean such of the following as to which NCT or any of its
Affiliates have any rights, including any such rights or interests
acquired pursuant to the Asset Purchase Agreement between NCT and ANVT
dated September 16, 1994: any and all existing and future technology
relating to the control, attenuation and/or cancellation of noise
and/or vibration, now, hereafter or previously owned by or licensed to
ANVT or any of its Affiliates (other than any of the patents or
technology owned by Chaplin Patents Holding Co., Inc.), including
without limitation all know-how, trade secrets, methods, operating
techniques, processes, software, materials, technical data,
engineering information, drawings, machinery and apparatus, patents
(including without limitation the patents identified on the attached
SCHEDULE 1.01.03 and any continuations, continuations-in- part,
divisions or reissues thereof and any patents covering any
Improvements thereto), patent applications, copyrights and other
intellectual property relating thereto; provided, that any
Improvements made by any Person other than the licensee of an ANVT
License or ANVT itself which are applicable to the ANVT Technology
shall not constitute part of the ANVT Technology.
1.01.04 Controller or Chip. The terms "Controller"
or "Chip" as used herein with respect to the electronic products which
attenuate noise and/or vibrations shall mean the component which
receives input concerning noise and vibration levels and in turn
directly or indirectly adjusts either or both (i) the frequency and/or
amplitude of countervailing soundwaves or vibrations and/or (ii) the
air pressure used to interfere with the noise or vibration (or both).
To the extent that such component consists of multiple chips which
function together rather than independently to effect any of the
aforementioned adjustments, all elements of such component, including
such chips, taken
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together shall be deemed for purposes of this Agreement to constitute
a single Controller or Chip.
1.01.05 CPH License. "CPH License" shall have the
meaning ascribed to it in Section 6.02 below.
1.01.06 CPH Marks. "CPH Marks" shall have the meaning
ascribed to it in section 6.02 below.
1.01.07 Electronic Muffler. "Electronic Muffler"
shall mean an apparatus, machine, product or equipment (including
replacement parts) which incorporates NCT Technology and which
achieves the reduction of noise by generating interfering noise and/or
changes in air pressure, and controlling the interfering noise and/or
changes in air pressure electronically in accordance with variations
in the noise, and which is used to reduce noise emanating as part of
or in connection with an intake stream into and/or an exhaust stream
from an Internal Combustion Engine. The term "Electronic Muffler"
shall not include any pipe, duct or tube containing an intake or
exhaust stream unless the pipe, duct or tube is designed specifically
to serve an integral function in electronically controlling the
interfering noise and/or changes in air pressure.
1.01.08 Europe. "Europe" shall mean the geographic
area contained within the political boundaries of the following
countries as of the date of this Agreement: Albania, Austria,
Belgium, Bulgaria, Denmark, Finland, France, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Luxembourg, Monaco, the Netherlands, Norway,
Poland, Portugal, Rumania, Spain, Switzerland, Turkey, the United
Kingdom, Russia, Sweden, and the geographic area encompassed within
the boundaries of the former States commonly referred to as Yugoslavia
and Czechoslovakia, respectively.
1.01.09 Exclusive Field. "Exclusive Field" shall have
the meaning ascribed to it in Section 2.03 below.
1.01.10 Fully Burdened Costs. "Fully Burdened Costs"
shall mean all direct and indirect costs and expenses, determined in
accordance with generally accepted accounting principles consistently
applied, incurred by the person or entity in question to the extent
attributable to the actual manufacture and sale of the product in
question.
1.01.11 Improvements. "Improvements" shall mean any
improvement, modifications, further invention, derivative work,
technology, trade secret, software, hardware, patent or patent
application (including without limitation continuations,
continuations-in-part,
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divisions and reissues) based upon any part of the NCT Technology.
1.01.12 Industrial Sector and Industrial Equipment.
"Industrial Sector" shall mean all markets for Electronic Mufflers,
Multiple Application Systems in which one application is an Electronic
Muffler, or Single Application Products, in each case which are
designed, manufactured or sold for, or used in or attached to, any of
the following: (a) rotary positive displacement vacuums and blowers;
(b) liquid ring pumps; or (c) any other items of industrial equipment
used in an industrial setting which either comprises (in whole or in
part) an Internal Combustion Engine or which uses an Internal
Combustion Engine for power other than for propulsion purposes,
including without limitation generators, diesel engines not installed
in an automobile, truck, train or other land vehicle (all of the
foregoing are, singly or collectively, referred to herein as
"Industrial Equipment"). For purposes of clarity, the term
"Industrial Equipment" includes equipment for military or defense
purposes but does not include Vehicles, office equipment used in an
office, or consumer equipment and appliances, and the term "Industrial
Sector" does not include duct or fan quieting except to the extent
that the duct or fan in question constitutes part of an item of
Industrial Equipment.
1.01.13 Internal Combustion Engine. "Internal
Combustion Engine" shall mean all internal combustion engines,
including without limitation turbines attached to or comprising a part
of turbochargers or superchargers which are attached to or which
comprise a part of such engine, which operate on any of the following
fuels (or derivatives thereof): gasoline, diesel, propane, butane,
natural gas (including without limitation liquified natural gas and
compressed natural gas), fuel oil, kerosine and alcohol (including
without limitation ethanol and methanol). Notwithstanding the
foregoing, the term "Internal Combustion Engine" shall not include a
turbo prop or jet engine which is used for propulsion purposes in an
aircraft.
1.01.14 Multiple Application System. "Multiple
Application System" shall mean an application involving a product or
system of products, in either case which incorporate NCT Technology
and which are designed or used to address multiple noise or vibration
problems utilizing a single Chip or Controller, and shall in all cases
be deemed to include the sensors, wiring, controllers, amplifiers,
transducers or actuators, housing and enclosures required to
electronically attenuate the noise or vibration problems. A Multiple
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<PAGE> 8
Application System will exist with respect to a Vehicle only if more
than one application within or among the classifications and
applications in (a) through (i) below are used on or in connection
with the Vehicle in any system utilizing a single Chip or Controller,
as follows:
(a) exhaust noise attenuation;
(b) intake noise attenuation;
(c) vibration isolation or attenuation (including
without limitation any application to shock
absorbers, suspension components, engine
mounts, mufflers, or other exhaust
components, steering linkage components,
power train components, hangars, panels,
windows, brakes, or tires);
(d) cabin quieting (meaning a product other than
a headset which attenuates noise in the cabin
of a Vehicle by introducing countervailing
soundwaves adjusted by a single Controller);
(e) noise attenuation for windows or panels;
(f) noise attenuation for any engine components
(including without limitation air intake
parts, cooling fans, engine blocks and engine
fans) or any power train component (including
without limitation transfer cases);
(g) noise attenuation for axles;
(h) noise attenuation for tires; and
(i) noise attenuation for brakes.
1.01.15 NCT Patents. "NCT Patents" shall mean the
patents owned by NCT and listed in SCHEDULE 1.01.15 attached
hereto, and any continuations, continuations-in-part, divisions or
reissues thereof, and any patents obtained by NCT on Improvements.
1.01.16 NCT Technology. "NCT Technology" shall mean any and
all existing and future technology relating to the control,
attenuation and/or cancellation of noise and/or vibration now or
hereafter owned by or licensed to NCT or any of its Affiliates,
including without limitation all know-how, trade secrets, methods,
operating techniques, processes, software, materials,
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<PAGE> 9
technical data, engineering information, drawings, machinery and
apparatus, patents (including without limitation the NCT Patents and
any patents covering any Improvements thereto and including without
limitation any continuations, continuations-in-part, divisions or
reissues of patents), patent applications, copyrights and other
intellectual properties relating thereto.
1.01.17 Net Revenues. "Net Revenues" shall have the
meaning ascribed to it in Section 3.02 below.
1.01.18 Non-Exclusive Field. "Non-Exclusive Field"
shall have the meaning ascribed to it in Section 2.04 below.
1.01.19 Passive Component. The term "Passive
Component" shall mean, with respect to the product in question, any or
subcomponent, as the case may be, which does not itself contain any of
the NCT Technology (notwithstanding that such component or subcomponent
may be connected to or itself controlled by a component or subcomponent
containing NCT Technology), including without limitation any component
or subcomponent which does not itself control noise or vibration or, to
the extent that it is designed to serve a function in controlling noise
or vibration, is not dependent for such function upon the electronic
control of noise or vibration.
1.01.20 Single Application Product. "Single
Application Product" shall mean a product other than an Electronic
Muffler or a system of products (which does not include an Electronic
Muffler), in either case which incorporates NCT Technology and which is
designed or used to address electronically a single noise or vibration
problem caused by or inhering in the operation of a Vehicle or an item
of Industrial Equipment, and shall in all cases be deemed to include
the sensors, wiring, controllers, amplifiers, transducers or actuators,
housings and enclosures required to attenuate the noise or vibration
problem.
1.01.21 Transfer Agreement. "Transfer Agreement"
shall mean the agreement of even date herewith entered into by and
among NCT, WEM, Walker Manufacturing Company, a division of Tennessee
Gas Pipeline Company, NCT Muffler, Inc., Chaplin Patents Holding Co.,
Inc., and WNCT.
1.01.22 Vehicle. "Vehicle" shall mean all civil and
all military vehicles, including without limitation automobiles, jeeps
and other vehicles competitive with jeeps, trucks and vans of any
class, motorcycles, emergency vehicles, buses, all agricultural and
farm
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vehicles, all construction vehicles (including without limitation
cranes, lifts and earthmoving equipment), trolleys, trains or other
vehicles that travel on or are guided by one or more rails, and marine
vessels of any nature (including without limitation hovercraft
designed for transport across water), but the term "Vehicle" shall not
mean an aircraft of any nature or any craft capable of sustained
flight other than hovercraft.
1.01.23 Vehicular Quieting Multiple Application
System. "Vehicular Quieting Multiple Application System" shall mean a
Multiple Application System installed in a Vehicle. For purposes of
clarity, a Vehicular Quieting Multiple Application System shall not
include any product or component which does not pertain to noise and/or
vibration caused by or inhering in the operation of a Vehicle, such as
a product or component which attenuates unwanted noise in or on a radio
or other audio system, a headset, a telephone or other communications
device used by a person while in a Vehicle, or any other product
described in Section 2.07 below.
1.01.24 Vehicular Quieting Single Application Product.
"Vehicular Quieting Single Application Product" shall mean a Single
Application Product installed in a Vehicle. For purposes of clarity,
a Vehicular Quieting Single Application Product is one which addresses
a noise or vibration problem caused by or inhering in the operation of
a Vehicle, including without limitation the applications described in
Sections 1.01.14(a) through (i), above, but does not include noise
and/or vibration attenuation products for radios or other audio
systems, headsets, telephones or other communications devices, or any
other products described in Section 2.07 below.
1.01.25 Vehicular Sector. "Vehicular Sector" shall
mean all markets or products designed, manufactured or sold for, or
installed in or attached to a Vehicle.
1.01.26 WEM Indemnitees. "WEM Indemnitees" (and in
the singular, "WEM Indemnitee") shall have the meaning ascribed to it
in Section 8.01 below.
1.01.27 Western Hemisphere. "Western Hemisphere"
shall mean the United States, Canada, Mexico and all countries of
Central America and South America.
1.02 Other Defined Terms. As used herein,
capitalized terms not otherwise expressly defined herein shall have the meaning
ascribed to them in the Transfer Agreement.
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1.03 Effect of Definitions. Nothing set forth in
this Article I or in the definition of other defined terms used herein shall
limit the generality of the provisions set forth in this Agreement governing
the scope of exclusive and non-exclusive rights.
ARTICLE II: GRANT OF LICENSE
2.01 Grant of License. Subject to the provisions
of this Agreement, NCT hereby grants to WEM a perpetual, worldwide license to
make, have made, use, sell or lease the following products or systems for the
Vehicular Sector and the Industrial Sector which incorporate or are based upon
NCT Technology, including without limitation such of these products which are
covered by any of the claims of the NCT Patents and/or any other patents
comprising part of the NCT Technology:
(a) Electronic Mufflers;
(b) Vehicular Quieting Multiple Application
Systems;
(c) Vehicular Quieting Single Application
Products;
(d) Single Application Products in the Industrial
Sector; and
(e) Multiple Application Systems in the
Industrial Sector which include an
Electronic Muffler.
2.02 Scope of License. It is the intent of the
parties that the scope of the technology governed by the license granted in
Section 2.01 shall be as broad as, and include all rights granted in, the
license granted to WNCT in the WNCT License, as amended (including as modified
by the Stock Purchase Agreement), provided, that (i) nothing contained herein
shall vitiate the release contained in Section 2.01 of the Transfer Agreement
of the remaining unfulfilled obligation to make Preferred Contributions (as
such term is used in Section 10 of Exhibit B of the Stock Purchase Agreement)
pursuant to Exhibit B of the Stock Purchase Agreement, and (ii) for purposes of
clarification, the parties hereto hereby acknowledge that the scope of the
technology and rights set out in Exhibit B of the Stock Purchase Agreement does
not extend beyond the scope of the rights described in the text of the License
Agreements comprising a part of the Restructuring Agreements. The license
granted to WEM pursuant to this Agreement shall also cover (i) all additional
fields of use licensed herein, (ii) all Improvements to the NCT Technology, and
(iii) the right to make, have made, use, sell and lease custom semiconductor
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devices (including without limitation Controllers and Chips) incorporating the
NCT Technology in connection with and for use as a component in or of products
and systems which incorporate or which are based upon NCT Technology and which
are made, used, sold or leased by WEM or a sublicensee of WEM for the Vehicular
Sector and the Industrial Sector. Notwithstanding the foregoing, the parties
hereby agree that nothing provided herein shall grant any rights to WEM (i) to
use, prior to the expiration or termination of the license agreements referred
to in Section 2.04(b)(i) below and more particularly described in SCHEDULES
1.01.02 and 5.05(b), in connection with the manufacture, use, sale or lease in
the Western Hemisphere of Electronic Mufflers addressing only the exhaust
stream of an Internal Combustion Engine, such ANVT Technology as came into
existence prior to December 31, 1995, together with any Improvements thereto
subsequently made only by Arvin Industries, Inc. or Arvin ANVT Manufacturing
Company, LLC, which are the subject of the grant of the ANVT Licenses to Arvin
Industries, Inc. and Arvin-ANVT Manufacturing Company, LLC more particularly
described in SCHEDULES 1.01.02 and 5.05(b), or (ii) to use, prior to the
expiration or termination of the license agreement referred to in Section
2.04(b)(ii) below and more particularly described in SCHEDULES 1.01.02 and
5.05(b) under which Elesa, S.p.A. is the licensee, in connection with the
manufacture, use, sale or lease in Europe of Electronic Mufflers, Vehicular
Quieting Single Application Products and Vehicular Quieting Multiple
Application Systems, used in each case only for ground-based transportation,
such ANVT Technology which came into existence prior to September 30, 1993,
together with any Improvements thereto subsequently made only by Elesa, S.p.A.,
which are the subject of the ANVT License to ELESA, S.p.A. (a company organized
under the laws of Italy) more particularly described in SCHEDULES 1.01.02 and
5.05(b), or (iii) to use, prior to the expiration or termination of the license
agreement referred to in Section 2.04(b)(v) below and more particularly
identified and described in SCHEDULES 1.01.02 and 5.05(b) under which Societe
Di Electronica per L'Automazione, S.p.A. ("SEPA, S.p.A.") is the licensee, in
connection with the manufacture, use, sale or lease in Italy of an apparatus,
machine, device or equipment or any subsystem thereof (including replacement
parts) which is uniquely designed and manufactured to military specifications
and which is sold to an identified military branch or defense agency of Italy
or which is sold to a company to be further manufactured or integrated in Italy
into equipment or systems which are uniquely designed or manufactured to
military specifications for sale to an identified military branch or defense
agency of Italy, such ANVT Technology which came into existence prior to
September 30, 1993, together with any Improvements thereto subsequently made
only by SEPA, S.p.A., which are the subject of the ANVT License to SEPA, S.p.A.
(a company organized under the laws of Italy) more particularly described in
SCHEDULES 1.01.02 and 5.05(b), or (iv) to the
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extent, if any, that such use is not contemplated and permitted by the terms
and conditions governing the license granted by CPH and NCT to Lotus Cars
Limited and Group Lotus Limited pursuant to the Settlement Agreement dated July
13, 1995 referred to in Section 2.04(d) below and more particularly described
in SCHEDULE 5.05(b), to use, prior to the expiration or termination of such
license to Lotus Cars Limited and Group Lotus Limited, in connection with the
manufacture, use, sale or lease of products for cabin quieting (as such term is
used and defined in Section 1.01.14(d) above) in the Vehicular Sector or to
attenuate noise or vibration only in engine mounts in the Vehicular Sector, the
technology covered by the claims of the three patents of Chaplin Patents
Holding Co., Inc. more particularly identified in SCHEDULE 2.02 except to the
extent that the same technology is covered by the claims of any other patents
comprising any of the NCT Technology.
2.03 Exclusive Rights. Except as otherwise
expressly provided in Sections 2.04(b), 2.04(c), and 2.04(d), below, the
license granted to WEM pursuant to this Agreement shall be exclusive worldwide
with respect to the manufacture, use and sale and lease of the following:
(a) Electronic Mufflers in the Vehicular Sector;
(b) Vehicular Quieting Multiple Application
Systems;
(c) Electronic Mufflers in the Industrial Sector;
and
(d) Multiple Application Systems in the
Industrial Sector in which one application
is an Electronic Muffler.
The applications described in this Section 2.03 as to which the aforementioned
rights of exclusivity apply are referred to collectively in this Agreement as
the "Exclusive Field." In addition, without limiting the generality of the
foregoing, but for purposes of clarification, the right more particularly
described in Section 2.02 above to make, have made, use, sell and lease custom
semiconductor devices of the type more particularly described in Section 2.02
above shall be exclusive with respect to semiconductor devices designed to
function as, and which are capable of functioning only as, a component of a
product comprising part of the Exclusive Field, and such right shall be
nonexclusive with respect to all other semiconductor devices of the type more
particularly described in Section 2.02 above.
2.04 Non-Exclusive Rights. The license granted to
WEM pursuant to this Agreement shall be non-
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<PAGE> 14
exclusive worldwide (except to the extent otherwise expressly provided in this
Section 2.04) as to the following (collectively the "Non-Exclusive Field"):
(a) Except to the extent otherwise provided in
and without limiting the effect of Sections
2.04(b)(ii), 2.04(b)(iii), 2.04(b)(v),
2.04(c), and 2.04(d) below, the manufacture,
use, sale and lease of Single Application
Products in the Industrial Sector and the
manufacture, use, sale and lease of Vehicular
Quieting Single Application Products.
(b) With respect to, but only to the extent of,
the use as to the following of the CPH
Patents owned as of the date hereof by CPH
and ANVT Technology:
(i) the manufacture, use and sale in the
Western Hemisphere by Arvin Industries, Inc.
or Arvin-ANVT Manufacturing Company, LLC of
Electronic Mufflers in the Vehicular Sector
(provided that such Electronic Mufflers
address only the exhaust stream of an
Internal Combustion Engine) and, with respect
to ANVT Technology, using only such ANVT
Technology as came into existence prior to
December 31, 1995 and any Improvements
thereto subsequently made only by Arvin
Industries, Inc. or Arvin ANVT Manufacturing
Company, LLC, all pursuant to and as limited
by an ANVT License more particularly
described in SCHEDULE 5.05(b);
(ii) the manufacture, use and sale in
Europe, together with replacement parts sales
on a worldwide basis, by ELESA, S.p.A., a
company organized under the laws of Italy, of
Electronic Mufflers, Vehicular Quieting
Single Application Products and Vehicular
Quieting Multiple Application Systems, used
in each case only for ground-based
transportation and, with respect to ANVT
Technology, using only such ANVT Technology
which came into existence prior to September
30, 1993, together with any Improvements
thereto subsequently made only by Elesa,
S.p.A., all pursuant to and as limited by an
ANVT License more particularly described in
SCHEDULE 5.05(b);
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<PAGE> 15
(iii) the manufacture, use and sale by
Alpine Electronics, Inc. or Alpine-ANVT, Inc.
of Electronic Mufflers in the Vehicular
Sector and Vehicular Quieting Single
Application Products, in each case which are
manufactured or designed to be integrated, or
are capable of being integrated, into any
single stereo or other sound reproduction
system installed or capable of being
installed in a single Vehicle and which are
sold to manufacturers for installation as
original equipment in Vehicles only as part
of the new manufacture of such Vehicles by
their manufacturer or sold by such Vehicle
manufacturers to their own new-Vehicle
dealers for optional installation by such
dealers in connection with the sale of new
Vehicles manufactured by such manufacturers
or sold by such manufacturers to such dealers
only as warranty replacement parts, all
pursuant to and as limited by an ANVT License
more particularly described in SCHEDULE
5.05(b);
(iv) the manufacture, use and sale by
Alpine Electronics, Inc. or Alpine-ANVT, Inc.
of Vehicular Quieting Multiple Application
Systems which are manufactured or designed to
be integrated, or are capable of being
integrated, into any single stereo or other
sound reproduction system installed or
capable of being installed in a single
Vehicle and which are sold to manufacturers
for installation as original equipment in
Vehicles only as part of the new manufacture
of such Vehicles by their manufacturer or
sold by such Vehicle manufacturers to their
own new-Vehicle dealers for optional
installation by such dealers in connection
with the sale of new Vehicles manufactured by
such manufacturers or sold by such
manufacturers to such dealers only as
warranty replacement parts, all pursuant to
and as limited by an ANVT License more
particularly described in SCHEDULE 5.05(b);
and
(v) the use and sale in Austria, Belgium,
Denmark, France, Finland, Germany, Greece,
Italy, Netherlands, Norway, Portugal, Spain,
Sweden,
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<PAGE> 16
Switzerland or Turkey by SEPA, S.p.A. of an
apparatus, machine, device or equipment or
any subsystem thereof (including replacement
parts) which is uniquely designed and
manufactured to military specifications and
which is sold to an identified military
branch or defense agency of one of the
aforementioned nations or which is sold to a
company to be further manufactured or
integrated in one of the aforementioned
nations into equipment or systems which are
uniquely designed or manufactured to military
specifications for sale to an identified
military branch or defense agency of one of
the aforementioned nations, and, with respect
to ANVT Technology, using only such ANVT
Technology which came into existence prior to
September 30, 1993 (or any Improvements
thereto subsequently made only by SEPA,
S.p.A.), all pursuant to and as limited by an
ANVT License more particularly described in
SCHEDULE 5.05(b).
(c) The manufacture, use, sale and lease of
Vehicular Quieting Single Application
Products by Magneti-Marelli, S.p.A. (a
company formed under the laws of Italy)
pursuant to a sublicense agreement with NCT
(with NCT as the sublicensor) more
particularly described in SCHEDULE 5.05(b)
and which includes "grant back" rights in
favor of NCT, and in turn to CPH pursuant to
a license agreement between CPH (with CPH as
the licensor) and NCT, governed by provisions
not less restrictive than the provisions set
forth in Section 2.08 below.
(d) With respect to, but only to the extent of,
the use by Lotus Cars Limited and Group Lotus
Limited of the technology covered by the
claims of the three patents owned by Chaplin
Patents Holding Co., Inc. which are
identified on SCHEDULE 2.02 hereto for use in
engaging in the "Core Business" (as such term
is defined and described in Paragraph 8 of
SCHEDULE 5.05(b) hereto pursuant to and as
limited by the license granted as a part of
the Settlement Agreement more
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particularly described in Paragraph 8 of SCHE
DULE 5.05(b) hereto.
2.05 Sublicense Rights. WEM shall have the right
to grant sublicenses, to make, use, sell or lease:
(a) Electronic Mufflers in the Vehicular Sector;
(b) Vehicular Quieting Multiple Application
Systems;
(c) Vehicular Quieting Single Application
Products;
(d) Electronic Mufflers in the Industrial Sector;
and
(e) Multiple Applications Systems in the
Industrial Sector in which one of the
applications is an Electronic Muffler.
In addition, upon first obtaining the prior written consent of NCT, which
consent shall not be unreasonably withheld, WEM shall have the right to grant
sublicenses to make, use, sell or lease Single Application Products in the
Industrial Sector. None of the sublicenses described above in this Section
2.05 shall include any right on the part of the sublicensee to grant further
sublicenses except to the extent of rights to use, sell or lease products sold
or leased.
2.06 Sublicense Audit Rights. Any sublicense
granted in accordance with the terms of this Agreement shall include audit
rights as against the sublicensee with respect to its revenues and direct
costs, as applicable, on the sale, lease or manufacture of products
incorporating the sublicensed technology in question for purposes of
determining royalties payable pursuant to Article III below. Each sublicense
shall also expressly identify as a third party beneficiary of such audit rights
either WEM or NCT, whichever is not the sublicensor with respect to the
sublicense in question.
2.07 Product Exclusions. WEM hereby acknowledges
and agrees that the license granted to WEM pursuant to Section 2.01 above shall
not extend to the manufacture, use or sale of telephones (whether wire lined,
cellular, radio or other non-wire line telephones), hands-free microphones,
headsets, radios, voice recognition systems, audio or entertainment systems,
consumer products other than Vehicles, personal computers (except to the extent
comprising a part of a product to which such license otherwise applies),
personal care products, household appliances, electronic entertainment products
such as VCR's
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<PAGE> 18
and electronic games, in-wire noise cancellation products for communication
devices, or any other communication device or systems.
2.08 Grant-Back. Subject to payment of the
royalties described in Sections 3.04, 3.05 and 3.06 below, WEM hereby grants to
NCT a non-exclusive license to make, have made, use and sell products
incorporating Improvements to the NCT Technology made or invented, or caused to
be made or invented, by WEM or its Affiliates; provided, that (i) NCT shall not
exercise any such rights to such Improvements in connection with the Exclusive
Field, and (ii) NCT shall not grant a sublicense to any third party concerning
any such Improvements unless the agreement governing such sublicensee includes
a "grant-back" provision pursuant to which NCT and licensees and sublicensees
of NCT (including without limitation WEM) shall have rights to make, have made,
use, sell and lease products incorporating Improvements made by or on behalf of
any such third party sublicensee.
ARTICLE III: ROYALTIES
3.01 Sales of Electronic Mufflers by WEM. WEM
shall pay royalties to NCT with respect to the sale or lease of products
comprising only Electronic Mufflers, in each case in which the Controller of
the product incorporates NCT Technology, by WEM in the Vehicular Sector or the
Industrial Sector. Such royalties shall be calculated on the basis of **
3.02 Other Sales or Leases by WEM. WEM shall pay
royalties to NCT with respect to the sale or lease by WEM of Vehicular Quieting
Single Application Products, Vehicular Quieting Multiple Application Systems,
Single Application Products in the Industrial Sector and Multiple Application
Systems in the Industrial Sector, in each case in which the product in question
incorporates NCT Technology. The amount of the royalties payable under this
Section 3.02 shall be calculated as a percentage, as set forth below with
respect to each of the aforementioned categories of products, of the
** Material for which Confidential Treatment has been requested.
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Net Revenues (as hereinafter defined) received by WEM in connection with the
sale or lease of such products:
(a) Vehicular Quieting Single
Application Products
-- **
(b) Vehicular Quieting Multiple
Application Systems
-- **
(c) Single Application Products
in the Industrial Sector
-- **
(d) Multiple Application Systems
in the Industrial Sector which
include an Electronic Muffler
-- **
For purposes of this Agreement, "Net Revenues" (and in the singular "Net
Revenue") refers to gross revenues received less (i) all taxes imposed in
connection therewith other than income taxes, and (ii) less any royalties
payable to third parties in connection with any intellectual property
incorporated into the product in question, and (iii) less all freight costs
charged to a customer and comprising a part of such revenues, and (iv) less the
amount of such revenues attributable, on the basis of bona fide costs and
profit margins, to the Passive Components of the product in question; provided,
that in no event shall the aforementioned deduction for the Passive Components
exceed **
3.03 Sublicensing by WEM. WEM shall pay a royalty
to NCT with respect to sublicenses granted by WEM for sales or leases of the
following items which incorporate NCT Technology: Electronic Mufflers,
Vehicular Quieting Multiple Application Systems, Vehicular Quieting Single
Application Products, Single Application Products in the Industrial Sector, and
Multiple Application Systems in the Industrial Sector which include an
Electronic Muffler. The amount of the royalties payable under this Section
3.03 shall, with respect to each sublicense in question, constitute the larger
of the two amounts determined pursuant to subparts (a) and (b) of this Section
3.03.
(a) For purposes of this Section 3.03, the amount
determined in this subpart (a) shall
** Material for which Confidential Treatment has been requested.
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<PAGE> 20
constitute one of the following three amounts, as
selected by WEM:
(i) ** of the Net Revenues received by
the sublicensee in question from
sales or leases of products pursuant
to such sublicense;
(ii) ** of the Fully Burdened Costs
incurred by the sublicensee in
connection with the products sold or
leased pursuant to the sublicense in
question; or
(iii) ** for each vehicle (with respect to
sales or leases by the sublicensee
of Vehicular Quieting Single
Application Products or Vehicular
Quieting Multiple Application
Systems) or each installation upon
industrial equipment (with respect
to sales or leases by the
sublicensee of Single Application
Products in the Industrial Sector or
Multiple Application Systems in the
Industrial Sector which include an
Electronic Muffler), as the case may
be.
(b) ** of the Net Revenues received by WEM from the
sublicensee pursuant to the sublicense in question.
3.04 Sales or Leases by NCT. Without affecting
the effect or generality of Section 2.03 above, NCT shall pay royalties to WEM
with respect to the sale or lease by NCT of (i) Vehicular Quieting Single
Application Products, or (ii) any product which incorporates any Improvement
which is subject to the license to NCT described in Section 2.08 above. The
amount of the royalties payable under this Section 3.04 shall be calculated as
a percentage, as set forth below with respect to each of the aforementioned
categories of products, of the Net Revenues (as hereinafter defined) received
by WEM in connection with the sale or lease of such products:
(a) Vehicular Quieting Single
Application Products -- **
(b) Products which incorporate any
Improvement which is subject to
** Material for which Confidential Treatment has been requested.
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<PAGE> 21
the license to NCT described in
Section 2.08 above: -- **
3.05 Licensing and Sublicensing by NCT. Without
affecting the effect or generality of Section 2.03 above, NCT shall pay a
royalty to WEM with respect to licenses or sublicenses, as the case may be,
granted at any time by NCT or as to which NCT is now or hereafter becomes the
owner or holder of the licensor's or sublicensor's rights, for sales or leases
of (i) Vehicular Quieting Single Application Products, or (ii) any product
which incorporates any Improvement which is subject to the license to NCT
described in Section 2.08 above, and NCT shall also pay a royalty to WEM with
respect to each of the licenses described in Sections 2.04(b), 2.04(c) or
2.04(d) above. The amount of the royalties payable under this Section 3.05
shall, with respect to each license or sublicense in question, constitute the
larger of the two amounts determined pursuant to subparts (a) and (b) of this
Section 3.05.
(a) For purposes of this Section 3.05, the amount
determined in this subpart (a) shall constitute one
of the following three amounts, as selected by NCT:
(i) ** of the Net Revenues received by
the licensee or sublicensee in
question from sales or leases of
products pursuant to such license or
sublicense;
(ii) ** of the Fully Burdened Costs
incurred by the licensee or
sublicensee in connection with the
products sold or leased pursuant to
the license or sublicense in
question; or
(iii) ** dollar for each vehicle (with
respect to sales or leases by the
licensee or sublicensee of
Electronic Mufflers in the Vehicular
Sector, Vehicular Quieting Single
Application Products or Vehicular
Quieting Multiple Application
Systems) or each installation upon
industrial equipment (with respect
to sales or leases by the licensee
or sublicensee of Single Application
Products in the Industrial Sector or
Multiple Application Systems in the
Industrial Sector which include an
Electronic Muffler), as the case may
be.
** Material for which Confidential Treatment has been requested.
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<PAGE> 22
(b) ** of the Net Revenues received by NCT from the
licensee or sublicensee pursuant to the license or
sublicense in question; provided, that with respect
to any such Net Revenues which are received by NCT
pursuant to or in connection with the ANVT license
referred to in Section 2.04(b)(i), above, such
percentage shall be **, and with respect to any such
Net Revenues which are received by NCT pursuant to or
in connection with any other license agreement
described in any of Sections 2.04(b) through Section
2.04(d) above which are derived from a product
comprising or including an Electronic Muffler, such
percentage shall be **.
3.06 Additional Royalties. NCT shall pay a royalty to WEM of
(i) ** of the Net Revenues arising from royalties or other payments received by
NCT or due (but not yet paid) or which become due to NCT or any of its
Affiliates, as the case may be, for any period up to and including the date of
this Agreement pursuant to or in connection with the ANVT Licenses referred to
in Section 2.04(b)(i) and the other license rights referred to in any of
Sections 2.04(b) through 2.04(d), above (but with respect to such Sections
2.04(b)(ii) through 2.04(b)(v), 2.04(c) and 2.04(d) above, only if the product
or products in question constitute or include an Electronic Muffler). Except
to the extent otherwise provided in the immediately preceding sentence of this
Section 3.06, with respect to any license rights referred to in any of Sections
2.04(b)(ii) through (v), 2.04(c) and 2.04(d) above, NCT shall pay a royalty to
WEM on the same basis as is provided with respect to the licenses and
sublicenses which are described in Section 3.05 above; provided, that with
respect to the licenses referred to in Section 2.04(b), such royalty obligation
shall not apply with respect to either (i) the sale or lease of any products
thereunder prior to the date on which NCT became entitled to and received
royalties for any such sale or lease pursuant to the assignment by ANVT to NCT
of the licensor's (or sublicensor's) rights thereunder, or (ii) that period of
time for which complete royalties were paid thereunder prior to the
aforementioned assignment by ANVT to NCT of the licensor's (or sublicensor's)
rights thereunder and for which no payment was actually received by NCT.
Royalties payable by NCT to WEM pursuant to Section 3.05 above shall be
credited to the royalties payable under this Section 3.06 to the extent (but
only to the extent) that the Net Revenues or other amounts referred to in this
Section 3.06 are attributable to the sale or lease of a product, or the grant
of a license or sublicense, for which a royalty is payable by NCT to WEM
pursuant to Section 3.05 above.
** Material for which Confidential Treatment has been requested.
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<PAGE> 23
3.07 Accrual of Royalty Obligations. The
obligation to pay a royalty due under this Agreement in connection with the
sale of a product shall arise upon consummation of the sale in question. The
obligation to pay a royalty due under this Agreement in connection with a
lease, sublicense or license to a third party shall arise upon the receipt by
the royalty obligor of the payment to it under such lease, license or
sublicense agreement to which the royalty relates.
3.08 Royalty Payment Dates. The royalties
described in this Article III shall be paid in arrears on a quarterly basis,
and all royalty payments shall be accompanied by a statement showing the costs
incurred or Net Revenues received, as applicable, and a calculation of the
royalties due for the applicable calendar quarter. Royalty payments shall be
due not later than the thirtieth (30th) day following the end of each calendar
quarter from and after the date of this Agreement.
3.09 Books and Records. WEM and NCT shall have
the right to inspect and audit the relevant books and records of the other, and
each shall cause its Affiliates to also permit the relevant books and records
of each Affiliate to be inspected and audited, upon reasonable advance notice
and during normal business hours for the sole purpose of verifying amounts of
royalties due pursuant to this Agreement; provided, that each party shall have
the right to conduct any such audit and inspection not more often than two
times during each calendar year. The cost of any such audit shall be borne by
the requesting party unless the audit reveals an underpayment of two percent or
more with respect to any specific royalty or with respect to the aggregate
amount of all types of royalties payable by such party for any calendar quarter
or for one year in total, in which case the cost of the audit shall be borne by
the audited party.
3.10 Interest. Any amounts for royalties not paid
when due shall bear interest for each day on which any such amounts remain due
and unpaid at the lesser of (i) an annual rate of four percentage points in
excess of the interest rate identified as the prime rate of interest in the
Wall Street Journal, or (ii) the maximum interest rate permitted by applicable
law.
3.11 Royalty Exceptions. Notwithstanding anything
provided herein to the contrary, a party obligated to pay royalties to the
other party to this Agreement shall not be obligated to pay such royalties to
such other party for, or during, any period during which such other party or an
Affiliate of that other party is in material breach of any provision of the
Transfer Agreement or any other of the Restructuring Agreements. In addition,
no royalties shall be due with respect to any product which, or any license or
any
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<PAGE> 24
sublicense pursuant to which a product is manufactured, sold, leased or used if
the product in question is one which, incorporates or is based only upon (i)
technology covered by the claim of a patent which has expired, (ii) any portion
of the NCT Technology or Improvements, as the case may be, with the exception
of issued patents, which does not continue to constitute confidential and
proprietary information of the licensor thereof as to which the exclusive
rights granted hereunder can be enforced, or (iii) both; provided, that the
foregoing provisions of this sentence shall not apply with respect to, and
during the period that WEM or NCT, as the case may be, continues, in its
capacity as the licensor or sublicensor, to receive revenues pursuant to
licenses or sublicenses granted by such party prior to the expiration of the
patent or patents in question or prior to the time that the enforceability of
the exclusive rights granted hereunder became unenforceable with respect to the
portion of the NCT Technology or the Improvements, as the case may be, in
question. Notwithstanding anything else contained herein, royalties otherwise
due hereunder shall not be payable to the extent expressly provided in the
Support, Research and Development Agreement constituting one of the
Restructuring Agreements.
ARTICLE IV: DELIVERY OF INTELLECTUAL PROPERTY MATERIALS
4.01 Delivery at Closing. Contemporaneously with
the execution of this Agreement, NCT shall deliver or cause to be delivered to
WEM the items identified in SCHEDULE 4.01(a). Not later than 14 days following
the execution of this Agreement, NCT shall deliver or cause to be delivered to
WEM copies of all documents and materials (whether written or in
machine-readable format on magnetic or other media) and things which contain,
set forth, explain or otherwise relate to that part of the NCT Technology
identified in SCHEDULE 4.01(b), and shall deliver to WEM, from time to time
upon request, all such items with respect to any other part of the NCT
Technology. Without limiting the generality of the foregoing, NCT shall
furnish to WEM at the Closing copies of all source codes for all software
included within the NCT Technology identified in SCHEDULES 4.01(a) AND 4.01(b).
4.02 Delivery of Improvements. Contemporaneously
with the delivery of the royalty calculation reports described in Section 3.08,
above, each party hereto shall furnish a written report to the other describing
in reasonable detail all Improvements to the NCT Technology made or caused to
be made by such party or any of its Affiliates during the immediately preceding
calendar quarter or, if none, reciting that no such Improvements have been made
or acquired by such party or its Affiliates during such quarter. With respect
to all Improvements disclosed in each such report, the party submitting the
report shall also deliver to the recipient of the report, as soon as is
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reasonably practicable following a written request, copies of all documents and
materials (whether written or in machine-readable format on magnetic or other
media) and things which contain, set forth, explain or otherwise relate to the
intellectual property comprising each of the Improvements in question
(including without limitation copies of source codes).
ARTICLE V: OTHER COVENANTS
5.01 Restrictions Concerning Exclusive Field. NCT
shall not, and shall not permit its Affiliates or any third parties to, grant
any licenses or sublicenses of the NCT Technology for use in the Exclusive
Field to any third party subsequent to the date of this Agreement. In
addition, with the exception of amendments to economic terms and conditions for
the limited purpose of increasing royalty rates and with the additional
exception of the affirming license agreement between NCT and Arvin Industries,
Inc. more particularly described in SCHEDULE 5.05(b), NCT shall not, and shall
not permit any of its Affiliates or any third party to, amend or alter any of
the ANVT Licenses or any other pre-existing licenses or sublicenses of the NCT
Technology that involve rights within or pertaining to the Exclusive Field.
5.02 Notice of Licenses. NCT shall itself, and
shall cause its Affiliates to, notify WEM in writing at least twenty (20)
business days in advance of granting to any third party any subsequent licenses
or sublicenses of any type with respect to any of the NCT Technology. Such
written notice shall include or be accompanied by a certificate of an officer
of NCT, or other evidence reasonably satisfactory to WEM, reflecting that, and
NCT hereby covenants that, the proposed license or sublicense (i) will not
infringe upon WEM's exclusive rights in the Exclusive Field, (ii) will either
include a grant-back provision to the licensor that will permit WEM and its
Affiliates to use, as a part of the license granted hereunder, all Improvements
made by the licensee or, if such a grant-back provision is not included, that
such proposed license or sublicense will not include any rights to any of the
Improvements described in Section 2.08 above, and (iii) to the extent that any
grant-back provisions will be included in such proposed license or sublicense,
will include provisions of the type described in Section 5.03 below. NCT shall
use its reasonable best efforts to cause any subsequent license or sublicense
(or permitted amendment of any existing license or sublicense) to include a
grant-back provision to the licensor that will permit WEM and its Affiliates to
use, as a part of the license granted hereunder, all Improvements made by the
licensee.
5.03 Third Party Beneficiary. NCT shall cause any
subsequent license or sublicense of the NCT Technology to include a provision
expressly designating WEM as a third
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<PAGE> 26
party beneficiary of the obligations of the licensor and licensee under such
license to ensure WEM's access to Improvements and its ability to enforce the
provisions of Sections 5.01 and 5.02, above.
5.04 Maintenance and Enforcement. NCT shall pay
or cause to be paid when due all maintenance fees and annuities for each of the
patents covering any of the NCT Technology, and shall furnish to WEM, not less
often than quarterly, a report reflecting in reasonable detail the status of
such maintenance fees and annuities payments. NCT shall also take all action
reasonably required to enforce the patents covering the NCT Technology against
infringement by third parties or other challenge (including without limitation
claims of invalidity or unenforceability), and shall promptly furnish WEM with
written notice of any actual or threatened action or proceeding concerning the
same. In addition, NCT shall furnish to WEM, upon request from time to time,
written reports describing in reasonable detail the status of any such matters.
In the event that NCT is unable or otherwise does not intend to (i) pay any
such patent maintenance fees or annuities, or (ii) take any action concerning
any such infringement or other challenge, NCT shall promptly notify WEM to that
effect, which notice shall in any event be given not later than the last day of
such period of time as would allow WEM sufficient time to make any such payment
or take action concerning any such infringement or other challenge prior to the
expiration of any rights to do so. If NCT fails to (i) pay any such patent
maintenance fees or annuities, or (ii) take any action concerning any such
infringement or other challenge, WEM shall have the right, but not the
obligation, to make such payment or to take such action, in its own name or (in
WEM's discretion) in the name and on behalf of NCT, as it deems appropriate to
defend the NCT Technology from such infringement or other challenge, and NCT
shall take all such action, at its own expense, as may be reasonably requested
by WEM to cooperate with such action by WEM.
5.05 Warranties and Representations. NCT hereby
warrants and represents to WEM as follows: (i) NCT is the owner of the NCT
Patents, free and clear of any liens, encumbrances or claims (but subject to the
licenses identified in SCHEDULE 5.05(A), none of which contain any provisions
which could result in a loss of ownership or any impairment of the rights
granted hereunder or of NCT's right to grant the rights hereunder), and except
as otherwise expressly set out in SCHEDULE 5.05(A) hereto, is the owner of the
NCT Technology or possesses nonterminable (except to the extent that any patents
covering such technology are adjudicated to be invalid or unenforceable, and NCT
hereby represents and warrants that it has no knowledge of any pending or
threatened proceedings, or any basis therefor, which could have such result),
perpetual worldwide license
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rights thereto which include the right to grant the license thereto pursuant to
this Agreement, in each case free and clear of any liens, encumbrances or
claims; (ii) SCHEDULE 5.05(b) hereto contains a complete description of each of
the rights of third parties to ANVT Technology with respect to the fields of
application referred to in Section 2.02 above as to which such Section 2.02
recites that WEM is not granted a license hereunder to use ANVT Technology;
(iii) SCHEDULE 5.05(b) hereto contains a complete description of each of the
rights of the third parties referred to in Section 2.04 as constituting
exceptions to the otherwise exclusive rights of WEM granted pursuant to this
Agreement and no other rights have been granted by any of the NCT Parties or,
to the Knowledge of the NCT Parties, upon due inquiry by or on behalf of NCT,
by ANVT which could infringe upon such exclusivity; and (iv) no representation
or warranty made herein by NCT, and no schedule attached hereto, contains any
untrue statement of a material fact or omits to state a material fact or to
include any information necessary to make such representation, warranty or
schedule not misleading or incomplete in light of the circumstances under which
it is made or prepared, as the case may be.
ARTICLE VI: TRADEMARKS, SERVICE MARKS AND TRADE NAMES
6.01 WNCT Marks. NCT hereby agrees that WEM
shall, at all times from and after the date of this Agreement, have the right
to use the Names and Marks of WALKER NOISE CANCELLATION TECHNOLOGIES, WNCT,
WALKER ELECTRONIC SILENCERS, WALKER ELECTRONIC SILENCING and WALKER INDUSTRIAL
SILENCERS in connection with its business and products which incorporate the
NCT Technology. NCT hereby agrees that it shall not oppose or object to WEM's
use or registration of the aforesaid names or marks. In addition, NCT shall
cause such of its Affiliates as may be designated by WEM from time to time to
execute, either contemporaneously with NCT's execution of this Agreement or
thereafter, an acknowledgment in form reasonably satisfactory to WEM confirming
the rights of WEM under this Section 6.01 and Section 6.02 below.
6.02 CPH Marks. NCT hereby acknowledges and
agrees that pursuant to a separate license agreement of even date between CPH
and WEM (the "CPH License"), WEM shall have the right to use the names and
marks of Chaplin Patents Holding Co., Inc. (the "CPH Marks") in connection with
its business and products which incorporate technology licensed to WEM under
such other license agreement. NCT hereby agrees that it shall not oppose or
object to WEM's use of the CPH Marks.
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ARTICLE VII: CONFIDENTIALITY
7.01 Confidentiality Covenants. Except as
expressly otherwise provided herein, each of the parties agrees that it shall
not disclose, nor shall it induce or permit others to disclose, to any third
party any of the terms and conditions of this Agreement or information learned
in course of inspecting the books and records of the other party or pertaining
to any intellectual property or other technology licensed to it by the other
party hereto; provided, that such information may be disclosed to the extent
necessary to give effect to any license or sublicense contemplated or otherwise
permitted by this Agreement. Each party shall, prior to disclosing any such
information in accordance with this Section 7.01, cause each person or entity
given access to such information to enter into a binding and enforceable
agreement pursuant to which the recipient of such information agrees to be
bound by the covenants of this Article VII for the benefit of the licensor (or
sublicensor, as the case may be) and for the benefit of WEM or NCT (whichever
is not the licensor or sublicensor in question, as the case may be).
Notwithstanding anything provided herein to the contrary, the covenants
restricting disclosure set forth in this Section 7.01 shall not apply with
respect to information or other items that the recipient thereof can show (i)
was known or becomes known to the general public without disclosure by such
recipient (or any Affiliate of such recipient), (ii) was already known by the
recipient thereof before its disclosure by a party hereto, or (iii) was legally
acquired by the recipient thereof from another party and in good faith,
provided that such disclosure by the other party was not a breach of any
agreement or in derogation of any confidential relationship between such other
party and any other party hereto. In addition, and notwithstanding the
foregoing, if legal counsel for either NCT, WEM or any of their respective
Affiliates is of the opinion that a statement, announcement or filing involving
the disclosure of any of the terms or conditions hereof is required by law or
regulation or by the rules of any stock exchange on which its securities are
traded, then such entity may issue a statement or announcement or make a
filing, in each instance limited solely to that which legal counsel for such
party advises is required under law or such rules. A party as to which any
such statement, announcement or filing is proposed on its own behalf or on
behalf of an Affiliate thereof shall provide a copy thereof to the other party
for its prior review, and shall use its reasonable best efforts to cause any
such filing to be accomplished on a basis that includes the redaction of all
economic terms and conditions (including without limitation the amounts of
royalties) and any other terms and conditions as to which redaction is
reasonably requested by such other party, and shall cooperate with and permit
such other party to participate in the process of seeking such redaction.
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ARTICLE VIII: INDEMNIFICATION
8.01 Indemnification by NCT. NCT hereby agrees to
indemnify and to hold WEM and its Affiliates, and the officers, directors,
shareholders, agents and employees of each of them (collectively the "WEM
Indemnitees" and singly a "WEM Indemnitee") harmless from and against any and
all liability, loss, damage or injury, together with all reasonable costs and
expenses relating thereto (including but not limited to legal and accounting
fees) arising out of or resulting from any claim which is asserted against any
of the WEM Indemnitees which includes any allegation of any product liability
claim concerning design based upon any defective design of the NCT Technology
(except with respect to but only to the extent of, allegations of defective
design pertaining only to Improvements made by or on behalf of WEM other than
those made on behalf of WEM by NCT).
8.02 Indemnification by WEM. WEM hereby agrees to
indemnify and hold NCT, its Affiliates, and the shareholders, directors,
officers, employees and agents of each of them (collectively the "NCT
Indemnitees" and singly a "NCT Indemnitee") harmless from and against any and
all liability, loss, damage or injury, together with all reasonable costs and
expenses relating thereto (including but not limited to legal and accounting
fees) arising out of or resulting from any claim which is asserted against any
of the NCT Indemnitees involving any allegation of any products liability in
connection with a product manufactured by or on behalf of WEM or any of its
Affiliates which incorporated any of the NCT Technology; provided that with
respect to any such product which incorporates any of the NCT Technology, the
obligation to provide indemnification under this Section 8.02 shall not apply
to the extent that such claim includes or is asserted in connection with any
allegation of defective design in the NCT Technology (except with respect to
but only to the extent of, allegations of defective design pertaining only to
Improvements made by or on behalf of WEM other than those made on behalf of WEM
by NCT).
8.03 Control of Contest. For purposes of this
Section 8, the party entitled to indemnification is referred to as the
"Indemnitee" and the party obligated to provide indemnification is referred to
as the "Indemnitor." The Indemnitor shall have the right, at its own expense,
to control any claim or matter as to which such Indemnitor is obligated to
provide indemnification pursuant to any provision of this Agreement. This
shall include the right to designate the attorneys and other professionals who
shall defend or pursue any such claim or matter and to make the decision
whether to pursue any such claim or matter to a judgment, to settle any such
claim or matter, or to agree to any such claim or matter without any contest
thereof; provided, that (i) the Indemnitor shall obtain the prior
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approval of the Indemnitee(s) to legal counsel engaged to defend or pursue any
such claim or matter, which approval shall not be unreasonably withheld, and
(ii) no Indemnitor shall have the right to agree to settle any claim or matter
in a manner that would adversely affect the interest of any Indemnitee without
the written consent of the adversely affected Indemnitee or Indemnitees, as the
case may be, which consent shall not be unreasonably withheld. From and after
the date on which the Indemnitor assumes control of the defense of any manner
as to which indemnification is required hereunder, the Indemnitor shall not be
obligated to pay any attorneys' fees incurred by the Indemnitee(s) for
additional counsel retained directly by the Indemnitee(s) without the consent
of the Indemnitor; provided, that in the event that any Indemnitor is unable or
unwilling to satisfy its indemnification obligation hereunder, the
Indemnitee(s) shall be entitled to engage at that Indemnitor's expense the
attorneys and other professionals who shall defend or pursue such claim or
matter and shall also be entitled to make any decision whether to defend,
pursue or settle such claim or matter.
8.04 Notice and Cooperation. The Indemnitee shall
promptly notify the Indemnitor upon learning of any claim or matter as to which
indemnification is required pursuant to this Section 8; provided, that the
failure to provide any such notice to an Indemnitor shall not relieve that
Indemnitor of its obligations with respect to the subject matter of any such
indemnification, except to the extent and only to the extent that the Indemnitor
suffers prejudice as a result of such failure. Each Indemnitee shall, without
compensation, afford such reasonable cooperation as may be requested by the
Indemnitor in the defense, pursuit or settlement of any claim or matter as to
which indemnification is required hereunder, including without limitation by
making available to the Indemnitor all pertinent non-privileged information and
non-privileged documents under the control of the Indemnitee.
ARTICLE IX: GENERAL PROVISIONS
9.01 Equitable Relief; Specific Performance. Each
party hereto acknowledges that with the exception of covenants which provide
only for the payment of money, a violation of any of the covenants contained in
this Agreement may cause irreparable damage to the other for which damages or
other monetary relief may be inadequate. Accordingly, each party hereto agrees
that in the event of a breach by it of any of the covenants contained in this
Agreement (other than covenants providing only for the payment of money), the
other party shall, in addition to all other available remedies, have the right
to obtain specific performance or such other injunctive relief or other
equitable relief from a
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court of competent jurisdiction as may be necessary or appropriate.
9.02 Further Assurances. The parties hereto agree
to execute all documents and do all of those things reasonably necessary to
give effect to the terms and intent of this license agreement.
9.03 Entire Agreement. Except as provided in the
Transfer Agreement, this Agreement and the schedules attached hereto constitute
the entire agreement of the parties hereto with respect to the subject matter
hereof and supersede all prior agreements, arrangements and communications of
the parties dealing with such subject matter, whether oral or written. No
other promise, agreement, understanding, or representation will be binding
unless made in writing and signed by the parties hereto. All amendments to
this Agreement must be in writing and signed by all of the parties hereto.
9.04 Governing Law. This Agreement and the rights
and obligations of the parties hereto shall be governed by and construed in
accordance with the internal laws of the State of Delaware, without giving
affect to the conflicts of law principles thereof, in every respect, including
but not limited to validity, interpretation and performance, notwithstanding
that one or more of the parties to this Agreement may now be or hereafter
become domiciled in or a resident of another state or a foreign country.
9.05 Non-Exclusive Forum. The parties hereto
agree that the state court located in Cook County, Illinois and the Federal
District Court for the Northern District of Illinois located in Chicago,
Illinois shall each have non-exclusive jurisdiction to adjudicate any dispute
between the parties hereto which arises out of or in connection with this
Agreement.
9.06 Relationship of Parties. Nothing provided in
this Agreement or in the schedules attached hereto shall be deemed to create
any relationship between the parties of employment, agency, partnership or
joint venture.
9.07 Severability. In the event that any
provision of this Agreement is held illegal or invalid for any reason, such
illegality or invalidity shall at the option of the party against whom the same
is asserted not affect the remaining parts of this Agreement, but this
Agreement shall be construed and enforced as if that illegal and invalid
provision had never been inserted herein.
9.08 Notices. All notices and other
communications under this Agreement shall be in writing and may be given by any
of the following methods: (a) personal
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delivery; (b) facsimile transmission; (c) registered or certified mail, postage
prepaid, return receipt requested; or (d) overnight delivery service. Notices
shall be sent to the appropriate party at its address or facsimile number given
below (or at such other address or facsimile number for such party as shall be
specified by notice given hereunder):
If to WEM:
Walker Electronic
Mufflers, Inc.
Attention: President
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
with a copy to:
Virginia L. Kearns
General Counsel
Tenneco Automotive
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
If to NCT:
Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636-5989
Attention: President
All such notices and communications shall be deemed received upon the earlier
of (a) actual receipt thereof by the addressee, or (b) actual delivery thereof
to the appropriate address, or (c) in the case of a facsimile transmission,
upon transmission thereof by the sender and issuance by the transmitting
machine of a confirmation slip confirming that the number of pages constituting
the notice have been transmitted without error. In the case of notices sent by
facsimile transmission, the sender shall contemporaneously mail a copy of the
notice to the addressee at the address provided for above. However, such
mailing shall in no way alter the time at which the facsimile notice is deemed
received.
9.09 Captions. Section headings and numbers
herein are included for convenience of reference only, and if there shall be
any conflict between any such numbers and headings and the text of this
Agreement, the text shall control.
9.10 Waiver. The failure (with or without intent)
of any party to insist upon the strict performance by
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any other party of any provision of this Agreement shall not be deemed to
constitute a modification of any of the provisions hereof, or a waiver of the
right to insist at any time thereafter upon performance strictly in accordance
with the provisions of this Agreement. No waiver of any term, condition or
provision shall operate as a waiver of any other term, condition or provision
of the Agreement, and no waiver of any term, condition or provision shall
operate as a continuing waiver.
9.11 Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be considered an original, and
all of which taken together shall constitute one and the same instrument.
9.12 No Assignment. Except as otherwise expressly
provided herein, no party may assign or delegate any of the benefits or duties
under this Agreement without the prior written consent of the other party.
Either of the parties may assign or delegate its benefits and duties under this
Agreement in connection with a transfer of all or substantially all assets of
the party which seeks to effect such assignment or in connection with a merger
or consolidation of that party with another entity. In addition, WEM shall
have the right to assign its benefits and duties under this Agreement to an
Affiliate of WEM.
9.13 Binding Effect. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
legal representatives, heirs (if any), permitted transferees, successors and
assigns, including any entity with which any party may merge or consolidate or
to which
[This space intentionally left blank]
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<PAGE> 34
it may transfer substantially all of its assets.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective duly authorized representatives on
the date first written above.
NOISE CANCELLATION
TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella
-------------------------
Its President
-------------------------
WALKER ELECTRONIC MUFFLERS, INC.
By: /s/ Lyle S. Lohmeyer
-------------------------
Its Vice President
-------------------------
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01.02 ANVT Licenses
Schedule 1.01.03 ANVT Patents
Schedule 1.01.15 NCT Patents
Schedule 2.02 Patents Subject to Lotus
Agreement
Schedule 4.01(a) NCT Technology Closing
Delivery
Schedule 4.01(b) NCT Technology
Post-Closing Delivery
Schedule 5.05(a) Ownership Disclosures
Schedule 5.05(b) Third Party Rights
</TABLE>
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<PAGE> 1
EXHIBIT 10(l)(6)
SUPPORT, RESEARCH AND DEVELOPMENT AGREEMENT
DATED NOVEMBER 15, 1995
AMONG
WALKER ELECTRONIC MUFFLERS, INC.,
A DELAWARE CORPORATION ("WEM"),
NOISE CANCELLATION TECHNOLOGIES, INC.,
A DELAWARE CORPORATION ("NCT"),
NCT MUFFLER, INC., A DELAWARE CORPORATION,
AND
CHAPLIN PATENTS HOLDING CO., INC.,
A DELAWARE CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Current Development Activities . . . . . . . . . . . . . . . . . . . . . . 2
1.03 Development Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.04 Development Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.05 Development Technology . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.06 Future Development Activities . . . . . . . . . . . . . . . . . . . . . . . 2
1.07 License Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.08 Licensed Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.09 NCT Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Support Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 WEM Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II SPECIFIC DEVELOPMENT AND SUPPORT SERVICE . . . . . . . . . . . . . . . . . 3
2.01 Current Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.02 Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.03 Speaker Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.04 Computer Access and Option . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III FUTURE RESEARCH AND DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . 5
3.01 Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.02 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.03 Amendment or Termination of Future
Development Services . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
ARTICLE IV GENERAL DEVELOPMENT COVENANTS . . . . . . . . . . . . . . . . . . . . . . 6
4.01 Inspection and Participation . . . . . . . . . . . . . . . . . . . . . . . 6
4.02 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.03 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.04 Patent Application Activities . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.01 Confidentiality Covenants . . . . . . . . . . . . . . . . . . . . . . . . 7
5.02 Return and Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . 8
5.03 Designation 8
5.04 Equitable Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VI FUTURE EMPLOYEE ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . 9
6.01 Employment Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.02 Use of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.03 Equitable Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE VII CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.01 Indemnification by NCT Parties . . . . . . . . . . . . . . . . . . . . . 10
7.02 Indemnification by WEM . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.03 Control of Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.04 Notice and Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.05 Joint and Several Obligations . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VIII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.01 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.02 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.03 Non-Exclusive Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.04 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.05 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.06 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.07 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.09 Assignment Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.10 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.11 Equitable Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<PAGE> 3
LIST OF SCHEDULES
<TABLE>
<S> <C>
Schedule 1.02 Description of Current
Development Activities
Schedule 3.01 Description of Future
Development Activities
Schedule 3.02 NCT Hourly Rates
Exhbit 4.05 S. A. Boet Release
</TABLE>
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<PAGE> 4
SUPPORT, RESEARCH AND DEVELOPMENT AGREEMENT
This Agreement is made and entered into this 15th day of
November, 1995, by and among Walker Electronic Mufflers, Inc., a Delaware
corporation ("WEM"), on the one hand, and Noise Cancellation Technologies,
Inc., a Delaware corporation ("NCT"), NCT Muffler, Inc., a Delaware corporation
("NCT-M"), and Chaplin Patents Holding Co., Inc., a Delaware corporation ("CPH"
and together with NCT and NCT-M, collectively the "NCT Parties" and singly an
"NCT Party").
INTRODUCTION
WEM, Walker Manufacturing Company and the NCT Parties entered
into a Transfer Agreement of even date (the "Transfer Agreement") pursuant to
which WEM and the NCT Parties agreed to enter into an agreement relating to
certain support, research and development activities. This Agreement sets
forth the agreements and understandings of the parties concerning such support,
research and development activities and has been entered into pursuant to the
aforementioned Transfer Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and understandings set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
ARTICLE I -- DEFINITIONS
Except to the extent of any inconsistency with any definition
expressly set forth in this Agreement, capitalized terms used in this Agreement
shall have the same meaning as is ascribed to them in the Transfer Agreement.
As used herein, the following terms shall have the meanings ascribed to them:
1.01 Confidential Information. The term "Confidential
Information" means information, including but not limited to all technical and
non-technical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data and lists of actual
and potential customers or suppliers, that (i) is sufficiently secret as to
derive actual or potential economic value from not being generally known to
others who could obtain economic value from its disclosure or use, and (ii) is
and has been the subject of efforts that are reasonable under the circumstances
to maintain its secrecy or confidentiality. Notwithstanding the foregoing, the
term "Confidential Information" shall not include information that the
recipient thereof can show (i) was known or becomes known to the general public
without disclosure by such recipient (or any Affiliate of such recipient), (ii)
was already known by the
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<PAGE> 5
recipient thereof before its disclosure by another party hereto, or (iii) was
legally acquired by the recipient thereof from another party and in good faith,
provided that such disclosure by the other party was not in breach of any
agreement or in derogation of any confidential relationship between such other
party and any other party hereto.
1.02 Current Development Activities. The term "Current
Development Activities" means collectively the research and other activities
needed to complete the development of the software algorithms described in the
attached SCHEDULE 1.02 and to undertake and complete the other tasks described
in the attached SCHEDULE 1.02.
1.03 Development Activities. The term "Development
Activities" refers to any of the research and other activities comprising any
of the Current Development Activities and any of the Future Development
Activities.
1.04 Development Period. The term "Development Period" means
the period commencing on (and including) the date of this Agreement and ending
on (and including) the second anniversary of this Agreement.
1.05 Development Technology. The term "Development
Technology" refers to any of the intellectual property or other forms of
technology resulting from any of the Development Activities, including without
limitation all data (whether printed or unprinted, and whether tangible or
intangible), expertise, trade secrets, patentable and unpatentable inventions,
patents, applications for patents, copyrights (whether registered or
unregistered), designs, models, prototypes, specifications, and methods of
production or manufacture.
1.06 Future Development Activities. The term "Future
Development Activities" has the meaning ascribed to it in Section 3.01 below;
provided, notwithstanding anything provided herein to the contrary, the Future
Development Activities shall not include any of the Current Development
Activities or any of the Support Services.
1.07 License Agreements. The term "License Agreements" means
collectively the License Agreement of even date between WEM and CPH and the
License Agreement of even date between WEM and NCT.
1.08 Licensed Technology. The term "Licensed Technology"
refers collectively to the intellectual property and other items comprising the
CPH Technology and the NCT Technology as defined in the respective License
Agreements.
1.09 NCT Indemnitees. The term "NCT Indemnitees" shall have
the meaning ascribed to it in Section 7.02 below.
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<PAGE> 6
1.10 Support Period. The term "Support Period" means the
period commencing on (and including) the date of this Agreement and ending on
(and including) the first anniversary of this Agreement.
1.11 WEM Indemnitees. The term "WEM Indemnitees" shall have
the meaning ascribed to it in Section 7.01 below.
ARTICLE II -- SPECIFIC DEVELOPMENT AND SUPPORT SERVICES
2.01 Current Undertaking. Subject to the terms and
conditions of this Agreement, the NCT Parties shall at their own expense
efficiently and diligently carry out and perform the Current Development
Activities for the benefit of WEM. The NCT Parties shall complete, or cause to
be completed, each of the Current Development Activities not later than the
completion deadline assigned to each such task as more particularly described
in the attached SCHEDULE 1.02. Notwithstanding the foregoing, WEM shall
advance to NCT in response to and on the basis of invoices and detailed
supporting documents reasonably satisfactory to WEM, issued monthly in arrears
by NCT, the amount of the expenses incurred by NCT to accomplish such of the
Current Development Activities comprising the completion of the software
(including without limitation the algorithms thereof) commonly referred to by
the parties hereto as the CSH Code and the CSID Code (including without
limitation such modifications thereto as are necessary to permit the same to
fulfill its function in connection with Electronic Mufflers attached to a dual
exhaust system). WEM shall have the right at all times to terminate any or all
of the Current Development Activities. The NCT Parties hereby agree that an
amount equal to one half of all royalties payable by WEM (or any Affiliate
thereof) under each of the License Agreements shall be credited to the amount
of the expenses advanced by WEM pursuant to this Section 2.01, and that WEM
shall accordingly be obligated to pay to the licensor under the License
Agreement to which the royalties in question are due only one half of the
applicable royalties, until the aggregate amount of such advances has been
recouped by WEM.
2.02 Support. During the Support Period, the NCT Parties
shall at no additional expense to WEM make available, or cause to be made
available, to WEM for advisory and consulting services the employees of any of
the NCT Parties who possess any knowledge or professional capabilities
concerning the Development Technology or the Licensed Technology. The advisory
and consulting services described in this Section 2.02, which shall include
without limitation consultation to explain various aspects of the Development
Technology and the Licensed Technology or to otherwise address problems
encountered by WEM in using the Development Technology or the Licensed
Technology, are hereinafter referred to as the "Support Services." The Support
Services
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<PAGE> 7
shall not exceed 20 hours in the aggregate during each calendar month (or
portion thereof) during the Support Period) and shall not exceed 240 hours in
the aggregate during the Support Period. The time devoted by each person
furnishing any Support Services shall be taken into account in determining the
hours of Support Services provided. The Support Services shall be provided
promptly in response to each request by WEM and shall be rendered on normal
business days between the hours of 9:00 a.m. (EDT) and 5:00 p.m. (EDT). To the
extent reasonably practicable, the Support Services may be provided by
telephone, telecopier, mail or courier service; provided, that the Support
Services shall be provided in person at the offices of the NCT Party providing
the Support Services in question upon a request by WEM for the same submitted
not less than 72 hours in advance.
2.03 ** Upon request from time to time by WEM, NCT shall accept
deliveries from WEM, F.O.B. NCT's facility in Linthicum, Maryland, of **
comprising part of the Inventory acquired by WEM pursuant to the Transfer
Agreement and shall, not later than 20 business days following each such
delivery and at the expense of NCT, ** to WEM, F.O.B. NCT's facility in
Linthicum, Maryland. For purposes of this Section 2.03, the obligation to **
2.04 Computer Access and Option. For a period of four (4)
years from and after the Closing Date, NCT shall permit WEM to have, at no
expense, access to and to use at NCT's facility in Linthicum, Maryland during
the hours of 9:00 a.m. through 6:00 p.m. on Monday through Friday of each week,
NCT's Silicon Graphics Computer and all related hardware and software owned or
leased by NCT or as to which NCT possesses license rights (including without
limitation in such hardware the processing unit or units, monitor, tape deck
and printer); provided, that WEM's use of such equipment shall be limited to 6
hours in the aggregate during each such day of access. During the
aforementioned period of access, NCT shall maintain such computer equipment and
software (including without limitation the ANSYS software) to which WEM shall
have access under this Section 2.04 in constant operating condition, subject to
(i) ordinary scheduled maintenance or emergency maintenance or repairs, and
(ii) "down time" due to causes beyond the reasonable control of NCT. In
addition, NCT shall furnish without charge such technical support (including
consultation with technicians) as may be reasonably requested by WEM to permit
WEM to make full and effective use of its access to and use of such computer
equipment and software provided under this Section
** Material for which confidential treatment has been requested
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<PAGE> 8
2.04. Information of either party disclosed to the other in connection with
the access and use of computer equipment provided under this Section 2.04 shall
be treated as Confidential Information. NCT hereby grants to Walker an option
to purchase the aforementioned computer equipment and software (or, with
respect to software, NCT's rights therein) to which access and use is granted
under this Section 2.04, which option may be exercised by written notice from
WEM to NCT within 45 days following the date on which NCT gives notice to WEM
of NCT's bona fide intention to move such computer equipment (or any part
thereof) to a different location or to otherwise dispose of such equipment,
which notice shall be given not less than 20 days prior to any such movement or
other disposition. In the event that WEM elects to exercise the option
provided hereunder, the purchase price for such equipment and software shall be
the lesser of (i) NCT's net book value at time of purchase or (ii) the fair
market value of such items. If the parties are unable to agree upon the fair
market value of such items, each party shall prepare a list of three commercial
appraisers having experience in the appraisal of such items. Any appraiser
which appears on both lists shall be engaged by the parties to determine the
fair market value of such items; provided, that if more than one appraiser
appears on both lists, the appraiser which occupies the highest order of
preference on the lists shall be engaged. If no appraiser appears on either
list, the two appraisers identified as the respective first choices of each
party shall be engaged to select a third appraiser who shall in turn determine
the fair market value of the items in question. The fees of the appraiser or
appraisers, as the case may be, shall be borne equally by the parties. NCT
shall deliver such documents and take such other action as is reasonably
requested by WEM to effectively transfer such items to WEM, free and clear of
all liens, encumbrances or other rights.
ARTICLE III -- FUTURE RESEARCH AND DEVELOPMENT
3.01 Future Research. During the Development Period, NCT
shall, with respect to requests by WEM for Future Development Activities which
NCT elects to accept, use its best efforts to complete the development,
enhancement or modification of software algorithms which may be described in
the attached SCHEDULE 3.01 or to undertake and complete the other tasks which
may be described in the attached SCHEDULE 3.01, all of which may be set forth
from time to time in such SCHEDULE 3.01 by WEM and NCT to reflect written
requests for research and development submitted by WEM to NCT from time to time
during the Development Period and which NCT has elected to undertake. The
research and other activities to be fulfilled by NCT upon its acceptance and
undertaking in response to such requests by WEM pursuant to this Section 3 are
hereinafter collectively referred to as the "Future Development Activities."
The Future Development Activities
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<PAGE> 9
shall be limited to matters pertaining to development, enhancement or
modification of the Development Technology or the Licensed Technology. Nothing
provided herein shall obligate WEM to request NCT to perform any Future
Development Activities or to obligate NCT to accept any such request.
3.02 Payment. With respect to each month during which any
Future Development Activities are conducted, NCT shall issue an invoice to WEM
monthly setting forth in detail the nature of the Future Development Activities
conducted, the identity of the person or persons engaged in providing such
Future Development Services, the number of hours during which each such person
was actually engaged in providing such Future Development Services, and the
hourly rate for each such person, as determined by reference to the employment
position of the person in question. The aforementioned hourly rates shall be
determined in accordance with the table of rates set forth in the attached
SCHEDULE 3.02. In addition, each invoice shall set forth in detail each item
of out-of-pocket expense incurred by NCT in obtaining supplies specifically
dedicated and used for fulfilling the Future Development Services during the
preceding month; provided, that without limiting the generality of the
foregoing, "out of pocket expenses" shall not include (i) any item of overhead
ordinarily incurred by NCT; or (ii) any items, whether singly or in the
aggregate, in excess of $250.00 which were not approved in advance by WEM.
Notwithstanding anything provided herein to the contrary, NCT shall not
perform, and shall not be entitled to compensation for, any Future Development
Activities that would cause the amount of any monthly invoice to exceed any
maximum amount which may be identified by WEM when submitting or amending any
request for Future Development Activities. WEM shall pay or cause to be paid
each of the aforementioned invoices not later than 45 days following receipt of
each invoice by WEM; provided, that WEM shall be obligated to pay each invoice
not later than 30 days following receipt thereof if NCT submits to WEM with
such invoice an offer in conspicuous written form to accept a discounted
payment of ninety-seven percent (97%) in satisfaction thereof.
3.03 Amendment or Termination of Future Development Services.
WEM shall have the right at all times to amend the scope of, or to terminate,
any or all of the Future Development Activities by giving written notice to
NCT, which notice shall describe in reasonable detail the amendment or
termination in question. An amendment or termination of Future Development
Activities shall not affect any rights or obligations of a party pertaining to
any period prior to such amendment or termination.
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<PAGE> 10
ARTICLE IV -- OTHER COVENANTS
4.01 Inspection and Participation. WEM shall have the right
to have its representatives inspect all documents and workpapers of NCT
relating to any of the Development Activities, and to discuss the same with the
representatives of NCT involved in the Development Activities, during normal
business hours. NCT shall also permit representatives of WEM to participate,
at the expense of WEM, in any of the Development Activities and NCT shall cause
its officers, directors and employees to afford all cooperation reasonably
requested by WEM in connection with any such participation.
4.02 Reports. With respect to each calendar month during
which any Development Activities are conducted by NCT, NCT shall furnish a
written report to WEM describing in detail the nature of the Development
Activities and the progress accomplished with respect to the same. Without
limiting the generality of the foregoing, each such report shall include copies
of all materials (whether in written, magnetic or other form) which set forth,
explain or otherwise reflect the Development Activities in question. To the
extent that the Development Activities in question involved any changes to
software, NCT shall deliver to WEM the source code for such software (as
changed) with each such monthly report.
4.03 Ownership. Except as otherwise expressly provided in
this Section 4.03, WEM shall be the owner of the Development Technology. WEM
hereby acknowledges that to the extent that any of the Development Technology
owned by WEM constitutes an Improvement (as such term is defined and used in
the License Agreements) made or invented, or caused to be made or invented by
WEM or its Affiliates, it shall be subject to the provisions of Section 2.08 of
each of the License Agreements. To the extent that any of the Development
Technology results from Current Development Activities pertaining to the
Licensed Technology, that portion of the Development Technology shall
constitute part of the Licensed Technology and the use of the same shall be
subject to the License Agreement which governs the Licensed Technology involved
in the Current Development Activities in question. NCT shall itself, and shall
cause such of its directors, shareholders, officers, employees and agents as
may be reasonably designated by WEM to, (i) execute and deliver to WEM such
instruments of assignment or other documents as may be requested by WEM from
time to time to transfer to and confirm in WEM ownership of the Development
Technology to which WEM is entitled in accordance with the first two sentences
of this Section 4.04, and (ii) at the expense of WEM, to prosecute or to
cooperate in the prosecution of any application for such patents, copyrights or
other forms of registration which WEM may determine should
-7-
<PAGE> 11
be accomplished in connection with any of the Development Technology owned by
WEM.
4.04 Patent Application Activities. NCT shall, at its own
expense, take or cause to be taken all action reasonably necessary and
appropriate to endeavor to complete and effect the registration and issuance of
the patents which are the subject of all pending patent applications of any of
the NCT Parties and which pertain to any of the activities of WNCT carried on
prior to the date hereof. WEM shall, at its own expense, cooperate with NCT in
such endeavors by furnishing any information which WEM may have specifically
pertaining to the subject of any of such patent applications.
4.05 Boet System Actif. The parties hereto hereby
acknowledge that each of them has approved the termination of the joint venture
formed between S.A. Andre Boet and NCT known as Boet System Actif. The NCT
Parties jointly and severally warrant and represent that (i) all parties to the
Boet System Actif joint venture have agreed to terminate such joint venture
without liability on the part of any Person and to evidence such agreement,
S.A. Andre Boet has executed and delivered to the NCT Parties a release, which
also runs in favor of WEM and Walker Manufacturing Company, a division of
Tennessee Gas Pipeline Company, a copy of which is attached hereto as EXHIBIT
4.05, and (ii) none of the NCT Parties has entered into or contemplates
entering into any other agreement or arrangement with S.A. Andre Boet or any
Affiliate of S.A. Andre Boet. The NCT Parties agree to take, or use their
reasonable best efforts to cause to be taken, all action needed to cause the
termination of the Boet System Actif joint venture to be completed and effected
in accordance with the requirements of all applicable laws, rules and
regulations of the governmental entities having jurisdiction as soon as
reasonably practicable. Without limiting the generality of the foregoing, the
NCT Parties jointly and severally covenant, warrant and represent that neither
WNCT nor WEM or any Affiliate of either of them has any liability or obligation
concerning or arising in connection with Boet System Actif.
ARTICLE V -- CONFIDENTIALITY
5.01 Confidentiality Covenants. Except as otherwise
permitted pursuant to the License Agreements, each of WEM and the NCT Parties
agrees that it shall not, except in accordance with this Section 5.01 or as
otherwise directed by WEM (with respect to Confidential Information of WEM) or
one of the NCT Parties (with respect to Confidential Information of the NCT
Party in question) in writing, disclose any of the terms or conditions of this
Agreement or any Confidential Information to any person or entity. Each of the
NCT Parties hereby covenants that it shall not use, nor shall it induce or
permit others to use, any of the
-8-
<PAGE> 12
Confidential Information of WEM for any purpose other than to furnish the
Support Services or to conduct the Current Development Activities or any Future
Development Activities. WEM hereby covenants that it shall not use, nor shall
it induce or permit others to use, any of the Confidential Information of any
of the NCT Parties for any purpose other than to engage in the activities
contemplated and permitted by the License Agreements. Without limiting the
generality of Section 8.09 below, except as otherwise provided in the License
Agreements, each of WEM and the NCT Parties shall, prior to using or disclosing
Confidential Information in accordance with this Section 5, cause each person
or entity given access to such Confidential Information to execute a Secrecy
Agreement in form and substance reasonably satisfactory to the entity which is
the owner of the Confidential Information in question. In addition, and
notwithstanding the foregoing, if legal counsel for either WEM or any of the
NCT Parties or any of their respective Affiliates is of the opinion that a
statement, announcement or filing involving the disclosure of any of the terms
or conditions hereof is required by law or regulation or by the rules of any
stock exchange on which its securities are traded, then such entity may issue a
statement or announcement or make a filing, in each instance limited solely to
that which legal counsel for such party advises is required under law or such
rules. A party as to which any such statement, announcement or filing is
proposed on its own behalf or on behalf of an Affiliate thereof shall provide a
copy thereof to the other party for its prior review, and shall use its
reasonable best efforts to cause any such filing to be accomplished on a basis
that includes the redaction of all economic terms and conditions (including
without limitation the amounts of royalties) and any other information, terms
or conditions as to which redaction is reasonably requested by such other
party, and shall cooperate with and permit such other party to participate in
the process of seeking such redaction.
5.02 Return and Acknowledgment. Except to the extent
otherwise provided in the License Agreements, each of the NCT Parties shall
upon the request of WEM immediately return to WEM without retaining copies
thereof all documents and other items reflecting, containing or revealing any
of WEM's Confidential Information. Each of the NCT Parties acknowledges that
by its receipt of Confidential Information of WEM, it is not acquiring any
right, title and interest in that Confidential Information or in any copyright,
patent or trade secret rights to or revealed by it.
5.03 Designation. Any Confidential Information disclosed
pursuant to this Agreement which is embodied and written or in any other
tangible form shall be clearly marked "Confidential."
-9-
<PAGE> 13
5.04 Equitable Remedies. The NCT Parties each acknowledge
that a violation of the covenants contained in this Section 5 may cause
irreparable damage to WEM for which other remedies may be inadequate.
Accordingly, each of the NCT Parties agrees that, in the event of a breach by
any of them of any of the covenants contained in this Section 5, WEM shall (in
addition to other available remedies) have the right to obtain such injunctive
or other relief from a court of competent jurisdiction as may be necessary or
appropriate.
ARTICLE VI -- FUTURE EMPLOYEE ARRANGEMENTS
6.01 Employment Opportunities. The NCT Parties hereby
acknowledge that WEM shall have the right to employ (or to engage as an
independent contractor) any employee or former employee of any of the NCT
Parties (or any Affiliates thereof) following a termination of the employee's
employment by the NCT Party (or its Affiliate) in question. Each of the NCT
Parties shall, as soon as is reasonably practicable following the execution of
this Agreement, modify any confidentiality or other restrictive covenants in
favor of the NCT Party in question such that these covenants would not bar the
employees of such NCT Party from employment with WEM (or any Affiliate of WEM)
or from using or disclosing to WEM (or any Affiliate of WEM) knowledge gained
while employed by the NCT Party to the extent that this knowledge pertains to
the Support Services, the Licensed Technology or the Development Technology.
In addition, each of the NCT Parties hereby acknowledges and agrees that it
shall not, prior to any such modification, seek to enforce any such restrictive
covenants in connection with the employment by WEM of any such current or
former employee of any of the NCT Parties and shall, upon request by WEM,
promptly effect the same modification of any confidentiality or other
restrictive covenants in favor of an NCT Party to which any former employee of
any NCT Party is bound.
6.02 Use of Information. In the event that WEM employs any
former employee of an NCT Party, WEM shall use its reasonable best efforts to
cause the employee to identify all Confidential Information of the NCT Party
which is disclosed to WEM by such employee in accordance with Section 6.01
above. Subject to this Agreement, WEM shall have the right to use such
Confidential Information; provided, that except as otherwise provided in the
License Agreements, WEM hereby agrees that it shall use any such Confidential
Information of an NCT Party only for purposes of activities related to the
Licensed Technology or the Development Technology, and that it shall not induce
or permit others to use any of such Confidential Information for any other
purpose. Except as otherwise provided in the License Agreements, WEM further
agrees that it shall not reveal, nor permit or induce others to reveal, any of
the Confidential Information of an NCT Party to any other person or entity
-10-
<PAGE> 14
except those who have a need to know that information to fulfill the purposes
for which WEM may use such Confidential Information; provided, that prior to
any such limited disclosure, WEM shall obtain from each person or entity given
access to such Confidential Information an executed Secrecy Agreement in form
and substance reasonably satisfactory to the NCT Party from which the
Confidential Information was derived.
6.03 Equitable Relief. WEM acknowledges that a violation of
the covenants of WEM contained in this Section 6 may cause irreparable damage
to one or more of the NCT Parties for which other remedies may be inadequate.
Accordingly, WEM agrees that, in the event of a breach by WEM of any of the
covenants made in this Section 6, the NCT Parties shall (in addition to all
other available remedies) have the right to obtain such injunctive or other
equitable relief from a court of competent jurisdiction as may be necessary or
appropriate.
ARTICLE VII -- INDEMNIFICATION
7.01 Indemnification by NCT Parties. The NCT Parties do
hereby agree to jointly and severally indemnify and hold WEM and its
Affiliates, and the officers, directors, shareholders, agents and employees
thereof (collectively the "WEM Indemnitees" and singly a "WEM Indemnitee")
harmless from and against any and all liability, loss, damage or injury,
together with all reasonable costs and expenses relating thereto (including but
not limited to legal and accounting fees) arising out of or resulting from any
claim which is asserted against any of the WEM Indemnitees which includes any
allegation of (i) any rights to proceed against any WEM Indemnitee or any of
the Assets by virtue of any non compliance with any Bulk Transfer Law in
connection with any of the transactions governed by the Restructuring Documents
or (ii) any product liability claims based upon a defect in the design of the
Licensed Technology.
7.02 Indemnification by WEM. WEM hereby agrees to indemnify
and hold the NCT Parties, their Affiliates, and the shareholders, directors,
officers, employees and agents of each of them (collectively the "NCT
Indemnitees") harmless from and against any and all liability, loss, damage or
injury, together with all reasonable costs and expenses relating thereto
(including but not limited to legal and accounting fees) arising out of or
resulting from any claim which is asserted against an NCT Indemnitee by a third
party involving any allegation of any product liability in connection with a
product manufactured by WEM which incorporated any of the Licensed Technology
or the Development Technology; provided that with respect to any such product
which incorporates any of the Licensed Technology, the obligation to provide
indemnification
-11-
<PAGE> 15
hereunder shall not apply if such claim includes or is asserted in connection
with any allegations of defective design in the Licensed Technology.
7.03 Control of Contest. For purposes of this Section 7, the
party entitled to indemnification is referred to as the "Indemnitee" and the
party obligated to provide indemnification is referred to as the "Indemnitor."
Each Indemnitor shall have the right, at its own expense, to control any claim
or matter as to which such Indemnitor is obligated to provide indemnification
pursuant to any provision of this Agreement; provided, that if more than one
Indemnitor is obligated to provide indemnification, the Indemnitors shall
exercise such control jointly. This shall include the right to designate the
attorneys and other professionals who shall defend or pursue any such claim or
matter and to make the decision whether to pursue any such claim or matter to a
judgment, to settle any such claim or matter, or to agree to any such claim or
matter without any contest thereof; provided, that (i) the Indemnitor or
Indemnitors, as the case may be, shall obtain the prior approval of the
Indemnitee to legal counsel engaged to defend or pursue any such claim or
matter, which approval shall not be unreasonably withheld, and (ii) no
Indemnitor shall have the right to agree to settle any claim or matter in a
manner that would adversely affect the interest of any Indemnitee without the
written consent of the adversely affected Indemnitee or Indemnitees, as the
case may be, which consent shall not be unreasonably withheld. From and after
the date on which the Indemnitor(s) assumes control of the defense of any
manner as to which indemnification is required hereunder, the Indemnitor(s)
shall not be obligated to pay any attorneys' fees incurred by the Indemnitee(s)
for additional counsel retained directly by the Indemnitee(s) without the
consent of the Indemnitor(s); provided, that in the event that any Indemnitor
is unable or unwilling to satisfy its indemnification obligation hereunder, the
Indemnitee(s) shall be entitled to engage at that Indemnitor's expense the
attorneys and other professionals who shall defend or pursue such claim or
matter and shall also be entitled to make any decision whether to defend,
pursue or settle such claim or matter.
7.04 Notice and Cooperation. The Indemnitee shall promptly
notify each Indemnitor upon learning of claim or matter as to which
indemnification is required pursuant to this Section 7; provided, that the
failure to provide any such notice to an Indemnitor shall not relieve that
Indemnitor of its obligations with respect to the subject matter of any such
indemnification, except to the extent and only to the extent that the
Indemnitor suffers prejudice as a result of such failure. Each Indemnitee
shall, without compensation, afford such reasonable cooperation as may be
requested by the Indemnitor in the defense, pursuit or
-12-
<PAGE> 16
settlement of any claim or matter as to which indemnification is required
hereunder, including without limitation by making available to each Indemnitor
all pertinent non-privileged information and non-privileged documents under the
control of the Indemnitee.
7.05 Joint and Several Obligations. Neither the inability or
unwillingness of one or more Indemnitors to defend, hold harmless or indemnify
any Indemnitee as provided in this Agreement, nor the insolvency of one or more
Indemnitors, the release of or compromise of claims with one or more
Indemnitors, the failure of any Indemnitee to pursue one or more Indemnitors or
a legal defense asserted by one or more Indemnitors shall relieve any of the
other Indemnitors from its obligation to defend, hold harmless and indemnify
which is contained in this Agreement. Neither the modification of this
Agreement, nor any merger, consolidation, corporate change, change in business,
change in ownership, transfer of assets or other event or occurrence of a like
or different nature affecting any of the parties hereto shall affect the
responsibility of any Indemnitor nor relieve any Indemnitor of its obligation
to defend, hold harmless or indemnify which is contained in this Agreement.
ARTICLE VIII -- GENERAL PROVISIONS
8.01 Entire Agreement. This Agreement and the schedules and
exhibits attached hereto constitute the entire agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior agreements,
arrangements and communications of the parties dealing with such subject
matter, whether oral or written. No other promise, agreement, understanding,
or representation with respect to such subject matter will be binding unless
made in writing and signed by the parties hereto. All amendments to this
Agreement must be in writing and signed by all of the parties hereto.
8.02 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by and construed in
accordance with the internal laws of the State of Delaware, without giving
affect to the conflicts of law principles thereof, in every respect, including
but not limited to validity, interpretation and performance, notwithstanding
that one or more of the parties to this Agreement may now be or hereafter
become domiciled in or a resident of another state or a foreign country.
8.03 Non-Exclusive Forum. The parties hereto agree that the
Circuit Court of Lake County, Illinois and the Federal District Court for the
Northern District of Illinois located in Chicago, Illinois, shall each have
non-exclusive jurisdiction to adjudicate any dispute between the parties
-13-
<PAGE> 17
hereto which arises out of or in connection with this Agreement.
8.04 Severability. In the event that any provision of this
Agreement is held illegal or invalid for any reason, such illegality or
invalidity shall at the option of the party against whom the same is asserted
not affect the remaining parts of this Agreement, but this Agreement shall be
construed and enforced as if that illegal and invalid provision had never been
inserted herein.
8.05 Notices. All notices and other communications under
this Agreement shall be in writing and may be given by any of the following
methods: (a) personal delivery; (b) facsimile transmission; (c) registered or
certified mail, postage prepaid, return receipt requested; or (d) overnight
delivery service. Notices shall be sent to the appropriate party at its
address or facsimile number given below (or at such other address or facsimile
number for such party as shall be specified by notice given hereunder):
If to CPH:
c/o Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636-5989
Attention: President
If to NCT:
Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636-5989
Attention: President
If to NCT-M:
c/o Noise Cancellation Technologies, Inc.
1015 W. Nursery Road
Linthicum, Maryland 21090-1203
Telecopy: (410) 636-5989
Attention: President
-14-
<PAGE> 18
If to WEM:
Walker Electronic
Mufflers, Inc.
Attention: President
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
with a copy to:
Virginia L. Kearns
General Counsel
Tenneco Automotive
111 Pfingsten Road
Deerfield, IL 60015
Telecopy: (708) 940-6196
All such notices and communications shall be deemed received upon the earlier
of (a) actual receipt thereof by the addressee, or (b) actual delivery thereof
to the appropriate address, or (c) in the case of a facsimile transmission,
upon transmission thereof by the sender and issuance by the transmitting
machine of a confirmation slip confirming that the number of pages constituting
the notice have been transmitted without error. In the case of notices sent by
facsimile transmission, the sender shall contemporaneously mail a copy of the
notice to the addressee at the address provided for above. However, such
mailing shall in no way alter the time at which the facsimile notice is deemed
received.
8.06 Captions. Section headings and numbers herein are
included for convenience of reference only, and if there shall be any conflict
between any such numbers and headings and the text of this Agreement, the text
shall control.
8.07 Waiver. The failure (with or without intent) of any
party to insist upon the strict performance by any other party of any provision
of this Agreement shall not be deemed to constitute a modification of any of
the provisions hereof, or a waiver of the right to insist at any time
thereafter upon performance strictly in accordance with the provisions of this
Agreement. No waiver of any term, condition or provision shall operate as a
waiver of any other term, condition or provision of the Agreement, and no
waiver of any term, condition or provision shall operate as a continuing
waiver.
8.08 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be considered an original, and all of
which taken together shall constitute one and the same instrument.
-15-
<PAGE> 19
8.09 Assignment Restriction. None of the NCT Parties may
assign or delegate any of the benefits or duties under this Agreement without
the prior written consent of each other party.
8.10 Binding Effect. This Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective legal
representatives, permitted transferees, successors and assigns, including any
entity with which any corporate party may merge or consolidate or to which it
may transfer substantially all of its assets. This Agreement and all
conditions and provisions hereof are intended for the sole and exclusive
benefit of the parties hereto and their respective permitted assignees
hereunder. Nothing in this Agreement shall give any other person any legal or
equitable right, remedy or claim under or in respect of the matters covered by
this Agreement.
[Continued on the next page]
-16-
<PAGE> 20
8.11 Equitable Relief. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, it is agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
executed by their respective duly authorized officers on the date first above
written.
NOISE CANCELLATION NCT MUFFLER, INC.
TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella By:/s/ Michael J. Parrella
----------------------- -----------------------
----------------------- ------------------------
Its President Its President
CHAPLIN PATENTS
HOLDING CO., INC.
By:/s/ Michael J. Parrella
------------------------
-----------------------
Its President
WALKER ELECTRONIC MUFFLERS, INC.
By:/s/ Lyle S. Lohmeyer
---------------------
---------------------
Its Vice President
------------------
-17-
<PAGE> 1
EXHIBIT 10(l)(7)
FORM OF MUTUAL RELEASE AGREEMENT
MUTUAL LIMITED RELEASE
1. Mutual Release.
1.1 For good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, except as otherwise expressly
provided in Section 1.3 below, Noise Cancellation Technologies, Inc., a
Delaware corporation ("NCT"), NCT Muffler, Inc., a Delaware corporation
("NCT-M"), and Chaplin Patents Holding Co., Inc., a Delaware corporation
("CPH"), and each of them, together with their respective legal
representatives, transferees, successors and assigns (hereinafter sometimes
referred to collectively as the "NCT Parties"), hereby fully release, remise,
and forever discharge Tennessee Gas Pipeline Company, a Delaware corporation
(including without limitation Tenneco Automotive and Walker Manufacturing
Company, each of which is a division of Tennessee Gas Pipeline Company) and
Walker Electronic Muffler, Inc., a Delaware corporation ("WEM"), and their
respective legal representatives, transferees, successors and assigns
(hereinafter referred to collectively as the "Walker Parties") from and against
any and all manner of actions, suits, causes of action, agreements, contracts,
claims, debts, demands, costs, expenses (including but not limited to
attorneys' fees), judgments, losses, damages, and liability of any kind or
nature whatsoever, which the NCT Parties, or any one or more of them now has,
ever had, or may hereafter have, whether known or unknown, against the Walker
Parties or any of them, directly or indirectly, arising out of, resulting from,
or relating in any way to the Original Agreements (as such term is defined in
the Transfer Agreement of even date entered into by and among the parties
hereto along with Walker Noise Cancellation Technologies), governing the
partnership and joint venture comprising Walker Noise Cancellation Technologies
("WNCT") of which NCT-M and WEM comprise the partners (the "Partnership")
(including, without limitation, any claims for profits or losses thereunder),
the management or operation of WNCT (the "Business") and any contracts,
agreements, or obligations entered into and any statements, promises or
commitments made in order to perform under, as a result of, pursuant to or
relating to the Original Agreements and the management or operation of the
Business. It is the specific intent and purpose of the NCT Parties that this
Release shall extend to any and all matters, whether now known or unknown and
whether specifically mentioned or not, which may exist or might be claimed to
exist at or prior to the date hereof arising from
-1-
<PAGE> 2
or relating to the Original Agreements or the management or operation of the
Business except as otherwise expressly provided in Section 1.3 below. The NCT
Parties hereby expressly waive any and all claims or rights to assert that any
matter, cause or thing of any kind or nature whatsoever has been, through
oversight or error, intentionally or unintentionally omitted with respect to
the matters described above (except as otherwise expressly provided in Section
1.3 below).
1.2 For good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, except as otherwise expressly
provided in Section 1.3 below, the Walker Parties, and each of them, hereby
fully release, remise, and forever discharge the NCT Parties, and each of them,
from and against any and all manner of actions, suits, causes of action,
agreements, contracts, claims, debts, demands, costs, expenses (including but
not limited to attorneys' fees), judgments, losses, damages, and liability of
any kind or nature whatsoever, which the Walker Parties or any one or more of
them now has, ever had, or may hereafter have, whether known or unknown,
against the NCT Parties or any of them, directly or indirectly, arising out of,
resulting from, or relating in any way to the Original Agreements (including,
without limitation, any claims for profits or losses thereunder), the
management or operation of the Business and any contracts, agreements, or
obligations entered into and any statements, promises or commitments made in
order to perform under, as a result of, pursuant to or relating to the Original
Agreements and the management or operation of the Business. It is the specific
intent and purpose of the Walker Parties that this Release shall extend to any
and all matters, whether now known or unknown and whether specifically
mentioned or not, which may exist or might be claimed to exist at or prior to
the date hereof arising from or relating to the Original Agreements or the
management or operation of the Business except as otherwise expressly provided
in Section 1.3 below. The Walker Parties hereby expressly waive any and all
claims or rights to assert that any matter, cause or thing of any kind or
nature whatsoever has been, through oversight or error, intentionally or
unintentionally omitted with respect to the matters described above (except as
otherwise expressly provided in Section 1.3 below).
1.3 Nothing contained herein shall constitute a release of or
discharge of or covenant not to sue with respect to (i) any claims arising
under the Transfer Agreement of even date among WNCT, the NCT Parties and the
Walker Parties (the "Transfer Agreement") or any instrument or any document
delivered pursuant thereto, or (ii) any claims arising subsequent to the date
hereof under the provisions of any of the Original Agreements to the extent
that such provisions are expressly excepted in accordance
-2-
<PAGE> 3
with the Transfer Agreement (either in the Transfer Agreement or in any of the
other agreements contemplated thereby) from the general termination provisions
set out in the Transfer Agreement with respect to the Original Agreements.
Notwithstanding anything provided to the contrary in this Mutual Release, no
partner of the Partnership shall be released from any obligation of, and no
partner of the Partnership hereby waives any rights to, such contribution
rights and obligations created by law or which otherwise exist among the
partners with respect to (i) any claim by a third party against the
Partnership, or (ii) any claim by a third party against any of the partners, in
either case in connection with the business, operations or property of the
Partnership and resulting or arising from or in connection with any act,
omission or condition which occurred prior to the Closing (as such term is
defined in the Transfer Agreement).
1.4 The Walker Parties and the NCT Parties, and each of
them, hereby jointly and severally represent that they have not sold, assigned
or otherwise transferred to any party any claim which is being released
pursuant to this Mutual Release Agreement.
2. Indemnification.
2.1 The NCT Parties, jointly and severally, hereby agree
to indemnify and hold harmless the Walker Parties, and each of them, from and
against any and all claims, causes of action, losses, damages, costs, expenses
(including but not limited to attorneys' fees) and liability arising out of any
breach by any of the NCT Parties of the representations set forth in Section
1.4 above of this Mutual Release Agreement.
2.2 The Walker Parties, jointly and severally, hereby
agree to indemnify and hold harmless the NCT Parties, and each of them, from
and against any and all claims, causes of action, losses, damages, costs,
expenses (including but not limited to attorneys' fees) and liability arising
out of any breach by any of the Walker Parties of the representations set forth
in Section 1.4 above of this Mutual Release Agreement.
The signatories to this Mutual Release Agreement certify that
they are duly authorized to execute this Release.
-3-
<PAGE> 4
THUS DONE AND SIGNED in multiple original as of the 15th day
of November, 1995.
NOISE CANCELLATION NCT MUFFLER, INC.
TECHNOLOGIES, INC.
By:/s/ Michael J. Parrella By:/s/ Michael J. Parrella
----------------------- -----------------------
Michael Parrella
------------------------
Its President Its President
CHAPLIN PATENTS
HOLDING CO., INC.
By:/s/ Michael J. Parrella
-----------------------
-----------------------
Its President
WALKER MANUFACTURING COMPANY, TENNECO AUTOMOTIVE,
A DIVISION OF TENNESSEE A DIVISION OF TENNESSEE
GAS PIPELINE COMPANY GAS PIPELINE COMPANY
By:/s/ Lyle S. Lohmeyer By:/s/ Lyle S. Lohmeyer
----------------------- --------------------
----------------------- ----------------------
Its Vice President Its Vice President
-------------------- ------------------
WALKER ELECTRONIC
MUFFLERS, INC.
By:/s/ Lyle S. Lohmeyer
-----------------------
Its Vice President
---------------------
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1995, FILED ON
APRIL 15, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1831
<SECURITIES> 0
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0
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