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, 1997. 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, 1998 was 17,556,406. The aggregate market value of voting stock
held by non-affiliates of the Registrant was $9,156,239 as of March 31, 1998.
Revenues for the year ended December 31, 1997 were $417,588.
Documents Incorporated by Reference: None.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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
proprietary technology (the "Sonex Combustion System", "SCS" or "Ultra Clean
Burn(TM) technology") which controls the combustion of fuel in engines through
modification of the pistons in large engines or the cylinder heads in small
engines. 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. The SCS process, which has no moving parts, produces
lower overall emissions at all engine speeds, particularly soot in diesel
engines, and is self-driven by the combustion process.
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.
Focus of commercialization efforts
- ----------------------------------
Over the past few years, Sonex has concentrated its efforts on the application
of its technology to the reduction of exhaust emissions in direct injected (DI)
turbocharged diesel truck and automobile engines. Demonstration and development
programs at various stages of completion are underway with some of the largest
multi-national diesel engine original equipment manufacturers (OEM's) 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 three of
these manufacturers, and each has verified and accepted that the SCS can
substantially reduce particulate emissions at future NO (nitrous oxide) levels
in a DI turbocharged diesel engine for medium duty trucks while maintaining fuel
consumption and power. The most recent tests conducted by one of these
manufacturers showed that an engine using Sonex-modified pistons along with EGR
(exhaust gas recirculation) would attain future U.S. and European emissions
targets when OEM type production pistons become available. 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 addition to diesel truck engine applications, the Company has successfully
applied a proprietary starting system and modified engine design to the
conversion of a small, lightweight, SI gasoline fueled engine to start and
operate on JP5/JP8 standard military fuels (also referred to as "heavy fuels").
The advantages of this converted SI engine have been demonstrated successfully
in a small, remotely controlled military Unmanned Aerial Vehicle (UAV). In
January 1998 the Company delivered to the United States Marine Corps Systems
Command in Quantico, Virginia, five protoytpe UAV engines that Sonex
successfully converted from gasoline to heavy fuel operation.
Employees
- ---------
As of March 31, 1998, the Company had five employees: its two executive officers
and three individuals who provide engineering and technical services. The
Company has never experienced a strike or work stoppage, and believes its
relations with its employees are good.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
Description of the Company's technology
- ---------------------------------------
The SCS improves the process of combustion through a combination of chemical,
acoustic and fluid dynamic 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 DI diesel technology involves the integration of a unique
geometric design of microchambers in the piston, placing one microchamber
adjacent to each fuel injector spray. The 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 rate of reaction of gases that may be resident in the chamber at any one
time. The resultant flux of highly reactive gases issue from the microchamber at
velocities that can attain sonic speeds under certain conditions. These gases
create high turbulence in the piston bowl, allowing exceptional oxidization of
the soot. The additional chemical activity is very effective with the use of
EGR, allowing enhanced ignition with low soot production in the presence of
large amounts of EGR. Similar SCS piston designs allow the use of alternative
fuels in diesel engines with a minimum of change.
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.
Current Sonex SI diesel technology for carburetted engines involves the use of
unique microchambers in the cylinder head of the engine. Patents for these
designs are currently pending. This technology allows the conversion of SI
gasoline engines to use heavy fuels with another Sonex innovation which allows
starting the engines on heavy fuels ranging from kerosine to diesel fuel.
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 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 at future targets 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 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.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 in the near future. All
testing to date by Sonex and the engine OEM's has shown that SCS diesel
technology is complementary to new developments such as high pressure injection
and EGR. Testing is scheduled to begin later this year with a diesel common rail
injection system which should also prove complementary.
Competition
- -----------
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
- --------------------------
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.
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
and tested by Sonex 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;
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 three 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 OEM's, 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 Group 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 Piston Products Group companies trade under the name of AE
Goetze Automotive. T&N was acquired recently by Federal-Mogul Corp., a major
supplier of engine components based in Southfield, Michgan.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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.
In December 1997 Sonex and T&N completed negotiations for a license agreement
for the marketing, manufacture and sale of diesel truck engine pistons
incorporating the SCS. Early in 1998, however, T&N informed the Company that
signing of the agreement would be delayed pending further refinement of the new
manufacturing techniques developed by T&N for Sonex pistons. T&N indicated that
it wants to be in a position to follow through to diesel truck engine
manufacturers with demonstrable product and well thought through manufacturing
plans before concluding the licensing agreement with Sonex. As of March 31,
1998, the proposed license agreement with T&N has yet to be executed.
Current diesel engine programs
- ------------------------------
On a continuing basis for the past few years, the Company has performed
extensive design and development work on medium- and heavy-duty truck engines
for three large multi-national diesel truck engine 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. Successful results to that point
led to initial discussions in 1995 for technology transfer and licensing
agreements with this engine manufacturer; however, late in 1996, 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. (See "Collaboration with piston suppliers") Negotiations are now
underway with this engine manufacturer for a joint program for the optimization
of the Sonex piston designs for a larger engine size to take place primarily at
an advanced engine laboratory in Europe.
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 pistons have been agreed to by all parties, and
further testing is planned in the summer of 1998.
In late 1996 a third major international engine manufacturer executed a funded
agreement with the Company for a similar demonstration program that is now at
the stage of testing pre-production prototype SCS pistons. This manufacturer has
demonstrated that by the use of EGR with SCS, it will be possible to attain
future U.S. and European emissions targets when OEM type production pistons
become available.
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's interest in the SCS was 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. Texaco believed that
the development of an engine design meeting the forthcoming low emissions
standards using the diesel fuel being produced today might make unnecessary the
manufacture of higher cost diesel fuel and avoid the significant impact that
higher cost would have on fleet owners and operators.
In March 1997 at Sonex, a representative of Texaco observed a successful
demonstration of the operating performance of this engine outfitted with a Sonex
piston, after which the engine was delivered to Texaco's research facility in
Beacon, New York, for confirmation testing. In September 1997, after being
informed by Texaco that the diesel laboratory at the Beacon facility was
closing, Sonex retrieved this engine to continue the investigation. Texaco has
yet to inform the Company of any future plans with respect to this program.
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
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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
- ---------------------------------------
In 1994 under contract to the U.S. Army's Fort Belvoir, Virginia, Research,
Development & Engineering Center, Sonex successfully demonstrated two prototype
lightweight, SI, carburetted two-stroke engines, which it modified to start and
run on JP-5/JP8 standard military fuels. The Army was interested in such an
engine for use in light-weight, man-portable generator sets in the field but
later informed the Company that the funding for the continuation of this program
had been canceled.
This demonstration for the Army led to an inquiry in 1995 from the U.S. Naval
Research Laboratory (NRL) in Washington, D.C., for the possible application of
this engine technology in Unmanned Aerial Vehicles (UAV's), which are small,
remotely piloted aircraft. UAV's conduct short-range tactical reconnaissance
while operating virtually unseen and unheard, taking pictures of battlefields
and enemy installations and relaying them back to ground forces. Existing UAV
engines in the military's inventory operate on gasoline. Because of safety and
logistics concerns, the use of gasoline aboard ship and in the motor pool is
being phased out by the military. All small engines, such as those found in
UAV's, will be required to operate on less volatile, widely available heavy
fuels (such as JP-5 and diesel) used by jet aircraft and most military vehicles.
Conversion of such engines to operate on heavy fuels rather than gasoline would
permit the military to continue to deploy such weapons well into the next
century.
Sonex subsequently demonstrated and delivered a lightweight, two-stroke, SI,
carburetted, 35cc single cylinder engine to NRL, similar to those delivered to
the Army, that 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 less volatile heavy fuels. NRL has continued flight testing during
the past year and is now considering this technology for its possible
application in a larger engine.
In August 1997 the Company was awarded a demonstration contract by the United
States Marine Corps (USMC) Systems Command in Quantico, Virginia, to upgrade the
capabilities of an operational UAV known as the Exdrone by converting the
existing SI, carburetted, 100cc single cylinder, two-stroke, gasoline fueled
engine to start and run on less volatile JP-5 fuel, and by installing improved
electronics. The contract in the amount of $204,170 included a subcontract of
$124,170 to AeroComm, Inc., a privately held Germantown, Maryland company, for
the upgrade of the electronics in the UAV to a configuration known as the
Dragondrone, while Sonex, as the prime contractor, would receive $80,000 for the
heavy fuel engine (HFE) conversion and overall program management.
In test flights conducted by the USMC Systems Command early in January 1998, a
UAV powered by the prototype Sonex HFE on JP-5 fuel demonstrated power and fuel
consumption comparable to that of the stock engine operating on gasoline. Upon
completion of this contract later in January 1998, the Company delivered to the
USMC five prototype UAV engines that Sonex successfully converted from gasoline
to heavy fuel operation.
In February 1998 Sonex received an order from the USMC Systems Command to
convert an additional forty Dragondrone UAV gasoline engines to heavy fuel
operation. The total amount of the new order, in the form of an amendment to the
original contract, is approximately $125,000, and delivery of the converted
engines is expected to be completed in June 1998.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
Sonex is also performing a UAV heavy fuel engine conversion under a
demonstration contract awarded in October 1997 by the U.S. Naval Air Warfare
Center, Aircraft Division (the "Navy"), in Patuxent River, Maryland. This UAV,
known as the Pioneer, has been in service for several years, and provided
reconnaissance support for Persian Gulf operations. The existing Pioneer engine
is a two-stroke, carburetted, SI two cylinder gasoline engine displacing 175cc
per cylinder. The contract in the amount of $87,795 calls for Sonex to deliver
two HFE's to the Navy in April 1998. The Navy has the right to exercise a
contract option by September 30, 1998 pursuant to which Sonex would conduct an
experimental evaluation of existing techniques now used in space technology to
be able to eliminate the need for the supplementary two-stroke lubricating oil
(required in all gasoline two-stroke engines) in the converted engine, without
loss of performance benefits.
The Company is exploring additional potential uses by the military for its heavy
fuel engine technology, such as in other UAV models and light-weight,
man-portable generator sets used in the field, as well as private sector
opportunities. Operation of a light-weight engine on a high flash point fuel
such as diesel, rather than gasoline, will reduce the hazard associated with
gasoline, making such an engine much more suitable for applications where
gasoline storage is undesirable, such as in diesel fueled utility engines used
in pumps, generator sets, etc., in homes, commercial buildings and boats. As a
result of the NRL demonstration and subsequent published report, during 1997 the
Company executed contracts with two U.S. manufacturers of small engines to
investigate the feasibility of applying the Sonex HFE design to production SI
engines. Sonex expects to reach agreement on the next prograqm steps with these
manufacturers later this year, following completion and publication of the
results of the Navy contract.
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 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 stated that industry "... sees very little
if no interest in using alcohol fuels in diesel engines." DOE now appears to
have adopted this position as well. The Company will re-visit this application
when there is renewed commercial interest.
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 1987, and is in the process of registering the name "Ultra Clean Burn"
technology at the U.S. Patent and Trademark Office.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 on a month-to-month basis under
the terms of an operating lease agreement that expired in April 1994. The lease
was extended initially through June 1995, after which the Company occupied the
premises on a month-to-month basis until November 1996 when an extension through
November 1997 was executed. No new long-term lease has been negotiated since
this last extension expired.
The Company once again is occupying 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 will seek to negotiate a new long-term lease for its
facility or 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.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this report, management is aware of no legal proceedings
pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's security holders held on October 22,
1997, the holders of the Company's Common Stock re-elected Mr. Nuno Brandolini
as a director for a term expiring at the annual meeting held in the year 2000.
No other matters were submitted to a vote of security holders during the fourth
quarter of 1997.
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 by Nasdaq. Quotation
information on OTC Bulletin Board stocks is available on stockbrokers' desktop
terminals.
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,
1996 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, 1996 $2.06 $1.00
June 30, 1996 2.06 1.00
September 30, 1996 1.34 .88
December 31, 1996 1.28 .69
March 31, 1997 1.56 .63
June 30, 1997 1.38 .81
September 30, 1997 1.28 .69
December 31, 1997 1.25 .72
March 31, 1998 1.06 .50
As of March 31, 1998, there were 17,556,406 shares issued and outstanding, with
approximately 1,000 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. A
total of 14,874,273 shares of the Company's Common Stock as of March 31, 1998
were reserved for issuance in connection with the conversion of preferred stock
and the exercise of warrants and options.
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SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 $20 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, 1998, the Company had available cash and equivalents of
approximately $400,000 and marketable securities valued at approximately
$125,000. The marketable securities represent holdings in the common stock of
the corporation which in October 1995 was merged with and into the Company's
inactive subsidiary, as further described in Note 4 to the accompanying
financial statements. The fair value of such securities, however, may be subject
to significant fluctuation due to, among other factors, limited trading volume
and a small public float.
Based upon current spending levels, management believes that the cash on hand
and expected revenue from current and potential contracts will be sufficient to
fund operations at least through the end 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 for 1999 and beyond.
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. As of
January 1, 1997, the ongoing deferral of salary for the Company's non-executive
employees was eliminated.
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 largest
beneficial owner of the Company's Common Stock by virtue of its purchase 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, 1997, an aggregate of $648,292 of
wages so deferred is recorded as accrued compensation in the accounts of the
Company.
9
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
Results of operations
- ---------------------
Revenue:
- -------
Development Sub-
contracts contracts
1997 $ 298,168 $ 119,420
1996 $ 70,000 -
1995 $ 223,141 -
Development contract revenue consisted of the following amounts from projects
more fully described in Item 1:
o $90,000 in 1997 and $70,000 in 1996 under a demonstration program begun
in 1996 to apply the SCS to a truck diesel engine for a major
international OEM;
o $90,000 in 1997 related to the delivery of prototype Sonex pistons to
another major international OEM;
o $64,330 in 1997 pursuant to the contract with the USMC (90% complete as
of year-end) to convert a gasoline fueled small UAV engine to use heavy
fuels and, through a subcontract for which related revenue of $119,420
has been recorded in 1997, to upgrade the electronics in the UAV;
o $26,338 in 1997 pursuant to the contract with the Navy (30% complete as
of year-end) to convert a gasoline fueled UAV engine to use heavy fuels;
o $27,500 under contracts with two U.S. manufacturers of small engines to
investigate the feasibility of applying the Sonex UAV design to
production SI engines;
o $150,000 in 1995 earned in connection with the development program begun
in 1994 on a diesel-fueled truck engine for another major international
OEM;
o $53,141 in 1995 from NREL for a methanol-fueled diesel engine
demonstration; o $20,000 in 1995 from the U.S. Naval Research Laboratory
for a generator set engine.
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. 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:
- ---------------------------------------
1997 1996 1995
---- ---- ----
Personnel:
Salaries $267,663 $255,919 $280,548
Taxes/benefits 41,071 37,025 35,542
Consulting 15,769
Stock & options 59,525 27,125 61,250
-------- -------- --------
Total personnel 384,028 320,069 377,340
Patent amortization
and maintenance fees 44,298 71,180 88,378
Occupancy 43,263 55,459 57,314
Testing supplies 30,869 39,475 31,156
Software engineering 20,000
Depreciation 13,750 21,783 20,646
Other expenses 22,318 15,558 10,399
-------- -------- --------
Total R&D $558,526 $523,524 $585,233
======== ======== ========
Total R&D expenses increased $35,002, or 7%, from 1996 to 1997, as major
increases in personnel costs ($63,959, or 20%) and software engineering fees
($20,000 in 1997, none in 1996) were partially offset by decreases in patent
maintenance fees and amortization ($26,882, or 38%), occupancy costs ($12,196,
or 22%), and a net decrease in other expenses ($9,879). From 1995 to 1996, total
R&D expenses decreased $61,709, or 11%, primarily due to a decrease in R&D
personnel costs of $57,271, or 15%, while other expenses showed a net decrease
of $4,438.
10
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
From 1996 to 1997, total salaries increased $11,744, or 5%, as a result of the
following factors: an increase effective January 1, 1997 in the wage rates for
all of the Company's employees, an increase in the accrual for unused vacation
pay in 1997, and an increase resulting from the hiring of a new engineer in the
fourth quarter of 1997, offset in part by decreases resulting from the
resignation in the second quarter of 1997 of the Company's manager of research
and the award of bonuses in 1996 while none were awarded in 1997. R&D salaries
decreased by $24,629, or 9%, from 1995 to 1996 primarily due to the $21,627
decrease in the amount of the total bonuses awarded in 1995 ($31,625) versus
1996 ($10,000).
The Company's R&D supervisor and corporate liaison in Europe serves as a
consultant, having been compensated in prior years primarily in the form of
restricted stock or stock options for services performed in Europe. In 1997,
however, he spent time in Annapolis, for which service he receives cash
compensation, a portion of which is deferred pursuant to the terms of the
Consent to Deferral. The $15,769 shown above as "Consulting - European liaison"
represents total cash compensation he earned in 1997, of which $6,308 has been
deferred.
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, while stock issued as compensation is measured at the
market price on the date of award or at the agreed-upon value of the services
rendered. Charges for compensation paid in the form of stock or options in 1997
included $35,212 for stock and options awarded to the Company's R&D supervisor
and corporate liaison in Europe, while such charges were $14,000 in 1996 and
$38,750 in 1995. Charges for options granted to employees were $24,313 in 1997,
$13,125 in 1996 and $22,500 in 1995.
The $26,882 decrease from 1996 to 1997 in patent maintenance fees and
amortization of the capitalized costs of patents and technology resulted from a
reduction in amortization expense of $54,104, offset in part by the write-off in
1997 of $24,527 in unamortized costs of patents abandoned and an increase in
patent maintenance fees of $2,695. The large decrease in amortization expense
was almost entirely due to higher amortization in 1996 for the capitalized costs
of computer simulations, which became fully amortized early in 1997. The $17,198
decrease from 1995 to 1996 in patent maintenance fees and amortization was
primarily caused by the write-off in 1995 of $18,862 in unamortized costs of
patents abandoned that year, while there was no such charge in 1996.
Occupancy expenses declined significantly from 1996 to 1997 as a result of a
reduction in the monthly rent from $4,500 to $3,500 in November 1996. 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. In 1996 the Company for the first time
earned a small amount of sublease income, but that figure was slightly lower in
1997 than in 1996.
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. Software engineering charges of $20,000 in
1997 represent amounts paid to the Company's former president for programming
assistance with the Company's technology design manual that is to be used to
teach engineers from prospective customers how to incorporate the elements of
the SCS into pistons. 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.
Cost of sub-contracts:
- ---------------------
The Company's August 1997 contract with the USMC to convert a gasoline fueled
UAV engine to use heavy fuels also included a subcontract to AeroComm, Inc., a
privately held Germantown, Maryland company, for the upgrade of the electronics
in the UAV. The $111,750 recorded in 1997 as "Cost of subcontracts" represents
the accrual, based on the percentage of completion of the contract as of
year-end, of a portion of the amount to be paid to AeroComm, Inc. upon final
delivery under the contract.
11
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
General and Administrative (G&A) Expenses:
- -----------------------------------------
1997 1996 1995
---- ---- ----
Personnel:
Salaries $124,910 $114,753 $217,924
Taxes/benefits 15,601 9,523 13,084
Stock options 50,893
-------- -------- --------
Total personnel 191,404 124,276 231,008
Legal fees 21,641 18,524 40,143
Stock transfer agent,
proxy fees, etc. 15,607 17,221 23,907
Occupancy 12,106 13,159 16,983
Travel 29,127 22,583 17,810
Telephone & postage 10,833 10,982 14,215
Insurance 11,507 11,789 10,939
Audit fee 12,454 9,815 9,720
Printing 8,661 8,603 9,238
Other expenses 19,914 23,491 20,120
-------- -------- --------
Total G&A $333,244 $260,443 $394,083
======== ======== ========
Total G&A expenses increased $72,801, or 28%, from 1996 to 1997, due almost
entirely to an increase in G&A personnel costs of $67,128, or 54%, that resulted
primarily from stock option charges in 1997 of $50,893. From 1995 to 1996, total
G&A expenses decreased $133,640, or 34%, largely due to a decrease in G&A
personnel costs of $106,732, or 46%.
The increase in G&A salaries of $10,157 from 1996 to 1997 was due to the
following factors: (1) an increase effective January 1, 1997 in the wage rates
for all of the Company's employees; (2) an increase in the accrual for unused
vacation pay in 1997; (3) charges incurred in 1997 for temporary office
employees (no such charges were incurred in 1996); offset in part by (4) a
reduction caused by the termination of the employment as of the end of the third
quarter of 1997 of the Company's former president; and (5) the award of bonuses
in 1996 while none were awarded in 1997. The large percentage increase in
payroll taxes and employee benefits was due primarily from payroll taxes
incurred on the exercise of stock options in 1997. There is no corresponding
amount recorded as wages when below-market options are exercised, but the
optionee is taxed on the excess of the aggregate market price over the aggregate
exercise price, and the Company incurs the related payroll taxes. There were no
such charges in 1996 or 1995. Compensation cost for stock options in 1997
includes a charge of $44,643 related to the below-market option grant from
Proactive, the Company's principal shareholder, to the new president of the
Company, and a $6,250 charge for options granted to other employees.
The decrease of $103,171 in G&A salaries from 1995 to 1996 primarily resulted
from a decrease of $25,000 in bonus awards and to a reduction of $76,000 in
salary expense for the Company's former 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 increased by $3,117, or 17%, from 1996 to 1997, as lower
charges from the Company's general legal and securities counsel were more than
offset by higher charges from its patent attorney for additional services in
connection with the filing of new patent applications and assistance with the
proposed piston license agreement with T&N. Total legal fees decreased by
$21,619, or 54%, from 1995 to 1996, as the amount in 1995 included significant
charges related to the lawsuit filed in 1993 by two former officers of the
Company seeking payment of deferred salaries. The litigation was concluded early
in 1996 in the Company's favor, resulting in lower fees in 1996. Also, charges
for services by the Company's patent attorney were substantially higher in 1995
versus 1996, as the 1995 figure included fees related to services in connection
with the review of the Company's decision in early 1995 to write-off the costs
of certain acquired technology, and related assistance in preparing and
negotiating the proposed settlement and in making the filings necessary to
legally abandon the related patents. The decrease from 1995 to 1996 resulting
from these factors was offset in part by higher charges for corporate securities
work related to the preparation and ultimate abandonment of a registration
statement during 1996.
Travel expenses have been increasing since 1995 as a result of an increase in
overseas travel by the Company's chairman and president during 1996 and 1997 in
connection with negotiations for licensing and technology transfer agreements.
12
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
Write-off of acquired technology:
- --------------------------------
As described in Note 6 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.
Gains on sales of marketable securities:
- ---------------------------------------
Gains recorded in 1996 and 1997 represent 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 4 to the accompanying
financial statements. Because the recorded basis for this investment is zero,
all sales proceeds are recognized as gains.
Effects of Year 2000 (Y2K) millenium date-change issues:
- -------------------------------------------------------
During the past year, the Company has upgraded some of the hardware and software
currently being used in its operations, and expects to continue to make further
upgrades to other hardware and software in the ordinary course of business
during the remainder of 1998 and in 1999 to ensure that all of its systems are
Y2K compliant. Expenditures in this regard outside the ordinary course of
business are not expected to be significant.
Adoption of new accounting pronouncements
- -----------------------------------------
The adoption by the Company in fiscal 1998 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:
Reports of independent accountants
Financial statements:
Balance sheets as of December 31, 1997 and 1996
Statements of operations and accumulated deficit for the three years in
the period ended December 31, 1997, and for the period from April 9,
1980 (inception) through December 31, 1997
Statements of paid-in capital for the period from April 9, 1980
(inception) through December 31, 1997
Statements of cash flows for the three years in the period ended
December 31, 1997, and for the period from April 9, 1980 (inception)
through December 31, 1997
Notes to financial statements
13
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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, 1997, and the
results of its operations and its cash flows for the year then ended, and for
the period from April 9, 1980 (inception) through December 31, 1997, 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.
C. L. STEWART & COMPANY
Annapolis, Maryland
March 25, 1998
14
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 the
results of its operations and its cash flows for each of the two years in the
period then ended, 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
Linthicum, Maryland
April 8, 1997
15
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
BALANCE SHEETS
December 31,
------------
1997 1996
---- ----
Assets
Current assets
Cash and equivalents $ 355,582 $ 89,739
Marketable securities, available-
for-sale (Note 4) 117,200 36,800
Accounts receivable, including unbilled
costs and estimated earnings on uncompleted
contracts of $183,750 in 1997 210,088 50,000
Prepaid expenses 36,284 38,692
Loans to officers and employees (Note 5) 22,500 16,906
---------- ----------
Total current assets 741,654 232,137
Loans to officers and employees -
non-current (Note 5) 15,000
Patents and technology (Note 6) 231,742 239,308
Property and equipment (Note 7) 17,206 28,008
---------- ----------
Total assets $ 990,602 $ 514,453
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accrued compensation (Note 8) $ 688,292 $ 620,620
Accounts payable and other accrued liabilities,
including accrued subcontract costs on
uncompleted contracts of $111,750 in 1997 147,220 170,371
---------- ----------
Total current liabilities 835,512 790,991
---------- ----------
Stockholders' equity (Note 10)
Preferred stock, $.01 par value - 2,000,000
shares issued; shares outstanding: 1,540,001
in 1997 and 1,550,001 in 1996 15,400 15,500
Common stock, $.01 par value - shares issued
and outstanding: 17,393,906 in 1997 and
16,214,020 in 1996 173,939 162,140
Additional paid-in capital 20,035,060 19,165,535
Unrealized increase in value of
marketable securities 117,200 36,800
Deficit accumulated during development stage (20,186,509) (19,656,513)
---------- ----------
Total stockholders' equity 155,090 (276,538)
Commitments (Note 11)
---------- ----------
Total liabilities and stockholders' equity $ 990,602 $ 514,453
========== ==========
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
April 9, 1980
(inception)
Year ended December 31, through
----------------------- December 31,
1997 1996 1995 1997
---- ---- ---- ----
Revenue
Development contracts $ 298,168 $ 70,000 $ 223,141 $ 1,963,734
Subcontracts 119,420 119,420
Other 124,425
--------- -------- -------- ---------
417,588 70,000 223,141 2,207,579
--------- -------- -------- ---------
Costs and expenses
Research and development 558,526 523,524 585,233 12,350,216
Cost of subcontracts 111,750 111,750
General and administrative 333,244 260,443 394,083 7,514,247
Interest 1,145 670 1,198 868,094
Write-off of acquired
technology 80,000 819,036
--------- --------- --------- ----------
1,004,665 784,637 1,060,514 21,663,343
--------- --------- --------- ----------
Net loss from operations (587,077) (714,637) (837,373) (19,455,764)
--------- -------- ---------- -----------
Other income and expense
Investment and other income 18,872 12,049 12,182 311,916
Debt conversion expense (1,112,350)
Gain on sales of
marketable securities 38,299 30,113 69,689
-------- -------- ---------- -----------
Net loss (529,996) (672,475) (825,191) (20,186,509)
Deficit accumulated during
development stage
Beginning of period (19,656,513) (18,984,038) (18,158,847)
----------- ----------- ----------- -----------
End of period $(20,186,509)$(19,656,513)$(18,984,038)$(20,186,509)
============ ============ ============ ============
Net loss per share $ (.03) $ (.04) $ (.06)
====== ====== ======
Weighted average number of
common shares outstanding 17,031,016 15,968,491 14,368,760
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF PAID-IN CAPITAL
APRIL 9, 1980 (INCEPTION) THROUGH DECEMBER 31, 1997
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 $13,651,066
(Continued on next page)
18
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF PAID-IN CAPITAL
APRIL 9, 1980 (INCEPTION) THROUGH DECEMBER 31, 1997
Price Preferred stock Common stock Additional
per ($.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 $19,078,191
(Continued on next page)
19
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF PAID-IN CAPITAL
APRIL 9, 1980 (INCEPTION) THROUGH DECEMBER 31, 1997
Price Preferred stock Common stock Additional
per ($.01 par value) ($.01 par value) paid-in
share Shares Amount Shares Amount capital
----- --------- ------- --------- ------- ----------
(Continued from previous page)
Balance, December 31, 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
January through December
option exercise .50 352,834 3,528 172,889
January through June
option exercise .75 17,000 170 12,580
March for cash .75 775,519 7,755 573,884
October -
conversion (.35 to 1) (10,000) (100) 28,571 286 (186)
December for services 1.00 5,962 60 5,902
Compensation - grant of
stock options 104,456
--------- ------ ---------- ------- ----------
Balance, December 31, 1997 1,540,001$15,400 17,393,906$173,939 $20,035,060
========= ====== ========== ======= ===========
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
April 9, 1980
(inception)
Year ended December 31, through
----------------------- December 31,
1997 1996 1995 1997
---- ---- ---- ----
Cash flows from operating
activities:
Net loss $(529,996) $(672,475) $(825,191) $(20,186,509)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation 13,747 21,783 20,646 679,262
Amortization of patents 72,394 101,970 79,653 1,449,002
Write-off of technology 80,000 819,036
Compensation - stock options 104,456 27,125 52,500 982,121
Imputed interest expense 551,247
Interest credited to paid-
in capital 44,614
Debt conversion expense 1,112,350
Current liabilities and
charges paid in stock 5,962 1,000 51,250 1,130,342
Gain on sale of
marketable securities (38,299) (30,113) (69,689)
(Increase) decrease in
accounts receivable (160,088) 13,741 17,959 (218,088)
(Increase) decrease in
prepaid expenses 2,408 (8,831) 1,935 (36,284)
Increase in accrued
liabilities 44,521 91,729 120,779 747,848
--------- --------- -------- -----------
Net cash used in operating
activities: (484,895) (454,071) (400,469) (12,986,748)
--------- --------- -------- -----------
Cash flows from investing
activities:
Purchases of marketable
securities (2,377,256)
Proceeds from sales of
marketable securities 38,299 30,113 17,292 2,446,945
(Increase) decrease in
loans to employees 9,406 26,470 (17,231) (22,500)
(Increase) decrease in cash
posted as security
for judgment 182,687 (5,599)
Acquisition of property
and equipment (2,945) (4,887) (546,981)
Additions to patents
and technology (64,828) (12,456) (15,941) (1,375,330)
--------- --------- -------- -----------
Net cash provided by (used in)
investing activities: (20,068) 221,927 (21,479) (1,875,122)
--------- --------- --------- -----------
Cash flows from financing
activities:
Issuance of stock 770,806 65,744 639,125 15,878,461
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) (2,038,916)
Distribution to stockholders (18,772)
Reduction of technology
purchase obligations (797,500)
Proceeds from borrowings 1,592,748
Reduction of borrowings (9,898) (1,608,569)
--------- -------- -------- -----------
Net cash provided by
financing activities: 770,806 65,744 632,035 15,217,452
--------- -------- -------- -----------
Increase (decrease) in cash: 265,843 (166,400) 210,087 355,582
Cash at beginning of period: 89,739 256,139 46,052
--------- -------- -------- -----------
Cash at end of period: $355,582 $ 89,739 $ 256,139 $ 355,582
========= ======== ========= ===========
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
SONEX RESEARCH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Sonex Research, Inc. has developed a proprietary technology, known as the Sonex
Combustion System (SCS), which controls the combustion of fuel in engines. The
Company expects to license several 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
historically has offset 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 1997. The financial statements
include the accounts of the Company and, until its disposition in October 1995
as described in Note 4, SonoChem, Inc. All intercompany balances have been
eliminated in consolidation.
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" in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115;
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 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. 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. 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
22
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 United States Government (the "Government") agency for
proof-of-concept demonstration programs, although in such instances the Company
seeks contract awards in which revenue is expected to equal or exceed related
costs.
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, commercial development contract revenue earned
by the Company has offset only a small percentage of total research and
development expenditures.
In 1997 the Company, for the first time, entered into contracts with the
Government which require a performance period of several months and, in one
instance, required the Company to serve as prime contractor with a substantial
portion of the related project being assigned to a subcontractor. Revenue and
costs for these fixed-price Government contracts, which contracts require the
Company to provide stipulated services for a fixed price, have been recognized
using the percentage-of-completion method of accounting by relating contract
costs incurred to date to total estimated contract costs at completion.
Subcontract revenue and costs, along with the associated receivables and accrued
liabilities, are reflected in the Company's financial statements because the
Company is contractually responsible for the ultimate acceptability of the
project by the Government.
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.
Net loss per share
- -------------------
Net loss per share is computed based upon the weighted average number of common
shares outstanding during the year. Potentially dilutive securities, which
include convertible preferred stock, stock options and warrants, 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 piston suppliers or 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 and
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 its officers 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.
23
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
NOTE 4 - MARKETABLE SECURITIES
In October 1995 the Company's former inactive, consolidated subsidiary,
SonoChem, Inc., effected a 1:10 reverse split of all of its outstanding shares
of common stock, and was merged with and into a privately held Virginia medical
transcription services company. The name of the surviving corporation was
changed to Digital Dictation, Inc. ("Digital") and the officers and directors of
the privately held company, two of whom are directors of the Company and general
partners of its largest shareholder, Proactive (see Note 8), became the
directors and officers of Digital. A total of 5% of the issued and outstanding
shares of Digital, including the 125,133 shares received by the Company pursuant
to this merger, began public trading in the over-the-counter market in April
1996.
At the time of this exchange in October 1995, the Company's carrying basis in
the SonoChem stock of zero was 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 became 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 78,133 shares held as of December 31, 1997 is
recorded in the accompanying financial statements at its aggregate fair value of
$117,200. 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 1997 and 1996
the Company sold 20,000 and 27,000 shares, respectively, of its Digital stock
and realized aggregate net proceeds of $38,299 and $30,113, respectively.
NOTE 5 - LOANS TO OFFICERS AND EMPLOYEES
Loans to officers and employees represent the remaining balance of amounts
advanced in prior years for the payment of income tax liabilities incurred by
these individuals upon their receipt of compensation in the form of shares of
the Company's common stock. The loans, which are non-interest bearing, are
secured by deferred salaries payable to each of the borrowers, and become due on
December 31, 1998.
NOTE 6 - PATENTS AND TECHNOLOGY
The capitalized costs of patents and technology consists of the following:
December 31,
------------------
1997 1996
---- ----
Patent application fees and
related legal costs $282,527 $249,093
Computer models and simulations 237,164
-------- --------
282,527 486,257
Accumulated amortization (50,785) (246,949)
-------- --------
$231,742 $239,308
======== ========
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, othertechnology 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 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.
24
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
------------------
1997 1996
---- ----
Shop equipment $383,380 $394,182
Vehicles 11,053 11,053
Office equipment 20,946 24,806
-------- --------
415,379 430,041
Accumulated depreciation (398,173) (402,033)
-------- --------
$17,206 $ 28,008
======== ========
NOTE 8 - ACCRUED COMPENSATION
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.
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 largest beneficial owner of the
Company's common stock by virtue of the purchase of convertible preferred stock
and common stock purchase warrants, required that the voluntary deferral of
salaries be documented formally. Accordingly, all 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. The
conditions of the Consent to Deferral that would allow repayment of deferred
salaries have yet to occur. As of December 31, 1997, an aggregate of $648,292 of
wages so deferred remained unpaid and has been recorded as accrued compensation
on the Company's balance sheet.
NOTE 9 - INCOME TAXES
The Company has not incurred any federal or state income taxes since its
inception due to operating losses. At December 31, 1997, the Company had net
operating loss carryforwards of approximately $16.8 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 1998 through 2012, as follows:
Expiring in 1998 $ 658,000
Expiring in 1999 900,000
Expiring in 2000 1,105,000
Expiring in 2001 1,749,000
Expiring in 2002 1,838,000
Expiring in 2003 - 2012 10,526,000
-----------
$16,776,000
===========
The difference between the net operating loss carryforwards described above and
the accumulated deficit reported in these financial statements results
principally from (1) temporary differences for income tax and financial
reporting purposes relating to the amounts and timing of deductibility of
deferred salaries and compensation related to the grant of stock options, and
the differences in the accounting for the Company's investment in its former
consolidated subsidiary for income tax and financial reporting purposes, and (2)
permanent differences principally due to the non-deductibility for income tax
purposes of a significant charge to operations for debt conversion expense in
25
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
1988 and the non-deductibility of compensation related to the exercise of stock
options recorded previously in the Company's accounts. The Company's sales of
some of its Digital shares in 1996 and 1997 have also generated capital loss
carryforwards for income tax purposes of approximately $335,000. Capital loss
carryforwards, which expire after five years, may only be used to offset future
capital gains.
The potential income tax benefit of these loss carryforwards and temporary
differences of approximately $6.5 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 10 - CAPITAL STOCK
Authorized 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, 1997, a total of 459,999 shares of preferred stock had been
converted into 1,314,278 shares of common stock.
Private placements of common equity
- -----------------------------------
In June 1995 the Company received an investment of $200,000 from Proactive, the
largest beneficial owner of the Company's common stock, 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, and five-year
warrants to purchase 400,000 shares of common stock at $.50 per share. The
Company also accepted additional investments, on the same terms as the Proactive
investment, aggregating $55,000 from a limited number of other shareholders who
qualified as "accredited investors" pursuant to Rule 501 of Regulation D of the
Securities Act of 1933 (the "Act"). The Company also paid accrued bonus
compensation aggregating $42,500 due to its officers and employees through the
issuance of common stock and warrants on the same terms as the Proactive
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 Company received
investments aggregating $340,000, in units of $10,000, from several shareholders
who qualified as 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").
In February 1997 the Company notified the holders of all of its outstanding
warrants to purchase shares of its common stock of proposed amendments to such
warrants, 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 private financings that
took place in February 1992 and June 1994, and in the June 1995 and December
1995 private financings described above. The proposed amendments included, in
various combinations, extensions of the expiration dates, reductions in the
exercise prices, reductions in the number of warrants, provisions for cashless
exercise, and provisions for "piggy-back" 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 Board of Directors in
February 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 the 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"). One other
participant in the Preferred Stock Investment also received the amendments to
26
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
the February 1992 Warrants in exchange for his cash investment of $1,639,
pursuant to which he also received 2,186 shares of common stock and five-year
warrants to purchase 1,093 shares of common stock at an exercise price of $.75
per share.
In March 1997 the Company completed a private financing in which it raised
$330,000 from a small number of the Company's shareholders who participated in
previous private financings of the Company and 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 this financing.
The offer and sale of a total of 775,519 shares of common stock and five-year
warrants to purchase a total of 387,759 shares of common stock in connection
with the February 1997 and March 1997 financings described above satisfied the
conditions of Rule 506 of Regulation D of the Act and, as such, were exempt from
the registration requirements of Section 5 of the Act as transactions not
involving any public offering within the meaning of Section 4(2) of the Act.
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 (the "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
granted to employees and directors become vested with respect to those options
which have not already vested. Options outstanding expire at various dates
through December 2007.
Between January 1, 1995 and December 31, 1997, 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, 1995 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
========= ====
Granted 147,000 .56
Exercised (369,834) .51
Lapsed or canceled (152,934) .50
----------- -------
Unexercised at December 31, 1997 3,597,716 $.52 3,277,966 $.52
========= ==== ========= ====
During 1997 the number of members of the Company's Board of Directors was
reduced from nine to five, and one of the remaining directors was also named
president of the Company. As a result of the resignation of several directors,
unvested options for the purchase of 150,000 shares of common stock lapsed.
Also, in order to induce the new president to take that position, Proactive, the
Company's principal shareholder, granted him a ten-year option to purchase
714,286 shares of common stock owned by Proactive at an exercise price of $.35
per share. This option becomes exercisable at the rate of 20% per year beginning
with the date of grant.
27
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 has estimated the grant date fair value of each option using the
Black-Sholes option pricing model with the following weighted average
assumptions: volatility factor of 112% in 1997 and 124% in 1996 and 1995,
risk-free interest rate of 6%, 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. For purposes of pro forma disclosures, the
estimated fair value of options is amortized to expense over the vesting period
of each option.
Had compensation cost for the Company's stock option plan been determined
consistent with the method of SFAS No. 123 using the weighted average fair value
of options granted during the year as indicated below, the Company's net loss
and net loss per share for each year on a pro forma basis would have been as
follows:
1997 1996 1995
-------- -------- ----------
Weighted average fair value per share $.70 $.96 $.47
Net loss - as reported $529,996 $672,475 $825,191
Net loss - pro forma $876,273 $910,840 $1,095,611
Net loss per share - as reported $.03 $.04 $.06
Net loss per share - pro forma $.05 $.06 $.08
The Black-Sholes and other option pricing models were developed for use in
estimating the fair value of traded options as opposed to the type of
compensatory options granted by the Company. It also requires the input of
highly subjective assumptions, such as the expected stock price volatility,
changes in which can materially affect the fair value estimate. As a result, the
amounts calculated using the Black Sholes option pricing model may not
necessarily provide a reliable single measure of fair value of options granted
by the Company. In addition, 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:
- -----------------------------------------
As of December 31, 1997, a total of 15,036,772 shares of common stock were
reserved by the Company for issuance for the following purposes:
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
-----------
6,635,937
Currently exercisable options:
Exercisable at $.50 per share 3,054,466
Exercisable at $.75 per share 173,500
Exercisable at $1.00 per share 50,000
-----------
3,277,966
Granted options becoming exercisable in the future:
Exercisable at $.50 per share 297,250
Exercisable at $.75 per share 22,500
-----------
319,750
Options available under plan for future grants 403,116
Conversion of preferred stock 4,400,003
-----------
Total shares reserved 15,036,772
28
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
NOTE 11 - COMMITMENTS
The Company occupies its office and laboratory facility on a month-to-month
basis under the terms of an operating lease agreement that expired in April 1994
and was subsequently extended twice, most recently through November 1997. No new
long-term lease has been negotiated since this last extension expired, and the
Company once again is occupying 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. The
lease provides for monthly rent of $3,500, and requires the Company to pay all
property related expenses. Gross rent charges aggregated $42,000, $52,000 and
$54,000 in 1997, 1996 and 1995, respectively, while the Company also earned
sublease income of $750 in 1997 and $2,400 in 1996. The Company will seek to
negotiate a new long-term lease for its facility or 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 31, 1997, the Company informed Price Waterhouse LLP, independent
accountants for Sonex since 1985, that it had been dismissed as independent
accountants for the year ended December 31, 1997. The Company's Board of
Directors made the decision to change independent accountants.
In connection with its audits for each of the two years in the period ended
December 31, 1996, and through October 31, 1997, there were no disagreements
with Price Waterhouse LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Price Waterhouse LLP,
would have caused them to make reference thereto in their report on the
financial statements for such years.
The reports of Price Waterhouse LLP on the financial statements of the Company
for the past two fiscal years, presented on page 16 of this Form 10-KSB, contain
no adverse opinion or disclaimer of opinion and are not qualified or modified as
to audit scope or accounting principle; however, such reports are modified by
the inclusion of an explanatory paragraph indicating that there is substantial
doubt about the Company's ability to continue as a going concern.
The Company's Board of Directors made the decision to engage C. L. Stewart &
Company as new independent accountants as of October 31, 1997. During the two
most recent fiscal years and through October 31, 1997, the Company had not
consulted with C. L. Stewart & Company regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements, and either a written report was provided to the Company or oral
advice was provided that C.L. Stewart & Co. concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K, or a reportable
event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
The Company has had no disagreements with its current independent accountants,
C. L. Stewart & Company, on any matter of accounting principles or practices or
financial statement disclosure. C. L. Stewart & Company has been the Company's
independent accountants since October 31, 1997.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The Company's Board of Directors is divided into two categories: "Common Stock"
directors elected by the holders of Common Stock; and "Preferred Stock"
directors elected by the holders of Preferred Stock. These two categories of
directors are further divided into three classes as nearly equal in number as
possible, with the term of one of the three classes of directors expiring at
each annual meeting of shareholders. The members of each class of directors are
to hold office for terms of three years until their successors have been elected
and qualified. 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.
29
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
The Company's By-laws state that the Board of Directors shall consist of not
fewer than three directors, with the total number of directors to be set by the
Board by resolution. Following the resignation of three Preferred Stock
directors and one Common Stock director in 1997, the total number of directors
is now five, two of whom are Preferred Stock directors and three of whom are
Common Stock directors.
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. Executive officers are appointed and serve at
the discretion of the Board of 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 53 1999 Director
Mr. Myron A. Wick, III 54 1999 Chairman of the Board
Common Stock Directors:
Mr. Nuno Brandolini 44 2000 Vice Chairman of the Board
Mr. Lawrence H. Hyde 73 1999 President and Director
Dr. Andrew A. Pouring 66 1998 Chief Executive Officer, Chief Scientist
and Vice Chairman of the Board
Other Executive Officers:
Mr. George E. Ponticas 38 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 Cuisine Solutions, Inc., Digital Dictation, Inc., I-Flow
Corporation, Modtech, Inc., PMR Corporation, Tanknology - NDE Corporation,
WrayTech Instruments, Inc., and Onsite Energy, Inc., 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. 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., Tanknology - NDE Corporation, and
WrayTech Instruments, Inc., of which he is the Chairman. 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.
30
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
Mr. Lawrence H. Hyde has been a director of the Company since September 1986,
serving as Chairman of the Board from June 1987 to June 1993, and was appointed
President of the Company in October 1997. 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 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 of Finance, 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 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
The following table sets forth the compensation paid by the Company to its chief
executive officer; no other executive officer earned annual compensation during
the most recently completed year in excess of $100,000 (together referred to as
the "Named Executives").
SUMMARY COMPENSATION TABLE
Annual compensation
--------------------------------
Salary Long-term
-------------------- compensation
Name and Position Year Cash paid Deferred Bonus # of options
----------------- ---- --------- -------- -------- ------------
Dr. Andrew A. Pouring 1997 $ 72,000 $ 48,000 35,000
CEO & Chief Scientist 1996 60,798 40,531 $ 10,000 25,000
1995 60,798 40,531
In order to help conserve the Company's limited cash resources, all of the
Company 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 salaries. 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. The conditions of the Consent to Deferral that would allow
repayment of deferred salaries have yet to occur. As of December 31, 1997, an
aggregate of $648,292 in deferred salaries is owed to current and former
employees.
31
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
In an effort to avoid long-term financial commitments, the Company does not have
employment agreements with any of its personnel. The salaries of executive
officers are set by the Board of directors on an annual basis. For the past
several years Dr. Pouring has been deferring 40% of his annual salary. As of
December 31, 1997, the amount of deferred salary owed to Dr. Pouring was
$250,981. His authorized annual salary was increased in 1997 for the first time
since 1989.
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.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------------------------
Number of % of total
securities options
underlying granted to
options employees in Exercise Market Expiration
Name granted fiscal year price price date
---- ------- ----------- ----- ----- -------------
Pouring 35,000 33% $.50 $.75 Dec. 14, 2007
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, 1997 December 31, 1997
# of shares
acquired on Value Exercisable/ Exercisable/
Name exercise realized unexercised unexercised
- -------- ----------- -------- ---------------------- -------------------
Pouring - - 146,316/185,066 $79,178/$97,850
With the exception of options to purchase 25,000 shares held by Dr. Pouring that
are exercisable at $.75 per share, all options held by the Named Executives are
exercisable at $.50 per share, which price was below the December 31, 1997
market price of the Company's publicly traded common stock of $1.0625 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following tables set forth as of March 31, 1998 information relating to
beneficial ownership by directors 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 which the reporting person currently owns or has the
right to acquire within 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.
32
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
Total Beneficial Ownership
--------------------------
Common Rights to Total shares
shares acquire beneficially Percent
Name and address (1) owned shares owned of class
-------------------- --------- --------- --------- --------
Nuno Brandolini 111,726 330,150 441,876 2.5
Lawrence H. Hyde 394,986 606,857 1,001,843 5.6
Charles C. McGettigan 1,570,211 5,842,794 7,413,005 (3) 31.6
Andrew A. Pouring 688,239 146,316 834,555 4.7
Myron A. Wick, III 1,570,211 5,842,794 7,413,005 (3) 31.6
All directors & officers
as a group (6 persons) 2,906,424 7,134,868 10,041,292 40.7
Herbert J. Mitschele, Jr.
Far Hills, NJ 946,755 105,715 1,052,470 6.0
Proactive , et.al. (2)
San Francisco, CA 2,919,157 9,736,003 12,655,160 46.1
- -----------------------------
(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 several affiliated entities and individuals
("Proactive et.al."), as reported in a Form 13D filing with the Securities
and Exchange Commission.
(3) Includes 7,199,005 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 et.al. Both individuals exercise shared voting
and investment power with respect to such shares.
Rights to Acquire Shares
------------------------
Total
Exercisable Preferred rights to
Exercisable (put)/ Exercisable stock acquire
Name options call (2) warrants converted shares
- -------------------- ---------- --------- --------- --------- ---------
Nuno Brandolini 330,150 330,150
Lawrence H. Hyde 464,000 142,857 606,857
Charles C. McGettigan (1) 214,000 (71,429) 3,414,510 2,285,713 5,842,794
Andrew A. Pouring 146,316 146,316
Myron A. Wick, III (1) 214,000 (71,429) 3,414,510 2,285,713 5,842,794
All directors & officers
as a group (6 persons) 1,477,216 71,429 3,514,510 2,285,713 7,134,868
Herbert J. Mitschele, Jr. 62,858 42,857 105,715
Proactive , et.al. (2)
San Francisco, CA (142,857) 5,521,719 4,357,141 9,736,003
- ---------------------------
(1) Includes 5,628,794 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, et.al. Both individuals exercise shared voting
and investment power with respect to such shares.
(2) Represents the currently exercisable portion of a ten-year option
granted by Proactive, et.al. to Mr. Hyde to purchase 714,286 shares of
common stock presently owned by Proactive, et.al. at an exercise price
of $.35 per share. This option becomes exercisable at the rate of 20%
per year beginning with the December 15, 1997 date of grant. Because
this agreement relates to shares which are already outstanding, the
exercise of such rights will not result in an increase in the total
number of the Company's outstanding shares for purposes of computing
the percentage of beneficial ownership of each reporting person. Mr.
McGettigan and Mr. Wick each has indirect beneficial ownership in 50%
of the shares subject to this agreement.
33
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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.a Consent of C.L. Stewart & Company
23.b Consent of Price Waterhouse LLP
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.
On November 4, 1997, the Registrant filed a Current Report on
Form 8-K to report a change in its independent accountants for
the fiscal year ended December 31, 1997.
34
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 9, 1998 By: /s/ Andrew A. Pouring
----------------------------------
Andrew A. Pouring
Principal Executive Officer
April 9, 1998 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 9, 1998 *
----------------------------------
Myron A. Wick, III
Chairman of the Board of Directors
April 9, 1998 *
----------------------------------
Nuno Brandolini
Vice Chairman of the Board of Directors
April 9, 1998 /s/ Andrew A. Pouring
----------------------------------
Andrew A. Pouring
Vice Chairman of the Board of Directors
April 9, 1998 *
----------------------------------
Lawrence H. Hyde
President and Director
April 9, 1998 *
----------------------------------
Charles C. McGettigan
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.
35
<PAGE>
SONEX RESEARCH, INC. 1997 FORM 10-KSB
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 March 25, 1998 appearing on page 14 of
this Form 10-KSB.
/s/C.L. STEWART & COMPANY
Annapolis, Maryland
April 9, 1998
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
Linthicum, Maryland
April 8, 1998
36
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