SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 Fee Required] for the fiscal year ended
December 31, 1996 or
Transition report pursuant to section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 [No Fee Required] for the transition period from
_____ to _____.
Commission File Number 0-20333
NOCOPI TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Maryland 87-0406496
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(State or other jurisdiction I.R.S. Employer
of incorporation) Identification No.)
230 Sugartown Road, Wayne, Pennsylvania 19087
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(Address of principal executive offices) (Zip Code)
Telephone Number, Including Area Code: (610) 687-2000
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
---------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. $9,700,000 at March 14, 1997.
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each class of registrant's common stock, as of the latest
practicable date. 14,080,654 Shares of Common Stock, $.01 par value at March 14,
1997.
Documents Incorporated by Reference.
Proxy Statement for the Annual Meeting of Shareholders to be Held June 9,
1997 (Part III).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _______
Exhibit Index Begins on Page 17.
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PART I
ITEM 1. BUSINESS
Background
Nocopi Technologies, Inc. (hereinafter "Nocopi" or "Registrant") was
organized to exploit a technology developed by its founders for impeding the
reproduction of documents on office copiers. In its early stages of development,
Nocopi's business consisted primarily of selling burgundy colored, copy
resistant paper to protect corporate documents, that is, to provide document
security. In the last several years, Registrant has continued to refine its
document security technologies but has increasingly focused on developing and
marketing technologies for document and product authentication which can reduce
losses caused by fraudulent document reproduction and by product counterfeiting
and/or diversion.
Registrant is involved in the business of product and document
authentication and security. It has developed and markets a variety of
products--special inks and paper which deters photocopying and transmission by
facsimile and proprietary inks which print invisibly until activated for the
purpose of identifying counterfeit or diverted products. Registrant's document
authentication products and technologies, over the last three years, have become
the most substantial market for Registrant. Sales are made either through
licensees or directly to end-users.
Anti-Counterfeiting and Anti-Diversion Technologies and Products
Recent developments in copying and printing technologies have made it ever
easier to counterfeit a wide variety of documents. Lottery tickets, gift
certificates, event and transportation tickets, travellers' checks and the like
are all susceptible to counterfeiting, and Registrant believes that losses from
such counterfeiting have increased substantially with improvements in
technology. Counterfeiting has long caused losses to manufacturers of brand name
products, and Registrant believes these losses have also increased as the
counterfeiting of labeling and packaging has become easier.
Registrant's document authentication technologies are useful to businesses
desiring to authenticate a wide variety of printed materials and products. These
include a technology with the ability to print invisibly on certain areas of a
document which can be activated or revealed by use of a special highlighter pen
when authentication is required. This is sold under the trade mark COPIMARK(TM).
Other variations of the COPIMARK(TM) technology involve multiple color responses
from a common pen, visible marks of one color that turn another color with the
pen or visible and invisible marks that turn into a multicolored image. A
related technology is Nocopi's RUB & REVEAL(R) system, which permits the
invisible printing of an authenticating symbol or code that can be revealed by
rubbing a fingernail over the printed area. These technologies provide users
with the ability to authenticate documents and detect counterfeit documents.
Applications include the authentication of documents having intrinsic value,
such as checks, travellers' checks, gift certificates and event tickets, and the
authentication of product labelling and packaging. The Rub & Reveal(R)
technology was enhanced during 1995 permitting its use in documents produced on
laser printers, thus affording expanded market opportunities for this
technology. When applied to product labels and packaging, such technologies can
be used to detect counterfeit products whose labels and packaging would not
contain the authenticating marks invisibly printed on the packaging or labels of
the legitimate product, as well as to
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combat product diversion (i.e., the sale of legitimate products through
unauthorized distribution channels or in unauthorized markets). During 1993,
Registrant developed its invisible inkjet technology which permits manufacturers
and distributors to track the movement of products from production to ultimate
consumption. During 1994, Registrant developed a new technology to address the
widespread problem of counterfeiting in the apparel industry consisting of a
reactive thread which can be woven into a label which is then sewn into a
garment. The woven label can be activated in the same manner as a reactive paper
label to reveal the authenticity of the garment. During 1995, Registrant
developed a new covert authenticating technology which allows a manufacturer of
compact discs to identify CD's produced by that manufacturer. Registrant
believes that this technology will provide CD manufacturers and publishers a
tool with which to combat the significant losses sustained as a result of
illegal pirating and counterfeiting of data, music and video discs.
Document Security Products
The first product Nocopi developed was a burgundy colored paper that
deterred photocopying and transmission by facsimile. The color was chosen and
designed so that it absorbed most of the light projected on documents during
photocopying except for light in the part of the spectrum the copy process is
incapable of detecting. This colored paper exhibited the ability to inhibit
reproduction at the cost of legibility to the reader. The darker it was, the
better it worked. The trade-off was and is tied to security. If a client needed
the security, he would put up with the diminished legibility. Registrant
currently markets its copy resistant papers in three grades, each balancing
improved copy resistance against diminished legibility.
The next step in the evolution of Registrant's products was the development
of a product which enables the user to select certain areas of a document for
copy protection. This led to the development of user defined pre-printed forms
on which certain areas were already activated, such as a doctor's prescription
form with the signature area protected or a financial instrument exhibiting the
same kind of protection. This product line is called SELECTIVE NOCOPI(TM).
Registrant also developed several inks which impede photocopying by color
copiers. This new technology is called COLOR BLOC(R).
During 1993, Registrant developed a technology for providing secure faxes.
Using this technology, a message printed by a receiving telecopier cannot be
read until the paper has been activated by the recipient. This technology
initially was available for use only in thermal facsimile machines, limiting its
marketability. During 1996, Registrant developed a new technology to allow plain
paper ink jet facsimile machines to receive confidential faxes. This new
technology is called SECRETFAX(TM). An associated technology, called
SECURPRINT(TM), enables an ink jet computer printer to produce documents in
which, at the discretion of the author, a portion or all of the document can be
rendered confidential until activation. Registrant is engaged in market
investigations which it believes may lead to the commercial introduction of
SECRETFAX(TM) and SECURPRINT(TM) during 1997.
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The following table illustrates the approximate percentage of Registrant's
revenues accounted for by each type of its products for each of the three last
fiscal years:
Year Ended December 31,
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1996 1995 1994
---- ---- ----
Product Type
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Anti-Counterfeiting & Anti-Diversion
Technologies and Products 97% 96% 94%
Document Security Products 3% 4% 6%
Marketing
The marketing approach of Registrant is to have sufficient flexibility in
its products and technologies so as to provide cost effective solutions to a
wide variety of counterfeiting, diversion and copier fraud problems. As a
technology company, Registrant generates revenues primarily by collecting
license fees from market-specific manufacturers who incorporate Registrant's
technologies into their manufacturing process and their products. Registrant
also licenses its technologies directly to end users.
Registrant has identified a number of major markets for its technologies
and products, including security printers, manufacturers of labels and packaging
materials and distributors of brand name products. Within each market, key
potential users have been identified, and, in many cases, already licensed.
Within North America, sales efforts include direct selling by company personnel
to create end user demand and selling through licensee sales forces with support
from company personnel. Registrant has determined that technical sales support
by its personnel is of great importance to increasing its licensees' sales of
products incorporating Registrant's technologies, and recently has significantly
increased its commitment to providing such support.
As continued improvements in color copier and desktop publishing technology
make counterfeiting and fraud opportunities less expensive and more available,
Registrant intends to maintain an interactive product development and
enhancement program with the combined efforts of marketing, applications
engineering and research and development. Registrant's objective is to
concentrate efforts on developing market-ready products with the most beneficial
ratios of market potential to development time and cost.
Euro-Nocopi S.A.
In 1994, the Registrant formed a European company, Euro-Nocopi S.A. to
market the Company's technologies in Europe under an exclusive license
agreement. Euro-Nocopi S.A., headquartered in Paris, has sales representatives
in France, England and Germany. Euro-Nocopi sells the full range of Nocopi
products and technologies in the European market, both to European-based
companies and to subsidiaries of U.S.-based corporations. The Registrant
receives an on-going royalty stream from revenues generated in Europe. The
Registrant owns an approximately 18% interest in Euro-Nocopi and holds warrants
permitting it to increase its interest to 55%. Beginning in August 1998, the
Euro-Nocopi stock sold to investors may be converted into
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approximately one million shares of the Registrant's common stock in the event
that no public offering of Euro-Nocopi has been made by that date.
Major Customers
During 1996, Registrant made sales or obtained revenues equal to 10% or
more of Registrant's 1996 total revenues from two customers, 3M Corporation and
Paxar Corporation, which accounted for approximately 22% and 18%, respectively,
of 1996 revenues. Registrant anticipates that its reliance on these customers
will diminish as other licensees increase their sales of products incorporating
Registrant's technologies.
Manufacturing
Nocopi does not have substantial manufacturing facilities. Registrant
presently subcontracts the manufacture of its applications to third party
manufacturers and expects to continue such subcontracting. Applications of
Registrant's technology are effected mainly through printing and coating. The
inks are custom manufactured by the Company. Since some of the processes that
Nocopi uses in its applications are based on relatively common manufacturing
technologies, there does not appear to be a technical or economic reason for
Registrant to invest capital in its own manufacturing facilities. In the area of
its proprietary inks, however, Registrant desires to control the manufacturing
process for security purposes and has invested $75,000 to establish an ink
making capacity capable of supplying commercial quantities of its security ink.
Registrant has established a quality control program which currently
entails laboratory analysis of developed technologies. Management intends to
expand this program to include placing specially trained Nocopi technicians
onsite at third party production facilities to monitor the manufacturing
process, where warranted. There can be no assurance that Registrant will, in
fact, so expand its quality control program.
Patents
Nocopi has received various patents and has patents pending in the United
States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan,
France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy,
Sweden, Switzerland, Luxembourg, and Liechtenstein. Patent applications for
Registrant's technology (including improvements in the technology) have been
filed in numerous other jurisdictions where commercial usage is foreseen,
including Europe, Japan, Australia, and New Zealand, and the rights under such
applications have been assigned to Registrant. Registrant's patent counsel,
which conducted the appropriate searches in Canada and the United States, has
reviewed the results of searches conducted in Europe and advised management that
effective patent protection for Registrant's technology should be obtainable in
all countries in which the patent applications have been filed. There can be no
assurance, however, that such protection will be obtained.
When a new product or process is developed, the developer may seek to
preserve for himself the economic benefit of the product or process by applying
for a patent in each jurisdiction in which the product or process is likely to
be exploited. Generally speaking, in order for a patent to be granted, the
product or process must be new and be inventively different from what has been
previously patented or otherwise known anywhere in the world. Patents generally
have a duration of 17 years from the date of grant or 20 years from the date of
application depending on the jurisdiction
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concerned, after which time any person is free to exploit the product or process
covered by a patent. A person who is the owner of a patent has, within the
jurisdiction in which the patent is granted, the exclusive right to exploit the
patent either directly or through licensees, and is entitled to prevent any
person from infringing on the patent.
The granting of a patent does not prevent a third party from seeking a
judicial determination that the patent is invalid. Such challenges to the
validity of a patent are not uncommon and are occasionally successful. There can
be no assurance that a challenge will not be filed to one or more of
Registrant's patents and that, if filed, such challenge(s) will not be
successful.
In the United States and Canada, the details of the product or process
which is sought to be patented are not publicly disclosed until a patent is
granted. However, in some other countries, patent applications are automatically
published at a specified time after filing.
Research and Development
Nocopi has been involved in research and development since its inception,
and intends to continue its research and development activities in three areas.
First, Registrant will continue to refine its present family of products.
Second, Registrant will seek to expand its technology into new areas of
implementation. Third, Registrant will seek to develop specific customer
applications.
During the years ended December 31, 1994, 1995, and 1996, Nocopi expended
approximately $742,100, $789,100 and $805,100, respectively, on research and
development activities (excluding capital expenditures related to research and
development activities).
Competition
Registrant is not aware of any competitors in the area of covert document
and product authentication. Likewise, Registrant is not aware of any competitors
that market paper which functions in the same way as Nocopi security papers,
although management is aware of a limited number of competitors which are
attempting different approaches to the same problems which Registrant's products
address. Management is aware of a Japanese company that has developed a film
overlay which is advertised as providing protection from photocopying.
Management has examined the film overlay and believes that it has a limited
number of applications. Nocopi security paper is also considerably less
expensive than the film overlay.
Other indirect competitors are marketing products utilizing the hologram
and copy void technologies. The hologram, which has been incorporated into
credit cards to foil counterfeiting, is considerably more costly than
Registrant's technology. Copy void is a security device which has been developed
to indicate whether a document has been photocopied.
Registrant has limited resources, and there can be no assurance that
businesses with greater resources than Registrant will not enter the market and
compete with Registrant.
Employees
At March 1, 1997, Registrant had 16 employees, including management.
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Financial Information about Foreign and Domestic Operations
Certain information concerning Registrant's foreign and domestic operations
is contained in Note 9 to Registrant's Financial Statements included elsewhere
in this Annual Report on Form 10-K, and is incorporated herein by reference.
ITEM 2. PROPERTIES
Registrant's corporate headquarters are located at 230 Sugartown Road,
Wayne, Pennsylvania 19087. Its telephone number at that location is (610)
687-2000. These premises consist of approximately 2,800 square feet of space
leased from an unaffiliated third party under a lease expiring in July, 2001.
Current monthly rental under this lease is $4,300.
In 1992, Registrant established research facilities at One Great Valley
Parkway, Malvern, Pennsylvania 19355. These facilities, currently consisting of
approximately 5,000 square feet of space, have been outfitted with approximately
$39,000 in leasehold improvements. The facilities are occupied by Registrant
under a lease expiring in September, 1998 at a current monthly rent of $4,200
including common area charges.
Registrant's European affiliate leases approximately 800 sq. ft. of office
space at 30 rue Ste. Marc, Paris, France, under a lease expiring in July, 1998.
Monthly rental under this lease is $1,200.
Registrant believes its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Registrant is not aware of any material pending litigation (other than
ordinary routine litigation incidental to its business where, in management's
view, the amount involved is less than 10% of Registrant's current assets) to
which Registrant is or may be a party, or to which any of its properties is or
may be subject, nor is it aware of any pending or contemplated proceedings
against it by any governmental authority. Registrant knows of no material legal
proceedings pending or threatened, or judgments entered against, any director or
officer of Registrant in his capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1996, no
matters were submitted to a vote of Registrant's security holders.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the over-the-counter market and
quoted on the NASD over-the-counter Bulletin Board under the symbol "NNUP". The
table below presents the range of high and low bid quotations of Registrant's
Common Stock by calendar quarter for the last two full fiscal years and for a
recent date, as reported by the National Quotation Bureau, Inc. The quotations
represent prices between dealers and do not include retail markup, markdown, or
commissions; hence, such quotations do not represent actual transactions.
Quotations for periods before July 15, 1996, the date on which the Company
amended its Bylaws to effect a one-for-five reverse split of its common stock,
have been adjusted for the reverse split.
High Bid Low Bid
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January 1, 1995 to March 31, 1995 $4.15 $ .35
April 1, 1995 to June 30, 1995 3.65 .65
July 1, 1995 to September 30, 1995 3.55 .65
October 1, 1995 to December 31, 1995 4.70 .65
January 1, 1996 to March 31, 1996 3.70 2.55
April 1, 1996 to June 30, 1996 4.60 2.65
July 1, 1996 to September 30, 1996 3.85 1.88
October 1, 1996 to December 31, 1996 2.50 1.00
January 1, 1997 to March 14, 1997 1.19 .75
As of March 14, 1997, 14,080,654 shares of Registrant's Common Stock were
outstanding. The number of holders of record of Registrant's Common Stock was
approximately 1,100. However, Registrant estimates that it has a significantly
greater number of Common Stockholders because a number of shares of Registrant's
Common Stock are held of record by broker-dealers for their customers in street
name. In addition to the 14,080,654 shares of Common Stock which are
outstanding, Registrant has reserved for issuance 2,664,472 shares of its Common
Stock which underlie outstanding options and warrants to purchase Common Stock
and securities issued by Registrant and Euro-Nocopi S.A., which may be converted
into its common stock.
Registrant has paid no cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been has been derived from the
Company's consolidated financial statements. The information set forth should be
read in conjunction with the Company's Consolidated Financial Statements, the
related notes and other financial information appearing elsewhere herein and
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues $ 3,640,300 $ 3,019,700 $ 1,761,700 $ 1,286,600 $ 354,800
Loss from operations (799,600) (644,700) (1,572,600) (1,288,400) (1,426,200)
Net loss (408,300) (241,900) (1,419,200) (1,293,400) (1,330,900)
Balance Sheet Data
Total assets 3,532,500 4,465,200 4,299,400 3,265,500 2,573,200
Working capital 1,891,000 2,645,500 3,128,100 2,437,800 1,873,500
Notes payable 950,000 950,000 1,362,500 1,412,500
Ownership interest of others
in consolidated entity 1,448,300 1,823,100 2,146,000
Shareholders' equity 172,200 572,700 255,600 1,642,300 2,269,000
Average common shares outstanding 14,067,606 14,006,254 13,878,593 13,719,036 13,520,095
Loss per common share $(.03) $(.02) ($.10) ($.09) ($.10)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the year ended December 31, 1996 were $3,640,300 compared to
$3,019,700 in 1995 and $1,761,700 in 1994, representing increases of 21% and
71%, respectively. The increase in both 1996 and 1995 is attributable to the
growing recognition by the international business community of the financial
impact of product counterfeiting and product diversion, as well as the need and
the ability to combat the problem through technologies such as those offered by
the Company. During 1996 the Company produced its initial order of pressure
sensitive security labels for 3M Corporation. These label sales are included in
Product and other sales. During 1996, the Company also renegotiated its
exclusive license agreement with Georgia-Pacific Corporation. The Company
believes the new arrangement, combined with a technical development which has
opened up the potential for an alternative method of applying the Company's
technology to checks and other security documents, will allow it to broaden the
distribution of its check printing technologies. The slower than anticipated
revenue growth from Georgia-Pacific which led, in part, to the license
renegotiation, negatively affected the Company's second half revenues compared
to the second half of 1995. The Company and its affiliate, Euro-Nocopi S.A.
(Euro-Nocopi) continued to sign licensees and end-user customers during the year
and experienced growth in revenues from certain customers and licensees signed
in earlier years.
The Company's gross profit declined to $2,581,600 or 71% of sales from
$2,620,900 or 87% of revenues and $1,473,300 in or 84% of revenues in 1994. The
decline in gross profit in 1996 in both absolute dollars and as a percentage of
revenues is due, in part, to the increase in sales of tangible products such as
pressure sensitive labels which are manufactured or purchased for resale and
carry a higher level of direct costs compared to the Company's license and
royalty revenues.
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Research and development costs increased to $805,100 in 1996 from $789,100
in 1995 and $742,100 in 1994. The increases in both 1996 and 1995 resulted from
a staff addition in late 1995 and travel expenses to support European sales
activity.
Sales and marketing expenses declined to $1,494,100 in 1996 from $1,552,600
in 1995. The decline relates primarily to lower commission and compensation
expenses experienced in 1996 compared to 1995. The increase in 1995 from
$1,485,000 in 1994 is primarily attributable to the development of a sales and
marketing organization in Europe where efforts intensified after 1994.
Euro-Nocopi has full-time sales persons in France, England and Germany. As a
significant amount of luxury products affected by counterfeiting and diversion
are produced in Europe, the successful implementation of a sales organization in
Europe was an important 1995 objective. This increase was partially offset by
lower sales and marketing expenses in the United States resulting in a reduction
of costs associated with a major sales and marketing program initiated in 1994
which included direct mail, public relations activities and participation in
anti-counterfeiting trade shows and meetings.
General and administrative expenses increased to $943,300 in 1996 from
$781,500 and $652,100 in 1994 in 1994. The increase in 1996 is attributable to
legal fees incurred relative to the Company's international patent activities
and professional fees incurred by Euro-Nocopi. The increase in 1995 compared to
1994 was attributable to the accrual of incentive payments payable for the
achievement of the Company's 1995 operating plan in that year and administrative
costs associated with Euro-Nocopi.
Other income (expenses) include interest on the Series B 7% Subordinated
Convertible Promissory Notes issued in May 1993 and amortization of debt issue
costs related to the Notes. The decrease in interest and amortization in 1995
reflects the conversion of $412,500 in principal amounts of these notes into
common stock during that year. Interest income includes interest on funds
invested in the U.S. as well as the investment of funds held by Euro-Nocopi.
Ownership interest of others in consolidated entity represents the
proportionate share in the loss of Euro-Nocopi attributable to the 82% ownership
interest of the outside shareholders of that company.
The net loss for 1996 was $408,300 compared to losses of $241,900 and
$1,419,200 respectively in 1995 and 1994.
The increase in the 1996 net loss compared to 1995 relates in part to the
lower revenues realized from Georgia-Pacific compared to 1995 leading to the
renegotiation of the Company's agreement with Georgia-Pacific as well as delays
in the development of revenues in other areas of the Company's business. Also
contributing to the 1996 increase in the net loss is the lower gross profit
realized as a result of changes in product mix in favor of tangible products
which carry a higher level of direct costs than licenses and royalties. The
significant improvement in 1995 compared to 1994 is primarily attributable to
U.S. revenue increases that year carrying a high gross profit margin as well as
reductions in domestic overhead costs.
Liquidity and Capital Resources
The Company's consolidated cash position declined to $2,229,200 at
December 31, 1996 from $2,982,100 at December 31, 1995. Included in the
December 31, 1996 cash balance is $1,641,200 held by Euro-Nocopi. This amount is
available primarily to fund Euro-Nocopi's operations. These funds were raised in
1994 to enable
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this new entity to exploit the European market for Nocopi's technologies. The
Company owns an approximate 18% interest in Euro-Nocopi with warrants which
could increase its holding to 55%. Euro-Nocopi markets the Company's
technologies in Europe under an exclusive licensing arrangement. Beginning in
August 1998, the Euro-Nocopi stock sold to investors may be converted into
approximately one million shares of the Registrant's common stock in the event
that no public offering of Euro-Nocopi has been made by that date.
The Company's domestic cash position decreased to $588,000 at December 31,
1995 from $827,900 at December 31, 1995. The decrease in cash resulted primarily
from the use of cash required to fund domestic operations, payments in 1996
related to the acquisition of ink production equipment in late 1995 and
incentive compensation paid for the achievement of the 1995 U.S. business plan,
offset by the proceeds of stock option exercises. The Euro-Nocopi cash balance
declined to $1,641,200 at December 31, 1996 from $2,075,000 at December 31,
1995. The decrease is attributable principally to funds required to support
Euro-Nocopi's operations. Capital spending was $61,500 in 1996, $112,000 in 1995
and $56,900 in 1994.
The Company has a $1 million short-term line of credit with a bank at
prime. Collateral for the line of credit includes all assets of the Company
along with personal assets pledged by two directors. No compensation is payable
to these directors under this arrangement. The credit line, unless renewed,
expires at December 31, 1997. There have been no borrowings under this line of
credit. The Company intends to renew this line prior to its expiration.
The Company believes that is has sufficient working capital and available
credit to support its consolidated operations and debt service requirements over
the next twelve months.
The Company, on July 15, 1996, amended its Articles of Incorporation to
effect a one-for-five reverse split of its common stock, increased the par value
of its common stock from $.002 to $.01 and decreased the number of shares of
common stock authorized under its Articles of Incorporation from 90,000,000 to
50,000,000.
Factors That May Affect Future Growth and Stock Price
The Company's operating results and stock price are dependent upon a number
of factors, some of which are beyond the Company's control. These include:
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle for the Company's
technologies, the potential for customer delay or deferral of implementation of
the Company's technologies, the size and timing of inception of individual
license agreements, the success of the Company's licensees and strategic
partners in exploiting the market for the licensed products, modifications of
customer budgets, and uneven patterns of royalty revenue and product orders. As
the Company's revenue base is not substantial, delays in finalizing license
contracts, implementing the technology to initiate the revenue stream and
customer ordering decisions can have a material adverse effect on the Company's
quarterly and annual revenue expectations and, as the Company's operating
expenses are substantially fixed, income expectations will be subject to a
similar adverse outcome.
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New Business Opportunities. The Company, with limited research and
development resources, is compelled to develop new technologies which it
believes will enhance and expand its leadership position in the
anti-counterfeiting and anti-diversion marketplace it serves. There can be no
assurance that the considerable resources expended in this effort will generate
significant revenues for the Company.
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentially, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. There
can be no assurance that the Company will be able to protect the basis of its
technologies from discovery by unauthorized third parties, thus adversely
affecting its customer and licensee relationships.
Volatility of Stock Price. The market price for the Company's common stock
has historically experienced significant fluctuations and may continue to do so.
The Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, receives limited public notice regarding its
business achievements and prospects nor is it extensively followed by securities
analysts and traders. The market price may be affected by announcements of new
relationships or modifications to existing relationships. The stock prices of
many developing public companies, particularly those with small capitalizations
have experienced wide fluctuations not necessarily related to operating
performance. Such fluctuations may adversely affect the market price of the
Company's common stock.
Recently Issued Accounting Standards
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997 (earlier application is not permitted).
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of Registrant meeting the requirements of Regulation
S-X (except section 210.3-05 and Article 11 thereof) are included herein
beginning at page F-1 of this Annual Report on Form 10-K.
For information required with respect to this Item 8, see "Consolidated
Financial Statements and Schedules on pages F-1 through F- of this report.
12
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
13
<PAGE>
PART III
The information required by Part III, Items 10 through 13, inclusive of
Form 10-K are incorporated by reference to Registrant's Definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled for June 9, 1997,
which shall be filed with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year to which this Annual Report on Form
10-K relates.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following Financial Statements are filed as part of this Annual Report
on Form 10-K
PAGE
----
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 to F-16
Schedule II - Valuation and Qualifying Accounts and Reserves F-17
All other schedules are omitted because they are not required or
are inapplicable.
- -------------------------------
(b) The Exhibit Index appears on Page 17 of this Annual Report on Form 10-K.
(c) Registrant has not filed any reports on Form 8-K during the last quarter of
the fiscal year covered by this Annual Report on Form 10-K.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC.
Registrant
Dated: March 27, 1997 By: /s/ Norman A. Gardner
------------------------------------
Norman A. Gardner
President & Chief Executive Officer
Dated: March 27, 1997 By: /s/ Rudolph A. Lutterschmidt
------------------------------------
Rudolph A. Lutterschmidt,
Vice President, Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 1997 /s/ William F. Drake, Jr.
----------------------------------------
William F. Drake, Jr., Director
Date: March 27, 1997 /s/ Norman A. Gardner
----------------------------------------
Norman A. Gardner, Director
Date: March 27, 1997 /s/ Dr. Arshavir Gundjian
----------------------------------------
Dr. Arshavir Gundjian, Director
Date: March 27, 1997 /s/ Ray B. Mundt
----------------------------------------
Ray B. Mundt, Director
Date: March 27, 1997 /s/ Edward N. Patrone
----------------------------------------
Edward N. Patrone,
Chairman of the Board of Directors
Date: March 27, 1997 /s/ Joel A. Pinsky
----------------------------------------
Joel A. Pinsky, Director
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Nocopi Technologies, Inc.
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Nocopi Technologies, Inc. listed on the index
on page 15 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nocopi
Technologies, Inc. as of December 31, 1996 and 1995 and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information required to be included herein.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 7, 1997
F-1
<PAGE>
Nocopi Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
---- ----
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $2,229,200 $2,982,100
Accounts receivable less allowances
(1996-$37,100; 1995-$21,000) 513,400 667,700
Inventory 5,100 22,200
Prepaid and other 105,300 93,900
----------- -----------
Total current assets 2,853,000 3,765,900
Fixed assets
Leasehold improvements 43,200 55,300
Furniture, fixtures and equipment 435,000 381,100
----------- -----------
478,200 436,400
Less: accumulated depreciation 296,600 231,600
----------- -----------
181,600 204,800
Other assets
Patents, net of accumulated amortization
(1996 - $214,300; 1995 - $171,200) 452,000 419,800
Debt issuance costs, net of accumulated
amortization (1996 - $156,500; 1995 - $131,200) 31,600 56,900
Other 14,300 17,800
----------- -----------
497,900 494,500
----------- -----------
$3,532,500 $4,465,200
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $539,800 $398,100
Accrued expenses 139,900 258,700
Accrued commissions 118,100 182,500
Deferred revenue 164,200 280,100
----------- -----------
Total current liabilities 962,000 1,119,400
Long-term notes payable 950,000 950,000
Commitments and contingencies
Ownership interest of others in consolidated entity 1,448,300 1,823,100
Shareholders' equity
Series A preferred stock $1.00 par value
Authorized - 300,000 shares
Issued and outstanding - none
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding
1996 - 14,080,654 shares 140,800
1995 - 14,044,166 shares 140,400
Paid-in capital 7,651,000 7,522,900
Currency translation adjustment 57,100 177,800
Accumulated deficit (7,676,700) (7,268,400)
----------- -----------
172.200 572,700
----------- -----------
$3,532,500 $4,465,200
=========== ===========
</TABLE>
F-2
See notes to consolidated financial statements.
<PAGE>
Nocopi Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues
Licenses, royalties and fees $3,036,800 $2,878,500 $1,610,800
Product and other sales 603,500 141,200 150,900
---------- ---------- ----------
3,640,300 3,019,700 1,761,700
Cost of sales
Licenses, royalties and fees 496,900 273,200 150,100
Product and other sales 561,800 125,600 138,300
---------- ---------- ----------
1,058,700 398,800 288,400
---------- ---------- ----------
Gross profit 2,581,600 2,620,900 1,473,300
Operating expenses
Research and development 805,100 789,100 742,100
Sales and marketing 1,494,100 1,552,600 1,485,600
General and administrative 943,300 781,500 652,100
Other expenses 138,700 142,400 166,100
---------- ---------- ----------
3,381,200 3,265,600 3,045,900
---------- ---------- ----------
Loss from operations (799,600) (644,700) (1,572,600)
Other income (expenses)
Amortization of debt issuance costs (25,300) (28,880) (37,600)
Interest income 113,900 189,300 74,800
Interest and bank charges (72,100) (80,600) (101,800)
Ownership interest of others in
loss of consolidated entity 374,800 322,900 218,000
---------- ---------- ----------
391,300 402,800 153,400
---------- ---------- ----------
Net loss ($408,300) ($241,900) ($1,419,200)
========== ========== ===========
Net loss per common share ($.03) ($.02) ($.10)
Average common shares outstanding 14,067,606 14,006,254 13,878,593
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Nocopi Technologies, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Currency
Common stock Paid-in Treasury Translation Accumulated
Shares Amount Capital Stock Adjustment Deficit Total
------ ------ ------- ----- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1994 13,789,048 $137,900 $7,111,700 $(5,607,300) $1,642,300
Acquisition of treasury stock (34,000) $(68,000) (68,000)
Exercise of stock options 140,000 1,100 900 68,000 70,000
Conversion of Series B note 14,536 100 50,700 50,800
Net loss (1,419,200) (1,419,200)
Translation adjustment $(20,300) (20,300)
----------------------------------------------------------------------------------------------
Balance-December 31, 1994 13,909,584 139,100 7,163,300 (20,300) (7,026,500) 255,600
Exercise of stock options 15,000 100 28,900 29,000
Conversion of Series B notes,
net of expenses 119,582 1,200 330,700 331,900
Net loss (241,900) (241,900)
Translation adjustment 198,100 198,100
----------------------------------------------------------------------------------------------
Balance-December 31, 1995 14,044,166 140,400 7,522,900 177,800 (7,268,400) 572,700
Exercise of stock options 36,488 400 128,100 128,500
Net loss (408,300) (408,300)
Translation adjustment (120,700) (120,700)
----------------------------------------------------------------------------------------------
Balance-December 31, 1996 14,080,654 $140,800 $7,651,000 $57,100 $(7,676,700) $172,200
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Nocopi Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net loss ($408,300) ($241,900) ($1,419,200)
Adjustments to reconcile net loss to
cash used by operating activities
Depreciation 84,200 68,600 51,100
Amortization 71,900 70,400 70,900
Allowance for doubtful accounts, net 16,100 7,400 9,000
Ownership interest of others in
loss of consolidated entity (374,800) (322,900) (218,000)
Other 6,000
---------- ---------- ----------
(610,900) (412,400) (1,506,200)
Changes in working capital
Accounts receivable 132,800 (230,400) (329,400)
Inventory 17,100 (8,600) 5,200
Prepaid and other (14,000) (17,000) (21,900)
Accounts payable and accrued expenses (30,200) 280,400 307,200
Deferred revenue (113,000) 235,300 18,800
---------- ---------- ----------
(7,300) 259,700 (20,100)
---------- ---------- ----------
Cash used by operating activities (618,200) (152,700) (1,526,300)
Investing Activities
Additions to fixed assets (61,500) (112,000) (56,900)
Additions to patents (75,300) (125,800) (84,000)
---------- ---------- ----------
Cash used by investing activities (136,800) (237,800) (140,900)
Financing Activities
Exercise of stock options 128,500 29,000 70,000
Issue of stock in Euro-Nocoopi, S.A., net of issue costs 2,310,200
Acquisition of treasury stock (68,000)
---------- ---------- ----------
Cash provided by financing activities 128,500 29,000 2,312,200
Effect of exchange rate changes on cash (126,400) 206,000 33,000
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (752,900) (155,500) 678,000
Cash and cash equivalents
Beginning of year 2,982,100 3,137,600 2,459,600
---------- ---------- ----------
End of year $2,229,200 $2,982,100 $3,137,600
========== ========== ==========
Supplemental cash flow data
Interest paid $66,500 $74,700 $98,000
Additional common stock was issued upon conversion
of Series B notes
Conversion of Series B notes, net of debt issuance
and conversion costs $331,900 $50,800
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Organization of the Company
Nocopi Technologies, Inc. (the Company) is organized under the laws of the
State of Maryland. Its main business activities are the development and
distribution of document security products and the licensing of its
patented authentication technologies in the United States and foreign
countries.
2. Significant Accounting Policies
Principles of consolidation - The financial statements include the
accounts of the Company and Euro-Nocopi S.A., the European affiliate of
the Company. The Company has an approximately 18% interest in Euro-Nocopi
and holds warrants permitting it to increase its interest to 55%. The
Company's operational and financial control of Euro-Nocopi requires
Euro-Nocopi's operations be included in the Consolidated Financial
Statements. The 82% equity interest of shareholders other than the Company
is shown as "Ownership interest of others in consolidated entity" in the
Consolidated Statements of Operations and Consolidated Balance Sheets. All
significant intercompany accounts and transactions have been eliminated.
Principles of accounting - The Company's financial statements are prepared
on a basis in conformity with U.S. generally accepted accounting
principles ("U.S. GAAP"). The preparation of the financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of financial statements
and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Cash and cash equivalents - Cash equivalents consist principally of time
deposits and highly liquid investments with an original maturity of three
months or less placed with major banks and financial institutions. The
investments are in excess of the FDIC insurance limit. Temporary cash
investments are carried at the lower of cost, plus accrued interest, or
market value. The amount included in the Consolidated Balance Sheets for
"Cash and temporary cash investments" includes $1.6 and $2.1 million in
cash and temporary cash investments of Euro-Nocopi at December 31, 1996
and 1995, respectively. These amounts are available primarily to fund
European operations.
F-6
<PAGE>
Inventory, is valued at the lower of cost or market, determined on a
first-in, first-out basis or net realizable value.
Income taxes are accounted for in accordance with SFAS 109, "Accounting
for Income Taxes". Deferred income taxes are provided for all temporary
differences and operating loss and tax credit carryforwards. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Fixed assets are carried at cost less accumulated depreciation and
amortization. Furniture, fixtures and equipment are generally depreciated
on the straight-line method over their estimated service lives. Leasehold
improvements are amortized on a straight-line basis over five years or the
term of the lease, if shorter. Major renovations and betterments are
capitalized. Maintenance, repairs and minor items are expensed as
incurred. Upon disposal, assets and related depreciation are removed from
the accounts and the net amount, less proceeds from disposal, is charged
or credited to income.
Patents are stated at cost less amortization and are being amortized on a
straight-line basis over the life of the patent (approximately fifteen
years).
Debt issuance costs are costs incurred in connection with the issuance of
long-term debt which have been capitalized and are being amortized over
the life of the related debt agreement.
Revenue, consisting primarily of license fees and royalties, is recorded
as earned over the license term. Product sales are recognized primarily
upon shipment of products.
Loss per share of common stock is computed utilizing the weighted average
number of shares outstanding during the year including dilutive common
stock equivalents after deducting dividends on preferred stock. Fully
diluted per share amounts are not presented because they are
anti-dilutive.
Recoverability of Long Lived Assets - Effective January 1, 1996 the
Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. The
Company is not aware of any events or circumstances which indicate the
existence of an impairment which would be material to the Company's
quarterly or annual financial statements.
Accounting for Stock-Based Compensation - Compensation costs attributable
to stock option and similar plans are recognized based on any difference
between the quoted market price of the stock on the date of the grant
over the amount the employee is required to pay to acquire the stock
(the intrinsic value method under Accounting Principles Board Opinion 25).
Such amount, if any, is accrued over the related vesting period, as
appropriate.
Effective January 1, 1996 the Company implemented SFAS No. 123,
"Accounting for Stock-Based Compensation." The Statement encourages
employers to account for stock compensation awards based on their fair
value on their date of grant. Entities may choose not to apply the new
accounting method but instead, disclose in the notes to the financial
statements the pro forma effects on net income and earnings per share as
if the new method had been applied. The Company has adopted the
disclosure-only approach of the Standard.
F-7
<PAGE>
Recently Issued Accounting Standards
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. This Statement is effective for financial
statements issued for periods ending after December 15, 1997 (earlier
application is not permitted). This Statement requires restatement of all
prior-period EPS data presented. The Company is currently evaluating the
impact, if any, adoption of SFAS No. 128 will have on its financial
statements.
3. Long-term Notes, Shareholders' Equity and Credit Arrangements.
The Company has $950,000 Series B 7% Subordinated Convertible Promissory
Notes (the B Notes) outstanding. Interest on the B notes is payable on a
semi-annual basis. The B Notes are payable in full on March 31, 1998, may
be prepaid at any time and are convertible into common stock of the
Company at a conversion price of $3.50 per share. The carrying cost of the
B Notes at December 31, 1996 and 1995 approximates their fair value.
Debt issuance costs of $188,200 related to the notes are being amortized
to other expense under the straight line method over the term of the B
Notes.
The Company, on July 15, 1996, amended its Articles of Incorporation to
effect a one-for-five reverse split of its common stock, to increase the
par value of its common stock from $.002 to $.01 and to decrease the
number of shares of common stock authorized under its Articles of
Incorporation from 90,000,000 to 50,000,000. All applicable share and per
share data have been adjusted for the reverse stock split.
During the first quarter of 1994, the Company provided a $30,000
short-term loan to a director arising from his exercise of 60,000 stock
options which was repaid in full in the second quarter. Additionally, the
Company acquired 34,000 shares of common stock from this director for
$68,000 which was reissued in connection with the exercise of stock
options by another individual.
F-8
<PAGE>
The Company has a $1 million short-term line of credit with a bank at
prime. Collateral for the line of credit includes all assets of the
Company along with personal assets pledged by two directors. No
compensation will be paid to these directors under this arrangement. The
credit line, unless renewed, expires at December 31, 1997. There have been
no borrowings under this line of credit. The Company intends to renew this
line prior to its expiration.
4. Income Taxes
On December 31, 1996 and 1995, the Company had operating loss
carryforwards totaling approximately $7,395,000 and $7,209,000,
respectively. These operating losses are available to offset future
taxable income through the years 2012 and 2011, respectively. A valuation
allowance has been provided against the deferred tax assets due to
uncertainty of realization.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1996 and December
31, 1995.
December 31, 1996
----------------------------------
Deferred Tax Deferred Tax
Asset Liability
----- ---------
Allowance for bad debts $ 12,700
Excess tax amortization
and depreciation on
intangible and fixed
assets $17,700
Inventory reserve 3,900
Net operating losses 2,638,900
Research and development
credits 140,600
----------- -------
2,796,100
Valuation allowance (2,778,400)
----------- -------
Total deferred tax assets
and liabilities $ 17,700 $17,700
=========== =======
F-9
<PAGE>
December 31, 1996
----------------------------------
Deferred Tax Deferred Tax
Asset Liability
----- ---------
Allowance for bad debts $ 7,100
Excess tax amortization
and depreciation on
intangible and fixed
assets $29,800
Inventory reserve 22,100
Net operating losses 2,567,000
Research and development
credits 99,500
---------- -------
2,695,700
Valuation allowance (2,665,900)
---------- -------
Total deferred tax assets
and liabilities $ 29,800 $29,800
========== =======
5. Related Party Transactions
During 1996, 1995 and 1994, payments of $138,700, $142,400 and $166,100,
respectively, were made to firms employing certain officers and directors
for legal, consulting and research services. In 1995, $50,000 was charged
to paid-in capital for services in connection with debt conversions in
that year.
6. Commitments and Contingencies
The Company conducts its operations in leased facilities and leases
equipment under leases expiring at various dates to 2001.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 1996 are:
$116,800 - 1997; $98,000 - 1998; $67,000 - 1999; $63,200 - 2000; and
$38,500 - 2001.
Total rental expense under operating leases was $149,600 in 1996, $125,100
in 1995 and $114,400 in 1994.
From time to time, the Company may be subject to legal proceedings and
claims which arise in the ordinary course of its business. In the opinion
of management, the amount of ultimate liability with respect to any
present actions will not materially affect the financial position or
results of operations of the Company.
F-10
<PAGE>
7. Stock Options and 401(k) Savings Plan
In accordance with the 1986 Incentive Stock Option Plan, the Company was
authorized through June 1996 to issue options to purchase up to 300,000
common shares to management and key employees of the Company. The exercise
price of the options granted must be equal to the fair market value of
such shares on the date of grant. The term of each option and the manner
in which it may be exercised was determined by the Company, subject to the
requirement that no option may be exercisable more than ten years after
the date of grant. With respect to any incentive stock option granted to a
participant who owns more than 10% of the voting rights of the Company's
capital stock on the date of grant, the exercise price of the option must
be at least equal to 110% of the fair market value on the date of grant
and the option may not be exercisable for more than five years from the
date of grant.
In accordance with the 1986 Non-Qualified Stock Option Plan, the Company
was authorized through June 1996 to issue options to purchase up to
700,000 common shares to certain key employees, independent contractors,
technical advisors and directors of the Company. The difference between
fair market value and the option price for grants made under the
non-qualified plan is charged to income as compensation expense over the
vesting periods of the related options.
The 1996 Stock Option Plan was approved by the shareholders of the Company
in June 1996. The Plan provides for the granting of up to 700,000
incentive and non-qualified stock options to employees, non-employee
directors, consultants and advisors to the Company. In the case of options
designated as incentive stock options, the exercise price of the options
granted must be not less than the fair market value of such shares on the
date of grant. Non-qualified stock options may be granted at any amount
established by the Stock Option Committee or, in the case of Discounted
Options issued to non-employee directors in lieu of any portion of an
Annual Retainer, in accordance with a formula designated in the Plan. The
difference between fair market value and the option price for
non-qualified options granted made under the plan is charged to income as
compensation expense over the vesting periods of the related options. No
options were granted in 1996 under this plan.
F-11
<PAGE>
A summary of stock options under these plans follows:
Outstanding at December 31, 1993 657,412 $.50 to $3.80
Options granted 270,000 2.20 to 2.80
Options exercised (140,000) .50
Options canceled (321,206) 3.00 to 3.80
--------
Outstanding at December 31, 1994 466,206 .75 to 3.75
Options granted 295,200 3.25 to 4.05
Options exercised (15,000) 1.30 and 2.25
Options canceled (63,706) 3.25 to 4.05
--------
Outstanding at December 31, 1995 682,700 .75 to 4.05
Options granted 43,000 3.10 and 4.35
Options exercised (36,488) 3.00 to 3.75
Options canceled (8,846) 3.00 to 4.05
--------
Outstanding at December 31, 1996 680,366 $.75 to $4.35
========
Exercisable at December 31, 1996 574,466 $.75 to $4.35
========
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized in connection with stock option grants under the plans. Had
compensation expense been determined based on the fair value on the grant
dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net loss and net loss per common share would have been
reported as the pro forma amounts below:
1996 1995
---- ----
Net loss
As reported ($408,300) ($241,900)
Pro forma ($470,400) ($629,200)
Loss per common share
As reported ($.03) ($.02)
Pro forma ($.03) ($.04)
The fair value of each option granted is estimated on the day of grant
based on a modified Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995,
respectively: expected volatility of 76% and 50%; risk free interest rates
of 6.1% to 6.3% and 5.7% to 6.6% and expected lives of two years.
At December 31, 1996, the Company has reserved 2,733,072 shares of common
stock for possible future issuance upon exercise of stock options,
warrants and convertible securities.
The Company sponsors a 401(k) savings plan, covering substantially all
employees, providing for employee and employer
F-12
<PAGE>
contributions. Employer contributions are made at the discretion
of the Company. There were no contributions charged to expense
during 1996, 1995 or 1994.
8. Euro-Nocopi, S.A.
Euro-Nocopi, S.A. was formed in 1994 to market the Company's technologies
in Europe under an exclusive license arrangement. Euro-Nocopi's Board of
Directors is composed of five members who are members of the Company's
Board of Directors and two outsiders. Euro-Nocopi was capitalized through
a European private placement which allows those investors to convert the
Euro-Nocopi stock into approximately one million shares of Nocopi
Technologies, Inc. common stock beginning in August 1998 in the event that
no public offering of Euro-Nocopi has been made by that date.
F-13
<PAGE>
9. Segment, Geographic and Major Customer Information
The Company operates in one principal industry segment - the development
and distribution of security products and the licensing of its patented
authentication technologies. The Company's technologies and products are
sold principally to the corporate market.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $2,604,900 $2,198,700 $ 1,467,900
Europe 872,300 720,500 217,200
Other foreign 163,100 100,500 76,600
---------- ----------- -----------
Total revenues $3,640,300 $3,019,700 $ 1,761,700
========== ========== ===========
Transfers between geographic segments
(eliminated in consolidation):
United States $ 150,200 $ 109,600 $ 27,800
Europe 48,000 44,900
---------- ---------- -----------
Total transfers $ 198,200 $ 154,500 $ 27,800
========== ========== ===========
Loss from operations:
United States $ (276,300) $ (109,400) $(1,142,300)
Europe (523,300) (535,300) (430,300)
---------- ---------- -----------
Total loss from operations $ (799,600) $ (644,700) $(1,572,600)
========== ========== ===========
Identifiable assets:
United States $1,673,300 $2,250,400 $ 1,868,200
Europe 1,857,100 2,209,300 2,426,200
Other foreign 2,100 5,500 5,000
---------- ---------- -----------
Total assets $3,532,500 $4,465,200 $ 4,299,400
========== ========== ===========
</TABLE>
Revenues from unaffiliated customers are based on the location of the
customers. Transfers between geographic areas are recorded according to
contractual arrangements. Loss from operations consists of total revenue
less operating expenses and does not include either interest or other
expenses, net. Identifiable assets of geographic areas are those assets
used in the Company's operations in each area.
The Company's two largest customers accounted for approximately 40%, 37%
and 52% of revenues in 1996, 1995 and 1994, respectively, and
approximately 35%, 39% and 61% of accounts receivable at December 31,
1996, 1995 and 1994, respectively. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company also maintains allowances for potential credit losses.
F-14
<PAGE>
10. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
Mar. 31 Jun. 30 Sep. 30 Dec. 31
------- ------- ------- -------
1996
----
<S> <C> <C> <C> <C>
Revenues $875,500 $936,200 $951,200 $877,400
Gross profit 705,300 673,900 604,300 598,100
Net loss (10,800) (34,600) (163,400) (199,500)
Loss per share (1) (.00) (.00) (.01) (.01)
1995
----
Revenues $653,200 $743,100 $782,100 $841,300
Gross profit 556,500 650,400 710,700 703,300
Net earnings (loss) (168,800) (60,800) (22,200) 9,900
Earnings (loss)
per share (1) (.01) (.00) (.00) .00
</TABLE>
(1) Quarterly earnings (loss) per share are based on the weighted average number
of shares outstanding for each quarter and, as a result, the quarterly earnings
(loss) per share do not add to the annual amount.
F-15
<PAGE>
NOCOPI TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance Additions
Beginning Charged to Balance
of Year Operations Deductions End of Year
------- ---------- ---------- -----------
DESCRIPTION
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $12,800 $9,000 $21,800
Inventory reserve 89,500 $12,900 76,600
Income tax valuation allowance 1,797,700 645,700 2,443,400
Year ended December 31, 1995
Allowance for doubtful accounts $21,800 $9,600 $10,400 $21,000
Inventory reserve 76,600 11,600 65,000
Income tax valuation allowance 2,443,400 222,500 2,665,900
Year ended December 31, 1996
Allowance for doubtful accounts $21,000 $18,300 $ 2,200 $37,100
Inventory reserve 65,000 53,500 11,500
Income tax valuation allowance 2,665,900 112,500 2,778,400
</TABLE>
F-16
<PAGE>
The following Exhibits are filed as part of this Annual Report on Form
10-K:
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Articles of Amendment to Articles
of Incorporation
10.1 Amended and Restated Non-Qualified Stock
Option Plan(3)
10.2 Amended and Restated Incentive Stock
Option Plan(3)
10.3 Employment Agreement between Registrant
and Dr. A. Gundjian
10.4 Summary Plan Description for Nocopi
Technologies, Inc. 401(k) Profit Sharing
Plan(2)
10.5 License Agreement between Registrant and
Euro-Nocopi S.A.(3)
10.6 Service Agreement between Registrant and
Euro-Nocopi S.A.(3)
10.7 Memorandum of Agreement between
Registrant and Euro-Nocopi S.A.(3)
10.8 Nocopi Technologies, Inc. 1996 Stock
Option Plan
21.1 List of Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P.
27.0 Financial Data Schedule
- ----------
(1) Incorporated by reference to Registrant's Registration Statement on
Form 10, as filed with the Commission on or about August 19, 1992
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1993
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1994
17
<PAGE>
NOCOPI TECHNOLOGIES, INC.
ARTICLES OF AMENDMENT
to
ARTICLES OF INCORPORATION
NOCOPI TECHNOLOGIES, INC., a Maryland corporation having its principal
office in Baltimore City, Maryland (the "Corporation") hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended (a) by deleting the
first sentence of Article V thereof and replacing such sentence with the
following:
"The aggregate number of shares which the corporation shall have authority
to issue is Fifty Million (50,000,000) shares of common stock having a par
value of $.01 per share and Three Million (3,000,000) shares of preferred
stock having a par value of $1.00 per share."
and (b) by adding the following at the end of Article V thereof:
"Upon the filing of this Amendment (the "Effective Time"), each five (5)
shares of common stock, par value $.002 then outstanding or in treasury
shall, without further action by the corporation or any shareholder, be
converted into one share of common stock, par value $.01; provided that
fractional shares shall not be issued and, in lieu of issuing any
fractional shares, the corporation shall purchase each such fractional
share for a price determined by multiplying the Fair Market Value (as
hereinafter defined) of one share of common stock, par value $.01 at the
Effective Time by a fraction, the numerator of which is the interest in the
corporation represented by such fractional share and the denominator of
which is the interest in the corporation represented by one whole share of
such common stock, in each case, rounded to the nearest one-thousandth of
one percent (.001%). For the purpose of the preceding sentence, the term
Fair Market Value shall mean an amount determined by multiplying Five (5)
by either (i) the closing selling price of the corporation's common stock,
par value $.002 on the day preceding the date of the Effective Time, or
(ii) if no sale of such common stock occurred on such date, the mean
average of the closing high bid and low asked
<PAGE>
prices of such common stock on the day preceding the date of the Effective
Time. From and after the Effective Time, each certificate evidencing shares
of common stock, par value $.002 of the corporation outstanding or in
treasury at the Effective Time shall thereafter evidence (x) that number of
shares of common stock, par value $.01 of the corporation as is determined
by dividing the number of shares of common stock, par value $.002 of the
corporation specified on such certificate by Five (5) and, if the result
thus obtained shall not be a whole number, by reducing such result to the
next smaller whole number, and (y) the right to receive payment for any
fractional share as hereinabove provided."
SECOND: The amendment of the Charter of the Corporation as hereinabove set
forth has been duly advised by the board of directors and approved by the
stockholders of the Corporation.
THIRD: Prior to the amendment, the total number of shares of all classes
which the Corporation had authority to issue was Ninety Three Million
(93,000,000), consisting of Ninety Million (90,000,000) shares of common stock,
par value $.002 per share, and Three Million (3,000.000) shares of preferred
stock, par value $1.00 per share, and the aggregate par value of all shares of
all classes was $3,180,000. Subsequent to the amendment, the total number of
shares of all classes which the Corporation had authority to issue was Fifty
Three Million (53,000,000), consisting of Fifty Million (50,000,000) shares of
common stock, par value $.01 per share, and Three Million (3,000,000) shares of
preferred stock, par value $1.00 per share, and the aggregate par value of all
shares of all classes was $3,500,000. The information required by subsection
(b)(2)(i) of Section 2-607 of the Maryland General Corporation Law was not
changed by the amendment.
-2-
<PAGE>
IN WITNESS WHEREOF, Nocopi Technologies, Inc. has caused these presents to
be signed in its name and on its behalf by its President and attested by its
Assistant Secretary on the 2nd day of July, 1996.
NOCOPI TECHNOLOGIES, INC.
By: /s/ Norman A. Gardner
------------------------------
Norman A. Gardner, President
Attest:
/s/ Donna Ciavarelli
- -------------------------------------
Donna Ciavarelli, Assistant Secretary
THE UNDERSIGNED, President of Nocopi Technologies, Inc., who executed on
behalf of said corporation the foregoing Articles of Amendment, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles of Amendment to be the corporate act of
said corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Norman A. Gardner
-------------------------------
Norman A. Gardner
-3-
<PAGE>
NOCOPI TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
1. Name, Purpose and Eligibility. This plan shall be known as the Nocopi
Technologies, Inc. 1996 Stock Option Plan (the "Plan"). The purpose of the Plan
is to advance the interests of Nocopi Technologies, Inc. (the "Company") by
encouraging the acquisition of its common stock by directors and key employees
of the Company and its subsidiaries upon whose judgment and ability the Company
depends for its long term growth and development. Accordingly, the Plan is
intended to promote a close identity of interests between the Company and its
directors and employees as well as a means to attract and retain outstanding
management. All salaried employees of the Company and its subsidiaries and
non-employee directors of the Company ("Eligible Employees") shall be eligible
to receive options under and in accordance with the terms of the Plan. In
addition, consultants and advisers to the Company may receive options under the
Plan to the extent that such persons are deemed to be employees for the purposes
of registering shares issuable upon the exercise of options under the Securities
Act of 1933 (the "Act") through the use of Form S- 8 promulgated thereunder.
2. Plan Administration.
(a) The Plan shall be administered by a committee (the "Committee")
which shall consist of not less than two non-employee directors appointed by the
Company's Board of Directors (the "Board"). No member of the Committee shall be,
or within one year before having become a member thereof shall have been,
eligible for selection as a person to whom stock options may be granted by the
Committee under the Plan. Non-employee directors, including members of the
Committee, may, however, participate under the Plan to the extent, and on the
terms, specified in Section 7 hereof.
(b) Subject to the terms of the Plan, the Committee shall have the
authority, in its sole discretion and from time to time, to: (i) designate the
Eligible Employees (other than non-employee directors) to whom options to
purchase ("Options") the Company's common stock, par value $.01 per share (such
common stock, and any other common stock or other securities which may be
issuable upon the exercise of Options granted hereunder by virtue of any
adjustment made pursuant to Section 11 hereof is herein referred to as "Common
Stock") shall be granted under the Plan; (ii) grant Options provided for in the
Plan in such form and amount as the Committee shall determine; (iii) impose such
limitations, restrictions and conditions upon any such Option as the Committee
shall deem appropriate; and (iv) interpret the Plan, adopt, amend and rescind
rules and regulations relating to the Plan, and make all other determinations
and take all other actions necessary and advisable for the administration of the
Plan.
<PAGE>
(c) Decisions and determinations of the Committee on all matters
relating to the Plan shall be in its sole discretion and shall be conclusive. No
member of the Committee shall be liable for any action taken or decision made in
good faith relating to this Plan or any award hereunder.
3. Types of Options Under Plan. The Committee may designate Options granted
to a person who (i) is an employee of the Company or a subsidiary of the Company
and (ii) does not own stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"). A stock option agreement for any Option intended
to qualify as an incentive stock option shall contain a statement of such
intent. All Options granted under the Plan which are not designated as incentive
stock options shall be non-qualified stock options.
4. Shares Subject to the Plan. The aggregate number of shares of the
Company's common stock, par value $.01 per share which may be issued upon the
exercise of Options granted under the Plan is 700,000 subject to adjustment as
provided in Section 11 hereof. Such shares may be authorized and unissued shares
or may be treasury shares. If an Option expires or terminates for any reason
during the term of the Plan and prior to its exercise in full, the number of
shares previously subject to but not delivered under such Option shall again be
available for the grant of Options thereafter.
5. Effective Date and Term of Plan. The Plan shall become effective at such
time as there shall have been filed and become effective articles of amendment
to the Company's articles of incorporation effecting a one for five reverse
stock split, setting the number of authorized shares of the Company's common
stock at 50,000,000, and setting the par value of such shares at $.01 per share,
provided that on such date, the adoption of the Plan shall have been approved by
the affirmative vote of the holders of a majority of the Company's Common Stock
present or represented and entitled to vote at a meeting duly held in accordance
with the provisions of the Maryland General Corporation Law, as amended, and
shall remain in effect for a period of ten years thereafter, or until
termination by the Board, whichever occurs first. The effectiveness of the Plan
shall constitute its adoption for the purposes of Section 422A of the Code.
-2-
<PAGE>
6. Stock Options.
(a) Options granted under the Plan shall be evidenced by stock option
agreements in such form, not inconsistent with this Plan, as the Committee shall
approve from time to time. At the time of the grant the Committee shall
determine for each Option the exercise period, which shall not continue for more
than ten years from the date of Option grant, the appropriate Option price (as
specified below) and such other conditions to or restrictions on the exercise of
the Option, including but not limited to vesting provisions, if any, as the
Committee deems appropriate.
(b) The per share price at which a share of Common Stock may be
purchased upon the exercise of an Option (the "Option Price") shall be
determined as follows:
(i) In the case of an Option designated as an incentive stock
option, the Option Price shall be not less than 100% of the fair market value
(on the date such Option is granted) of the Common Stock issuable upon the
exercise thereof, as determined by the Committee in the reasonable exercise of
its discretion.
(ii) In the case of a non-qualified Option, the Option Price shall
be any amount established by the Committee in its discretion or, in the case of
Discounted Options (as hereafter defined), the amount determined in accordance
with Section 7(a)(iii) of this Plan.
(c) The aggregate Option Price payable to the Company in connection with
the exercise of Option(s) may be paid in cash or, in whole or in part, with
unrestricted shares of Company Common Stock, as the Committee may determine.
7. Non-Employee Director Options.
(a) If, during the term of this Plan, the Company shall adopt a policy
of compensating non-employee directors for their service as directors on an
annual basis, the Company shall issue discounted options ("Discounted Options")
to any non-employee director of the Company electing to receive such Discounted
Options in lieu of the payment to said non-employee director of any specified
portion of the Annual Retainer (as defined hereinbelow) otherwise payable to
such non-employee director, provided that in the particular case all of the
limitations and provisions of this Section shall have been complied with:
-3-
<PAGE>
(i) A Discounted Option shall be issued automatically on June 1
(or if June 1 is not a business day, on the next succeeding business day) of
each year to any non-employee director who, prior to January 1 of such year,
files with the Committee or its designee an irrevocable, written election to
receive such Discounted Option in lieu of all or a specified portion of the
Annual Retainer to be earned in such year by such non-employee director.
(ii) The number of shares subject to a Discounted Option issued to a
non-employee director pursuant to this Section shall be equal to the nearest
number of whole shares determined in accordance with the following formula:
Dollar Amount of Annual Retainer to
be Received as Discounted Option = Number
Fair Market Value of Common Stock of Shares
on Date of Issue - Per Share
Option Price
"Annual Retainer" shall mean the amount which the non-employee director will be
entitled to receive for serving as a director in the relevant calendar year, but
shall not include fees or expenses for attendance at meetings of the Board or
any committee of the Board or for any other services to be provided to the
Company.
(iii) The Option price per share for the shares covered by
Discounted Options issued in accordance with this Section shall be Seventy Five
Percent (75%) of the fair market value of the Common Stock. For the purpose of
this subsection 7(a)(iii), the fair market value of the Common Stock shall be
deemed to be the closing selling price of the Common Stock on the trading day
immediately preceding the date on which the Discounted Option is issued, or, if
no sale of Common Stock occurred on such day, the mean average of the low
"asked" and high "bid" prices for the Common Stock on such day, in either case,
as reported by the National Quotation Bureau, Inc.
(iv) No Discounted Option issued under this Section may be
exercised before the first anniversary of the date upon which it was issued;
provided, however, that any Discounted Option so issued shall become exercisable
upon the retirement of the non-employee director because of age or upon the
death or disability of the director, as provided in paragraphs (v) and (vi) of
this Section. No Discounted Option issued under this Section shall be
exercisable after the expiration of ten years from the date upon which such
Discounted Option is issued. Each Discounted Option shall be subject to
termination before its date of expiration as hereinafter provided.
-4-
<PAGE>
(v) Except as herein provided, the rights of a non-employee
director in a Discounted Option issued under this Section shall not terminate
upon such director's termination as a director for any reason (including death,
retirement or disability). That portion of any Discounted Option granted under
this Section which is attributable to a portion of an Annual Retainer which is
not earned due to termination as a director (for any reason) shall automatically
abate and be canceled.
(vi) Any Discounted Option issued to a non- employee director and
outstanding on the date of his or her death may be exercised by the
administrator of such director's estate, the executor under his or her will, or
the person or persons to whom such Discounted Option shall have been validly
transferred by such executor or administrator pursuant to the will of the
deceased non-employee director or the laws of intestate succession (but not
beyond the specified expiration date of such Discounted Option).
(vii) Discounted Options issued under this Section may be exercised
only by written notice to the Company accompanied by payment in cash of the full
consideration for the shares as to which they are exercised.
(b) The provisions of this Section shall apply only to Discounted
Options issued or to be issued to non-employee directors, and shall not be
deemed to modify, limit or otherwise apply to any other provision of this Plan
or any Option issued under this Plan to a participant who is not a non-employee
director of the Company.
8. Termination of Employment. Except as the Committee otherwise determines
in a particular case, Options held by a participant whose employment with the
Company or a subsidiary terminates for reasons other than (i) retirement at the
normal retirement date then in effect for employees of the Company or such
subsidiary, (ii) early retirement with the consent of the Board, (iii)
disability, or (iv) death shall terminate upon the expiration of thirty days
after such participant's termination of employment. This Section shall not apply
to Discounted Options awarded to non-employee directors.
9. Death of a Participant. In the event of the death of a participant, if
the deceased participant holds Options some portion of one or more of which is
exercisable at the time of his or her death, the administrator of such
participant's estate, the executor under his or her will, or the person or
persons to whom
-5-
<PAGE>
such Options shall have been validly transferred by such executor or
administrator pursuant to the participant's will or the laws of intestate
succession shall have the right, within twelve months from the date of such
participant's death, to exercise all Options (or any portion thereof) held by
such participant on the date of death which were then exercisable, but not yet
exercised; provided, however, that no Option shall be exercised after its
specified expiration date.
10. Retirement and Disability. In the event of termination of the
employment of a participant (or the termination of a participant's service as a
non-employee director) due to retirement at the normal retirement date then in
effect for employees or non-employee directors of the Company or early
retirement with the consent of the Board, or in the event a participant becomes
disabled, a participant who, upon retirement or disability, holds Options some
portion of one or more of which is then exercisable shall have the right, within
three years of the date of such retirement or disability, to exercise all
Options (or any portion thereof) held by such participant on the date of
retirement or disability which were then exercisable but not yet exercised;
provided, however, that no Option shall be exercised after its specified
expiration date.
11. Changes in Capitalization. The (i) total number of shares of Common
Stock of the Company for which Options may be granted, (ii) number of shares
subject to each outstanding Option, and (iii) Option prices and Discount Option
prices per share shall be subject to appropriate adjustment by the Committee for
any changes in the number of outstanding shares of Common Stock resulting from a
merger, recapitalization, stock split, stock dividend or other change in the
Company's corporate or capital structure.
12. Withholding Taxes. Whenever shares of Company Common Stock are to be
issued or delivered upon the exercise of Options granted hereunder, the
Committee shall have the right, at or prior to the delivery of any certificate
or certificates for shares, to require the exercising participant to remit to
the Company, in cash, in shares of Company Common Stock, or in other
consideration deemed satisfactory to the Committee, as the Committee may
determine, an amount sufficient to satisfy withholding requirements, with
respect to federal, state and local income and employment taxes.
13. Employment. The establishment of the Plan and awards hereunder shall
not be construed as conferring on any participant any right to continued
employment, and the employment of any participant may be terminated without
regard to the effect which such action might have upon him or her as a
participant.
-6-
<PAGE>
14. Transferability.
(a) Options are not transferable other than by will, by the laws of
intestate succession or pursuant to a qualified domestic relations order. No
transfer shall be effective to bind the Company unless the Committee shall have
been furnished with a copy of the deceased participant's will and such other
evidence as the Committee may deem necessary to establish the validity of the
transfer or, if applicable, a certified copy of such qualified domestic
relations order.
(b) Only the participant or his or her guardian, or in the event of
death, his or her legal representative or beneficiary, may exercise Options or
Discounted Options and receive deliveries of shares.
15. Non-Uniform Determinations. The Committee's determinations under this
Plan (including without limitation determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions of
such awards and the agreements evidencing the same, and the establishment of
performance standards) need not be uniform and may be made by it selectively
among persons who receive, or are eligible to receive, awards under the Plan,
whether or not such persons are similarly situated.
16. Effect on Other Plans. Participation in this Plan shall not affect a
participant's eligibility to participate in any other benefit or incentive plan
of the Company.
17. Amendment, Modification, and Termination. The Board, at any time, may
terminate and in any respect amend or modify the Plan; provided, however, that
no such action by the Board, without approval of the Company's shareholders, may
(i) increase the total number of shares of Common Stock available under the Plan
in the aggregate (except as otherwise provided in Section 11), (ii) materially
increase the benefits accruing to participants under the Plan, or (iii)
materially modify the requirements as to eligibility for participation under the
Plan. No amendment, modification or termination of the Plan shall in any manner
adversely affect the rights of any participant under an award previously
granted. Section 7 of this Plan shall not be amended more than once in any six
month period, except to comport with changes in the Code or the Employee
Retirement Income Security Act of 1974, as amended.
18. Governing Law. This Plan shall be governed by the laws of the State of
Maryland.
-7-
<PAGE>
NOCOPI TECHNOLOGIES, INC.
COMPUTATION OF LOSS PER COMMON SHARE
EXHIBIT 11.1
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary
Net loss applicable to common shares $ (408,300) $ (241,900) $(1,419,200)
========== ========== ==========
Weighted average common shares outstanding 14,067,606 14,006,254 13,878,593
Dilutive shares - based on the
treasury stock method using the
average market price (1) 34,780 83,586 17,535
---------- ---------- ----------
14,102,386 14,089,840 13,896,128
========== ========== ==========
Per share amount applicable to net loss ($.03) ($.02) ($.10)
1996 1995 1994
---- ---- ----
Fully diluted
Net loss $ (408,300) $ (241,900) $(1,419,200)
Add interest on Series B notes 66,500 74,700 98,000
Deduct ownership interest of others
in loss of consolidated entity (374,800) (322,900) (218,000)
---------- ---------- ----------
Net loss applicable to common shares $(716,600) $(490,100) $(1,539,200)
========== ========== ==========
Weighted average common shares outstanding 14,067,606 14,006,254 13,878,593
Dilutive shares - based on the
treasury stock method using the
greater of the period-end market
price or the average market price (2) 1,336,461 1,411,382 934,978
---------- ---------- ----------
15,404,067 15,417,636 14,813,571
========== ========== ==========
Per share amount applicable to net loss ($.05) ($.03) ($.10)
</TABLE>
(1) represents shares resulting from stock options and warrants.
(2) represents shares resulting from stock options, warrants and the assumed
conversion of convertible notes and Euro-Nocopi S.A. stock.
<PAGE>
NOCOPI TECHNOLOGIES, INC.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
Registrant has the following subsidiaries:
Name Jurisdiction Where Organized
---- ----------------------------
Euro-Nocopi S.A. (1) France
Nocopi (UK) Limited (2) Great Britain
(1) Registrant holds an approximate 18% interest in Euro-Nocopi S.A. together
with warrants which, if exercised, would result in Registrant owning an
approximate 55% equity interest. In addition, Registrant has the power to
appoint a majority of the Board of Directors of Euro-Nocopi S.A.
(2) Nocopi (UK) Limited is a wholly owned subsidiary of Euro-Nocopi S.A.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Nocopi Technologies, Inc. on Form S-8 (Files No. 33-84388 and 33-84402) of our
report dated March 7, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Nocopi Technologies, Inc. as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 27, 1997
<TABLE> <S> <C>
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<S> <C>
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0
0
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</TABLE>
