SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission
file number 0-14465.
SONEX RESEARCH, INC.
Incorporated in State of Maryland
23 Hudson Street, Annapolis, Maryland 21401
Telephone Number:(410)266-5556 I.R.S. Employer Identification No. 52-1188993
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange on
each class which registered
---------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ X ]
The number of shares outstanding of the Issuer's $.01 par value Common Stock as
of March 31, 1997 was 17,134,539. The aggregate market value of voting stock
held by non-affiliates of the Registrant was $13,334,656 as of March 31, 1997.
Revenues for the year ended December 31, 1996 were $70,000.
Documents Incorporated by Reference: None.
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ITEM 1. DESCRIPTION OF BUSINESS
The Company
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Sonex Research, Inc. ("Sonex" or the "Company"), incorporated in Maryland in
1980, is engaged in the research, development and commercialization of a
patented technology (the "Sonex Combustion System", "SCS" or "Ultra Clean
Burn(TM) technology") which controls the combustion of fuel in engines,
primarily through modification of the piston. The Company has shown through
tests in manufacturers' engines and in computer models that its technology has
the ability to control combustion and allow fuel to be used more efficiently,
and that engines using the Company's technology have performance superior to
conventional engines and emit fewer harmful exhaust emissions.
Management believes that the Company's technology can be applied to all types of
internal combustion engines, including those used in personal and commercial
vehicles (automobiles, trucks, buses, boats and motorcycles) as well as engines
used in fixed or portable utility applications (motor generator sets, pumps, and
chain saws), whether spark ignited (SI) or compression ignited (CI), carburetted
or fuel injected, using either gasoline, diesel, alcohol and/or other fuels.
Sonex is concentrating its efforts on the application of its technology to
direct injected (DI) turbocharged diesel engines. Demonstration and development
programs at various stages of completion are underway with some of the largest
multi-national diesel engine manufacturers in the world. The goal of such
programs is to execute broad agreements with the diesel engine manufacturers and
their piston suppliers for industrial production of Sonex pistons under license
from the Company. The demonstration process involves many stages, from proof of
concept using screw-assembled prototype pistons fabricated in-house by Sonex, to
working with piston suppliers for the fabrication of finished pre-production
pistons that will be used in field trials and durability, manufacturing
optimization, and other tests required before the start of full series
production.
To date, the Company has completed separate demonstration programs with two of
these manufacturers, and each has verified and accepted that the SCS can
substantially reduce particulate emissions in a DI turbocharged diesel engine
for medium duty trucks while maintaining fuel consumption and power.
Negotiations are underway with one of the world's largest piston suppliers and
with these manufacturers for licensing, technology transfer and further
development programs. In October 1996 a third major international engine
manufacturer executed a funded agreement with the Company for a similar
demonstration program.
In addition to diesel truck engine applications, the Company has successfully
applied its proprietary combustion technology to the conversion of a small,
lightweight, SI gasoline fueled engine to start and operate on JP5/JP8 standard
military fuel while also improving fuel consumption. The advantages of this
converted SI engine have been demonstrated successfully in a small, remotely
controlled Unmanned Aerial Vehicle (UAV).
Employees
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As of March 31, 1997, the Company had six employees: its three executive
officers and three individuals who provide technical services. The Company has
never experienced a strike or work stoppage, and believes its relations with its
employees are good.
Description of the Company's technology
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The SCS improves the process of combustion through a combination of chemical and
acoustic effects that occur by modifying the engine's combustion chamber and the
processes occurring within that chamber. Sonex designs rely on a cavity of some
kind located in the piston, the cylinder head, or existing temporarily between
both the piston and cylinder head. Current Sonex diesel technology involves the
installation of a unique geometric design of microchambers in the piston,
placing one microchamber adjacent to each fuel injector spray. The
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microchambers surround the piston bowl in the form of a segmented annulus, or
tubular ring. The position of the microchamber is a critical factor in
controlling the temperature of the chamber and the gases that may be resident in
the chamber at any one time.
Sonex places several small tubular vents between the piston bowl and the
microchamber. These vents control the amount of fuel and air that enter the
microchamber and also control the amount of turbulence that is created when
gases jet out of the microchambers through these vents into the piston bowl. The
size, length, angle and position of the vents are critical to the level of
emissions reduction. At different times during the combustion cycle, air and
fuel are admitted to the microchamber, compressed under high pressure and
temperature, reformed chemically, and then exhaled from the microchamber. This
process, which has no moving parts, produces lower overall emissions at all
engine speeds and loads and is self-driven by the combustion process.
Potential benefits of the SCS in the reduction of emissions
- -----------------------------------------------------------
Government agencies in North America, Europe and Japan continue to mandate
increasingly more strict requirements for the reduction of allowable diesel
truck emissions, specifically with respect to smoke/particulates and nitrous
oxide (NO). The use of costly high pressure injection systems and electronic
controls may permit truck manufacturers to attain some of these reductions;
however, it is unlikely any one emissions reduction technique will enable
manufacturers to meet the emission standards to be implemented in the next few
years.
High pressure injectors may reduce smoke/particulates, but they also increase NO
emissions while doing so. Manufacturers, therefore, may be able to eliminate
present equipment such as particulate traps, but they likely will need larger
catalytic converters, leading to an increase in fuel consumption and a decrease
in power, all at a significantly higher cost. Management believes that the
Company's diesel technology, which consists of a relatively simple change of
piston design, under various conditions causes a reduction in
smoke/particulates, carbon monoxide (CO), hydrocarbons (HC), and NO by
significant amounts while maintaining or improving upon brake specific fuel
consumption (BSFC) and power. In tests conducted in the latest production
engines of several manufacturers fitted with a variety of Sonex pistons,
including aluminum screw assembled pistons, electron beam welded pistons, and
ferrous crown pistons, the Company has demonstrated that the SCS may reduce
smoke/particulate emissions in excess of 40% and HC emissions by 5%, while
maintaining equal NO emissions and BSFC within 2% above or below that of the
stock engine.
The Company's ability to reduce soot emissions has an added benefit towards the
reduction of NO in diesel engines. Many manufacturers are turning to using
exhaust gas recirculation (EGR) to reduce NO. EGR is inert exhaust gas recycled
and pumped back into the engine cylinders for the next combustion cycle. EGR can
significantly reduce NO, but the soot recirculated with EGR can increase
particulate emissions and increase engine wear. The SCS acts to reduce both the
engine wear and the quantity of particulates in the emissions by significantly
reducing the soot content of the emissions.
Management believes that Sonex Ultra Clean BurnTM technology is perhaps the
least expensive method of emissions reduction, but it is likely to be used in
conjunction with other technologies to enable manufacturers to meet the strict
diesel truck emission standards that will be introduced later in this decade.
Health risks attributed to particulate and soot emissions
- ---------------------------------------------------------
Management also believes that the public will pressure regulators to set
increasingly lower particulate and soot emissions standards following the recent
publication of the results of major studies in Europe and North America showing
a direct correlation between these emissions and the incidence of lung cancer
and asthma. In a study conducted by researchers at the Harvard School of Public
Health, Brigham Young University and the American Cancer Society, the soot
content of particulate emissions has been shown to significantly increase the
risk of a large variety of respiratory diseases. As a result of these and other
studies, in June 1997 the U.S. Environmental Protection Agency (EPA) is expected
to issue new, more stringent National Ambient Air Quality Standards
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(NAAQS) on small size (2.5 or lower microns) soot particulates. It is believed
that conventional diesel engine soot particulates are mainly in this size range.
Competition
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The Company's competition comes from the extensive research departments of the
world's major vehicle and engine manufacturers as well as independent research
organizations. Although the experience and financial resources of its
competitors far exceed those of the Company, management believes that the SCS
can provide significant advantages over the competition in terms of cost,
performance and simplicity.
Secrecy and non-disclosure
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Due to the highly competitive nature of the world's automotive and truck
industries, in connection with its contracts and/or demonstration programs with
such manufacturers the Company is required to execute joint secrecy and
disclosure agreements that expressly prohibit the public disclosure of the
customers' names and other significant information. Failure by Sonex to maintain
this strict level of confidentiality would jeopardize the relationship of the
Company with its customers.
Overview of engine testing
- --------------------------
The combustion process of an internal combustion engine is extremely complex,
involving a vast number of sequential and simultaneous reactions. Even slight
adjustments to the system can create large changes to the reactions forming the
combustion process. As a result of these factors, the engine testing that the
Company undertakes is extremely rigorous and time-consuming; however, the
experience gained from this process over the past few years has gradually given
the Company's technical staff an increased understanding of how to rapidly
design the SCS into a diesel engine of a specific size and configuration.
In the highly competitive world automotive and truck industries, very small
percentage changes in either fuel consumption, power or emissions can translate
into success or failure in the marketplace. In addition, because current engines
burn much cleaner and are more efficient than those produced only a few years
ago, the task of extracting even further improvements in the combustion process
presents an enormous challenge.
The emission targets set by the different engine manufacturers vary from one
engine to another, sometimes on the basis of the specific market, i.e. North
America, Europe or Japan, in which the manufacturer intends to sell the engine.
In addition to running the specific emissions test relating to a given market,
the Company must test each engine at a number of different timing
configurations. This work must be repeated for each change that Sonex makes to
the geometry of its microchambers and vents. The testing process is repetitive
and laborious, yet necessary to satisfy the demands of the engine manufacturers.
Stages of technology demonstration and piston design
- ----------------------------------------------------
The major stages in the Company's demonstration and development process for DI
turbocharged diesel truck engines include the following:
o execution of secrecy and disclosure agreements;
o exchange of technical information;
o proof of concept with screw-assembled, Sonex-modified pistons fabricated
by Sonex and tested by the engine manufacturer in its laboratories;
o testing at mandated emissions and part-load cycles at Sonex on one of the
manufacturer's latest engines, aimed at piston design improvement;
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o delivery of best design, screw-assembled, Sonex-modified pistons that
allow the test engine to meet specified emission and fuel consumption
targets to the engine manufacturer for verification testing and to one or
more piston suppliers for the fabrication of finished pre-production
pistons;
o delivery by piston supplier of pre-production pistons for review, approval
and testing through the same cycles as before, first by Sonex, then by the
engine manufacturer, to insure that the performance of these pistons
equals or exceeds that of the screw-assembled pistons.
The Company has now reached the next stage with two such programs, that is,
optimization of the piston design for the fabrication of piston prototypes that
will be used in field trials and durability, manufacturing optimization, and
other tests required before the start of full series production. (See "Current
diesel engine programs".) The engine manufacturers have stated that the SCS
benefits could be in lower cost, less complexity and greater reliability. These
three factors are now being addressed by the Company and its customers.
Collaboration with piston suppliers
- -----------------------------------
In cooperation with the engine manufacturers, the Company has worked with the
major piston suppliers to these manufacturers, providing engineering
specifications and drawings for their use in evaluating alternative production
methods in anticipation of eventual piston orders from the engine manufacturers.
One of these companies, T&N Piston Products of the U.K., is widely recognized as
one of the world's leading suppliers of pistons and other components to the
engine industry.
T&N has developed innovative and economical techniques of manufacturing Sonex
pistons for series production. Additional work by T&N involves finite element
analysis, stress analysis and thermal cycling to examine the effects of stress
on the Sonex piston under a variety of extreme conditions. Sonex and T&N believe
the results of the joint development work, which has been moved from T&N's
research facility to its advanced technology center, will demonstrate to engine
manufacturers that Sonex pistons meet their technical requirements while
remaining cost effective.
Current diesel engine programs
- ------------------------------
On a continuing basis for the past four years, the Company has performed
extensive design and development work for two large multi-national diesel truck
engine original equipment manufacturers (OEM's), in separate programs.
A funded agreement to develop Sonex pistons for industrial production for one of
these companies was executed in 1994. This program advanced to the stage of
verification tests by this engine manufacturer on an engine in its own facility
using pre-production finished Sonex pistons fabricated by T&N. Successful
results to that point led to initial discussions late in 1995 for technology
transfer and licensing agreements. Such discussions remained preliminary while
the engine manufacturer investigated the manufacturing costs of Sonex pistons
and initiated discussions for a joint program for the optimization of the piston
design to take place primarily at the manufacturer's advanced engine division
laboratory in Europe. Late in 1996, however, the focus of discussions changed,
and it was agreed by all three parties that the Company first should execute a
commercial license with T&N. Under this approach, the cost of any and all
royalties payable to the Company would be included in the selling price for
Sonex pistons to be produced and sold by T&N to the engine manufacturer. Based
on the progress of recent discussions, the Company hopes to have such an
agreement in place by summer 1997.
The second large multi-national OEM has verified Sonex test results on a set of
pre-production Sonex pistons fabricated by T&N. Subsequent adjustments to the
manufacturing process of these pre-production pistons have been agreed to by all
parties, and further testing is planned in the summer of 1997.
In October 1996 a third major international engine manufacturer executed a
funded agreement with the Company for a similar demonstration program that is
expected to be completed by the end of 1997, with all engine testing being
conducted by the manufacturer in its own laboratories.
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In March 1996 Texaco Group, Inc. ("Texaco") agreed to undertake a feasibility
demonstration and evaluation of the SCS to confirm the capability of a Sonex
piston to reduce emissions in a single cylinder DI diesel research engine.
Texaco is funding the SCS investigation in response to increasingly rigorous
federal fuel specifications now under consideration that are intended to assist
engine makers in meeting future emissions and performance targets. Tests
conducted by Texaco and others in the petroleum industry have shown that
advanced technology diesel engines exhibit less sensitivity to fuel composition
than current technology engines. Texaco believes that the development of an
engine design meeting the forthcoming low emissions standards using the diesel
fuel being produced today will make unnecessary the manufacture of higher cost
diesel fuel and avoid the significant impact that higher cost would have on
fleet owners and operators.
The engine selected for this testing is a single cylinder OEM generator set
engine. The Company first developed a full set of data for the baseline engine,
then fabricated and installed Sonex pistons in the engine. A representative of
Texaco observed the operating performance of both configurations of this engine
in Annapolis in March 1997, after which the engine was delivered to Texaco's
research facility in Beacon, New York, for confirmation testing. Assuming
satisfactory results are achieved in this first phase of the feasibility
demonstration, Texaco and Sonex will consider more extensive testing to document
optically the in-cylinder SCS behavior. Upon completion of the testing, the
companies will publish jointly the evaluation findings in scientific and trade
publications.
Lightweight, spark-ignited (SI) engines
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In 1994 Sonex delivered two prototype lightweight, SI, carburetted two-stroke
engines, which it modified to start and run on JP-5/JP8 standard military
(diesel) fuel, to the U.S. Army's Fort Belvoir, Virginia, Research, Development
& Engineering Center. The Army was interested in such an engine to be used in
light-weight, man- portable generator sets for use in the field. While the
demonstration of the prototypes was successful, the Company was informed later
that the funding for the continuation of this program had been canceled.
In 1995, however, the U.S. Naval Research Laboratory (NRL) in Washington, D.C.,
contacted the Company for the possible application of this engine technology in
Unmanned Aerial Vehicles (UAV's), which are small, remotely controlled
surveillance aircraft. Sonex subsequently demonstrated and delivered an engine
to NRL similar to those delivered to the Army. This engine, which is a
lightweight, two-stroke, SI, carburetted, aircooled engine, was used in July
1996 in successful flight demonstrations by NRL of a UAV. The engine, originally
gasoline fueled, was converted by Sonex to operate with JP5/JP8 fuel. NRL
reported an increase of nearly 50% in fuel economy for the Sonex engine versus
the stock gasoline engine. NRL is now considering this technology for its
possible application in a larger engine, although funding for the project has
not yet become available.
Based upon the successful public demonstration of the Sonex NRL UAV, the results
of which were documented by NRL in a published report, a U.S. OEM of two-stroke
engines recently contracted the Company to investigate the feasibility of
applying that design in its high volume production gasoline fueled engine since
the design has other beneficial characteristics, such as low cylinder head
temperatures. In addition, a second U.S. OEM has provided four-stroke engines to
the Company and is negotiating a contract to investigate the feasibility of
applying the Sonex NRL UAV design to its SI engines using diesel fuel.
Alternative-fuel engines
- ------------------------
In the summer of 1994 the National Renewable Energy Laboratory Division (NREL)
of the Midwest Research Institute, which is the field manager for the DOE
Alternative Fuels Utilization Program, awarded the Company a contract to
demonstrate the SCS on a one liter per cylinder diesel engine running on a
number of different fuels, including methanol, ethanol, biofuel and diesel. In
1995 the Company successfully started and ran such an engine on neat M100
methanol fuel (100% methanol) at standard diesel compression ratio (17:5) with
no fuel additive, ignition enhancer or in-cylinder ignition device. The engine
was stable at all speeds and loads, and achieved power levels similar to those
of the same engine running on diesel fuel. These results were achieved by
replacing
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the engine's stock piston with a Sonex-modified piston, in addition to the
standard modifications normally required to fuel a diesel engine on methanol.
On the basis of these results, the Company was informed by NREL that funding was
to be set aside to continue the program in a vehicular demonstration. Sonex then
submitted its final report to NREL, which was required to distribute the report
for outside review. One such reviewer, an employee of Cummins Engine Co., a
major U.S. diesel engine manufacturer, stated that "... Cummins sees very little
if no interest in using alcohol fuels in diesel engines." DOE now appears to
have adopted this position as well. Sonex is now participating in discussions
with DOE and Sandia National Laboratories to proceed on diesel fuel programs
rather than methanol.
Patents and proprietary information
- -----------------------------------
The Company has endeavored to protect its technology by filing for patents in
the United States and in those foreign countries in which it may be able to
commercialize the technology. The Company has also developed a significant body
of trade secrets, proprietary information and know-how relating to its
technology. Although the principles underlying the SCS concept are capable of
being understood by experts in the field, management believes that it would be
difficult to apply the Sonex technology successfully to any given engine
configuration without the benefit of the trade secrets, know-how and proprietary
information owned by the Company.
Management believes that the Company's business depends substantially upon the
protection afforded by its granted and pending patents, as well as its trade
secrets, proprietary information and know-how. All contracts outside the Company
involving any exchange of confidential technical information are made under
secrecy agreements approved by the Company's patent counsel. In addition, all of
the management and technical employees of the Company are required to sign
non-disclosure agreements respecting the Company's technology.
The Company registered the name "SONEX" at the U.S. Patent and Trademark Office
in March 1987, and is in the process of registering the name "Ultra Clean Burn"
technology at the U.S. Patent and Trademark Office.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices and testing facility are located at 23
Hudson Street, Annapolis, Maryland, 21401. The facility is equipped with
emissions test equipment and machine shop and storage facilities necessary to
support the laboratory. Management believes that all of the Company's property
is adequately covered by insurance. The building contains approximately 6,000
square feet and is being occupied by the Company pursuant to an extension
through November 1997 under the terms of a long-term operating lease agreement
that expired in 1994.
The Company will either attempt to negotiate a new long-term lease for its
current office and laboratory facility once the current extension expires, or
continue to occupy the premises on a month-to-month basis under the terms of the
previous lease, pursuant to which the property owner is required to provide
thirty days notice if he wants the Company to vacate the premises. Management
may also search for an alternative location in the event that an agreement
cannot be reached for the existing premises. Management believes that the
resolution of the uncertainty with respect to the facility will not result in a
significant interruption in the operations of the Company.
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ITEM 3. LEGAL PROCEEDINGS
As described in detail below, the Company successfully defended itself against a
legal action, initiated by two former officers of the Company, which concluded
in 1996. As of the date of this report, management is aware of no other legal
proceedings pending against the Company.
In June 1993 the Company eliminated the full-time positions of vice-president of
operations, vice-president of engineering, and vice-president international. One
of these individuals accepted the Company's financial separation offer, while
the other two former officers, Mr. Charles C. Failla and Mr. Theodore P. Naydan
(referred to as the "Plaintiffs") rejected the Company's offer and in November
1993 filed a Complaint in the Anne Arundel County, Maryland, Circuit Court. The
Complaint demanded immediate full payment of aggregate unpaid salaries of
$165,515 less approximately $14,500 representing a loan payable to the Company
by Mr. Naydan, alleging that the Company breached contractual obligations by
failing to pay salary due under previous employment agreements and violated
Maryland labor laws by failing to pay wages due upon termination of employment.
The Complaint also sought damages of up to three times the amount owed, plus
prejudgment interest, attorney's fees and costs.
The Company denied the allegations and filed a counterclaim against the
Plaintiffs for breach of contract with respect to a February 12, 1992 agreement
known as the "Consent to Deferral" (See Item 6), executed by all salaried
employees of the Company, including the Plaintiffs, in connection with an
indispensable capital infusion. Pursuant to the Consent to Deferral, each signer
consented to the past and future deferral of portions of their salaries and
agreed to defer payment of amounts so accumulated until the Company has achieved
commercial success through the receipt of substantial licensing revenue. The
Company also maintained that it was not liable for treble damages because its
actions did not violate the relevant law, which requires an employer to pay an
employee all wages due upon termination of employment unless there exists a bona
fide dispute over payment.
Following a hearing in June 1994 on various motions for dismissal and summary
judgment filed by the parties, the hearing judge denied the Plaintiffs claims
for treble damages and recovery of attorneys' fees and costs, dismissed most of
the other motions, and ordered that a trial be held on the issue of whether the
Plaintiffs received consideration in exchange for executing the Consent to
Deferral.
At a trial held in November 1994 before a different judge, the Plaintiffs were
awarded judgment in the amount of $163,140 that included pre-judgment interest
from the date of termination of employment through the date of the trial and
reflected an offset for the $14,500 loan payable to the Company by Mr. Naydan.
Following the trial, the Company filed an appeal, and the Plaintiffs filed a
motion to revise the judgment by seeking to reverse the prior ruling of the
hearing judge denying the claim for treble damages. In order to stay the
Plaintiffs from initiating steps to collect on the judgment prior to a ruling on
the appeal, on November 30, 1994 the Company posted cash security with the court
in the amount of $177,088, which figure included interest over the estimated
period of the appeal process.
In February 1995 the trial judge denied the Plaintiffs' motion to revise the
judgment, following which the Company refiled its appeal and the Plaintiffs
filed an appeal of the decision to deny treble damages. Oral arguments before a
panel of three judges of the Maryland Court of Special Appeals were presented in
November 1995. In December 1995 the Court of Special Appeals reversed the
judgment awarded to the Plaintiffs by the trial court, and remanded the case for
consideration by the trial court of two issues not addressed in the trial. These
issues, which were to be addressed in a second trial, involved clarification of
whether the reference to $2 million in licensing fees in the Consent to Deferral
refers to amounts from only one contract or an aggregate from more than one
contract, and a determination of whether the Company acted in good faith in
claiming an inability to pay deferred wages prior to the receipt of $2 million
in licensing fees.
In January 1996 the Plaintiffs filed a Petition for Writ of Certiorari with the
Court of Appeals of Maryland seeking a review of the reversal of the judgment by
the Court of Special Appeals. The Company immediately filed its opposition to
the Petition, and, in April 1996 the Petition was denied. In May 1996 a total of
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approximately $184,000, including interest earned through that date, was
returned to the Company, and the parties executed a Stipulation of Dismissal
with Prejudice pursuant to which all claims were dismissed.
In July 1996 the Company filed a Complaint in the Circuit Court for Anne Arundel
County seeking to collect from Mr. Naydan principal and interest owed in
connection with the $14,500 loan payable to the Company referred to above. In
August 1996 Mr. Naydan filed a Motion to Dismiss or, in the alternative, a
Motion for Summary Judgment, asserting that all amounts due to the Company were
ruled at the November 9, 1994 trial to have been satisfied by offset against an
equal amount of deferred salary owed by the Company to Mr. Naydan. In September
1996 the Company filed a Cross Motion for Summary Judgment in which it argued
that as a result of the overturn on appeal of the November 1994 judgment against
the Company, the ruling regarding the offset of the loan against deferred salary
had been vacated. At a hearing in November 1996, the trial court ruled against
the Company and granted Mr. Naydan's motion for dismissal. Although the Company
and its legal counsel feel that this decision was incorrect and could be
reversed upon appeal, the Company declined to appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently is traded in the over-the-counter market on
the OTC Bulletin Board service under the symbol "SONX". The OTC Bulletin Board
is an electronic and screen-based quotation medium, operated and regulated by
Nasdaq. Quotation information on OTC Bulletin Board stocks is available on
stockbrokers' desktop terminals. The Company's Common Stock had traded on the
Nasdaq Small-Cap Market until February 9, 1995, at which time its listing was
discontinued for failure to maintain the minimum bid price required by Nasdaq
for continued listing.
The Company has never paid cash dividends on its Common Stock and does not
expect to pay any cash dividends in the foreseeable future. The high and low
closing prices of the Common Stock for each quarterly period since January 1,
1995 were as follows (These prices, which are drawn from reports provided to the
Company by Nasdaq, reflect inter-dealer prices without mark-ups, mark-downs, or
commissions, and may not necessarily represent actual transactions.):
Quarter ended: High Low
-------------- ---- ---
March 31, 1995 $3/4 $1/4
June 30, 1995 5/8 11/32
September 30, 1995 1 5/8 7/16
December 31, 1995 1 9/16 1
March 31, 1996 2 1/16 1
June 30, 1996 2 1/16 1
September 30, 1996 1 11/32 7/8
December 31, 1996 1 9/32 11/16
March 31, 1997 1 9/16 5/8
As of March 31, 1997, there were 17,134,539 shares issued and outstanding, with
approximately 1,050 holders of record. The shares for approximately 2,800
additional beneficial owners of the Common Stock are held of record (in "street
name") by brokers, dealers, banks, and other entities holding such securities of
record in nominee name or otherwise or as a participant in a clearing agency
registered pursuant to Section 17A of the Securities Exchange Act of 1934.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
Losses accumulated during development stage
- -------------------------------------------
Since its inception in 1980, the Company has generated cumulative net losses in
excess of $19 million. Operating funds have been raised primarily through the
sale of equity securities in both public and private offerings, while revenues
to date have not been significant. Accordingly, Sonex continues to be classified
as a development stage company.
Financial position and liquidity
- --------------------------------
As of March 31, 1997, the Company had available cash and equivalents of
approximately $644,000 after having completed two private financings in March
1997 which yielded aggregate proceeds of $580,000. Based upon current spending
levels, management believes that the cash on hand and expected revenue from
currently executed contracts will be sufficient to fund operations at least
through the end of the first quarter of 1998. The Company is currently in
negotiations for technology transfer and licensing agreements which would
provide substantial operating funds, but execution of such agreements is not
assured. In the absence of the realization of significant revenues, additional
capital may be necessary to fund operations beyond the first quarter of 1998.
Salary deferrals by employees
- -----------------------------
In order to help conserve the Company's limited cash resources, all of the
Company's employees, at the request of the Board of Directors, for several years
have been voluntarily deferring receipt of payment of significant portions of
their authorized annual salaries. From time to time, portions of such deferred
amounts have been paid through the issuance to the employees of shares, or
discounted options to purchase shares, of the Company's Common Stock.
In February 1992 the Company sold $2 million in convertible preferred stock and
common stock purchase warrants in a private placement pursuant to a proposal
from Proactive Partners, L.P. and certain of its affiliates ("Proactive"). The
proposal called for immediate payment to employees of a portion of the salaries
deferred through that time. As a condition to the Company's receiving this
indispensable financing, Proactive required that all salaried employees document
and agree in writing to the ongoing deferral of salaries described above.
Accordingly, in February 1992 all of the Company's salaried employees jointly
executed an agreement referred to as the "Consent to Deferral" in which the
employees consented to the past and future deferral of portions of their annual
salaries, and agreed to defer payment of amounts so accumulated until the
Company has received licensing revenue of at least $2 million or at such earlier
date as the Board of Directors determines that the Company's cash flow is
sufficient to allow such payment. Immediately upon execution of the Consent to
Deferral and in accordance with the terms of the Proactive investment, the
Company received the proceeds from the financing, with which it paid a portion
of previously deferred salaries in cash and in Company stock.
Following the completion of this investment, Proactive became the Company's
largest shareholder by virtue of its holdings of convertible preferred stock and
common stock purchase warrants, and two of the general partners of Proactive,
Mr. Myron A. "Mike" Wick, III and Mr. Charles C. McGettigan, became directors of
the Company.
The conditions of the Consent to Deferral that would allow repayment of deferred
salaries have yet to occur. As of December 31, 1996, an aggregate of $595,620 of
wages so deferred is recorded as accrued compensation in the accounts of the
Company.
Page 10 of 40
<PAGE>
Results of operations
- ---------------------
Development Contract Revenue:
1996 $ 70,000
1995 $223,141
1994 $146,800
Development contract revenue consisted of the following amounts from projects
more fully described in Item 1: (1) $70,000 in 1996 under a demonstration
program begun in October 1996 to apply the SCS to a truck diesel engine for a
major international OEM; (2) $150,000 in 1995 and $75,000 in 1994 earned in
connection with the development program begun in 1994 on a diesel-fueled truck
engine for a major European manufacturer; (3) $53,141 in 1995 and $46,800 in
1994 from NREL for a methanol-fueled diesel engine demonstration; (4) $20,000 in
1995 from the U.S. Naval Research Laboratory for a generator set engine; (5)
$25,000 in 1994 from the U.S. Army's Fort Belvoir RD&E Center for two engine
generator sets.
Management is unable to predict future changes to development contract revenue
because the amounts earned to date under previous development contracts have
been determined through negotiations with individual manufacturers based upon
the level of effort required and the level of funding that each manufacturer has
been willing to commit. In addition, not all of the Company's development work
has been funded by manufacturers. Management anticipates, however, that future
revenue may also include consulting fees earned while working together with
manufacturers to optimize the results achieved on a particular manufacturer's
engine, and, ultimately, license fees and royalty revenue once the Company's
technology is placed into production engines by manufacturers. The future
amounts of such other types of revenue, however, cannot be reasonably estimated.
Research and Development (R&D) Expenses:
1996 1995 1994
---- ---- ----
Personnel:
Salaries $245,919 $248,923 $209,998
Taxes/benefits 37,025 35,542 33,813
Bonuses 10,000 31,625
Stock & options 27,125 61,250 24,000
-------- -------- --------
Total personnel 320,069 377,340 267,811
Patent amortization
and maintenance fees 71,180 88,378 193,318
Occupancy 55,459 57,314 61,959
Testing supplies 35,898 29,312 45,547
Depreciation 21,783 20,646 23,677
Other expenses 19,135 12,243 30,468
-------- -------- --------
Total R&D $523,524 $585,233 $622,780
======== ======== ========
Total R&D expenses decreased $61,709, or 11%, from 1995 to 1996, primarily due
to a decrease in R&D personnel costs of $57,271, or 15%. From 1994 to 1995,
total R&D expenses decreased $37,547, or 6%, as higher personnel costs by
$109,529 were more than offset by a $113,665 decrease in patent amortization
expense.
R&D salaries increased by $38,925 from 1994 to 1995 primarily due to the
inclusion of a full year's salary in 1995 versus one month's salary in 1994 for
the Company's new director of research hired in late 1994. Also, in 1995 the
Company awarded bonuses totaling $31,625, payable in stock and cash, to three
non-officer employees in recognition of their continued deferral of portions of
their salaries. In 1996 the only bonus awarded was a cash bonus of $10,000 to
the Company's chief executive officer. No bonuses were awarded in 1994.
Page 11 of 40
<PAGE>
Compensation cost for stock options is measured as the excess, if any, of the
market price of the Company's stock at the date of grant over the exercise price
of the option granted, and is recognized ratably over the related vesting
period. Charges for compensation paid in the form of stock or stock options in
1994 of $24,000 represented the value of consulting fees paid in stock to the
Company's former vice-president - international, who now serves as corporate
liaison in Europe. Late in 1995 the form of payment to this individual was
changed to stock options, with related charges in 1995 of $30,000, while charges
for payments in stock in 1995 were $8,750. Also in 1995 the Company recorded a
charge to operations of $22,500 for below-market options granted to three
non-executive employees. Charges in 1996 for stock option grants to the
Company's corporate liaison in Europe were $14,000 while additional charges of
$13,125 in 1996 related to option grants made to each of the Company's
employees.
The significant decrease in amortization of patents and technology from 1994 to
1995 was primarily due to the fact that the total amount of capitalized costs of
patents and technology was far lower in 1995 as opposed to 1994 as a result of
the write-off at the end of 1994 of the capitalized costs of certain older
purchased technologies that were abandoned, as described below. This decrease
was partially offset by the inclusion in amortization expense in 1995 of $18,862
of additional write-offs, which figure was also the primary reason for the
decrease in patent amortization and maintenance fee expense from 1995 to 1996 of
$17,198.
Occupancy expenses have been declining for the last three years. When the lease
for the Company's office and laboratory facility expired in April 1994, the
Company negotiated a reduction in the monthly rent from $5,400 to $4,500, and
two extensions through June 1995. From July 1995 through October 1996 the
Company occupied its facility on a month-to-month basis under the terms of the
expired lease agreement. An extension through November 1997 was then executed,
with a reduction in the monthly rental to $3,500. Rent expense is allocated 80%
to R&D and 20% to G&A based on the proportionate share of floor space devoted to
each category.
Testing supplies include motor fuel, engine parts and other items used or
consumed in engine testing and in the machine shop. Related costs fluctuate from
year to year depending on the number and type of engines being tested, and the
timing of purchases of certain items. The charges for 1994 included an unusually
large purchase of specialized testing fuel which was made to take advantage of
favorable volume discounts from the supplier.
Depreciation expense has been declining for the last three years, as most of the
Company's equipment that was purchased several years ago has become fully
depreciated, while purchases of new equipment have not been significant.
General and Administrative (G&A) Expenses:
1996 1995 1994
---- ---- ----
Personnel:
Salaries $104,753 $182,924 $193,524
Taxes/benefits 9,523 13,084 13,123
Bonuses 10,000 35,000
-------- -------- --------
Total personnel 124,276 231,008 206,647
Legal fees 18,524 40,143 46,802
Stock transfer agent,
proxy fees, etc. 21,183 23,907 13,302
Occupancy 13,159 16,983 15,988
Travel 22,583 17,810 25,826
Telephone & postage 10,982 14,215 11,211
Insurance 11,789 10,939 16,338
Audit fee 9,815 9,720 9,772
Other expenses 28,132 29,358 32,661
-------- -------- --------
Total G&A $260,443 $394,083 $378,547
======== ======== ========
Page 12 of 40
<PAGE>
Total G&A expenses decreased $133,640, or 34%, from 1995 to 1996, primarily due
to a decrease in G&A personnel costs of $106,732, or 46%. From 1994 to 1995,
total G&A expenses increased $15,536, or 4%, primarily due to higher personnel
costs by $24,361.
The increase in G&A personnel costs from 1994 to 1995 is largely due to the fact
that in 1995 the Company awarded a bonus of $35,000, payable in stock and cash,
to its chief financial officer, while no bonus was awarded in 1994. In 1996 he
was awarded a cash bonus of $10,000. The decrease of $78,171 in G&A salaries
from 1995 to 1996 is nearly entirely due to a reduction of $76,000 in salary
expense for the Company's president. Effective January 1, 1996, his employment
commitment was changed from full-time to part-time, with a corresponding
reduction in salary from $100,000 per year, 40% of which amount was deferred, to
$2,000 per month with no portion deferred.
Total legal fees decreased by $6,659 from 1994 to 1995 and by $21,619 from 1995
to 1996. The year to year decrease is explained in part by the reduction in fees
related to the lawsuit filed in November 1993 by two former officers of the
Company, from $27,934 in 1994 to $21,132 in 1995 to $7,155 in 1996. Such fees
were lower in 1995 because more time from the attorneys was needed in the early
stages of the litigation - in the first half of 1994 with respect to motions for
dismissal, and in the second half of that year for preparation for and
attendance at the November 1994 trial. Less time was needed in 1995 for the
filing of appeal briefs and for preparation for and attendance at the oral
arguments in November 1995. The litigation was concluded early in 1996 in the
Company's favor, resulting in lower fees in 1996. Legal fees for charges for
general legal and securities related services were $16,407 in 1994, $6,204 in
1995 and $10,066 in 1996. Charges for services from the Company's patent counsel
were $2,461 in 1994, $12,807 in 1995 and $1,303 in 1996.
Charges for stock transfer agent fees and for mailing of proxy materials and
other communications to shareholders increased by $9,065 from 1994 to 1995,
primarily due to the fact that the Company began to incur the additional expense
of sending all press releases and shareholder letters to its "street name"
holders as well as to those holding stock in their own names, whereas this was
not often done in the past. Such charges in 1996 were only slightly lower than
in 1995.
Write-off of Acquired Technology:
1995 $ 80,000
1994 $739,036
As described in Note 7 to the Company's financial statements, management
determined in 1994 that the value of certain of its older technologies had
suffered a permanent impairment. Accordingly, the net book value of the related
capitalized costs, representing the unamortized portion of costs capitalized by
the Company in connection with the acquisition and maintenance of these older
technologies, was reduced to its estimated recoverable amount of $80,000,
resulting in a charge to operations in 1994 of $739,036. In 1995 it was
determined that the remaining balance of $80,000 was not recoverable, and this
amount was also charged to operations.
Interest Expense:
1996 $ 670
1995 $ 1,198
1994 $32,864
Interest expense decreased by $31,666 from 1994 to 1995 because of the write-off
in late 1994 of the capitalized costs of acquired technology, resulting in no
further interest expense being imputed on the related technology purchase
obligations.
Page 13 of 40
<PAGE>
Gains and Losses Related to Marketable Securities:
The unrealized gain on sales of marketable securities of $42,625 in 1994
represents the reversal of unrealized losses recorded in 1993 upon the sale in
1994 of securities for which the aggregate cost exceeded the aggregate market
value at December 31, 1993. Sales of these securities made during 1994 resulted
in realized gains of $23,666.
The realized gains on sales of marketable securities in 1996 represents the
proceeds from the sale of a portion of the Company's investment in Digital
Dictation, Inc., the corporation which in October 1995 was merged with and into
the Company's inactive subsidiary, SonoChem, Inc., as further described in Note
13 to the accompanying financial statements. Because the recorded basis for this
investment is zero, all sales proceeds are recognized as gains.
Adoption of new accounting pronouncements
- -----------------------------------------
The adoption by the Company in fiscal 1997 of new accounting pronouncements
which have a delayed effective date is not expected to have a material impact on
the financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS
Index to financial statements presented on pages 15 to 31:
Report of independent accountants
Financial statements:
Balance sheets as of December 31, 1996 and 1995
Statements of operations and accumulated deficit for the three years in
the period ended December 31, 1996, and for the period from April 9,
1980 (inception) through December 31, 1996
Statements of paid-in capital for the period from April 9, 1980
(inception) through December 31, 1996
Statements of cash flows for the three years in the period ended
December 31, 1996, and for the period from April 9, 1980 (inception)
through December 31, 1996
Notes to financial statements
Page 14 of 40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Sonex Research, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Sonex
Research, Inc. (a development stage company) at December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, and for the period from April 9, 1980
(inception) through December 31, 1996, in conformity with generally accepted
accounting principles. 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 conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 3 to the
financial statements, the Company's ability to emerge from the development
stage, commence generation of significant revenue and ultimately achieve
profitable operations remains uncertain. The Company has incurred significant
net losses since its inception. The Company's future prospects depend upon its
ability to demonstrate commercial viability of its products and/or to obtain
capital sufficient to assure the completion of its development stage activities,
all of which raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Baltimore, Maryland
April 8, 1997
Page 15 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
BALANCE SHEETS
December 31,
------------
1996 1995
---- ----
Assets
Current assets
Cash and equivalents $ 89,739 $ 256,139
Cash posted as security for
judgment (Note 4) 182,687
Marketable securities, available-
for-sale (Note 5) 36,800
Accounts receivable 50,000 63,741
Prepaid expenses 38,692 29,861
Loans to officers and employees (Note 6) 16,906 43,376
---------- ----------
Total current assets 232,137 575,804
Loans to officers and employees (Note 6) 15,000 15,000
Patents and technology (Note 7) 239,308 328,822
Property and equipment (Note 8) 28,008 44,904
---------- ----------
Total assets $ 514,453 $ 964,530
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accrued compensation (Note 9) $ 620,620 $ 580,785
Accounts payable and accrued liabilities 170,371 118,477
---------- ----------
Total current liabilities 790,991 699,262
---------- ----------
Stockholders' equity (Note 12)
Preferred stock, $.01 par value - 2,000,000
shares issued; shares outstanding: 1,550,001
in 1996 and 1,830,000 in 1995 15,500 18,300
Common stock, $.01 par value - shares issued
and outstanding: 16,214,020 in 1996 and
15,281,535 in 1995 162,140 152,815
Additional paid-in capital 19,165,535 19,078,191
Unrealized increase in value of
marketable securities 36,800
Deficit accumulated during development stage (19,656,513) (18,984,038)
---------- ----------
Total stockholders' equity (276,538) 265,268
Commitments (Note 14)
---------- ----------
Total liabilities and stockholders' equity $ 514,453 $ 964,530
========== ==========
The accompanying notes are an integral part of the financial statements.
Page 16 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
April 9, 1980
(inception)
Year ended December 31, through
----------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
Revenue
Development contracts $ 70,000 $ 223,141 $ 146,800 $ 1,665,566
Other 124,425
-------- -------- -------- ---------
70,000 223,141 146,800 1,789,991
-------- -------- -------- ---------
Costs and expenses
Research and development 523,524 585,233 622,780 11,791,690
General and administrative 260,443 394,083 378,547 7,181,003
Interest 670 1,198 32,864 866,949
Write-off of acquired
technology 80,000 739,036 819,036
-------- --------- --------- ----------
784,637 1,060,514 1,773,227 20,658,678
-------- --------- --------- ----------
Net loss from operations (714,637) (837,373) (1,626,427) (18,868,687)
-------- -------- ---------- -----------
Other income and expense
Investment and other income 12,049 12,182 9,299 293,134
Debt conversion expense (1,112,350)
Gain (loss) on sales of
marketable securities 30,113 23,666 31,390
Unrealized gain on
marketable securities 42,625
-------- -------- ---------- -----------
Net loss (672,475) (825,191) (1,550,837) (19,656,513)
Deficit accumulated during
development stage
Beginning of period (18,984,038) (18,158,847) (16,608,010)
----------- ----------- ----------- -----------
End of period $(19,656,513)$(18,984,038)$(18,158,847)$(19,656,513)
============ ============ ============ ============
Net loss per share $ (.04) $ (.06) $ (.12)
====== ====== ======
Weighted average number of
common shares outstanding 15,968,491 14,368,760 13,032,717
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
Page 17 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF PAID-IN CAPITAL
APRIL 9, 1980 (INCEPTION) THROUGH DECEMBER 31, 1996
Price Preferred stock Common stock Additional
per ($.01 par value) ($.01 par value) paid-in
share Shares Amount Shares Amount capital
----- ------ ------ -------- ------ -----------
Note: Retroactive effect has been given to all previously declared stock splits.
April 1980 - property 1,076,252 $10,764 $ (10,764)
December 1980 - cash $1.08 115,312 1,152 123,848
November 1981 - repurchase (115,312) (1,152) 1,077
November 1981 for services 76,874 768 (718)
January, August 1982 - cash 2.25 200,000 $2,000 448,000
January, August 1982 - cash .26 76,874 768 19,232
1982 stock issuance costs (36,975)
February 1983 option exercise .30 738,000 7,380 213,420
August, November 1983 - cash
and services .04 53,812 538 1,712
January-December 1984 - cash .78 830,054 8,300 639,573
1984 stock issuance costs (142,092)
1983 and 1984 anti-dilution 200,000 2,000 492,000 4,920 (6,920)
July, August 1984 - for past
and future services .78 293,620 2,936 226,164
July 1984 conversion (.65 to 1) (400,000)(4,000) 615,000 6,150 (2,150)
July 1984 note conversion .78 160,154 1,602 123,398
April 1985 IPO 2.50 1,000,000 10,000 2,490,000
1985 stock issuance costs (764,938)
1985 option exercise .74 61,494 615 44,585
July through November 1985 -
exercise of warrants 3.00 750 8 2,242
Dec. 1985 and Feb. 1986 -
exercise of warrants 2.62 521,788 5,218 1,361,079
July 1985 note conversion .94 32,030 320 29,680
1986 option exercise .74 99,834 998 72,988
1986 exercise of warrants 2.85 155,943 1,560 442,815
December 1986 - cash 3.57 280,000 2,800 997,200
1986 stock issuance costs (213,402)
1986 distribution to stockholders (18,772)
1986 deferred compensation -
grant of stock options 276,500
April 1987 - cash 4.55 220,000 2,200 997,800
May 1987 - cash 7.14 140,000 1,400 998,600
1987 option exercise 3.50 20,000 200 69,800
1987 stock issuance costs (265,186)
1987 deferred compensation -
grant of stock options 410,625
March, December 1988 option 3.00 25,666 257 76,741
1988 exercise of warrants 2.50 7,500 75 18,675
1988 for services 2.63 11,428 114 29,886
1988 note conversion 2.00 816,500 8,165 1,624,835
1988 debt conversion expense 737,500
1988 reclassification of
issuance costs (176,981)
1988 forgiveness of interest
on note conversion 44,614
1988 deferred compensation -
grant of stock options 33,750
1989 for services 2.63 11,429 114 29,886
1989 option exercise .48 36,903 369 17,432
March - June 1989 - cash 2.05 281,000 2,810 572,200
1989 exercise of warrants 2.00 28,840 288 57,392
1989 exchange offer 2.38 604,200 6,042 1,428,933
1989 note conversion 2.38 55,000 550 130,075
1989 technology rights 2.38 250,000 2,500 591,250
1989 exercise of warrants 1.75 73,650 737 128,151
1989 stock issuance costs (252,950)
1989 deferred compensation -
grant of stock options 25,603
1990 for services .59 9,684 97 5,653
------- ---- --------- ------- -----------
Balance, December 31, 1990 - - 9,156,279 $91,563 $13,651,066
(Continued on next page)
Page 18 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF PAID-IN CAPITAL
APRIL 9, 1980 (INCEPTION) THROUGH DECEMBER 31, 1996
Price Preferred stock Common stock Additional
per ($.01 par value) ($.01 par value) paid-in
share Shares Amount Shares Amount capital
----- --------- ------- --------- ------- ----------
(Continued from previous page)
Balance, December 31, 1990 - - 9,156,279 $91,563 $13,651,066
March through December -
debt issuance costs $ .50 765,000 7,650 374,850
May, September for services .50 86,400 864 42,336
September - conversion of
notes and interest .33 645,442 6,454 208,693
Adjustment to stock ledger (1,500) (15) (3,547)
--------- ------ ---------- ------- ----------
Balance, December 31, 1991 - - 10,651,621 106,516 14,273,398
February for cash 1.00 1,750,000 17,500 1,732,500
Feb. - loan conversion 1.00 250,000 2,500 247,500
February - conversion of
notes and interest .33 349,892 3,499 113,131
February - payment
of accrued compensation .50 384,220 3,842 188,268
April - conversion (.35 to 1) (20,000) (200) 57,143 571 (371)
August, December option
exercise .50 14,050 141 6,884
December - exercise of
Class A warrants 1.50 431,775 4,318 643,344
December - exercise of
Class B warrants 2.00 1,800 18 3,582
December - exercise of
warrants 1.00 21,429 214 21,215
Compensation - grant of
stock options 51,562
Stock issuance costs (164,836)
--------- ------ ---------- ------- ----------
Balance, December 31, 1992 1,980,000 19,800 11,911,930 119,119 17,116,177
May through December -
option exercise .50 153,038 1,531 74,988
May - exercise of warrants 2.00 833 8 1,658
Issuance of discounted
options in payment of:
Accrued compensation 303,611
Note payable to officer 28,000
Stock issuance costs (1,596)
--------- ------ ---------- ------- ----------
Balance, December 31, 1993 1,980,000 19,800 12,065,801 120,658 17,522,838
February through August -
option exercise .50 75,379 754 36,936
April - conversion (.35 to 1) (150,000)(1,500) 428,567 4,286 (2,786)
April - conversion of
loan and interest .75 281,872 2,819 208,585
June and July for cash .75 766,666 7,666 567,334
October for services .80 30,000 300 23,700
Stock issuance costs (7,767)
--------- ------ ---------- ------- ----------
Balance, December 31, 1994 1,830,000 18,300 13,648,285 136,483 18,348,840
January - July for services .58 15,000 150 8,600
June for cash .25 1,020,000 10,200 244,800
June - payment of
accrued compensation .25 170,000 1,700 40,800
June - indemnification
by officer 15,000
September through November
option exercise .50 88,250 882 43,243
December for cash 1.00 340,000 3,400 336,600
Compensation - grant of
stock options 52,500
Stock issuance costs (12,192)
--------- ------ ---------- ------- ----------
Balance, December 31, 1995 1,830,000 18,300 15,281,535 152,815 19,078,191
January for services 1.00 1,000 10 990
January through August
option exercise .50 131,488 1,315 64,429
April and July -
conversion (.35 to 1) (279,999)(2,800) 799,997 8,000 (5,200)
Compensation - grant of
stock options 27,125
--------- ------ ---------- ------- ----------
Balance, December 31, 1996 1,550,001$15,500 16,214,020$162,140 $19,165,535
========= ====== ========== ======= ===========
The accompanying notes are an integral part of the financial statements.
Page 19 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
April 9, 1980
(inception)
Year ended December 31, through
----------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
Cash flows from operating
activities:
Net loss $(672,475) $(825,191) $(1,550,837) $(19,656,513)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation 21,783 20,646 23,680 665,515
Amortization of patents 101,970 79,653 193,318 1,376,608
Write-off of acquired
technology 80,000 739,036 819,036
Compensation - stock options 27,125 52,500 877,665
Imputed interest expense 23,328 551,247
Interest credited to paid-
in capital 44,614
Debt conversion expense 1,112,350
Current liabilities and
charges paid in stock 1,000 51,250 35,404 1,124,380
(Gain)/loss on sale of
marketable securities (30,113) (23,666) (31,390)
Unrealized gain on sale of
marketable securities (42,625)
(Increase) decrease in
accounts receivable 13,741 17,959 (81,700) (50,000)
(Increase) decrease in
prepaid expenses (8,831) 1,935 (5,300) (38,692)
Increase in accrued
liabilities 91,729 120,779 153,746 703,327
-------- -------- -------- -----------
Net cash used in operating
activities : (454,071) (400,469) (535,616) (12,501,853)
-------- -------- -------- -----------
Cash flows from investing
activities:
Purchase of marketable
securities (245,618) (2,377,256)
Proceeds from sales of
marketable securities 30,113 17,292 822,617 2,408,646
(Increase) decrease in
loans to employees 26,470 (17,231) (2,231) (31,906)
(Increase) decrease in cash
posted as security
for judgment 182,687 (5,599) (177,088)
Acquisition of property
and equipment (4,887) (3,462) (544,036)
Additions to patents
and technology (12,456) (15,941) (187,492) (1,310,502)
-------- -------- -------- -----------
Net cash provided by (used in)
investing activities: 221,927 (21,479) 206,726 (1,855,054)
-------- -------- -------- -----------
Cash flows from financing
activities:
Issuance of stock 65,744 639,125 612,690 15,107,655
Issuance of convertible debt 2,287,500
Indemnification by officer 15,000 15,000
Repayment of convertible debt (92,500)
Stock and debt issuance costs (12,192) (7,768) (2,038,916)
Distribution to stockholders (18,772)
Reduction of technology
purchase obligations (797,500)
Proceeds from borrowings 77,020 1,592,748
Reduction of borrowings (9,898) (320,707) (1,608,569)
-------- -------- -------- -----------
Net cash provided by
financing activities: 65,744 632,035 361,235 14,446,646
-------- -------- -------- -----------
Increase (decrease) in cash: (166,400) 210,087 32,345 89,739
Cash at beginning of period: 256,139 46,052 13,707
-------- -------- -------- -----------
Cash at end of period: $ 89,739 $256,139 $ 46,052 $ 89,739
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
Page 20 of 40
<PAGE>
SONEX RESEARCH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Sonex Research, Inc. has developed and acquired technology which controls the
combustion of fuel in engines. The Company is in the process of developing
several commercial applications of its technology, referred to as the Sonex
Combustion System (SCS). Sonex expects to license several commercial
applications of its technology and commercially exploit other applications
itself. Related revenue earned to date has been derived principally from
development contracts, but such revenue offsets only a small portion of the
related development expenditures.
Accordingly, Sonex Research, Inc. is classified as a development stage company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation of financial statements
- ------------------------------------
Certain reclassifications have been made to the financial statements of prior
years to conform to the classifications used in 1996. The financial statements
include the accounts of the Company and, until its disposition in October 1995
as described in Note 13, SonoChem, Inc. All intercompany balances have been
eliminated in consolidation. SonoChem, Inc. has been an inactive company since
1988, and its recorded expenses since then have not been significant.
Cash and equivalents
- --------------------
The Company's By-Laws restrict the types of permitted investments to securities
issued by the U.S. Treasury, savings accounts insured by the U.S. Government, or
investment companies that invest in obligations of the U.S. Government or its
agencies. The Company considers all short-term, highly liquid investments which
are convertible into cash within three months or less to be cash equivalents.
Marketable securities
- ----------------------
Securities held by the Company are classified as "available-for-sale" for
financial statement purposes; accordingly, unrealized gains and losses with
respect to such securities are reported as a separate component of stockholders'
equity. Realized gains and losses are reported in the Company's statement of
operations.
Patents and technology
- ------------------------
The costs associated with the filing of patent applications, computer models and
simulations developed by third parties, and the acquisition of patents and
technology from third parties are deferred. Amortization is recorded on a
straight-line basis over the remaining legal life of patents, commencing in the
year in which the patent is granted, or over a five-year period for the
capitalized costs of computer models and simulations. Costs related to patent
applications which ultimately fail to result in the grant of a patent, either
through rejection by patent authorities or through abandonment by the Company,
are charged to operations at the time such determination is made.
Property and equipment
- ----------------------
Property and equipment is stated at cost or, in the case of leased equipment
under capital leases, at the present value of future lease payments, less
accumulated depreciation. Major renewals and betterments are capitalized and
ordinary repair and maintenance expenditures are charged to operations in the
year incurred. Depreciation is computed using the straight line method for
financial reporting purposes and accelerated methods for income tax purposes.
Equipment and vehicles are depreciated over three to seven years, while
leasehold improvements are depreciated over the shorter of the useful life or
the remaining term of the related lease.
Revenue recognition
- --------------------
Revenue derived from development contracts is recognized upon the Company's
completion of the milestones and/or submission of progress reports specified in
each contract. Commercial development contracts are executed in situations in
which a manufacturer is willing to provide funding to partially offset the
Page 21 of 40
<PAGE>
development costs incurred by the Company in applying its technology to one of
the manufacturer's engines. Development contracts are also executed for funding
supplied by a government or quasi-government agency.
Generally, commercial development contracts require the Company to demonstrate
that the manufacturer's engine, when modified with the Company's technology, can
meet certain emissions reduction and performance goals specified in the
contract. In addition, these contracts sometimes provide that payment of part of
the contract amount will be made only if the Company meets the specified goals.
The Company is not required to repay any funds received in connection with its
development contracts. To date, the development contract revenue earned by the
Company has offset only a small percentage of total research and development
expenditures.
Stock-based compensation
- -------------------------
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25. Under APB
No. 25, compensation cost is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the exercise price
of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. The Company provides additional pro
forma disclosures as required under SFAS No. 123 "Accounting for Stock-Based
Compensation".
Net loss per share
- -------------------
Net loss per share is computed based upon the weighted average number of common
shares outstanding during the year. No consideration is given to convertible
preferred stock and exercisable stock options and warrants in these computations
since they would serve to reduce the loss per share.
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 amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
NOTE 3 - LIQUIDITY AND ABILITY TO EMERGE FROM THE DEVELOPMENT STAGE
Substantial progress toward commercialization of the SCS has been made under
joint development programs with manufacturers, and negotiations for production
piston development programs and licensing agreements are currently in progress.
Until such time, however, as licensing agreements are executed with one or more
major engine manufacturers, substantial doubt remains about the Company's
ability to emerge from the development stage, commence generation of significant
revenues and ultimately achieve profitable operations.
Management recognizes that the Company's current level of available funds,
including the capital raised in March 1997 pursuant to the transactions
described in Note 15, combined with revenue from current and future development
contracts, may not provide sufficient operating capital to fund operations until
such time as a stream of royalty revenue is realized from the licensing of the
SCS. Accordingly, the Company will continue to minimize its operating
expenditures through a number of measures, including the continued deferral by
officers and other salaried employees of significant portions of their salaries.
In the event that the realization of significant revenue from the licensing of
the SCS is further delayed, the Company may need to raise additional capital to
fund its development stage activities.
NOTE 4 - CASH POSTED AS SECURITY FOR JUDGMENT
In connection with a judgment stemming from a lawsuit against the Company filed
by two former officers as described in Note 10, on November 30, 1994, the
Company placed $177,088 in cash on deposit with the court pending the resolution
of an appeal. The judgment was later reversed on appeal, and, in May 1996, a
total of approximately $184,000, including interest earned through that date,
was returned to the Company.
Page 22 of 40
<PAGE>
NOTE 5 - MARKETABLE SECURITIES
As described in Note 13, in October 1995 the Company's inactive, public shell
subsidiary, SonoChem, Inc., was merged with and into Digital Dictation, Inc.
("Digital"), a privately held Virginia medical transcription services company.
In connection with the merger, the Company exchanged all of its shares in
SonoChem for 125,133 shares of the common stock of Digital, representing 2% of
the issued and outstanding shares of Digital. A total of 5% of the issued and
outstanding shares of Digital, including those shares held by Sonex, began
trading in the over-the-counter market in April 1996. During 1996 the Company
sold a total of 27,000 shares of its Digital stock and realized aggregate net
proceeds of $30,113.
At the time of this exchange in October 1995, the fair value of neither the
SonoChem stock nor the Digital stock was reasonably estimable. As a result, the
Company's carrying basis in the SonoChem stock of zero is considered to be its
cost basis in the Digital stock, and no gain or loss was recorded in the 1995
financial statements with respect to this transaction. Since public trading
began in April 1996 and a readily determinable fair value for the Digital stock
has become available, the investment is now accounted for in accordance with
SFAS No. 115 and classified as a current asset as a security that is
"available-for-sale". Accordingly, the Company's investment in the 98,133 shares
held as of December 31, 1996 is recorded in the accompanying financial
statements at its aggregate fair value of $36,800. A corresponding amount,
representing the aggregate unrealized gain in the fair value of this investment
in excess of its cost basis, is reported as a separate component of
stockholders' equity. Subsequent changes in the aggregate market value of this
investment will be similarly recorded.
During 1992 and early 1993 approximately $778,000 of the Company's funds were
invested in a publicly traded stock. This investment was purchased on behalf of
the Company by its president pursuant to authority granted him under the
Company's By-Laws in effect at the time, although without the knowledge or
approval of the Company's Board of Directors. The president subsequently agreed
to indemnify the Company against any losses on the sale of this investment, and
the Company's By-Laws were amended to restrict the types of permitted
investments to those described in Note 1.
The investment was sold in stages from December 1993 through March 1995 and, in
the aggregate, the Company recognized a net gain of $1,750 from such sales and
incurred interest of $11,727 on borrowed funds secured by the investment. The
Company has since been indemnified by its president for net losses of $9,977. In
June 1995 the Company received an additional reimbursement from its president in
the amount of $5,023 for expenses paid by the Company since late 1991 that were
subsequently determined to have been incurred by its president for matters
unrelated to the Company's operations. The aggregate indemnification and expense
reimbursement of $15,000 has been credited to additional paid-in capital during
1995.
NOTE 6 - LOANS TO OFFICERS AND EMPLOYEES
Loans totaling $37,180, bearing interest at six percent per annum, were made
early in 1993 to four of the Company's officers and one non-officer employee for
the payment of income tax liabilities incurred by these individuals upon their
receipt in 1992 of shares of common stock in payment of deferred wages.
Outstanding loan principal and accrued interest balances are secured by deferred
salaries payable to each of the borrowers. One of these loans in the principal
amount of $14,500 was made to the Company's vice-president of operations, whose
employment was later terminated. The former officer, however, instituted legal
action against the Company in November 1993, as described in Note 10, to collect
additional amounts of deferred salary, net of the loan balance. During 1996 the
Company unsuccessfully instituted legal action for collection of this amount; as
a result, the outstanding loan principal and interest was satisfied through
offset against deferred salary payable to the former officer.
The maturity date for the loan principal and interest due from current employees
has been extended through December 31, 1997. As of December 31, 1996, aggregate
loan principal of $13,580 remained outstanding, while accrued interest on the
loans aggregated $3,326.
Page 23 of 40
<PAGE>
Loans totaling $15,000 were made at the end of December 1995 to one of the
Company's officers and two non-officer employees for the payment of income tax
liabilities incurred by these individuals upon their receipt in 1995 of shares
of common stock in payment of bonus compensation. The loans are secured by
deferred salaries payable to each of the borrowers, and become due within ninety
days of the date that the shares of common stock received by the borrowers in
1995 first become saleable. The loans originally bore a stated interest rate of
six percent per annum, but were amended recently by the Board of Directors to
eliminate the accrual of interest.
NOTE 7 - PATENTS AND TECHNOLOGY
The capitalized costs of patents and technology consists of the following:
December 31,
------------------
1996 1995
---- ----
Patent application fees and
related legal costs $249,093 $236,637
Computer models and simulations 237,164 237,164
-------- --------
486,257 473,801
Accumulated amortization (246,949) (144,979)
-------- --------
$239,308 $328,822
======== ========
Following an extensive evaluation in 1994 of the factors affecting the economic
value of all of the Company's proprietary technology, the carrying values of
certain technology developed internally, other technology acquired from a third
party, and related technology purchase obligations, were reduced to their
estimated recoverable amounts. Related charges to operations in the accompanying
financial statements aggregated $739,036 in 1994 and $80,000 in 1995.
The Company has conducted and continues to conduct its own research and
development activities which have resulted in additional proprietary technology
and patents. Development of commercial applications of certain elements of the
SCS has commenced and management believes the capitalized cost of patents and
technology will be recovered through revenue derived from the licensing of such
technology. Management closely monitors the patent application process and other
factors which may affect the economic value of the Company's technology, and
will further reduce the capitalized cost of patents and technology should the
recovery of such cost no longer be sustainable.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
------------------
1996 1995
---- ----
Shop equipment $394,182 $388,346
Equipment under capital lease 43,299
Vehicles 11,053 11,053
Office equipment 24,806 22,902
Leasehold improvements 31,367
-------- --------
430,041 496,967
Accumulated depreciation (402,033) (452,063)
-------- --------
$ 28,008 $ 44,904
======== ========
Page 24 of 40
<PAGE>
NOTE 9 - ACCRUED COMPENSATION
In order to help conserve the Company's limited cash resources, all of the
Company's salaried employees for several years have been voluntarily deferring
significant portions of the salaries due them under the terms of previous
employment agreements or as otherwise established by the Board of Directors. As
of December 31, 1996, an aggregate of $595,620 of wages so deferred remained
unpaid and has been recorded as accrued compensation on the Company's balance
sheet. This balance includes amounts payable to two former officers who
unsuccessfully sought early repayment through the legal action described in Note
10. As a result of that litigation and a subsequent unsuccessful collection
action filed by the Company in 1996, approximately $14,500 representing a loan
payable to the Company by one of the former officers, plus accrued interest, was
determined to have been satisfied by offset against an equal amount of deferred
salary owed by the Company to the former officer.
As a condition of the Company's receiving an indispensable capital infusion in
February 1992, the investors, Proactive Partners, L.P. and certain of its
affiliates ("Proactive") who became the Company's largest shareholder by virtue
of their purchase of convertible preferred stock and common stock purchase
warrants, required that the voluntary deferral of salaries be documented
formally. Accordingly, all salaried employees executed an agreement referred to
as the "Consent to Deferral" in which they consented to the past and future
deferral of portions of their annual salaries, and agreed to defer payment of
amounts so accumulated until the Company has received licensing revenue of at
least $2 million or at such earlier date as the Board of Directors determines
that the Company's cash flow is sufficient to allow such payment.
NOTE 10 - LITIGATION
In June 1993 the Company eliminated the positions of three full-time
vice-presidents. One of these individuals accepted the Company's separation
compensation offer, while the other two former officers (referred to as the
"Plaintiffs") instituted legal action in November 1993, demanding immediate full
payment of aggregate unpaid salaries of $165,515 less approximately $14,500
representing a loan payable to the Company by one of the Plaintiffs. This
lawsuit alleged that the Company breached contractual obligations by failing to
pay salary due under previous employment agreements and violated Maryland labor
laws by failing to pay wages due upon termination of employment. The Plaintiffs
sought immediate full repayment of deferred salaries and damages of up to three
times the amount owed, plus prejudgment interest, attorney's fees and costs.
Following a hearing in the trial court in June 1994 on various motions for
dismissal and summary judgment filed by the parties, the hearing judge denied
the Plaintiffs claims for treble damages and recovery of attorneys' fees and
costs, and dismissed most of the other motions. At a trial held in November 1994
before a different judge, the Plaintiffs were awarded judgment in the amount of
$163,140 that included pre-judgment interest from the date of termination of
employment through the date of the trial and reflected an offset for the $14,500
loan. Following the trial, the Company filed an appeal and, in order to stay the
Plaintiffs from initiating steps to collect on the judgment prior to a ruling on
the appeal, on November 30, 1994 the Company posted cash security with the court
in the amount of $177,088, which figure included interest over the estimated
period of the appeal process.
In December 1995 the Maryland Court of Special Appeals reversed the judgment
awarded to the Plaintiffs by the trial court, following which the Plaintiffs
filed a Petition for Writ of Certiorari with the Court of Appeals of Maryland
seeking a review of the reversal of the judgment by the Court of Special
Appeals. In April 1996 the Petition was denied and, in May 1996, a total of
approximately $184,000, including interest earned through that date, was
returned to the Company. Also in May 1996, the parties executed a Stipulation of
Dismissal with Prejudice pursuant to which all claims were dismissed.
Page 25 of 40
<PAGE>
NOTE 11 - INCOME TAXES
The Company has not incurred any federal or state income taxes since its
inception due to operating losses. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $16.5 million available to offset
future taxable income. If certain substantial changes in the Company's ownership
should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized. The Company's net operating loss
carryforwards expire at various dates from 1997 through 2011, as follows:
Expiring in 1997 - 1998 $ 947,000
Expiring in 1999 - 2000 2,005,000
Expiring in 2001 - 2002 3,907,000
Expiring in 2003 - 2011 9,667,000
-----------
$16,526,000
===========
The difference between the net operating loss carryforwards for income tax
reporting purposes and the accumulated deficit reported in these financial
statements results principally from temporary differences relating to the timing
of the recording of deferred salaries and compensation related to the grant of
stock options for income tax and financial reporting purposes, the differences
in the accounting for the Company's investment in its former consolidated
subsidiary for income tax and financial reporting purposes, and as a result of
the non-deductibility for income tax purposes of the charge to operations for
debt conversion expense in 1988. The potential income tax benefit of these
carryforwards and temporary differences of approximately $6.4 million has not
been recorded in the financial statements due to the uncertainty of realization
based on the Company's financial performance to date.
NOTE 12 - CAPITAL STOCK
Authorized capital stock
- ------------------------
The Company is presently authorized to issue 48 million shares of $.01 par value
common stock and 2 million shares of $.01 par value convertible preferred stock.
The preferred stock has priority in liquidation over the common stock, but it
carries no stated dividend. The holders of the preferred stock, voting as a
separate class, have the right to elect that number of directors of the Company
which represents a majority of the total number of directors. The preferred
stock is convertible at any time at the option of the holder into common stock
at the rate of $.35 per share of common stock. As of December 31, 1996, a total
of 449,999 shares of preferred stock had been converted into 1,285,707 shares of
common stock.
Private placements of common equity
- -----------------------------------
In June 1994 the Board of Directors accepted a proposal from Proactive, the
Company's largest shareholder and two of whose general partners are directors of
the Company, for an immediate private investment of $500,000 and the conversion
to common equity of loans payable to Proactive aggregating $200,000, along with
accrued interest of $11,404.
In consideration of its $500,000 cash investment Proactive received 666,666
shares of common stock, five-year warrants to purchase 333,333 shares of common
stock at $1.125 per share (the "$1.125 Warrants"), and five-year warrants to
purchase 333,333 shares of common stock at $1.50 per share (the "$1.50
Warrants"). The Company also accepted additional investments aggregating
$75,000, on the same terms as the Proactive cash investment, from a limited
number of other shareholders. The outstanding loans and accrued interest
aggregating $211,404 owed to Proactive were converted into 281,872 shares of
common stock, and Proactive also received 140,936 of the $1.125 Warrants and
140,936 of the $1.50 Warrants.
In late May 1995 the Board of Directors accepted a proposal from Proactive for
an immediate private investment of $200,000, in consideration for which
Proactive received 800,000 shares of common stock, five-year warrants to
purchase 400,000 shares of common stock at $.375 per share (the "$.375
Warrants"), and five-year warrants to purchase 400,000 shares of common stock at
$.50 per share (the "$.50 Warrants"). The Company also accepted
Page 26 of 40
<PAGE>
additional investments aggregating $55,000, in units of $5,000 on the same terms
as the Proactive cash investment, from a limited number of other shareholders.
In connection with this financing, the Company paid an advisory fee of $10,000
to an entity affiliated with Proactive.
In June 1995 accrued bonus compensation aggregating $42,500 due to the Company's
chief financial officer and three other employees of the Company was paid
through the issuance of common stock and warrants on the same terms as the
Proactive cash investment. In total, these employees received 170,000 shares of
common stock, $.375 Warrants to purchase 85,000 shares, and $.50 Warrants to
purchase 85,000 shares.
In connection with a private financing in December 1995, the Board of Directors
accepted investments aggregating $340,000, in units of $10,000, from several
shareholders who are accredited investors. Each $10,000 Unit consisted of 10,000
shares of the Company's common stock and five-year warrants to purchase an
additional 10,000 shares of common stock at $1.25 per share (the "$1.25
Warrants"). The Company also agreed to file, prior to June 30, 1996, an
effective registration statement covering the common stock issued in connection
with this private placement and the common stock issuable upon the exercise of
the $1.25 Warrants.
As described in Note 15, the Company was unable to complete a registration,
initiated in 1996, of the securities issued in connection with the financings
described above. Instead, as of February 28, 1997, the Company offered the
holders thereof a number of amendments to their warrants. As a result, the
exercise prices of the $1.125 and $1.50 Warrants issued in June 1994 to purchase
an aggregate of 1,048,536 shares of common stock and the $1.25 Warrants issued
in December 1995 to purchase 340,000 shares of comon stock were reduced to $.75.
In addition, all of these warrants, as well as the $.375 and $.50 Warrants
issued in May 1995 and June 1995, were amended to permit cashless exercise at
the option of the holder and to provide for "piggy-back" registration rights.
As described in Note 15, in March 1997 the Company raised additional equity
capital aggregating $580,000 from Proactive and other shareholders, and amended
the terms of certain warrants issued in February 1992 in addition to making the
amendments to the warrants described above.
No separate value has been reflected in the financial statements for the
warrants issued in the above transactions based on management's belief that the
separate fair value of such warrants is not significant.
Stock options
- -------------
The Company maintains a non-qualified stock option plan which has made available
for issuance a total of five million shares of common stock. All directors,
full-time employees and consultants to the Company are eligible for
participation. Option awards are determined at the discretion of the Board of
Directors. Upon a change in control of the Company, all outstanding options
become vested with respect to those options which have not already vested.
Options granted to date expire at various dates through August 2006.
In June 1995 the Board of Directors approved the grant to each of the Company's
seven outside directors of ten-year options to purchase 200,000 shares of common
stock. These options vest at the rate of 25% per year beginning with the date of
grant and have an exercise price of $.50 per share, which price was above the
then current market price of the common stock. Also in June 1995, the exercise
price of a total of 448,000 options granted to outside directors in June 1992
was reduced from $1.25 per share to $.50 per share to reflect the fact that the
incentive element of these options had been eliminated as a result of the
subsequent sustained decline in the market price of the common stock to a value
substantially below the exercise price established at the date of grant of these
options.
Page 27 of 40
<PAGE>
Between January 1, 1994 and December 31, 1996, the Company had the following
activity in options to purchase shares of common stock:
Weighted Weighted
average average
exercise # of shares exercise
# of shares price exercisable price
----------- ------- ----------- --------
Unexercised at January 1, 1994 2,534,851 $.64 1,986,529 $.64
========= ====
Granted 48,500 .50
Exercised (75,379) .50
Lapsed or canceled (3,750) .50
----------- -------
Unexercised at December 31, 1994 2,504,222 .64 2,270,067 $.64
========= ====
Granted 1,611,000 .52
Exercised (88,250) .50
Lapsed or canceled
----------- -------
Unexercised at December 31, 1995 4,026,972 .51 2,807,372 $.52
========= ====
Granted 123,000 .80
Exercised (131,488) .50
Lapsed or canceled (45,000) .50
----------- -------
Unexercised at December 31, 1996 3,973,484 $.51 3,195,734 $.53
========= ==== ========= ====
Of the options exercisable at December 31, 1996, options for the purchase of
3,002,484, 53,250, and 140,000 shares, respectively, were exercisable at prices
of $.50, $.75 and $1.00 per share, respectively. As of December 31, 1996, taking
into account options that expired, were cancelled or were exercised, options to
purchase 397,182 shares of common stock remain available for future grant.
For certain options granted during 1996 and 1995, the Company credited $27,125
and $52,500, respectively, to additional paid-in capital, representing the
excess of the aggregate market value at the date of grant of shares under option
over the aggregate exercise price of such options, and charged a like amount to
compensation expense.
No such charges were incurred in 1994.
The Company applies APB Opinion No. 25 in accounting for stock option
compensation; however, SFAS No. 123 requires the Company to make certain
disclosures as if the fair value based method of accounting had been applied to
the Company's stock option grants made subsequent to 1994. Accordingly, the
Company estimated the grant date fair value of each option awarded in 1995 and
1996 using the Black-Sholes option pricing model with the following weighted
average assumptions: expected volatility of 124%, risk-free interest rate
between 6.19% and 6.87%, zero dividend yield, and expected terms of ten years
for options granted to employees, officers and directors and three years for
options granted to consultants.
Had compensation cost for the Company's stock option plan been determined
consistent with the method of SFAS No. 123 using the weighted average estimate
of the fair value of each option granted of $.59 in 1996 and $.58 in 1995, the
Company's net loss and net loss per share (LPS) for 1996 and 1995 on a pro forma
basis would have been as indicated below:
Net loss LPS
---------- -----
1996 - as reported $ 672,475 $.04
1996 - pro forma $ 910,840 $.06
1995 - as reported $ 825,191 $.06
1995 - pro forma $1,095,611 $.08
Page 28 of 40
<PAGE>
These pro forma disclosures are not representative of the effects on reported
net loss and net loss per share for future years due to the effects of vesting.
Common stock reserved for future issuance. The number of shares of common stock
reserved by the Company for issuance for the following purposes have been
adjusted to reflect the changes resulting from the transactions in March 1997
described in Note 15 as if such changes had occurred as of December 31, 1996:
Purpose # of shares
----------------------------- -----------
Currently exercisable warrants:
Exercisable at $.35 per share, expiring in February 2000 571,428
Exercisable at $.375 per share, expiring in June 2000 595,000
Exercisable at $.50 per share, expiring in June 2000 595,000
Exercisable at $.75 per share, expiring on various dates
from June 1999 through March 2002 4,874,509
Exercisable at $1.00 per share, expiring in December 1997 428,571
Exercisable at $1.50 per share, expiring in December 1997 428,572
----------
7,493,080
----------
Currently exercisable options:
Exercisable at $.50 per share 3,002,484
Exercisable at $.75 per share 53,250
Exercisable at $1.00 per share 140,000
----------
3,195,734
----------
Granted options becoming exercisable in the future:
Exercisable at $.50 per share 744,000
Exercisable at $.75 per share 33,750
----------
777,750
Options available under plan for future grants 397,182
Conversion of preferred stock 4,428,574
----------
Total shares reserved 16,292,320
==========
NOTE 13 - INVESTMENT IN DIGITAL DICTATION, INC.
In October 1995 the Company's inactive, public company subsidiary, SonoChem,
Inc., effected a 1:10 reverse split of all of its issued and outstanding shares
of common stock, leaving 312,874 post-split shares, and was merged (the
"Merger") with and into Digital Dictation, Inc. ("DDI"), a privately held
Virginia medical transcription services company. Pursuant to the Merger,
SonoChem issued and exchanged 5,944,606 post-split shares of its common stock in
return for 100% of the issued and outstanding shares of common stock of DDI, and
SonoChem's name was changed to Digital Dictation, Inc. ("Digital"). Upon
consummation of the Merger, the present officers and directors of DDI, two of
whom are directors of the Company and general partners of Proactive, became the
directors and officers of Digital. See Note 5 for the accounting treatment of
this exchange and the subsequent accounting for the Company's investment in the
Digital stock.
Page 29 of 40
<PAGE>
NOTE 14 - COMMITMENTS
The Company does not have employment agreements with any of its officers;
however, as detailed in Note 9, all salaried employees have been deferring
significant portions of their authorized salaries under the terms of the Consent
to Deferral in order to help conserve cash.
The Company occupies its office and laboratory facilities pursuant to an
extension through November 1997 under the terms of an operating lease agreement
that has expired. The lease provides for monthly rent of $3,500, and requires
the Company to pay all property related expenses. Gross rent charges aggregated
$52,000, $54,000 and $57,600 in 1996, 1995 and 1994, respectively, while the
Company also earned sublease income of $2,400 in 1996. The Company will either
attempt to negotiate a new long-term lease for its current office and laboratory
facility once the current extension expires, or continue to occupy the premises
on a month-to-month basis under the terms of the previous lease, pursuant to
which the property owner is required to provide thirty days notice if he wants
the Company to vacate the premises. Management may also search for an
alternative location in the event that an agreement cannot be reached for the
existing premises. Management believes that the resolution of the uncertainty
with respect to the facility will not result in a significant interruption in
the operations of the Company.
NOTE 15 - SUBSEQUENT EVENTS
On February 28, 1997, the Company notified the holders of all of its outstanding
warrants to purchase shares its common stock of proposed amendments to such
warrants. These amendments were offered because the Company was unable to
complete a planned registration during 1996 of the common stock issuable upon
the exercise of the warrants. The warrants, all of which had original expiration
dates five years from the respective acquisition date, were issued in the
private financings that took place in June 1994, June 1995 and December 1995 as
described in Note 12, and in February 1992. The proposed amendments included, in
various combinations, extensions of the expiration dates, reductions in the
exercise prices, provisions for cashless exercise, and provisions for
"piggyback" registration rights.
The amendments proposed for the warrants issued in February 1992 (the "February
1992 Warrants") were also offered in connection with a $250,000 equity
investment proposal from Proactive accepted by the Company on February 24, 1997.
In exchange for this cash investment, Proactive received 333,333 shares of
common stock and five-year warrants to purchase 166,666 shares of common stock
at an exercise price of $.75 per share, along with a number of amendments to its
February 1992 warrants issued by the Company to Proactive and other investors in
connection with the sale of $2 million of convertible Preferred Stock in
February 1992 (the "Preferred Stock Investment").
In connection with the Preferred Stock Investment, $1,525,000 of which was
provided by Proactive, the Company had issued to investors the following
February 1992 Warrants to purchase shares of common stock: 2,857,143 exercisable
at $1.00 per share and 2,857,143 exercisable at $1.50 per share. The Company
also issued additional February 1992 Warrants to purchase 571,428 shares at
$.35, 285,714 shares at $1.00, and 285,714 shares at $1.50, to Proactive and
others for investment advisory services provided in connection with the
Preferred Stock Investment. February 1992 Warrants to purchase 21,429 shares at
$1.00 were later exercised.
Under the terms of this new investment, Proactive received the following
amendments to their February 1992 Warrants: reduction of the exercise prices of
warrants originally exercisable at $1.00 and $1.50 per share to $.75 per share,
with a reduction in the number of shares purchaseable pursuant to these warrants
of 25% for the warrants originally exercisable at $1.00 and 50% for the warrants
originally exercisable at $1.50; and extension of the expiration dates for the
remaining warrants outstanding through February 12, 2000.
The other February 1992 investors were offered the opportunity to make
additional cash investments on these same terms in amounts proportional to the
original investments made in February 1992. One investor, a director of the
Company, did remit $1,639 on those terms, while the remaining investors who
declined in writing to make a new
Page 30 of 40
<PAGE>
investment received an extension of the expiration date of their warrants to
December 31, 1997. The warrants held by those investors who failed to respond to
the Company's offer expired as of March 15, 1997.
On March 31, 1997, the Company completed a private financing in which it raised
$330,000 from a small number of the Company's existing shareholders who
qualified as accredited investors. A total of 440,000 shares of the Company's
common stock and five-year warrants to purchase an additional 220,000 shares of
common stock at $.75 per share were issued in connection with this transaction.
If the transactions described above had taken place on December 31, 1996, the
following adjustments would have been made to the December 31, 1996 historical
balance sheet:
As previously
reported Adjustments Pro forma
------------- ----------- ----------
Cash $ 89,739 $ 580,000 $ 669,739
========== ========= =========
Total stockholders' equity $ (276,538) $ 580,000 $ 303,462
========== ========= =========
Number of shares of common stock 16,214,020 773,333 16,987,353
========== ======= ==========
Presented below is a schedule summarizing the number, exercise prices and
expiration dates of the warrants outstanding as of March 31, 1997 both as
originally issued and as amended as described above and in Note 12.
Before amendments After amendments
----------------------------- -----------------------------
Month issued $ # of shares Expiration $ # of shares Expiration
------------ ---- ----------- ---------- ---- ----------- ----------
February 1992 0.35 571,428 Feb. 1997 0.35 571,428 Feb. 2000
February 1992 1.00 3,121,428 Feb. 1997 0.75 1,858,928 Feb. 2000
1.00 428,571 Dec. 1997
February 1992 1.50 3,142,857 Feb. 1997 0.75 1,239,286 Feb. 2000
1.50 428,572 Dec. 1997
June 1994 1.125 524,268 June 1999 0.75 524,268 June 1999
June 1994 1.50 524,268 June 1999 0.75 524,268 June 1999
June 1995 0.375 595,000 June 2000 0.375 595,000 June 2000
June 1995 0.50 595,000 June 2000 0.50 595,000 June 2000
December 1995 1.25 340,000 Dec. 2000 0.75 340,000 Dec. 2000
----------- -----------
Totals 9,414,249 7,105,321
========= =========
Page 31 of 40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its current independent accountants,
Price Waterhouse LLP, on any matter of accounting principles or practices or
financial statement disclosure. Price Waterhouse LLP has been the Company's
independent accountants since 1985.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
Executive officers are appointed and serve at the discretion of the Board of
Directors. The Company's Board of Directors is divided into two categories: (1)
"Preferred Stock" directors, who are elected by the holders of preferred stock
and who constitute a majority of the Board; and (2) "Common Stock" directors,
who are elected by the holders of common stock. These two categories of
directors are each further divided into three classes as nearly equal in number
as possible. The term of one class of directors expires at each annual meeting
of stockholders, with the members of each class to hold office until their
successors are elected and qualified. Directors of the Company do not receive
fees for their services, but are eligible to receive stock option grants and are
reimbursed for expenses related to their activities as directors.
The names, ages, dates first elected as directors, and principal occupations and
employment of the directors and executive officers of the Company are set forth
below.
Term as
director
Name Age expires Position
---------------- --- ------- -------------------
Preferred Stock Directors:
Mr. Charles C. McGettigan 52 1999 Director
Mr. Peter Y. Mills 42 1997 President and Director
Mr. Craig A. Nalen 66 1998 Director
Mr. Robert D. van Roijen 57 1998 Director
Mr. Myron A. Wick, III 53 1999 Chairman of the Board
Common Stock Directors:
Mr. Nuno Brandolini 43 1997 Vice Chairman of the Board
Mr. Lawrence H. Hyde 72 1999 Director
Mr. Ronald A. Glantz 55 1997 Director
Dr. Andrew A. Pouring 65 1998 Chief Executive Officer, Chief Scientist
and Vice Chairman of the Board
Other Executive Officers:
Mr. George E. Ponticas 37 Vice President - Finance, Secretary,
Treasurer and Chief Financial Officer
Background of Directors and Executive Officers
- ----------------------------------------------
Mr. Charles C. McGettigan has been a director of the Company since February
1992. He was a founding partner in 1991 and is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P. In 1988 Mr. McGettigan co-founded McGettigan, Wick & Co., Inc., an
investment banking firm. From 1984 to 1988 he was a Principal, Corporate
Finance, of Hambrecht & Quist, Inc. Prior to that Mr. McGettigan was a Senior
Vice President of Dillon, Read & Co. Inc. He currently serves on the Boards of
Directors of Digital Dictation, Inc., I-Flow Corporation, Modtech, Inc., PMR
Corporation, and Onsite Energy, Inc.,
Page 32 of 40
<PAGE>
of which he is the Chairman. Mr. McGettigan is a graduate of Georgetown
University, and received his MBA in Finance from The Wharton School of the
University of Pennsylvania.
Mr. Peter Y. Mills has been President and a director of the Company since
November 1991. Mr. Mills has nearly two decades of international business
experience in managing, financing, and turning around small high technology
companies in the U. K., the U. S. and Canada. He has also been a financial
consultant to companies that he has helped finance, including Database Sapphire
Intl., IXI, Finamex Financial, All Computers, Inc., and Saracen Electronics. Mr.
Mills currently serves on the Board of Directors of WrayTech Instruments, Inc.
He was educated at Winchester College in the U.K. and Langues Orientales,
Nouvelle Sorbonne in Paris, France.
Mr. Craig A. Nalen has been a director of the Company since February 1992. In
1990 Mr. Nalen founded U.S. Business Centers, Inc. (USBC) and currently serves
as its Chairman of the Board. USBC is presently involved in the development,
financing, construction, and management of major commercial office building
complexes in Eastern Europe. From 1981 to 1990 Mr. Nalen served as President and
Chief Executive Officer of the U.S. Overseas Private Investment Company (OPIC),
a post to which he was appointed by President Reagan and subsequently confirmed
by the U.S. Senate. From 1972 to 1975 he was Chairman, President, and Chief
Executive Officer of American Photograph Company, and from 1975 to 1980, he was
Chairman, President, and Chief Executive Officer of the STP Company, a company
which develops and markets premium automotive products. Mr. Nalen currently
serves on the Board of Directors of Firan Corp. He received a B.A. degree from
Princeton University and an MBA from Stanford University.
Mr. Robert D. van Roijen has been a director of the Company since February 1992.
Since 1988 he has been the President of Tox Financial Company, an investment
advisory and venture capital firm. From 1977 through 1987 Mr. van Roijen was the
Chairman of the Board of Control Laser Company, serving also as President and
Chief Executive Officer from 1981 to 1985. He currently serves on the Board of
Directors of Applied Digital Technologies, Commonwealth Scientific, Quixote
Corp. and Security Storage Company of Washington. Mr. van Roijen received a B.A.
degree in Economics and Philosophy from Harvard College.
Mr. Myron A. ("Mike") Wick, III, has been a director of the Company since
November 1991 and was elected Chairman of the Board of Directors in June 1993.
He was a founding partner in 1991 and is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P. In 1988 Mr. Wick co-founded McGettigan, Wick & Co., Inc., an investment
banking firm. From 1985 to 1988 Mr. Wick was Chief Operating Officer of
California Biotechnology, Inc. in Mountain View, California. He currently serves
on the Boards of Directors of Children's Discovery Centers of America, Inc.,
Digital Dictation, Inc., Modtech, Inc., NDE Environmental, Phoenix Network,
Inc., and WrayTech Instruments, Inc., and serves as the Chairman of the Board of
Directors for Stat-Tech International Company. Mr. Wick received a B.A. degree
from Yale University and an MBA from the Harvard Business School.
Mr. Nuno Brandolini has been a director of the Company since January 1982 and
was elected a Vice Chairman of the Board in May 1988. Since November 1995 Mr.
Brandolini has been the Chairman of the Board and Chief Executive Officer of
Scorpion Holdings, Inc., a merchant banking company. From December 1993 through
October 1995 he was a managing director of Rosecliff, Inc., also a merchant
banking company. From June 1991 to November 1993 he was a Vice President with
Salomon Brothers, Inc. From 1988 to 1991 Mr. Brandolini was a part owner of The
Baltheus Group, Inc., a management consulting and financial advisory firm. He
has a law degree from the University of Paris and he received an MBA from The
Wharton School of the University of Pennsylvania.
Mr. Ronald A. Glantz has been a director of the Company since November 1983.
Since February 1990 he has been a Senior Vice President and Head of West Coast
Research for Dean Witter Reynolds, Inc. From February 1985 through February 1990
Mr. Glantz was a general partner of Montgomery Securities in San Francisco,
California. He was Chief Investment Officer and Senior Vice President at
PaineWebber Inc., which he joined in 1973, between 1982 and July 1984. Between
July 1984 and February 1985 Mr. Glantz was the Director of Economics and
Financial Markets for PaineWebber. He was ranked the number one automobile
analyst on Wall
Page 33 of 40
<PAGE>
Street for seven consecutive years by Institutional Investor magazine. Mr.
Glantz received a B.A. from Harvard College, an M.A. in economics from The
Fletcher School and an MBA from the Harvard Business School.
Mr. Lawrence H. Hyde has been a director of the Company since September 1986,
and served as Chairman of the Board from June 1987 to June 1993. Mr. Hyde was a
director of Harris Graphics Corp. from 1983 to 1986, where during 1985 and 1986
he also served as its Chairman of the Board and Chief Executive Officer. He was
President and Chief Executive Officer of AM General Company from 1979 to 1985.
He joined American Motors in 1974 and remained until 1983. At various times he
had corporate wide responsibility for engineering, international and marketing;
his last position was Executive Vice President responsible for International and
Engineering. He was employed by Ford Motor Company from 1947 to 1965, and by
Harris Corp. from 1965 to 1973. He is a director of Whatman plc and a trustee of
the American University in Cairo, where he is also chairman of the University
Educational Investment Fund. Mr. Hyde is a graduate of Harvard College and
Harvard Business School.
Dr. Andrew A. Pouring has been a full-time employee, director, and Chief
Scientist of the Company since 1980, serving as President from April 1980
through November 1991, and as Chief Executive Officer since May 1985. In
November 1991 he was elected a Vice Chairman of the Board of Directors. He is
the principal author of the Company's numerous patents and has personally
contributed most of the recently patented improvements and extensions to the
original discoveries. He served as a Professor of Aerospace Engineering at the
U.S. Naval Academy from 1964 to 1983, and was Chairman of the Academy's
Department of Aerospace Engineering from 1975 to 1978. Dr. Pouring is a member
of various professional and scientific societies, including the American Society
of Mechanical Engineers and the Society of Automotive Engineers, as has been
organizer and chairman of many symposia for these societies. Dr. Pouring
received his Bachelors and Masters degrees in mechanical engineering from
Rensselaer Polytechnic Institute. He received his Doctor of Engineering degree
from Yale University, where he also was a post doctoral research fellow and
lecturer.
Mr. George E. Ponticas has been Vice President - Finance and Chief Financial
Officer, Secretary and Treasurer of the Company since September 1991. From May
1987 through August 1991, he served as the Company's Controller and Assistant
Secretary. From August 1981 through April 1987, Mr. Ponticas was a member of the
auditing staff of Price Waterhouse in Baltimore, Maryland, attaining the
position of audit manager in July 1986. At Price Waterhouse, he worked on the
audits of a number of public and private companies, with an emphasis on small
businesses. Mr. Ponticas is a Certified Public Accountant, and is a member of
the American Institute of Certified Public Accountants and the Maryland
Association of Certified Public Accountants. He received his B.S.
in Accounting from Loyola College in Maryland.
ITEM 10. EXECUTIVE COMPENSATION
In order to help conserve the Company's limited cash resources, all of the
Company's executive officers and other salaried employees for several years have
been voluntarily deferring significant portions of the salaries due them under
the terms of employment agreements or as otherwise established by the Board of
Directors. In February 1992 as a condition of the Company's receiving an
indispensable capital infusion, this voluntary deferral of salaries was
documented formally through an agreement known as the "Consent to Deferral"
executed by all salaried employees. Under this agreement, each of the signers
consented to the past and future deferral of portions of their annual salaries,
and agreed to defer payment of amounts so accumulated until the Company has
received licensing revenue of at least $2 million or at such earlier date as the
Board of Directors determines that the Company's cash flow is sufficient to
allow such payment. As of December 31, 1996, an aggregate of $595,620 in
deferred salaries is owed to current and former employees.
In an effort to avoid long-term financial commitments, the Company no longer
enters into employment agreements with any of its employees. The salaries of
executive officers are set by the Board of directors on an annual basis. For the
past several years Dr. Andrew A. Pouring, the Company's chief executive officer,
and Mr. Peter Y. Mills, the Company's president, each has been deferring 40% of
his annual salary. As of December 31, 1996, the
Page 34 of 40
<PAGE>
amounts of deferred salary owed to Dr. Pouring and Mr. Mills were $213,817 and
$115,769, respectively. Effective January 1, 1996, the employment commitment of
Mr. Mills was changed from full-time to part-time. He continues to serve as
president of the Company and is being paid $2,000 per month for his services,
with no additional amount being deferred.
The following table sets forth the compensation paid by the Company to its chief
executive officer and other executive officers whose annual compensation
exceeded $100,000 (together referred to as the "Named Executives").
Summary Compensation Table
--------------------------
Annual salary Long-term
--------------------- compensation -
Name and position Year Cash paid Deferred options (shares)
- ---------------------- ---- --------- -------- ----------------
Andrew A. Pouring 1996 $60,798 $40,531 25,000
CEO & Chief Scientist 1995 60,798 41,531 -
1994 60,798 41,531 -
Peter Y. Mills 1996 24,000 0 -
President 1995 60,000 40,000 -
1994 60,000 40,000 -
With the exception of the granting of stock options, the Company does not pay
its Named Executives any bonuses or any type of long-term compensation in the
form of restricted stock awards, stock appreciation rights (SARs) or other form
of long-term incentive plan payments.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-end Option/SAR Values
---------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money
options/SARs at options/SARs at
December 31, 1996 December 31, 1996
# of shares
acquired on Value Exercisable/ Exercisable/
Name exercise realized unexercised unexercised
- -------- ----------- -------- ---------------------- -------------------
Pouring - - 134,250/153,000 $46,148/$52,594
Mills 55,000 $73,200 675,000/675,000 $232,031/$232,031
All options held by the Named Executives are exercisable at $.50 per share,
which price was below the December 31, 1996 market price of the Company's
publicly traded common stock of $0.84375 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of March 31, 1997 information relating to
beneficial ownership by directors and executive officers of the Company,
directors and executive officers of the Company as a group, and any other
persons known by the Company to be the beneficial owner of more than five
percent of the currently issued and outstanding common stock of the Company. The
term "shares beneficially owned" encompasses those shares
Page 35 of 40
<PAGE>
which the reporting person currently owns or has the right to acquire within the
next sixty days through the exercise of currently exercisable options and
warrants or through the conversion of preferred stock. Shares which the
reporting person has the right to acquire are not deemed to be outstanding for
computing the percentage of beneficial ownership of any other person. Unless
otherwise noted, all shares are beneficially owned and sole voting and
investment power is held by the persons named.
Common Rights to Total shares
shares acquire beneficially Percent
Name and address (1) owned shares (4) owned of class
-------------------- --------- --------- --------- --------
Nuno Brandolini 97,726 315,150 402,876 2.3
Ronald A. Glantz 17,517 176,500 194,017 1.1
Lawrence H. Hyde 272,986 536,000 808,986 4.6
Charles C. McGettigan 1,213,068 5,864,223 7,077,291 (3) 30.8
Peter Y. Mills 744,286 675,000 2,133,572 11.5
Craig A. Nalen 2,186 211,522 213,708 1.2
George E. Ponticas 118,262 207,500 325,762 1.9
Andrew A. Pouring 688,239 134,250 822,489 4.8
Robert D. van Roijen 67,143 221,142 288,285 1.7
Myron A. Wick, III 1,213,068 5,864,223 7,077,291 (3) 30.8
All directors and officers
as a group (10 persons) 3,211,413 9,055,573 12,266,986 46.8
Herbert J. Mitschele, Jr. 941,755 105,715 1,047,470 6.1
Far Hills, NJ
Proactive , et.al. (2) 2,199,871 9,978,860 12,078,731 44.7
San Francisco, CA
- -----------------------------
(1) The business address for each director and named executive officer is 23
Hudson Street, Annapolis, Maryland, 21401.
(2) Includes shares beneficially owned directly and indirectly by Proactive
Partners, L.P. and six affiliated entities and individuals ("Proactive
et.al."), as reported in a Form 13D filing with the Securities and
Exchange Commission.
(3) Includes 6,913,291 shares beneficially owned by Proactive et.al.,
which shares could be deemed to be beneficially owned by both Mr.
McGettigan and Mr. Wick by virtue of their executive and ownership
positions in Proactive Partners, et.al. Both individuals exercise shared
voting and investment power with respect to such shares.
(4) Includes shares which the reporting person has the right to acquire within
the next sixty days through the exercise of currently exercisable options
and warrants or through the conversion of preferred stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Page 36 of 40
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits.
3 Articles of Incorporation and Bylaws (as amended) - Incorporated
by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1992.
4 Instruments defining the rights of security holders (contained in
Exhibit 3 hereof).
10.1 1987 Non-Qualified Stock Option Plan, as amended - Incorporated by
reference to the Company's Registration Statement No. 33-34520 on
Form S-8.
21 Subsidiaries of the Registrant: Sonex International, B.V. - The
Netherlands; Sonex Engines, Inc. - Delaware (both are inactive
subsidiaries).
23 Consent of Price Waterhouse LLP (Sequential page number 39 of 40
total pages)
24 Power of Attorney - Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 37 of 40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act , the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SONEX RESEARCH, INC.
April 15, 1997 By: /s/ Andrew A. Pouring
----------------------------------
Andrew A. Pouring
Principal Executive Officer
April 15, 1997 By: /s/ George E. Ponticas
----------------------------------
George E. Ponticas
Principal Financial and Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
April 15, 1997 *
----------------------------------
Myron A. Wick, III
Chairman of the Board of Directors
April 15, 1997 *
----------------------------------
Nuno Brandolini
Vice Chairman of the Board of Directors
April 15, 1997 /s/ Andrew A. Pouring
----------------------------------
Andrew A. Pouring
Vice Chairman of the Board of Directors
April 15, 1997 /s/ Peter Y. Mills
----------------------------------
Peter Y. Mills
President and Director
April 15, 1997 *
----------------------------------
Ronald A. Glantz
Director
April 15, 1997 *
----------------------------------
Lawrence H. Hyde
Director
April 15, 1997 *
----------------------------------
Charles C. McGettigan
Director
April 15, 1997 *
----------------------------------
Craig A. Nalen
Director
April 15, 1997 *
----------------------------------
Robert D. van Roijen
Director
- --------------------
* Executed on behalf of these persons by George E. Ponticas, a duly appointed
attorney-in-fact of each such person.
/s/ George E. Ponticas
- ----------------------------------
George E. Ponticas, Attorney-In-Fact
The Registrant will furnish its shareholders with copies of its annual report
and proxy statement after the date of this report.
Page 38 of 40
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-34520) of
Sonex Research, Inc. of our report dated April 8, 1997 appearing on page 15 of
this Form 10-KSB.
/s/PRICE WATERHOUSE LLP
Baltimore, Maryland
April 8, 1997
Page 39 of 40
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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