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, 1997
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
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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.)
537 Apple Street, West Conshohocken, Pennsylvania 19428
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(Address of principal executive offices) (Zip Code)
Telephone Number, Including Area Code: (610) 834-9600
--------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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(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. $6,900,000 at March 13, 1998.
(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. 33,587,332 Shares of Common Stock, $.01 par value at March 13,
1998.
Documents Incorporated by Reference.
Proxy Statement for the Annual Meeting of Shareholders to be Held June 8,
1998 (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 definitive 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 20.
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PART I
ITEM 1. BUSINESS
Background
Nocopi Technologies, Inc. (hereinafter "Nocopi" or "Registrant") was
originally organized to utilize 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 when coupled with proprietary software. 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 can
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 technology is called COLORBLOC(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 INFOBLOC(TM). An associated technology, called
SECRETPRINT(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. During 1997, Registrant engaged in
market investigations for INFOBLOC(TM) and SECRETPRINT(TM). As a result of these
market investigations, Registrant has established relationships with
manufacturers of ink jet computer printers as well as authors and publishers of
computer software for the entertainment and educational markets. Registrant
believes that these activities may lead, by late 1998, to the commercial
introduction of SECRETPRINT(TM) as an enhancement to specific entertainment and
educational software applications providing for the on demand printing of
invisible text and graphics which can be revealed at a point in time in the
future. Registrant believes that the inherent discovery feature of
SECRETPRINT(TM) can enhance many current entertainment and educational software
packages and make learning more fun for children.
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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,
----------------------------------
Product Type 1997 1996 1995
- ------------ ---- ---- ----
Anti-Counterfeiting & Anti-Diversion
Technologies and Products 97% 97% 96%
Document Security Products 3% 3% 4%
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, therefore, maintains 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 its 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 a minimum licensing fee and, when certain annual revenue levels are
attained by Euro-Nocopi, an additional royalty stream from revenues generated in
Europe. The Registrant owns approximately an 18% interest in Euro-Nocopi and
holds warrants permitting it to increase its interest to 55%. As part of a
settlement agreement resulting from a dispute between
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Euro-Nocopi S. A. and the Registrant in the second quarter of 1997, the
Registrant agreed to modify its warrant by extending its term through December
2001 but making it exercisable beginning the earlier of 1) January 1, 2001; 2)
in the event of a sale of all or part of Euro-Nocopi; or 3) in the event of a
public listing of Euro-Nocopi's shares on a stock market. Prior to the
modification, the warrants were exercisable at any time. 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.
Major Customers
During 1997, Registrant made sales or obtained revenues equal to 10% or
more of Registrant's 1997 total revenues from two customers, 3M Corporation and
Paxar Corporation, which accounted for approximately 26% and 20%, respectively,
of 1997 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. Because some of the processes that
Nocopi uses in its applications are based on relatively common manufacturing
technologies, there appears to be no 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. Registrant intends to
expand this program to include placing specially trained Nocopi technicians on
site at third party production facilities to monitor the manufacturing process,
where warranted. There can be no assurance that Registrant will, in fact, expand
this 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.
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When a new product or process is developed, the developer may seek to
preserve for itself 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 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, 1997, 1996, and 1995, Nocopi expended
approximately $480,500, $805,100 and $789,100, respectively, on research and
development activities (excluding capital expenditures related to research and
development activities).
Competition
In the area of document and product authentication and serialization,
Registrant is aware of other technologies, both covert and overt surface marking
techniques, requiring decoding implements or analytical methods to reveal the
relevant information. These technologies are offered by other companies for the
same anti-counterfeiting and anti-diversion purposes the Registrant markets its
covert technologies. Registrant believes its patented and proprietary
technologies provide a unique and cost-effective solution to the problem of
counterfeiting and grey marketing. 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. Registrant is aware of a Japanese company that has developed a film
overlay which is advertised as providing protection from photocopying.
Registrant 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.
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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, 1998, Registrant had 14 employees, including management.
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, effective March 1, 1998, are located
at 537 Apple Street, West Conshohocken, Pennsylvania 19428. Its telephone number
at that location is (610) 834-9600. These premises consist of approximately
14,800 square feet of space leased from an unaffiliated third party under a
lease expiring in February 2003. Current monthly rental under this lease is
$5,000, increasing to $7,000 per month in September 1998 and subject to further
annual increases on the anniversary date of the lease. Registrant is also
responsible for the operating costs of the building. Registrant intends to
relocate its research facilities, currently in Malvern, Pennsylvania, to the
West Conshohocken location by September, 1998, the expiration date of the lease
for that facility. Registrant believes significant efficiencies will be realized
by having its business operations consolidated at one location.
Registrant's former corporate headquarters, located at 230 Sugartown Road,
Wayne, Pennsylvania 19087, has been sub-let for the duration of the lease term
at a monthly rental approximating the Registrant's rental obligation. 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, consisting of
approximately 5,000 square feet of space, have been outfitted with approximately
$42,000 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 believes its facilities are adequate for its current needs.
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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, 1997, 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, 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 31, 1997 1.19 .59
April 1, 1997 to June 30, 1997 .69 .38
July 1, 1997 to September 30, 1997 .41 .25
October 1, 1997 to December 31, 1997 .47 .13
January 1, 1998 to March 13, 1998 .25 .16
As of March 13, 1998, 33,587,332 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 33,587,332 shares of Common Stock which are
outstanding, Registrant has reserved for issuance 12,784,378 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 derived from the Company's
financial statements. The information set forth should be read in conjunction
with the Company's 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. The data for the years 1994
through 1996 includes financial information for Euro-Nocopi S.A. on consolidated
basis. As a result of the loss of control of Euro-Nocopi in 1997, its 1997
financial information is excluded.
Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues $ 3,046,000 $ 3,640,300 $ 3,019,700 $ 1,761,700 $ 1,286,600
Loss from operations (739,600) (799,600) (644,700) (1,572,600) (1,288,400)
Net loss (847,000) (408,300) (241,900) (1,419,200) (1,293,400)
Balance Sheet Data
Total assets 3,813,600 3,532,500 4,465,200 4,299,400 3,265,500
Working capital 1,307,600 1,891,000 2,645,500 3,128,100 2,437,800
Notes payable 950,000 950,000 950,000 1,362,500 1,412,500
Ownership interest of others
in consolidated entity 1,448,300 1,823,100 2,146,000
Shareholders' equity 2,184,500 172,200 572,700 255,600 1,642,300
Average common shares outstanding 17,192,323 14,067,606 14,006,254 13,878,593 13,719,036
Loss per common share $ (.05) $ (.03) $ (.02) $ (.10) $ (.09)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis of Presentation
Prior to January 1, 1997, the financial statements included the accounts of
the Company and Euro-Nocopi S.A. (Euro), the European affiliate of the Company,
on a consolidated basis. Consolidation was appropriate due to the operational
and financial control the Company exercised over Euro. Additionally, the Company
held approximately an 18% interest in Euro and warrants permitting it to
increase its interest in Euro to 55%. During the second quarter of 1997, the
Company ceased to exercise effective control over Euro. The cessation of
effective control resulted from a dispute which arose in April 1997 between the
Company and Euro under the license agreement between the Company and Euro
concerning Euro's contention that it was entitled to a share of certain minimum
royalties under a worldwide agreement with a manufacturer which distributes
products incorporating the Company's technologies. In an agreement negotiated
during the second quarter of 1997 and concluded in July 1997, the Company agreed
to credit Euro $154,500 as Euro's share of previously collected minimum
royalties, the $154,500 to be applied to license fee payments due the Company by
Euro through the first quarter of 1998. The Company also agreed to pay Euro 35%
of future guaranteed royalties from this manufacturer. The $154,500 settlement
has been charged to cost of sales and was included in the results of operations
for the six months ended June 30, 1997. The Company also agreed to modify its
warrant by extending its term through December 2001 but making it exercisable
beginning the earlier of 1) January 1, 2001; 2) in the event of a sale of all or
part of Euro; or 3) in the event of a public listing of Euro's shares on a stock
market. In addition, the Company agreed to defer to January 1, 2001 its right to
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acquire, under certain conditions, all remaining shares of Euro for shares of
the Company. This call right expires December 31, 2001.
Additionally, the licensing agreement between the two companies was amended
relative to the negotiation of future worldwide licensing contracts, the five
directors of Euro who were also Nocopi directors resigned from Euro's Board, and
the Company ceased to exercise effective control of Euro. During the fourth
quarter of 1997, a Nocopi director was elected to Euro's Board of Directors and
the Chief Operating Officer of Euro was appointed to the Company's Board of
Directors. Additionally, Euro is dependent on the Company for the technology it
licenses from the Company and markets in Europe. Accordingly, the Company ceased
consolidating effective January 1, 1997, applied the equity method, and recorded
an adjustment to paid-in capital of $377,300 to record its 18% share of Euro's
net equity at January 1, 1997 resulting primarily from the expiration in 1997 of
certain liquidation privileges on the 82% of Euro's stock not owned by the
Company.
Results of Operations
The Company's revenues are derived from royalties paid by licensees of the
Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, principally pressure sensitive labels. Royalties consist of
guaranteed minimum royalties payable by the Company's licensees in certain cases
and additional royalties which typically vary with the licensee's sales or
production of products incorporating the licensed technology. Service fee and
sales revenues vary directly with the number of units of service or product
provided.
Because the Company has a relatively high level of fixed costs, its
operating results are substantially dependent on revenue levels. Because
revenues derived from licenses and royalties carry a much higher gross profit
margin than other revenues, operating results are also substantially affected by
changes in revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, as certain
customers have developed experience with the Company's technologies, they have
sought to renegotiate certain provisions of their license agreements and, when
the Company agrees to revise terms, revenues from the customer may be affected.
Revenues for 1997 were $3,046,000 compared to $3,640,300 in 1996 and
$3,019,700 in 1995, representing a decline of 16% in 1997 compared to 1996.
Revenues for 1996 increased 21% compared to 1995. The decline of $594,300 in
1997 compared to 1996 is due in part to the change in accounting for Euro, whose
revenues are not included in 1997. The Company's 1996 results included revenues
of $418,000 attributable to Euro. In addition, domestic licenses, royalties and
fees declined by $548,100 due primarily to lower minimum license fees due under
renegotiated contracts with 3M Corporation and Georgia-Pacific, offset in part
by a $371,800 increase in product sales, primarily security labels, during 1997.
The $620,600 increase in revenues in 1996 compared to 1995 is due, in part, to
higher product sales, primarily security labels, compared to 1995. In 1996, the
Company
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produced its initial order of pressure-sensitive security labels for 3M
Corporation. During the second half of 1996, the Company renegotiated its
exclusive license agree ment with Georgia-Pacific. The slower than anticipated
revenue growth from Georgia-Pacific, which led, in part, to the license
renegotiation, negatively affected the Company's second half 1996 revenues
compared to the second half of 1995.
The Company's 1997 gross profit declined to $1,504,500 or 49% of revenues
from $2,581,600 or 71% of revenues in 1996 and $2,620,900 or 87% of revenues in
1995. The decline in 1997 compared to 1996, both in absolute dollars and as a
percentage of revenues is due to three factors: 1) lower licenses, royalties and
fees resulting from the exclusion of Euro's revenues as well as lower domestic
licenses, royalties and fees; 2) higher levels of sales of tangible products
such as pressure- sensitive labels, which are manufactured or purchased for
resale and carry a significantly higher level of direct costs compared to the
Company's license and royalty revenues; and 3) the Company recorded a one-time
charge to cost of sales totaling $154,500 in the first half of 1997 in
connection with the settlement of its dispute with Euro. The decline in gross
profit in 1996 from 1995 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.
Research and development expenses declined to $480,500 from $805,100 in
1996 and $789,100 in 1995. The reduction in 1997 results from the exclusion of
Euro's costs from the statement of operations and a cost containment program
implemented during the year.
Sales and marketing expenses declined to $662,900 in 1997 from $1,494,100
in 1996. The exclusion of Euro's sales and marketing expenses in 1997 is the
principal reason for the year-to-year decrease in sales and marketing expenses.
Euro's 1996 sales and marketing expenses were $544,400. In addition, the
Company's domestic sales and marketing expenses declined by $286,800 during 1997
as a result of fewer sales personnel, lower commissions and lower discretionary
sales promotion expenses as the Company sought to conserve cash. The decline of
$58,500 in 1996 from the 1995 sales and marketing expense of $1,552,600 relates
primarily to lower commissions and compensation expenses experienced in 1996
compared to 1995.
General and administrative expenses were $903,600 in 1997 compared to
$943,300 in 1996 and $781,500 in 1995. The decline in 1997 is due primarily to
the exclusion of the general and administrative expense of Euro offset in part
by higher professional expenses incurred during the year. Euro's 1996 general
and administrative expenses were $171,400. The Company also incurred legal and
professional costs of approximately $40,000 in 1997 related to the restructuring
of its ownership and license arrangements with Euro. The increase in 1996
compared to 1995 is attributable to legal fees incurred relative to the
Company's international patent activities and professional fees incurred by
Euro.
Other expenses, principally legal expenses incurred with related parties,
were $197,100 in 1997 compared to $138,700 in 1996 and $142,400 in 1995. The
increase in 1997 relates primarily to a fee arrangement with the Company's U.S.
Counsel whereby the Company agreed to a one-time fee commitment of $100,000
covering time expended by U.S. Counsel in 1997 and previous years in excess of
payments made under the fixed fee structure negotiated for those years.
12
<PAGE>
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. Interest income includes interest on funds invested
in the U.S. as well as the investment of funds held by Euro during the periods
that its accounts were included in the Company's financial statements.
Equity in loss of affiliate represents the proportionate share in the loss
of Euro attributable to the Company's approximate 18% ownership share from
January 1, 1997, the date on which the Company began applying the equity method.
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 for the periods that its
accounts were included in the Company's financial statements on a consolidated
basis.
The net loss for 1997 was $847,000 compared to losses of $408,300 and
$241,900, respectively, in 1996 and 1995. The increase in the 1997 net loss
compared to 1996 relates primarily to lower revenues in the U.S. attributable,
in part, to the renegotiated license arrangements with 3M Corporation and
Georgia-Pacific, a further change in revenue mix in favor of tangible products
such as labels, which carry lower gross profit margins than licenses and
royalties, and the $154,500 charge in settlement of the dispute with Euro offset
in part by lower overhead expenses as the Company instituted a cost-containment
program in the first quarter of the year to conserve cash during the period of
adverse liquidity which existed until the Company completed its equity financing
late in the year. The increase in the 1996 net loss compared to 1995 related in
part to the lower revenues realized from Georgia-Pacific compared to 1995 which
led 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $2,714,600 at December
31, 1997. The Company's consolidated cash and cash equivalent position at
December 31, 1996 was $2,229,200 of which $1,641,200 was held by Euro and
$588,000 was held by the Company. The amount held by Euro was available
primarily to fund Euro's operation. Because the financial statements of the
Company can no longer be consolidated with those of Euro, the cash position
declined by the $1,641,200 held by Euro at December 31, 1996. The Company's
domestic cash position increased to $2,714,600 at December 31, 1997 from
$588,000 at December 31, 1996, primarily as a result of a fourth quarter equity
offering in which the Company raised $2,926,000 ($2,548,000 net of expenses)
offset in part by cash required to fund operations during the year. Capital
spending was $19,500 in 1997, $61,500 in 1996 and $112,000 in 1995.
In December 1997, the Company completed an offering of investment units in
Europe whereby 9,753,339, of a total 10,666,667 investment units offered, were
sold at $.30 per unit. Each unit consists of two shares of common stock and one
five-year stock purchase warrant. Each warrant entitles the holder to purchase
one share of the Company's common stock at a price of $.25 per share, subject to
escalation after three years. Proceeds of the offering totaled $2,926,000
($2,548,000 net of expenses).
13
<PAGE>
Current debt obligations represent the reclassification of the Company's
$950,000 Series B 7% Subordinated Convertible Promissory Notes due March 31,
1998 into current liabilities. The Company anticipates that approximately
$125,000 of the Notes will be extended.
Until August 1997, the Company had a line of credit with a bank for up to
$1 million secured by a pledge of securities, including equity securities, made
by certain directors. The line of credit was cancelled in August 1997, and the
collateral returned to the pledgors of the collateral. During the time that the
line of credit was in effect, there had been no funds drawn against it by the
Company.
The Company does not currently plan any significant capital investment in
the foreseeable future.
As a result of the 1997 equity offering, the Company believes that it has
sufficient working capital to support its operations and debt service
requirements over the next twelve months.
The foregoing contains forward looking information within the meaning of
the Private Securities Litigation Act of 1995. Such forward looking statements
involve certain risks and uncertainties including the particular factors
described in this Management Discussion and Analysis. In each case, actual
results may differ materially from such forward looking statements. The Company
does not undertake to publicly update or revise its forward looking statements
even if experience or future changes make it clear that any projected results
(expressed or implied) will not be realized.
Other Factors That May Affect Future Growth and Stock Price
Prior to the successful completion of the equity offering in late 1997, the
Company's operating results and stock price were adversely affected by the
Company's adverse liquidity, previously discussed, and, in addition, 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.
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 position in the anti-counterfeiting and anti-diversion
marketplace it serves. There can be no assurance that the 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
14
<PAGE>
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, the Company receives limited publicity 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
The following Statements of Financial Accounting Standards are effective for
financial statements for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Adoption of all three
statements is not expected to impact financial statements or disclosures.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for public
enterprises reporting of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"), revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of
15
<PAGE>
plan assets that will facilitate financial analysis and eliminate certain
existing disclosure requirements.
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 "Financial
Statements and Schedules on pages F-1 through F-17 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In October 1997, Registrant appointed BDO Seidman, LLP as the Registrant's
independent public accountant to audit the Registrant's financial statements
replacing Coopers & Lybrand L.L.P. who resigned in August 1997. These events are
more fully described in 8-K filings dated August 25, 1997 and October 27, 1997
which are incorporated herein by reference.
16
<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 8, 1998,
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.
17
<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
Balance Sheets as of December 31, 1997 and 1996 F-3
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7 to F-17
Schedule II - Valuation and Qualifying Accounts
and Reserves F-18
All other schedules are omitted because they are not required or are
inapplicable.
- ----------
(b) The Exhibit Index begins on Page 20 of this Annual Report on Form 10-K.
(c) Registrant filed the following report on Form 8-K during the last quarter
of the fiscal year covered by this Annual Report on Form 10-K.
October 27, 1997 - Change in Registrant's Certifying Accountant.
18
<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: April 7, 1998 By: /s/ Richard A. Check
-------------------------------------------
Richard A. Check,
President & Chief Executive Officer
Dated: April 7, 1998 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: April 7, 1998 /s/ Richard A. Check
---------------------------------------
Richard A. Check,
Chairman of the Board of Directors
Date: April 7, 1998 /s/ Susan Cox
---------------------------------------
Susan Cox, Director
Date: April 7, 1998 /s/ Dr. Arshavir Gundjian
---------------------------------------
Dr. Arshavir Gundjian, Director
Date: April 7, 1998 /s/ Jack H. Halperin
---------------------------------------
Jack H. Halperin, Director
Date: April 7, 1998 /s/ Neal Sroka
---------------------------------------
Neal Sroka, Director
19
<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(4)
10.1 Amended and Restated Non-Qualified Stock Option Plan(3)
10.2 Amended and Restated Incentive Stock Option Plan(3)
10.3 Summary Plan Description for Nocopi Technologies, Inc. 401(k)
Profit Sharing Plan(2)
10.4 License Agreement between Registrant and Euro-Nocopi S.A.(3)
10.5 Service Agreement between Registrant and Euro-Nocopi S.A.(3)
10.6 Memorandum of Agreement between Registrant and Euro-Nocopi S.A.(3)
10.7 Nocopi Technologies, Inc. 1996 Stock Option Plan(4)
10.8 Settlement Agreement between Registrant and Euro-Nocopi S.A.
10.9 Employment Agreement between Registrant and Richard A. Check
10.10 Employment Agreement between Registrant and Norman A. Gardner
10.11 Employment Agreement between Registrant and Dr. A. Gundjian
10.12 Form of Common Stock Purchase Warrant
10.13 Lease Agreement dated February 17, 1998 relating to premises at 537
Apple Street, West Conshohocken, PA 19428
20
<PAGE>
16.1 Letter dated August 25, 1997 from Coopers & Lybrand L.L.P.
re: Change in Certifying Accountant(5)
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of BDO Seidman, LLP
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
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1996
(5) Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 25, 1997
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Nocopi Technologies, Inc.
We have audited the accompanying balance sheet of Nocopi Technologies, Inc.
as of December 31, 1997 and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. We have also audited the
financial statement schedule as of and for the year ended December 31, 1997
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nocopi Technologies, Inc. at
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 3, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Nocopi Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Nocopi
Technologies, Inc. as of December 31, 1996, the related consolidated statements
of income, cash flows and changes in stockholders equity for each of the two
years in the period ended December 31, 1996. We have also audited the financial
statement schedules for the two years ended December 31, 1996 listed on the
index on page F-18 of this Form 10-K. These financial statements and financial
statements 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 the consolidated results of their
operations and cash flows for each of the two 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.
/s/ COOPERS & LYBRAND LLP
- -------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 7, 1997
F-2
<PAGE>
Nocopi Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $2,714,600 $2,229,200
Accounts receivable less allowances
(1997-$44,100; 1996-$37,100) 167,400 513,400
Inventory 5,500 5,100
Prepaid and other 49,200 105,300
---------- ----------
Total current assets 2,936,700 2,853,000
Fixed assets
Leasehold improvements 45,600 43,200
Furniture, fixtures and equipment 422,600 435,000
---------- ----------
468,200 478,200
Less: accumulated depreciation and amortization 354,400 296,600
---------- ----------
113,800 181,600
Other assets
Investment in and advances to affiliate 209,100
Patents, net of accumulated amortization
(1997 - $266,600; 1996 - $214,300) 537,000 452,000
Debt issuance costs, net of accumulated
amortization (1997 - $181,800; 1996 - $156,500) 6,300 31,600
Other 10,700 14,300
---------- ----------
763,100 497,900
---------- ----------
$3,813,600 $3,532,500
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Current debt obligations $950,000
Accounts payable 321,000 $539,800
Accrued expenses 172,800 139,900
Accrued commissions 116,700 118,100
Deferred revenue 68,600 164,200
---------- ----------
Total current liabilities 1,629,100 962,000
Long-term notes payable 950,000
Commitments and contingencies
Ownership interest of others in consolidated entity 1,448,300
Stockholders' 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
1997 - 33,587,332 shares 335,900
1996 - 14,080,654 shares 140,800
Paid-in capital 10,396,200 7,651,000
Currency translation adjustment (23,900) 57,100
Accumulated deficit (8,523,700) (7,676,700)
---------- ----------
2,184,500 172,200
---------- ----------
$3,813,600 $3,532,500
========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
Nocopi Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues
Licenses, royalties and fees $2,085,300 $3,036,800 $2,878,500
Product and other sales 960,700 603,500 141,200
---------- ---------- ----------
3,046,000 3,640,300 3,019,700
Cost of sales
Licenses, royalties and fees 582,900 496,900 273,200
Product and other sales 958,600 561,800 125,600
---------- ---------- ----------
1,541,500 1,058,700 398,800
---------- ---------- ----------
Gross profit 1,504,500 2,581,600 2,620,900
Operating expenses
Research and development 480,500 805,100 789,100
Sales and marketing 662,900 1,494,100 1,552,600
General and administrative 903,600 943,300 781,500
Other expenses 197,100 138,700 142,400
---------- ---------- ----------
2,244,100 3,381,200 3,265,600
---------- ---------- ----------
Loss from operations (739,600) (799,600) (644,700)
Other income (expenses)
Amortization of debt issuance costs (25,300) (25,300) (28,800)
Interest income 27,800 113,900 189,300
Interest and bank charges (71,000) (72,100) (80,600)
Equity in net loss of affiliate (38,900)
Ownership interest of others in net
loss of consolidated entity 374,800 322,900
---------- ---------- ----------
(107,400) 391,300 402,800
---------- ---------- ----------
Net loss ($847,000) ($408,300) ($241,900)
========== ========== ==========
Basic and dilutive loss
per common share ($.05) ($.03) ($.02)
Weighted average common shares outstanding 17,192,323 14,067,606 14,006,254
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Nocopi Technologies, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common stock Currency
------------------------ Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
----------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1995 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
Equity in net assets of Euro-Nocopi
S.A. from application of equity
method of accounting 377,300 377,300
Private placement, net of expenses 19,506,678 195,100 2,352,900 2,548,000
Nonqualified stock options
issued as compensation 15,000 15,000
Net loss (847,000) (847,000)
Translation adjustment (81,000) (81,000)
==============================================================================================
Balance-December 31, 1997 33,587,332 $335,900 $10,396,200 ($23,900) ($8,523,700) $2,184,500
==============================================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net loss $ (847,000) $ (408,300) $ (241,900)
Adjustments to reconcile net loss to
cash used by operating activities
Depreciation and amortization 73,300 84,200 68,600
Amortization 81,200 71,900 70,400
Allowance for doubtful accounts, net 7,000 16,100 7,400
Equity in loss of affiliate 38,900
Ownership interest of others in
loss of consolidated entity (374,800) (322,900)
Other 18,000 6,000
----------- ----------- -----------
(628,600) (610,900) (412,400)
Changes in assets and liabilities
Accounts receivable 187,600 132,800 (230,400)
Inventory (400) 17,100 (8,600)
Prepaid and other 96,300 (14,000) (17,000)
Accounts payable and accrued expenses 131,800 (30,200) 280,400
Deferred revenue (6,600) (113,000) 235,300
----------- ----------- -----------
408,700 (7,300) 259,700
----------- ----------- -----------
Cash used in operating activities (219,900) (618,200) (152,700)
Investing Activities
Additions to fixed assets (19,500) (61,500) (112,000)
Additions to patents (137,300) (75,300) (125,800)
Cash of Euro, beginning of year (1,641,200)
Other (44,700)
----------- ----------- -----------
Cash used in investing activities (1,842,700) (136,800) (237,800)
Financing Activities
Issuance of common shares, net 2,548,000
Exercise of stock options 128,500 29,000
----------- ----------- -----------
Cash provided in financing activities 2,548,000 128,500 29,000
Effect of exchange rate changes on cash (126,400) 206,000
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 485,400 (752,900) (155,500)
Cash and cash equivalents
Beginning of year 2,229,200 2,982,100 3,137,600
----------- ----------- -----------
End of year $ 2,714,600 $ 2,229,200 $ 2,982,100
=========== =========== ===========
Supplemental cash flow data
Interest paid $ 66,500 $ 66,500 $ 74,700
=========== =========== ===========
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
===========
Equity in net assets of Euro-Nocopi
S.A. from application of equity
method of accounting $ 377,300
===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
NOTES TO 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
Basis of Presentation - Through December 31,1996, the financial statements
included the accounts of the Company and Euro-Nocopi S.A. (Euro), the
European affiliate of the Company on a consolidatd basis. The Company has
an approximately 18% interest in Euro and holds warrants permitting it to
increase its interest to 55%. The Company's operational and financial
control of Euro required Euro's operations be included in the Consolidated
Financial Statements. The 82% equity interest of shareholders other than
the Company was shown as "Ownership interest of others in consolidated
entity" in the Statements of Operations and Balance Sheets. All significant
intercompany accounts and transactions were eliminated. During 1997, the
Company ceased to exercise effective control over Euro. As a result,
consolidation was no longer permitted and the Company's investments in Euro
has been accounted for under the equity method. (See note 8)
Use of Estimates - The Company's financial statements are prepared 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. Cash equivalents are
carried at the lower of cost, plus accrued interest, or market value and
are held in money market accounts at a local bank. At December 31,1997 and
1996, Nocopi's investments in money market accounts amounted to $2,589,700
and $518,300,respectively. At December 31, 1996, the Balance Sheet for
"Cash and cash equivalents" includes $1.6 million in cash and cash
equivalents of Euro.
F-7
<PAGE>
This amount was available primarily to fund European operations.
Inventory is valued at the lower of cost or market, determined on a
first-in, first-out basis.
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 the shorter of
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 incurred in connection with the issuance of long-term
debt have been capitalized and are being amortized over the life of the
related debt agreement.
Revenues, consisting primarily of license fees and royalties, are generally
recorded as earned over the license term. Product sales are recognized upon
shipment of products.
Loss per share - the Company has adopted SFAS No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the standards for computing earnings per
share (EPS), replaces simple and primary EPS with a newly defined basic EPS
and modifies the computation of diluted EPS. Pursuant to SFAS No. 128 the
Company reflected on its Statements of Operations basic and dilutive loss
per share (LPS) for the years ended December 31, 1997, 1996 and 1995.
Adoption of SFAS No. 128 did not impact the amount of LPS and there is no
difference in the amounts calculated as basic LPS and dilutive LPS because
options and warrants are anti-dilutive.
Recoverability of Long Lived Assets - The Company has 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, including patents, be reviewed for
impairment whenever
F-8
<PAGE>
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 indicating the existence of an impairment which would be
material to the Company's quarterly or annual financial statements.
Accounting for Stock-Based Compensation - The Company has 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. See proforma disclosures in
Note 7.
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.
Recently Issued Accounting Standards
The following Statements of Financial Accounting Standards are effective
for financial statements for periods beginning after December 15, 1997 and
require comparative information for earlier years to be restated. Adoption
of all three statements is not expected to impact financial statements or
disclosures.
Statements of Financial accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items required to be
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for
public enterprises reporting of information about operating segments in
annual financial statements and requires reporting of selected information
about
F-9
<PAGE>
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments
as components of an enterprise about which separate financial information
is available and that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis and eliminate certain
existing disclosure requirements.
3. Notes Payable and Shareholders' Equity.
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, 1997 and 1996 approximates their fair value.
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.
In December 1997, the Company completed a private placement in Europe
whereby 9,753,339 units (each unit consisting of two shares of common stock
and one warrant to purchase common stock)
F-10
<PAGE>
were sold raising $2,926,000 in cash ($2,548,000 net of expenses). Each
warrant is exercisable for the purchase of one share of the Company's
common stock at a price of $.25 per share during the first three years
after issuance, subject to escalation on the third anniversary of the
issuance of the warrants. The warrants will expire five years after
issuance unless extended by the Board of Directors. In conjunction with the
private placement, 780,267 warrants, having the same terms and conditions
as those issued as part of the units, were issued as partial commission to
the Placement Agent. The European investors were also given the right to
appoint two representatives to the Company's Board of Directors.
4. Income Taxes
At December 31, 1997 and 1996, the Company had net operating loss
carryforwards totaling approximately $8,200,000 and $7,400,000,
respectively. These net operating losses are available to offset future
taxable income through the years 2013 and 2012, respectively. As a result
of the issuance of the Company's common stock in an equity offering in late
1997, the amount of the net operating loss carryforwards may be limited.
Additionally, the utilization of these losses, if available, will depend on
the generation of sufficient taxable income prior to the expiration of the
net operating loss carryforwards. Valuation allowances of approximately
$3,000,000 and $2,800,000 at December 31, 1997 and 1996, respectively, have
been provided against the deferred tax assets due to uncertainty of
realization and any limitation as a result of the potential change in
control of the Company.
F-11
<PAGE>
5. Related Party Transactions
During 1997, 1996 and 1995, charges of $472,000, $138,700 and $142,400,
respectively, were made to firms employing certain officers and directors
for legal and consulting services. Of these amounts, $274,900 was charged
in 1997 to paid-in capital for placement and legal fees related to the 1997
European private placement (See note 3). In October 1997, an executive
officer of the Placement Agent was appointed to the Company's Board of
Directors as a representative of the European investors in that private
placement. In 1995, $50,000 was charged to paid-in capital for legal
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 2003.
Future minimum lease payments under operating leases with initial or
remaining terms of one year or more at December 31, 1997 are: $100,400 -
1998; $99,600 - 1999; $102,000 - 2000; $104,800 - 2001; and $107,500 -
2002.
Total rental expense under operating leases was $123,100 in 1997, $149,600
in 1996 and $125,100 in 1995.
The Company has employment contracts with certain executive officers and
employees, the terms of which expire at various dates through 2002. Future
minimum compensation payments under these agreements at December 31, 1997
are $454,000 - 1998; $412,500 - 1999; $387,500 - 2000; $242,500 - 2001; and
$212,500 - 2002.
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.
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.
F-12
<PAGE>
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 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 under the plans is charged to income as
compensation expense over the vesting periods of the related options. There
was no compensation expense recorded during 1997, 1996 or 1995 as a result
of below market stock option grants.
A summary of stock options under these plans follows:
<TABLE>
<CAPTION>
Exercise Weighted
Number of Price Range Average
Shares Per Share Price
------ --------- -----
<S> <C> <C> <C>
Outstanding at December 31, 1994 466,206 $.75 to $3.75 $2.91
Options granted 295,200 3.25 to 4.05 3.70
Options exercised (15,000) 1.30 and 2.25 1.95
Options canceled (63,706) 3.25 to 4.05 3.50
--------
Outstanding at December 31, 1995 682,700 .75 to 4.05 3.21
Options granted 43,000 3.10 and 4.35 3.75
Options exercised (36,488) 3.00 to 3.75 3.55
Options canceled (8,846) 3.00 to 4.05 3.70
--------
Outstanding at December 31, 1996 680,366 .75 to 4.35 3.22
Options granted 525,000 .30 and .45 .36
Options canceled (422,300) .75 to 4.35 3.03
--------
Outstanding at December 31, 1997 783,066 $.30 to $4.35 1.40
========
Exercise Weighted
Option Price Range Average
Shares Per Share Price
------ --------- -----
Exercisable at year end:
1995 507,436 $.75 to $4.05 $3.35
1996 574,466 $.75 to $4.35 $3.28
1997 377,666 $.30 to $4.35 $2.44
Options available for future
grant under all plans:
1995 45,633
1996 700,000
1997 175,000
The following table summarizes information about stock options outstanding at
December 31, 1997:
Ranges Total
------------------------------ -------------
Range of exercise prices: $.30 to $.45 $2.25 to $4.35 $.30 to $4.35
------------ -------------- -------------
Number outstanding at
December 31, 1997: 525,000 258,066 783,066
------------ -------------- -------------
Weighted average remaining
contractual life (years) 6.52 1.71 4.94
------------ -------------- -------------
Weighted average exercise
price $ .36 $2.90 $1.40
------------ -------------- -------------
Exercisable options:
Number outstanding at
December 31, 1997: 125,000 252,666 377,666
------------ -------------- -------------
Weighted average remaining
contractual life 2.60 1.68 1.98
------------ -------------- -------------
Weighted average exercise
price $.30 $2.87 $2.44
------------ -------------- -------------
</TABLE>
F-13
<PAGE>
The Company applies APB Opinion 25 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 basic net loss per common share would have been reported as
follows:
1997 1996 1995
---------- ---------- ----------
Net loss
As reported ($847,000) ($408,300) ($241,900)
Pro forma ($929,700) ($470,400) ($629,200)
Loss per common share
As reported ($.05) ($.03) ($.02)
Pro forma ($.05) ($.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 1997, 1996 and 1995
respectively: expected volatility of 46%, 76% and 50%; risk free interest
rates of 6.0% to 7.2%, 6.1% to 6.3% and 5.7% to 6.6% and expected lives
of two years.
At December 31, 1997, the Company has reserved 12,784,378 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 contributions. Employer
contributions are made at the discretion of the Company. There were no
contributions charged to expense during 1997, 1996 or 1995.
8. Euro-Nocopi, S.A.
Euro-Nocopi, S.A. (Euro) was formed in 1994 to market the Company's
technologies in Europe under an exclusive license arrangement. Euro was
capitalized through a European private placement which allows those
investors to convert the Euro 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 has been made by that date.
Prior to January 1, 1997, the financial statements included the accounts of
the Company and Euro-Nocopi S.A. (Euro), the European affiliate of the
Company, on a consolidated basis. Consolidation was appropriate due to the
operational and
F-14
<PAGE>
financial control the Company exercised over Euro. Additionally, the
Company held approximately an 18% interest in Euro and warrants permitting
it to increase its interest in Euro to 55%. During the second quarter of
1997, the Company ceased to exercise effective control over Euro. The
cessation of effective control resulted from a dispute which arose in April
1997 between the Company and Euro under the license agreement between the
Company and Euro concerning Euro's contention that it was entitled to a
share of certain minimum royalties under a worldwide agreement with a
manufacturer which distributes products incorporating the Company's
technologies. In an agreement negotiated during the second quarter of 1997
and concluded in July 1997, the Company agreed to credit Euro $154,500 as
Euro's share of previously collected minimum royalties, the $154,500 to be
applied to license fee payments due the Company by Euro through the first
quarter of 1998. The Company also agreed to pay Euro 35% of future
guaranteed royalties from this manufacturer. The $154,500 settlement has
been charged to cost of sales and was included in the results of operations
for the six months ended June 30, 1997. The Company also agreed to modify
its warrant by extending its term through December 2001 but making it
exercisable beginning the earlier of 1) January 1, 2001; 2) in the event of
a sale of all or part of Euro; or 3) in the event of a public listing of
Euro's shares on a stock market. In addition, the Company agreed to defer
to January 1, 2001 its right to acquire, under certain conditions, all
remaining shares of Euro for shares of the Company. This call right expires
December 31, 2001.
Additionally, the licensing agreement between the two companies was amended
relative to the negotiation of future worldwide licensing contracts, the
five directors of Euro who were also Nocopi directors resigned from Euro's
Board, and the Company ceased to exercise effective control of Euro. During
the fourth quarter of 1997, a Nocopi director was elected to Euro's Board
of Directors and the Chief Operating Officer of Euro was appointed to the
Company's Board of Directors. Additionally, Euro is dependent on the
Company for the technology it licenses from the Company and markets in
Europe. Accordingly, the Company ceased consolidating effective January 1,
1997, applied the equity method, and recorded an adjustment to paid-in
capital of $377,300 to record its 18% share of Euro's net equity at January
1, 1997 resulting primarily from the expiration in 1997 of certain
liquidation privileges on the 82% of Euro's stock not owned by the Company.
F-15
<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.
The following geographic financial information is presented in conformity
with SFAS 14:
<TABLE>
<CAPTION>
1997(1) 1996(2) 1995(2)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States $2,580,400 $2,604,900 $2,198,700
Europe 361,000 872,300 720,500
Other foreign 104,600 163,100 100,500
---------- ---------- ----------
Total revenues $3,046,000 $3,640,300 $3,019,700
========== ========== ==========
Transfers between geographic segments
(eliminated in consolidation):
United States $ $ 150,200 $ 109,600
Europe 48,000 44,900
---------- ---------- ----------
Total transfers $ $ 198,200 $ 154,500
========== ========== ==========
Loss from operations:
United States $ (739,600) $ (276,300) $ (109,400)
Europe (523,300) (535,300)
---------- ---------- ----------
Total loss from operations $ (739,600) (799,600) $ (644,700)
========== ========== ==========
Identifiable assets:
United States $3,602,800 $1,673,300 $2,250,400
Europe 209,100 1,857,100 2,209,300
Other foreign 1,700 2,100 5,500
---------- ---------- ----------
Total assets $3,813,600 $3,532,500 $4,465,200
========== ========== ==========
</TABLE>
(1) Does not include the geographic financial information of Euro.
(2) Includes the geographic financial information of Euro.
F-16
<PAGE>
Revenues from customers are based on the location of the customers and
include, in 1997, approximately $200,000 derived from the Company's
European affiliate. 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 46%, 40%
and 37% of revenues in 1997, 1996 and 1995, respectively, and approximately
42%, 35% and 39% of accounts receivable at December 31, 1997, 1996 and
1995, 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-17
<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, 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
Year ended December 31, 1997
Allowance for doubtful accounts $ 37,100 $ 23,200 $16,200 $ 44,100
Inventory reserve 11,500 1,500 10,000
</TABLE>
F-18
Confidential
Proposed agreement for settlement purposes only -
cannot be used for any other purposes.
SETTLEMENT AGREEMENT
By and Between:
Nocopi Technologies Inc., a corporation duly organized and existing
under the laws of the State of Maryland, U.S.A. with offices at
Sugartown Square, 230 Sugartown Road, Wayne, PA 19087, USA,
herein referred to as [Nocopi]
and
Euro-Nocopi S.A. a corporation duly organized and existing under the
laws of the Republic of France, with offices at 30, rue Saint-Marc,
75002 Paris, France,
herein referred to as [Euro]
Whereas a dispute has arisen between Nocopi and Euro concerning the
management and financial relationship between the two companies, and
in particular the monies that are due to Euro by Nocopi under a
certain Agreement (the [3M Agreement]) dated October 30, 1995 between
Nocopi and the Identification and Converter Systems Division of
Minnesota Mining and Manufacturing company ([3M]), as well as
concerning certain inter-company accounts and other matters, and
Whereas by letter dated June 5, 1997, Nocopi and Euro entered into an
understanding referred to as a standstill agreement having as its
purpose for the parties to agree to freeze all action or litigation
pending the conducting of negotiations between them in view of a
settlement, and
Whereas Nocopi and Euro have mutually agreed to make concessions in
order to arrive at a settlement of their differences.
<PAGE>
NOW THEREFORE IT HAS BEEN AGREED AS FOLLOWS:
Article 1: 3M Agreement
1-1 Nocopi agrees that Euro has a right to receive a proportionate share of any
minimum royalties or consideration or their equivalent which have been
received by Nocopi as of this date or which may be received by Nocopi in
the future and in particular those payments due under paragraph 4.5.1 of
the 3M Agreement.
1-2 Nocopi represents that since December 1, 1995, it has received payments
under the 3M Agreement representing minimum royalties, termination charges
and label production payments. Since April 1, 1997, minimum royalties have
been received at the rate of $10,000 per month.
1-3 Nocopi and Euro agree that from and after April 1, 1997, Nocopi shall pay
to Euro 35% of the said minimum royalties. For the contract period from
December 1, 1995 to May 31, 1997, it will pay the sum of $151,000 (which
includes the sum of $14,000 in late interest payments). For the period
commencing on June 1, 1997, an additional sum of $3,500 for a total of USD
154,500, due to Euro as of the date hereof. This sum will be paid in three
equal installments, of $51,500 each payable on the first day of July 1997,
October 1997 and January 1998. Each installment so due shall be deducted
from the royalty payment of $62,500 due by Euro to Nocopi on these same
dates pursuant to paragraph 3.03(i) of a certain License Agreement (the
License Agreement) dated June 10, 1994 between said parties.
1-4 Concerning any payments received by Nocopi from 3M pursuant to paragraph
4.5.1 of the 3M Agreement after the date of this agreement, Nocopi shall
within 8 days after receipt thereof pay to Euro an amount equal to 35% of
the amount so received. This payment shall be made by wire transfer to an
account determined by Euro. No royalties shall be payable by Euro to Nocopi
on 3M minimum royalties.
1-5 Nocopi agrees that Euro shall be entitled to receive all Running Charges on
any Products (as these terms are defined in the 3M Agreement) which are
sold or delivered or destined for sale or delivery in the Territory as this
term is defined in the License Agreement, to the extent that such Running
Charges exceed minimum royalty payments received by Euro.
1-6 Following such time as Euro makes arrangements for manufacture in Europe,
the place of production of the Products for 3M and accordingly the identity
of the party, Nocopi or Euro, entitled to receive handling, converting or
other charges, shall unless otherwise agreed, be Euro if the place where
the Products are destined to be sold or delivered is in Europe, otherwise
it shall be Nocopi. For example, if an order is placed by Bosch Germany
with 3M for labels, they will be produced by Euro in Europe and Euro will
be entitled to receive all consideration related to manufacturing and
marking the labels.
-2-
<PAGE>
Article 2: Licensing/Contracts
2-1 In their efforts to market and sell the Nocopi Technology, Nocopi and Euro
on occasion find it appropriate to propose contractual arrangements to
customers which provide for the marking, sale, and use of products in
Europe and the rest of the world. In order to enable a smooth working
relationship and an equitable division of royalties and other revenues,
Nocopi and Euro have agreed to establish certain principles which shall
govern contracts (other than 3M with respect to which the provisions of
Article 1 shall be controlling).
o Negotiations for exclusive or non-exclusive agreements in Europe shall
be carried out by and be the sole responsibility of Euro;
o Negotiations for exclusive or non-exclusive agreements in the rest of
the world (excluding Europe) shall be carried out by and be the sole
responsibility of Nocopi;
o The party conducting the negotiations shall keep the other party fully
and contemporaneously advised of all developments in the negotiations
and shall copy the other party on all correspondence, memorandums,
contracts, documents etc.
o No contract affecting Europe shall be signed unless Euro has approved
the signature thereof on its behalf.
o With respect to world contracts, negotiations will first be carried
out by representatives of both Euro and Nocopi; in the event that Euro
and Nocopi are unable to agree between themselves as to the terms and
conditions affecting each of their exclusive territories, then each
may enter separately into an agreement relating to its territory.
o Handling, converting, servicing, technical assistance and similar
revenues shall be apportioned equitably, on the basis of each party's
contribution of relevant services.
Article 3: Warrants/Conversion
3-1 Nocopi is the owner of 12,500 warrants (called Bons de Souscsription
Autonome or BSA of Euro, giving it the right to acquire 12,500 shares of
Series A of Euro, for a period of five years commencing on June 17, 1994,
and expiring on June 16, 1999, or at the time of a public offering by Euro
on the quotation of the shares of Euro on a stock exchange, whichever is
earlier.
3-2 Euro and Nocopi agree that exercise period for these BSA shall be modified
to make them exercisable commencing only on January 1, 2001, for a period
of one year ending on December 31, 2001, provided that these BSA shall be
exercisable earlier in the event that Euro makes a public offering of its
shares or is quoted on a stock market, or in the event an offer to sell any
part or all of Euro is accepted by the Euro Board or by its shareholders.
-3-
<PAGE>
In the latter event the BSA shall be exercisable in the thirty day period
preceding the public offering or stock market quotation, or sale subject to
local regulations. In exchange for the deferral of exercisability of these
BSA, Euro agrees it will not make any change to its articles of
incorporation or to its bylaws without first obtaining the written consent
of Nocopi during the deferral period.
3-3 The modification of the terms of exercise of the BSA is required to be
submitted to the appropriate approval of the shareholders of Euro. Nocopi
and, in the event they are shareholders or directors at the relevant time,
Messrs. Gardner, Pinsky, Drake, Mundt and Gundjian agree to cast their
votes as shareholders and directors in favor of said modification. The
releases granted by Euro in Article 7 hereof are subject to the condition
that these parties cast their votes as agreed.
3-4 Nocopi hereby agrees to defer to January 1, 2001, and the year ending
December 31, 2001, the exercise of the Conversion call rights granted to it
in paragraph 3-6 of an agreement entitled Shareholders Agreement-Conversion
signed between Nocopi and each of the shareholders who participated in the
increase in capital of Euro, decided by a shareholders extraordinary
meeting of Euro dated June 17, 1994.
Article 4: Directors
At the time of the signature of this agreement Nocopi will deliver to Euro
the resignations of Messrs. Gardner, Pinsky, Mundt, Drake and Gundjian from
their duties as members of the Board of Directors of Euro and the signed
transfer documents for the assignment of all shares owned by these persons
in Euro.
Article 5: Technical Assistance
5-1 Subject to license and technical service payments due from Euro being made
on a timely basis, Nocopi hereby reiterates its undertaking to provide
technical assistance to Euro on an on-going basis, and in particular the
technical assistance described in paragraph 8.03 of the License Agreement.
This technical assistance will be performed by Nocopi technical personnel
as determined by Dr. Gundjian. When possible, Nocopi will endeavor to
comply with Euro's reasonable requests for specific personnel. No technical
assistance, trips or expenditures will be undertaken without the specific
approval of Euro.
5-2 Nocopi agrees that it will cooperate in making Dr. Gundjian available to
perform his services for Euro in Europe, as may be requested by the latter
for up to 30 working days per year and a senior and/or junior technical
assistant for up to 10 working days per year. Nocopi further agrees that
Euro will pay the USD 1,000 per diem referred to in paragraph 5-3 directly
to Dr. Gundjian as an annual salary or consulting fee of $30,000,
commencing July 1, 1997, in lieu of payment to Nocopi, subject to Dr.
Gundjian's agreement that his compensation from Nocopi may be reduced by
this amount.
-4-
<PAGE>
5-3 When technical assistance services are rendered in Europe, Euro shall pay
reasonable travel, lodging and meals after receipt of adequate proof of
expenditure, as well as a per diem charge for working days of USD 1,000 for
Dr. Gundjian, USD 400 for a senior assistant, USD 200 for a junior
assistant. It is agreed that Euro will pay air transportation tickets
directly or by charge to its Carte Bleu and that it will pay hotel bills
directly.
5-4 Under paragraph 8.03 of the License Agreement, Nocopi is required to
provide technical assistance to Euro, without charge when rendered at
Nocopi's premises. It had previously been agreed between the parties that
Euro, in order to avoid the cost of creating its own laboratory would pay
50% of the salary cost of a senior assistant and 100% of the salary cost of
a junior assistant. This laboratory personnel is intended among other
things to test the use of Nocopi Technology and inks on customer products.
It is agreed that commencing April 1, 1997, and until such time as Euro
installs its own laboratory, Euro will pay Nocopi 35% of Nocopi's U.S. lab
costs, which costs shall be subject to review and audit by Euro. Euro's
share shall be subject to a cap of USD 80,000 per year.
Article 6: Accounting
Concerning inter-company accounts, Nocopi has submitted to Euro its version
of these accounts. Euro contends that USD 54,805 is owed to it for
1995-1996 concerning L'Oreal and Chanel and that it owes Nocopi no more
than USD 49,101 for the first quarter of 1997 whereas Nocopi claims USD
111,587 is owed to it for the first quarter of 1997, and a further $73,000
for the months of April and May, 1997, as well as an amount of $38,000
relating to Nocopi U.K. totaling approximately $220,000 based on statements
provided to Euro. Euro agrees at the time of signing this agreement to pay
Nocopi $150,000 on account with respect to such net inter-company accounts
as may be determined to be payable with respect to inter-company items from
January 1, 1997, to the date of this agreement. Representatives of Euro and
Nocopi (most probably Dr. Gundjian and Susan Cox) shall meet as soon as
possible after signing to reach agreement with respect to inter-company
items. Failing agreement, Euro and Nocopi agree to seek the mediation of
Coopers & Lybrand, Paris to settle any questions concerning these
accounts. Each party shall be entitled to submit one or more written
statements to Coopers & Lybrand who will be asked to render a written
determination. If either party refuses to accept the determination of
Coopers & Lybrand, it may within 30 days of receipt of the written
determination submit the matter to the binding arbitration of the American
Arbitration Association, New York.
Article 7: Releases
Nocopi and Euro each hereby represent that they have no claims or actions
against the other party except as described herein. Upon the signature and
full execution of this agreement,
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<PAGE>
each party hereby releases the other party of all claims, actions,
judgments, damages, that it now has or may have against the other party.
Article 8: Arbitration
Any dispute, difference, or question arising between the parties in
connection with this Agreement, or any clause or the construction hereof,
or the rights, duties or liabilities of either party which cannot be
amicably resolved by the parties shall be finally determined by a single
arbitrator appointed by the American Arbitration Association of New York,
NY.
Made this ____ day of June 1997
In
- ---------------------------------- -----------------------------------
Nocopi Euro-Nocopi
-6-
MEMORANDUM OF AGREEMENT made and entered this 24th day of October, 1997.
BY AND BETWEEN: RICHARD A CHECK, Executive, of Radnor,
Pennsylvania, hereinafter referred to as "EXECUTIVE"
AND: NOCOPI TECHNOLOGIES, INC., a company
incorporated under the laws of the State of Maryland,
hereinafter referred to as "COMPANY"
WHEREAS the COMPANY desires that EXECUTIVE serve as President and Chief
Executive Officer of the COMPANY and EXECUTIVE is willing to serve in such
capacity, subject to the terms and conditions of this agreement; and
WHEREAS all of the terms, conditions and undertakings of this agreement,
have been approved, authorized and directed by its Board of Directors;
NOW, THEREFORE, for valuable consideration, it is mutually agreed by and
between the parties hereto as follows:
1. EMPLOYMENT PERIOD AND DUTIES
1.1 The COMPANY agrees to and does hereby employ the EXECUTIVE as President
and Chief Executive Officer and the EXECUTIVE agrees to serve the COMPANY in
such capacity for a period commencing on the effective date of this agreement
and continuing for three (3) years thereafter (the "Employment Period"). This
agreement shall become effective when the COMPANY will have received not less
than $500,000 pursuant to a financing commitment which commitment shall be in
form and substance satisfactory to Executive.
<PAGE>
1.2 The COMPANY agrees and undertakes to nominate the EXECUTIVE as a Director
of the COMPANY during each year of the Employment Period and further agrees that
it will support the EXECUTIVE's nomination in the COMPANY's annual proxy
statement.
2. COMPENSATION
2.1 Subject to the provisions of Clause 2.3, the COMPANY shall pay to said
EXECUTIVE, and said EXECUTIVE shall accept from the COMPANY as basic payment for
his services during the Employment Period, (the "BASIC PAYMENT") compensation at
the rate of One hundred eighty thousand and 00/100 ($180,000.00) Dollars per
annum, payable in weekly or semi-monthly installments.
2.2 In addition to the BASIC PAYMENT during the Employment Period, the
EXECUTIVE shall receive a sum, with respect to any fiscal year of the COMPANY
during the Employment Term, in which the net income of the COMPANY before taxes
and as determined solely by the firm of public accountants of the COMPANY shall
exceed Two hundred and fifty thousand 00/100 ($250,000.00) Dollars equal to ten
percent (10%) of such excess, the amount of any such additional sum shall not
exceed One hundred eighty thousand 00/100 ($180,000.00) Dollars in any fiscal
year.
2.3 The COMPANY and the EXECUTIVE acknowledge that as of the date of signing
this agreement, the EXECUTIVE's salary as well as other salaries being paid to
personnel of the COMPANY are being disbursed at reduced rates because of cash
flow constraints. The COMPANY and the EXECUTIVE agree that notwithstanding the
provisions of Clause 2.1 hereof that the EXECUTIVE's salary shall remain at the
presently reduced rate until such time as the COMPANY's cash flow from
operations is positive for two consecutive quarters at which time the
EXECUTIVE's salary shall revert to the rate of One hundred eighty thousand
00/100 ($180,000.00) Dollars set out in Clause 2.1. The COMPANY and the
EXECUTIVE
2
<PAGE>
acknowledge that the reduced salary of the EXECUTIVE is One hundred fifty
thousand 00/100 $150,000.00) Dollars per annum.
3. EXPENSES
3.1 During the Employment Period the COMPANY will pay all reasonable business
related expenses incurred by the EXECUTIVE in furtherance of or in connection
with the business of the COMPANY and its subsidiaries.
3.2 The EXECUTIVE shall be supplied with a leased car by the COMPANY provided
that the annual lease monthly payments do not exceed the sum of Nine hundred
00/100 ($900.00) Dollars per month. The COMPANY shall pay or reimburse the
EXECUTIVE for all operating costs of this vehicle including leasing costs (to
the extent only of the amount heretofore mentioned), insurance, maintenance, gas
and oil.
4. SERVICES
4.1 The EXECUTIVE shall be entitled to a minimum vacation period totaling at
least one (1) month each year which he may take, at his option, either in whole
or in part, consecutively or not, in any given year, and which vacation periods
shall be cumulative over the term of the Employment Period.
4.2 The EXECUTIVE shall perform his duties faithfully, diligently, and to the
best of his ability during the Employment Period. These duties shall include the
customary duties, responsibilities and authority of a chief executive officer
with a view to establishing a positive cash flow from operations and
profitability of the company.
3
<PAGE>
5. RESTRICTIVE COVENANT
5.1 The EXECUTIVE agrees that so long as this agreement is in full force and
effect, he will not, directly or indirectly, either as principal, agent,
stockholder, or in any other capacity, engage in or have a financial interest
in, any business which is competitive to the business of the COMPANY and its
subsidiaries, (except that nothing contained herein shall preclude the EXECUTIVE
from purchasing or owning stock in any such business, providing that his
holdings do not exceed one (1%) percent of the issued and outstanding capital
stock.) For the purpose hereof, a business will be deemed competitive if it
involves the production, manufacture or distribution of any product similar to
those produced, manufactured or distributed by the COMPANY or any of its
subsidiaries. The EXECUTIVE expressly agrees that upon a breach or violation of
the foregoing provision of this agreement, the COMPANY in addition to all other
remedies shall be entitled, as a matter of right, to injunctive relief in any
court of competent jurisdiction.
6. SECRET PROCESSES
6.1 The EXECUTIVE will not divulge, furnish or make accessible to any one
(otherwise than in the regular course of the business of the COMPANY or any of
its subsidiaries) any knowledge or information with respect to confidential or
secret processes, formula, machinery, plans, devices or material of the COMPANY
or any of its subsidiaries, with respect to any confidential or secret
engineering, development or research work of the COMPANY or any of its
subsidiaries, or with respect to any other confidential or secret aspect of the
business of the COMPANY or any of its subsidiaries.
4
<PAGE>
7. DEATH
7.1 In the event of the death of the EXECUTIVE the COMPANY shall pay to his
surviving spouse an amount equal to one (1) year compensation calculated on the
basis of the compensation payable to the EXECUTIVE under this agreement at the
date of his death. Such payments shall be made in equal monthly installments
over a period of two (2) years from the date of the death of the EXECUTIVE. If
the EXECUTIVE has no surviving spouse, then such amount shall be paid to the
EXECUTIVE's estate in a lump sum. If the EXECUTIVE's spouse survives him but
dies before all of the aforementioned monthly payments have been made, then the
balance of such payments shall be paid to the EXECUTIVE's estate in a lump sum.
8. TERMINATION
a) Death. Employment of the Executive hereunder shall terminate upon his
death, subject to the payments to be made to his surviving spouse
pursuant to Section 7 hereof.
b) Disability. In the event that during the Employment Period the
EXECUTIVE shall be disabled from rendering services hereunder as Chief
Executive Officer to the COMPANY for three (3) consecutive months, the
Board of Directors of the COMPANY may terminate the Employment Period
after sixty (60) days written notice.
c) Termination for cause. The Company may, in its sole discretion,
terminate Executive's Employment Period under the following
circumstances:
(1) Executive breaches his obligations under the terms of this
agreement; or
(2) the Executive has committed an act of dishonesty, moral turpitude
or theft or has breached his duties of loyalty to the Company or
an act of insubordination to its Board of Directors.
5
<PAGE>
It is specifically understood that during the Employment Period, Executive
shall not be terminated pursuant to either 8(c) (1) or (2) unless and until
(a) Executive has received reasonable written notice from the Company of
the applicable reasons for termination and Executive has had a reasonable
opportunity to remedy such a breach of duties or act of insubordination;
however, the Company may immediately terminate Executive in the event of
the commission of an of dishonesty, moral turpitude or theft.
In the event of the termination of Executive under this section 8(c)
Executive's right to the compensation and benefits provided herein shall
immediately terminate and or cease to accrue, provided, however, that
Executive shall receive (i) the unpaid portion, if any, of his base salary
computed on a pro-rated basis to the date of termination of employment and
(ii) any unpaid accrued benefits owed to the Executive in accordance with
the term of any Plan or Program in which he is a participant.
d) Termination other than for cause. The Company may terminate the
employment of Executive during the Employment Period for reasons other
than those enumerated in Section 8(c); however, in such event the
Company shall be liable to Executive for compensation for the
remainder of the Employment Period and, to the extent not inconsistent
with applicable law and/or the terms and conditions of any Plan or
Program, all other remaining benefits shall continue to accrue until
the end of the Employment Period, which shall constitute the full
liquidated damages to which Executive is entitled.
e) In the event of termination of this agreement for any reason other
than death, Executive shall be entitled to purchase any life insurance
policies on his life then owned by the Company for the case value
thereof or, if such policies have no cash value, upon payment of $100.
6
<PAGE>
9. STOCK OPTION
9.1 As a further inducement to the EXECUTIVE to enter into this agreement and
to provide a means of enhancing the EXECUTIVE's proprietary interest in the
COMPANY and to increase the EXECUTIVE's incentive, the COMPANY hereby grants to
the EXECUTIVE the right and option to purchase from the COMPANY up to two
hundred thousand (200,000) shares of its par value common stock, exercisable
upon the following terms and conditions and in accordance with the terms and
conditions of the Stock Option Plan of the COMPANY and intended to the extent
permitted by the Internal Revenue Code) be an Incentive Stock Option.:
a) The option price shall be one hundred (100%) percent of the highest
price at which said common stock is sold on the open market on the
date that the execution of this agreement was authorized by the Board
of Directors;
b) Subject to the provisions hereof, this option shall be exercisable as
follows:
(i) After the expiration of one (1) year from the effective date
hereof this option may be exercised with respect to all or any
part of one hundred thousand (100,000) of the said two hundred
thousand (200,000) shares;
(ii) After the expiration of two (2) years from the effective date
hereof, this option may be exercised with respect to all or any
part of two hundred thousand (200,000) of the said two hundred
thousand (200,000) shares less such number of shares as may have
been taken down by the EXECUTIVE hereunder prior thereto;
c) The option shall be granted pursuant to and subject to the terms and
conditions of the COMPANY's stock option plan.
7
<PAGE>
10. EXECUTIVE'S RIGHTS UNDER CERTAIN PLANS
10.1 The COMPANY agrees that nothing contained herein is intended to or shall be
deemed to be granted to the EXECUTIVE in lieu of any rights and privileges which
the EXECUTIVE may be entitled to as an employee of the COMPANY under any
retirement, pension, insurance, hospitalization, or other plans which may now be
in effect or which may hereafter be adopted, it being understood that the
EXECUTIVE shall have the same rights and privileges to participate in such plans
or benefits as any other employee.
11. SUCCESSORS, ETC. OF THE COMPANY
11.1 This agreement shall inure to the benefit of and be binding upon the
COMPANY, its successors and assigns, including without limitation any person,
partnership or corporation which may acquire all or substantially all of the
COMPANY's assets and business, or into which the COMPANY may be consolidated or
merged, and this provision shall apply in the event of any subsequent merger,
consolidation or transfer, and the EXECUTIVE, his heirs, assigns, executors and
personal representatives.
12. ENTIRE AGREEMENT
12.1 The parties hereto agree that this agreement supersedes any employment
agreement between the EXECUTIVE and the COMPANY and contains the entire
understanding and agreement between the parties and cannot be amended, modified
or supplemented in any respect, except by a subsequent written agreement entered
into by both parties hereto.
8
<PAGE>
13. APPLICABLE LAW
13.1 The agreement shall be construed according to the laws of the State of
Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have executed this agreement the day
and year first above mentioned.
NOCOPI TECHNOLOGIES, INC.
Per:___________________________
RICHARD A. CHECK
Per:___________________________
9
MEMORANDUM OF AGREEMENT made and entered this 24th day of October, 1997.
BY AND BETWEEN: NORMAN A. GARDNER, Executive, of the City of Wayne,
Pennsylvania;
hereinafter referred to as
"EXECUTIVE"
OF THE FIRST PART
AND: NOCOPI TECHNOLOGIES INC., a company incorporated
under the laws of the State of Maryland,
hereinafter referred to as
"COMPANY"
OF THE SECOND PART
WHEREAS the EXECUTIVE presently serves as President and Chief Executive
Officer of the COMPANY and has served the COMPANY and its predecessors
continuously during the past fifteen (15) years as its principal executive; and
WHEREAS the leadership of the EXECUTIVE has constituted a major factor in
the development of the COMPANY and the COMPANY is greatly in need of the
EXECUTIVE's continued leadership so that the further and uninterrupted progress
of the COMPANY will be assured; and
WHEREAS the COMPANY acknowledges and recognizes the value of the
EXECUTIVE's services, including the capacity for service of special, unique and
extraordinary character; and
WHEREAS the COMPANY desires to employ, retain and make secure for itself
the experience and outstanding abilities and services of the EXECUTIVE for the
period of at least three (3) years from the effective date hereof and thereafter
to employ, retain and make secure for the COMPANY his services in an advisory
and consultative capacity for two years so as to prevent any other competitive
business from securing the services of the EXECUTIVE and from utilizing the
EXECUTIVE's experience, background and "know-how"; and
<PAGE>
WHEREAS both parties desire to embody the terms and conditions of
employment of the EXECUTIVE and of the Stock Option granted to him in connection
therewith into a written agreement; and
WHEREAS all of the terms, conditions and undertakings of this agreement,
including without limitations those of the Stock Option embodied herein and the
execution of this agreement, were duly fixed, stated, approved, authorized and
directed for and on behalf of the COMPANY by resolution of its Board of
Directors at a meeting of such Board held at the office of the COMPANY on
October 7, 1997, at which a quorum of Directors was present and voted,
exclusive of the EXECUTIVE, and to which resolution reference is hereby made,
and which resolution by this reference is incorporated herein as though fully
and at length repeated;
NOW, THEREFORE, for valuable consideration, it is mutually agreed by and
between the parties hereto as follows:
1. EMPLOYMENT PERIOD AND DUTIES
1.1 The COMPANY agrees to and does hereby employ the EXECUTIVE as Chairman and
the EXECUTIVE agrees to serve the COMPANY in such capacity for a period
commencing on the effective date of this agreement and continuing for three (3)
years thereafter (the "Employment Period"). This agreement shall become
effective when the COMPANY will have received not less than $500,000 pursuant to
a financing commitment which commitment shall be in form and substance
satisfactory to Executive.
1.2 The COMPANY agrees and undertakes to nominate the EXECUTIVE as a Director of
the COMPANY during each year of the Employment Period and further agrees that
they will support the EXECUTIVE's nomination in the COMPANY's annual proxy
statement. In addition and provided that the EXECUTIVE is elected as a Director
of the COMPANY, the COMPANY agrees that it will elect the EXECUTIVE as Chairman
of the Board during the Employment Period.
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<PAGE>
2. COMPENSATION
2.1 Subject to the provisions of Clause 2.3, the COMPANY shall pay to said
EXECUTIVE, and said EXECUTIVE shall accept from the COMPANY as basic payment for
his services during the Employment Period, (the "BASIC PAYMENT") compensation at
the rate of One hundred seventy-five thousand and 00/100 ($175,000.00) Dollars
per annum, payable in weekly or semi-monthly installments.
2.2 In addition to the BASIC PAYMENT during the Employment Period, the EXECUTIVE
shall receive a sum, with respect to any fiscal year of the COMPANY during the
Employment Term, in which the net income of the COMPANY before taxes and as
determined solely by the firm of public accountants of the COMPANY shall exceed
Two hundred and fifty thousand 00/100 ($250,000.00) Dollars equal to ten percent
(10%) of such excess, the amount of any such additional sum shall not exceed One
hundred twenty-five thousand 00/100 ($125,000.00) Dollars in any fiscal year.
2.3 The COMPANY and the EXECUTIVE acknowledge that as of the date of signing
this agreement, the EXECUTIVE's salary as well as other salaries being paid to
personnel of the COMPANY are being disbursed at reduced rates because of cash
flow constraints. The COMPANY and the EXECUTIVE agree that notwithstanding the
provisions of Clause 2.1 hereof that the EXECUTIVE's salary shall remain at the
presently reduced rate until such time as the COMPANY's cash flow from
operations is positive for two consecutive quarters at which time the
EXECUTIVE's salary shall revert to the rate of One hundred seventy-five thousand
00/100 ($175,000.00) Dollars set out in Clause 2.1. The COMPANY and the
EXECUTIVE acknowledge that the reduced salary of the EXECUTIVE is One hundred
fifty-six thousand 00/100 ($156,000.00) Dollars per annum.
3. EXPENSES
3.1 During the Employment Period the COMPANY will pay all reasonable business
related expenses incurred by the EXECUTIVE in furtherance of or in connection
with the business of the COMPANY and its subsidiaries.
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<PAGE>
3.2 The EXECUTIVE shall be supplied with a leased car by the COMPANY provided
that the annual lease monthly payments do not exceed the sum of Nine hundred
00/100 ($900.00) Dollars per month. The COMPANY shall pay or reimburse the
EXECUTIVE for all operating costs of this vehicle including leasing costs (to
the extent only ot the anount heretofore mentioned), insurance, maintenance, gas
and oil.
4. SERVICES
4.1 The EXECUTIVE agrees to devote his full time and efforts during the
Employment Period to the business of the COMPANY and its subsidiaries, if any,
and to serve as a Director and Chairman of the Board of the COMPANY, if elected
as such, provided, however, that he shall be entitled to a minimum vacation
period totally at least one (1) month each year which he may take, at his
option, either in whole or in part, consecutively or not, in any given year, and
which vacation periods shall be cumulative over the term of the Employment
Period.
4.2 The EXECUTIVE shall perform his duties faithfully, diligently, and to the
best of his ability during the Employment Period. These duties shall include
sales and marketing activities to promote and increase sales of the COMPANY's
products and services. If he is not elected as Chairman of the Board of the
COMPANY, he shall be obliged to perform only such duties, services and tasks as
he performed prior to his being elected, and he shall be extended by the COMPANY
such courtesies, privileges and rights as are consistent with the title of
Chairman of a public company of comparable size.
5. RESTRICTIVE COVENANT
5.1 The EXECUTIVE agrees that so long as this agreement is in full force and
effect, he will not, directly or indirectly, either as principal, agent,
stockholder, or in any other capacity, engage in or
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<PAGE>
have a financial interest in, any business which is competitive to the business
of the COMPANY and its subsidiaries, (except that nothing contained herein shall
preclude the EXECUTIVE from purchasing or owning stock in any such business,
providing that his holdings do not exceed one (1%) percent of the issued and
outstanding capital stock.) For the purpose hereof, a business will be deemed
competitive if it involves the production, manufacture or distribution of any
product similar to those produced, manufactured or distributed by the COMPANY or
any of its subsidiaries. The EXECUTIVE expressly agrees that upon a breach or
violation of the foregoing provision of this agreement, the COMPANY in addition
to all other remedies shall be entitled, as a matter of right, to injunctive
relief in any court of competent jurisdiction.
6. SECRET PROCESSES
6.1 The EXECUTIVE will not divulge, furnish or make accessible to any one
(otherwise than in the regular course of the business of the COMPANY or any of
its subsidiaries) any knowledge or information with respect to confidential or
secret processes, formula, machinery, plans, devices or material of the COMPANY
or any of its subsidiaries, with respect to any confidential or secret
engineering, development or research work of the COMPANY or any of its
subsidiaries, or with respect to any other confidential or secret aspect of the
business of the COMPANY or any of its subsidiaries.
7. DEATH
7.1 In the event of the death of the EXECUTIVE the COMPANY shall pay to his
surviving spouse an amount equal to one (1) year compensation calculated on the
basis of the compensation payable to the EXECUTIVE under this agreement at the
date of his death. Such payments shall be made in equal monthly installments
over a period of two (2) years from the date of the death of the EXECUTIVE. If
the EXECUTIVE has no surviving spouse, then such amount shall be paid to the
Executive's estate in a lump sum. If the Executive's spouse survives him but
dies before all of the forementioned monthly payments have been made, then the
balance of such payments shall be paid to the Executive's estate in a lump sum.
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<PAGE>
8. TERMINATION
a) Death. Employment of the Executive hereunder shall terminate upon his
death, subject to the payments to be made to his surviving spouse pursuant
to Section 7 hereof.
b) Disability. In the event that during the Employment Period the EXECUTIVE
shall be disabled from rendering services hereunder as Chief Executive
Officer to the COMPANY for three (3) consecutive months, the Board of
Directors of the COMPANY may terminate the Employment Period after sixty
(60) days written notice.
c) Termination for cause. The Company may, in its sole discretion,
terminate Executive's Employment Period under the following circumstances:
(l) Executive breaches his obligations under the terms of this
agreement; or
(2) the Executive has committed an act of dishonesty, moral turpitude
or theft or has breached his duties of loyalty to the Company or an
act of insubordination to its Board of Directors or the Chief
Executive Officer.
It is specifically understood that during the Employment Period, Executive shall
not be terminated pursuant to either 8(c) (1) or (2) unless and until (a)
Executive has received reasonable written notice from the Company of the
applicable reasons for termination and Executive has had a reasonable
opportunity to remedy such a breach of duties or act of insubordination;
however, the Company may immediately terminate Executive in the event of the
commission of an act of dishonesty, moral turpitude or theft.
In the event of the termination of Executive under this section 8(c)
Executive's right to the compensation and benefits provided herein shall
immediately terminate and/or cease to accrue, provided, however, that Executive
shall receive (i) the unpaid portion, if any, of his base salary computed on a
pro-rated basis to the date of termination of employment and (ii) any unpaid
accrued benefits owed to the Executive in accordance with the term of any Plan
or Program in which he is a participant.
d) Termination other than for cause. The Company may terminate the
employment of Executive during the Employment Period for reasons other than
those enumerated in Section 8(c); however, in such event the Company shall
be liable to Executive for compensation for the remainder of the Employment
Period and, to the extent not inconsistent with applicable law and/or the
terms and conditions of any Plan or Program, all other remaining benefits
shall continue to accrue until the end of the Employment Period, which
shall constitute the full liquidated damages to which Executive is
entitled.
e) In the event of termination of this agreement for any reason other than
death, Executive shall be entitled to purchase any life insurance policies
on his life then owned by the Company for the cash value thereof or, if
such policies have no cash value, upon payment of $100.
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<PAGE>
9. STOCK OPTION
9.1 As a further inducement to the EXECUTIVE to enter into this agreement and to
provide a means of enhancing the EXECUTIVE's proprietary interest in the COMPANY
and to increase the EXECUTIVE's incentive, the COMPANY hereby grants to the
EXECUTIVE the right and option to purchase from the COMPANY up to two hundred
thousand (200,000) shares of its par value common stock, exercisable upon the
following terms and conditions and in accordance with the amended and restated
non-qualified Stock Option Plan of the COMPANY:
a) The option price shall be one hundred and fifty (150%) percent of the
highest price at which said common stock is sold on the open market on
the date that the execution of this agreement was authorized by the
Board of Directors;
b) Subject to the provisions hereof, this option shall be exercisable as
follows:
(i) After the expiration of one (1) year from the effective date
hereof this option may be exercised with respect to all or any
part of one hundred thousand (100,000) of the said two hundred
thousand (200,000) shares;
(ii) After the expiration of two (2) years from the effective date
hereof, this option may be exercised with respect to all or any
part of two hundred thousand (200,000) of the said two hundred
thousand (200,000) shares less such number of shares as may have
been taken down by the EXECUTIVE hereunder prior thereto;
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c) This option shall not be transferable by the Executive otherwise than
by will or the laws of descent and distribution, and shall be
exercisable during his lifetime only by him (and in no event later
than eight (8) years from the effective date hereof);
d) In the event of the death of the EXECUTIVE, this option may be
exercised by the estate of the EXECUTIVE or by any person who
hereafter acquires the right to exercise such option by bequest or
inheritance or by reason of the death of the EXECUTIVE, within the
period of two (2) years after the date of death or such shorter period
as may then be required under applicable provisions of the United
States Internal Revenue Code relating to Stock Options;
e) Subject to the requirements for restricted stock options of the United
States Internal Revenue Code, as now in effect or as hereafter
amended:
(i) In case the COMPANY shall hereafter declare or pay to the
holders of its par value common stock a dividend or dividends in
stock of the COMPANY, the EXECUTIVE upon any purchase thereafter
of Option Shares as herein provided, shall be entitled, without
additional payment, to receive in addition to the Option Shares
purchased such additional share or shares of stock, disregarding
fractions, as the EXECUTIVE would have received in the form of
such dividend or dividends if, on the effective date hereof, he
had been the holder of record of the Option Shares purchased and
had continued to hold such shares and all shares received as
stock dividends;
(ii) In case the shares of outstanding par value common stock of the
COMPANY shall be reclassified or changed into the same or a
different number of shares of the same or a different class,
then the appropriate number of shares, disregarding fractions,
resulting from such reclassification or change shall be
substituted for the Option Shares for all purposes hereof;
(iii) In case pursuant to any reorganization or recapitalization of
the COMPANY, or its liquidation or partial liquidation or
spin-off, voluntary or otherwise, or its consolidation or merger
into or with another corporation, or the sale,
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conversion, lease or other transfer by the COMPANY of all or
substantially all of its property, pursuant to which the then
outstanding shares of par value common stock of the COMPANY
become exchangeable for other shares of stock, the EXECUTIVE,
upon his purchase of Option Shares pursuant to the terms hereof,
shall be entitled to receive in lieu of the shares of stock of
the COMPANY to which he would otherwise be entitled, the shares
of stock, disregarding fractions, which the EXECUTIVE would have
received upon such reorganization, recapitalization, liquidation,
partial liquidation, spin-off, consolidation, merger, or
transfer, if immediately prior thereto he had owned the shares of
stock of the COMPANY at that time issuable to him pursuant to
such purchase and had exchanged such shares, disregarding
fractions, in accordance with terms of such reorganization,
recapitalization, liquidation, partial liquidation, spin-off,
consolidation, merger, or transfer;
f) This option shall be exercised by written notice or notices
delivered to the COMPANY's principal place of business;
g) Delivery of the certificates representing the shares of stock as
to which this option shall be exercised at any given time, shall
be made promptly after receipt of such notice by the COMPANY
against the payment of the purchase price of the shares with
respect to which the option is exercised at such time;
h) The EXECUTIVE, on behalf of himself, his legal representative and
any other person who may become entitled to act hereunder by
reason of the EXECUTIVE's death, undertakes and agrees that, in
conjunction with each purchase of stock hereunder, the purchaser
will deliver to the COMPANY his written representation that such
shares are being purchased with the then present intention of
holding the same for investment and not with a view to the
distribution thereof;
i) Nothing contained in this Agreement is intended, or shall be
construed, to deprive the EXECUTIVE of the full benefits of this
option for two hundred thousand
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(200,000) shares in the event of the discharge of the EXECUTIVE
by the COMPANY or other reach of this agreement by the COMPANY;
j) The COMPANY agrees that it now holds and will hold available a
sufficient number of shares of its par value common stock to
satisfy the requirements of this option;
k) It is specifically understood that the Stock Option hereby
granted to the EXECUTIVE is instead of, and meant to be a
replacement of any stock options heretofore granted by the
COMPANY to the EXECUTIVE.
10. EXECUTIVE'S RIGHTS UNDER CERTAIN PLANS
10.1 The COMPANY agrees that nothing contained herein is intended to or shall be
deemed to be granted to the EXECUTIVE in lieu of any rights and privileges which
the EXECUTIVE may be entitled to as an employee of the COMPANY under any
retirement, pension, insurance, hospitalization, or other plans which may now be
in effect or which may hereafter be adopted, it being understood that the
EXECUTIVE shall have the same rights and privileges to participate in such plans
or benefits as any other employee.
11. SUCCESSORS, ETC. OF THE COMPANY
11.1 This agreement shall inure to the benefit of and be binding upon the
COMPANY, its successors and assigns, including without limitation any person,
partnership or corporation which may acquire all or substantially all of the
COMPANY's asets and business, or into which the COMPANY may be consolidated or
merged, and this provision shall apply in the event of any subsequent merger,
consolidation or transfer, and the EXECUTIVE, his heirs, assigns, executors and
personal representatives.
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12. ENTIRE AGREEMENT
12.1 The parties hereto agree that this agreement supersedes any employment
agreement between the EXECUTIVE and the COMPANY and contains the entire
understanding and agreement between the parties and cannot be amended, modified
or supplmented in any respect, except by a subsequent written agreement entered
into by both parties hereto.
13. APPLICABLE LAW
13.1 This Agreement shall be construed according to the laws of the State of
Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have executed this agreement the day
and year first above mentioned.
NOCOPI TECHNOLOGIES, INC.
Per:
------------------------------
NORMAN A. GARDNER
Per:
------------------------------
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MEMORANDUM OF AGREEMENT (hereinafter referred to as the "AGREEMENT"), entered
into on this 8th day of December, 1997, to take effect from December 1, 1997, by
and between Dr. Arshavir Gundjian, whose address is 12450 Albert Prevost, St.
Laurent, Quebec, (hereinafter called "DR. G."), and Nocopi Technologies Inc.,
having its principal offices at Sugartown Square, 230 Sugartown Road, Suite 100,
Wayne, Pennsylvania, (hereinafter called "NOCOPI")
NOCOPI desires to continue to employ, retain and make secure for itself the
experience and outstanding abilities of DR. G. as its Senior Vice-President of
Technology and of Technical Sales for the period commencing December 1, 1997 to
at least December 3l, l998.
DR. G. understands that, in its business, NOCOPI has developed and uses
commercially valuable technical and nontechnical information in the various
existing and projected fields of NOCOPI's business and, to guard the legitimate
interest of NOCOPI, it is necessary for NOCOPI to protect certain of the
information as confidential and/or as a trade secret, either by means of a
patent, copyright, and/or other methods recognized as being legally protective
of the interests of NOCOPI.
DR. G. understands that all such information is vital to the success of
NOCOPI's business, and that through DR. G's employment by NOCOPI, DR. G. may
become acquainted with that information, and may contribute to that information
through inventions, discoveries, improvements or in some other manner.
DR. G. understands that all such information, inventions, discoveries,
improvements, and other results of DR. G's employment by NOCOPI are the
exclusive property of NOCOPI and may be protected by NOCOPI as NOCOPI deems
appropriate.
THEREFORE, in consideration of DR. G's employment or continued employment
by NOCOPI ("Employment"), and of the mutual promises in this Agreement, DR. G.
and NOCOPI agree as follows:
1. Employment
1.1 The scope of the Employment shall be to perform the duties of Senior
Vice-President of Technology and of Technical Sales of NOCOPI.
1.2 The Employment shall also specifically include, but not be limited to,
the reasonable provision of documentation and annotation for any
products or information resulting, in whole or in part, from the
Employment ("Dr. G's Output") that is deemed adequate by NOCOPI for
NOCOPI to continue to productively utilize DR. G's Output subsequent
to the termination of the Employment, for any reason whatsoever.
<PAGE>
1.3 DR. G. shall devote the whole of his time, attention and ability to
the business and affairs of NOCOPI during the EMPLOYMENT TERM as
defined in Clause 2.2 hereof. For purposes hereof, the whole of DR.
G's time and attention shall mean 9:00 a.m. Monday to 5:00
p.m. Thursday inclusive of each week during the term hereof plus every
other Friday until 5:00 p.m. DR. G. understands and agrees that whilst
most of his time will be spent in Montreal or at either of NOCOPI'S
premises in Pennsylvania, he will spend, if requested by the President
of NOCOPI, time in Europe working for Euro-Nocopi S.A., such periods
will not exceed five (5) working days per trip, unless previously
agreed to by DR. G.
1.4 DR. G. may take vacations provided the duration is in keeping with the
policy in effect from time to time for Senior Executives of NOCOPI,
and provided further that the specific times are agreed to by the
President of NOCOPI, who shall act reasonably in meeting any
determination.
2. Term and Consultancy Periods
2.1 NOCOPI shall employ DR. G. from December 1, 1997 to December 31, 1998.
2.2 NOCOPI shall have the option to renew DR. G.'s employment for two
successive periods of one year from January 1, 1999 and January 1,
2000, respectively, upon the same terms and conditions contained
herein, provided that NOCOPI shall give DR. G. notice of its intention
to exercise each or both of such options, no later than October 1,
1998 and October 1, 1999, as the case may be. (Each of the terms or
all of them collectively referred to in Clauses 2.1 and 2.2, shall
hereinafter be referred to as the "EMPLOYMENT TERM").
2.3 Should NOCOPI not exercise the first or both of its aforementioned
renewal options, then NOCOPI agrees that it will retain DR. G. as a
consultant for each year that NOCOPI has not renewed its option
(hereinafter the "FIRST CONSULTANCY PERIOD) at a consultancy fee of
Eighty-Two Thousand Five Hundred Dollars ($82,500.00) per annum,
provided however that DR. G. devotes ten (10) full working days per
month to such consultancy.
2.4 Following upon the termination of the First CONSULTANCY PERIOD, NOCOPI
agrees that it will further retain DR. G. as a consultant for two (2)
additional calendar years (hereinafter the "SECOND CONSULTANCY
PERIOD") at a consultancy fee of Sixty-two Thousand Five Hundred
Dollars ($62,500.00) U.S. per annum provided however that DR. G.
devotes seven (7) working days per month to such consultancy.
Notwithstanding the
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foregoing sentence, DR. G. shall have the option to be exercised by
him at any time prior to the commencement of each year of the SECOND
CONSULTANCY PERIOD (the "DESIGNATED YEAR") of electing not to receive
the aforesaid sum of Sixty-two Thousand Five Hundred Dollars
($62,500.00) U.S. but to receive a sum with respect to the DESIGNATED
YEAR equal to ten per cent (10%) of the net income of NOCOPI in excess
of Two Hundred Fifty Thousand Dollars ($250,000.00) U.S. as determined
by the firm of public accountants of NOCOPI in their sole discretion,
provided that any amount paid to DR. G. for such excess does not
exceed One Hundred Twenty-Five Thousand Dollars ($125,000.00) U.S. in
any such year.
3. Remuneration
3.1 The monthly base salary payable to DR. G. for his services during the
EMPLOYMENT PERIOD shall be Ten Thousand Eight Hundred Thirty-Three
Dollars and Thirty-Three Cents ($10,833.33) U.S. The said monthly base
salary shall be payable in accordance with the prevailing NOCOPI pay
schedule or in such other manner as may be mutually agreed upon, less,
in any case, any deductions or withholdings required by law.
3.2 In addition to DR. G's salary as provided for in clause 3.1 and in
addition to any consultancy fee that may be payable pursuant to
Clauses 2.3 and 2.4, NOCOPI shall provide DR. G. with a return airline
ticket, economy class, to Montreal whenever the President of NOCOPI
requires the presence of DR. G. in Wayne, Pennsylvania.
3.3 Whenever DR. G. has been requested by the President of NOCOPI to be
present in Wayne, Pennsylvania, NOCOPI shall also provide DR. G.
during his employment and/or consultancy as herein set out, with
lodging in or near Wayne, Pennsylvania.
3.4 NOCOPI and DR. G. acknowledge that as of the date of signing this
agreement, DR. G's salary as well as other salaries being paid to
personnel of NOCOPI are being disbursed at reduced rates because of
cash flow constraints of NOCOPI. NOCOPI and DR. G. agree that if and
when NOCOPI's cash flow from operations is positive for two
consecutive quarters, that DR. G's salary shall revert to the rate of
One Hundred Sixty-five Thousand Dollars ($165,000.00) U.S. per annum
or Thirteen Thousand Seven Hundred and Fifty dollars ($13,750.00) U.S.
per month as and from the first day of the month next following the
last day of the second consecutive quarter of positive cash flow. In
addition to such salary augmentation, NOCOPI will pay to DR. G.
commencing in the month next
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following the last day of the second consecutive quarter of positive
cash flow, the amount of Eight Hundred Dollars ($800.00) U.S. per
month for supplemental automobile car expenses. This amount should be
in addition to the amount stipulated in clause 5 hereof.
4. Bonus Adjustment
4.1 In addition to the remuneration provided for in clauses 2.3, 2.4 and 3
hereof, Dr. G. will receive:
4.1.1. In addition to the salary provided for in clause 3.1, DR. G.
shall receive a sum, with respect to any fiscal year of the
COMPANY during the Employment Term, in which the net income of
the COMPANY before taxes and as determined solely by the firm
of public accountants of NOCOPI shall exceed Two Hundred and
Fifty Thousand Dollars ($250,000.00) U.S., equal to ten percent
(10%) of such excess, provided however that the amount of any
such additional sum shall not exceed One Hundred Sixty-five
Thousand Dollars ($165,000.00) U.S. in any fiscal year.
4.1.2 In addition to the consultancy fee set out in clause 2.3 hereof
for the FIRST CONSULTANCY PERIOD, DR. G. shall receive a sum
with respect to any fiscal year of NOCOPI during the FIRST
CONSULTANCY PERIOD in which the net income of NOCOPI before
taxes as determined solely by the firm of public accountants of
NOCOPI shall exceed Two Hundred and Fifty Thousand Dollars
($250,000.00) U.S. equal to five percent (5%) of such excess,
provided however that the amount of any such excess sum does
not exceed Eighty-two Thousand Five Hundred Dollars
($82,500.00) U.S.
4.2 Any amounts due to DR. G. by virtue of this Article 4 shall be paid to
him by NOCOPI within sixty days of the public release of the relevant
financial statement.
5. Automobile
5.1 As an automobile allowance and in lieu of all other car expenses other
than as provided below in Clause 5.2, NOCOPI shall pay to DR. G. the
amount of Eight Hundred Thirty-three Dollars and Thirty-three cents
($833.33) U.S. per month.
5.2 NOCOPI shall reimburse DR. G. the costs of a rental vehicle and any
corresponding gas and oil expenses whilst DR. G. is carrying out his
duties in Wayne, Pennsylvania provided that DR. G. shall have provided
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NOCOPI with all invoices or statements in respect of which he seeks
reimbursement.
6. Expenses
DR. G. shall be reimbursed for all reasonable travel and other
out-of-pocket expenses actually and properly incurred by him from time to
time in connection with carrying out his duties hereunder. For all such
expenses, DR. G. shall furnish to NOCOPI originals of all invoices or
statements in respect of which he seeks reimbursement.
7. Termination
7.1 For Cause
NOCOPI may terminate the employment of DR. G. without notice or any
payment in lieu of notice for any cause which, according to the laws
of the State of Pennsylvania, shall be deemed just and sufficient
cause and, without limiting the generality of the foregoing, shall
include:
7.1.1 if DR. G. is convicted of a criminal offence involving fraud or
dishonesty;
7.1.2 if DR. G. or any member of his family makes any personal profit
arising out of or in connection with a transaction to which
NOCOPI is a party or with which it is associated without making
disclosure to and obtaining the prior written consent of
NOCOPI;
7.2 For Disability/Death
This Agreement may be immediately terminated by NOCOPI by notice to
DR. G. if DR. G. becomes permanently disabled. DR. G. shall be deemed
to have become permanently disabled if during the employment period,
because of ill health, physical or mental disability, or for other
causes beyond the control of DR. G., he has been continuously unable
or unwilling or has failed to perform his duties for thirty (30)
consecutive days, or if, during the employment period he has been
unable or unwilling or has failed to perform his duties for a total of
forty-five (45), consecutive or not.
This Agreement shall terminate without notice upon the death of DR. G.
8. Severance Payments
8.1 Upon termination of DR. G's employment: (i) for cause; or (ii) by the
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voluntary termination of consultancy or employment of DR. G.; DR. G.
shall not be entitled to any severance payment other than the base
salary referred to in Clause 3.1 earned by him before the date of
termination calculated pro rata up to and including the date of
termination, together with any amount to which he is entitled under
any applicable legislation.
8.2 If DR. G's employment is terminated as a result of his permanent
disability or death, DR. G. or his estate, as applicable, shall be
entitled to receive, within thirty (30) days of the date of such
termination, the balance of the base salary that would otherwise be
paid to him during the remainder of the term of this Agreement. DR. G.
agrees to reasonably comply with all requirements necessary for NOCOPI
to obtain life insurance for the term of this Agreement.
8.3 For the purposes of this clause 8, whenever a payment is to be
determined with reference to the remaining term of this Agreement, if
less than three (3) months remain in the term of this Agreement, the
"remaining term of this Agreement" shall include the remainder of the
then existing term of this Agreement plus the renewal period.
9. Ownership
9.1 DR. G. acknowledges and agrees that NOCOPI is the sole and exclusive
owner of all rights and remedies in and to certain confidential ideas
and trade secrets concerning the operation of NOCOPI ("Trade Secret
Information", which shall include information whether or not developed
by DR. G. and shall further include all such research and development
work, procedures, formulae, proposals, vendors' and suppliers'
identities and such further information as is generally considered to
be confidential according to the laws of Pennsylvania and the United
States), all of DR. G's Output, and all products or information
derived or to be derived from DR. G's Output, regardless of whether
such Trade Secret Information or DR. G's Output is subject to patent,
copyright, or other protection.
9.2 In the event that the Trade Secret Information or DR. G's Output is or
becomes the subject of a patent application, patent, copyright, or
other rights under the laws of the United States or any other country,
DR. G. agrees and understands that NOCOPI shall have all the rights
and remedies available to NOCOPI under the law as a result of such
patent applications, patents, copyrights, or other rights.
9.3 Both parties understand that this Agreement does not constitute a
license to use the Trade Secret Information or DR. G's Output other
than as specified herein during the Employment.
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10. Confidentiality and Non-Disclosure
10.1 DR. G. acknowledges that during the Employment, he has had and/or
shall have access to and has become and/or shall or may become aware
of Trade Secret Information. DR. G. agrees to hold in confidence all
Trade Secret Information disclosed to him or developed by him in
connection with the Employment, either in writing, verbally or as a
result of the Employment except:
10.1.1 information which, at the time of disclosure, is in the public
domain or which, after disclosure, becomes part of the public
domain by publication or otherwise through no action or fault
of DR. G.; or
10.1.2 information which DR. G. can show is in his possession at the
time of disclosure and was not acquired, directly or
indirectly, from NOCOPI; or
10.1.3 information which was received by DR. G. from a third party
having the legal right to transmit that information.
10.2 DR. G. shall not, without the written permission of NOCOPI, use the
Trade Secret Information which he is obligated hereunder to maintain
in confidence for any reason other than to enable him to properly and
completely perform the Employment.
10.3 DR. G. shall not reproduce or make copies of the Trade Secret
Information or DR. G's Output, except as required in the performance
of the Employment. Upon termination of the Employment for any reason
whatsoever, DR. G. shall promptly deliver to NOCOPI all
correspondence, drawings, blue prints, manuals, letters, notes,
notebooks, reports, flow-charts, programs, proposals, documents
concerning NOCOPI's customers/clients, documents concerning products
or processes used by NOCOPI and all other documents, writings, and
materials utilized by NOCOPI, together with any copies or other
reproductions thereof made by DR. G. or in the possession or control
of DR. G. DR. G. understands that all such records, whether developed
by him or others, are and shall remain the property of NOCOPI.
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10.4 Except as may be required by the Employment, DR. G. shall not, during
or at any time subsequent to the Employment, unless NOCOPI has given
prior written consent, disclose or use the Trade Secret Information or
engage in or refrain from any action, where such action or inaction
may result (a) in the unauthorized disclosure of any or all such trade
secrets to any person or entity; or (b) in the infringement of any or
all such rights.
11. Non-Competition
11.1 DR. G. shall not, subject to clause 11.2, during the Employment and
after the termination of the Employment for any reason whatsoever,
directly or indirectly,
11.1.1 solicit the trade or patronage of any of the customers/clients
or prospective customers/clients of NOCOPI, with respect to any
of the services, products, trade secrets or other matters of
NOCOPI; and
11.1.2 found, work for, consult to, or assist in any way, whether in a
paid or unpaid capacity, any individual, partnership, company
or other business entity which competes with NOCOPI.
11.2 These restrictions set out in clause 11.1 shall last for a period of
three (3) years and shall cover the geographic area of the world.
12. Copyright
DR. G. hereby agrees that he is an "employee-for-hire" as defined by the
laws of the United States regarding copyrights. All works resulting from
the Employment are "works made for hire" as defined by the laws of the
United States regarding copyrights.
13. Patent
DR. G. shall promptly disclose to NOCOPI, in writing if requested, any and
all inventions, discoveries and improvements conceived or made by DR. G.
during his prior years of association with NOCOPI as well as during the
period of Employment and related to the business or activities of NOCOPI.
DR. G. shall assign and hereby agrees to sign all of his interests therein
to NOCOPI or its nominee. DR. G. shall execute, whenever NOCOPI requests
him to do so, any and all applications, assignments or other instruments
which NOCOPI shall deem necessary to apply for
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and attain Letters Patent of the United States or any foreign country or to
protect otherwise NOCOPI's interests therein. These obligations shall
continue beyond the termination of DR. G's employment with respect to
inventions, discoveries and improvements conceived or made by him during
the period of Employment and shall be binding upon his assigns, executors,
administrators and other legal representatives.
14. Patent, Trademark and Copyright Notices
DR. G. agrees to place all appropriate notices of patent rights, trade mark
rights and copyrights on all works resulting from the Employment. NOCOPI
shall provide DR. G. with the form and substance of such notices.
15. Indemnification
15.1 DR. G. understands that if he knowingly fails to perform as specified
in this Agreement, he may be subject to legal action by NOCOPI.
15.2 DR. G. shall indemnify NOCOPI from and against any loss, damage or
injury NOCOPI shall suffer as a result of any breach of this Agreement
by DR. G. insofar as Clauses 7.l and 9 to l4, inclusive, are
concerned. Such all encompassing indemnity shall include, but not be
limited to, losses, damages, injury or liability that NOCOPI may
suffer as a result of DR. G's breach, in any way, of this Agreement.
Such damages and injuries that may be awarded to NOCOPI against DR. G.
shall be deemed to include all actual, general, special and
consequential damages awarded to NOCOPI, its agents, employees or
assigns, against any party who benefits, in any way from DR. G's
breach of this Agreement, as well as any attorney fees, costs of
suits, costs of arbitration, or costs of appeal which may be awarded
in any litigation or arbitration instituted by or against NOCOPI to
recover monetary compensation for such loss, damage or injury or to
obtain injunctive relief from DR. G's failure to perform as specified
in this Agreement.
16. Return of Materials
All files forms, brochures, books, materials, written correspondence,
memoranda, documents, manuals and lists (including lists of customers,
suppliers, products and prices) pertaining to the business of NOCOPI or any
of its subsidiaries and associates that may come into the possession or
control of DR. G. shall at all times
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remain the property of NOCOPI or such subsidiary or associate, as the case
may be. On termination of DR. G's employment for any reason, DR. G. agrees
to deliver promptly to NOCOPI all such property of NOCOPI in his possession
or directly or indirectly under his control. DR. G. agrees not to make for
his personal or business use or that of any other party, reproductions or
copies of any such property or other property of NOCOPI.
17. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Pennsylvania.
18. Severability
If any provision of this Agreement, including the breadth or scope of such
provision, shall be held by any court of competent jurisdiction to be
invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remaining provisions, or part thereof, of this Agreement and such remaining
provisions, or part thereof, shall remain enforceable and binding.
19. Enforceability
DR. G. hereby confirms and agrees that the covenants and restrictions
pertaining to him contained in this Agreement are reasonable and valid and
hereby further acknowledges and agrees that NOCOPI would suffer irreparable
injury in the event of any breach by him of his obligations under any such
covenant or restriction. Accordingly, DR. G. hereby acknowledges and agrees
that damages would be an inadequate remedy at law in connection with any
such breach and that NOCOPI shall, therefore, be entitled in lieu of any
action for damages, temporary and permanent injunctive relief enjoining and
restraining DR. G. from any such breach.
20. No Assignment
DR. G. may not assign, pledge or encumber his interest in this Agreement
nor assign any of his rights or duties under this Agreement without the
prior written consent of NOCOPI.
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21. Successors
This Agreement shall be binding on and enure to the benefit of the
successors and assigns of NOCOPI and the heirs, executors, personal legal
representatives and permitted assigns of DR. G.
22. Notices
Any notice or other communication required or permitted to be given
hereunder shall be in writing and either delivered by hand or mailed by
prepaid registered mail. Notices shall be addressed as follows:
IF TO NOCOPI: Nocopi Technologies Inc.,
Sugartown Square
230 Sugartown Road,
Suite 100
Wayne, PA 19087
IF TO DR. G: Dr. Arshavir Gundjian
12450 Albert Prevost,
St. Laurent, Quebec
H4K 2A7
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23. Legal Advice
DR. G. hereby represents and warrants to NOCOPI and acknowledges and agrees
that he had the opportunity to seek and was not prevented nor discouraged
by NOCOPI from seeking independent legal advise prior to the execution and
delivery of this Agreement and that, in the event that he did not avail
himself of that opportunity prior to signing this Agreement, he did so
voluntarily without any undue pressure and agrees that his failure to
obtain independent legal advice shall not be used by him as a defence to
the enforcement of his obligations under this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
date first above written on the dates hereinafter set forth opposite their
names.
NOCOPI TECHNOLOGIES INC.
Per:
------------------------------
Richard Check
Dated:
"NOCOPI"
-----------------------------------
ARSHAVIR GUNDJIAN
Dated:
"DR. G."
THESE SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE OF THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
("STATE ACT"). THESE SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
OF THESE SECURITIES MAY NOT BE OFFERED, SOLD, OR TRANSFERRED, DIRECTLY OR
INDIRECTLY, UNLESS THEY HAVE BEEN DULY REGISTERED UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE ACT, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE ACT IS AVAILABLE, AND THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL TO SUCH EFFECT REASONABLY SATISFACTORY TO IT. THESE
SECURITIES MAY NOT BE EXERCISED BY OR ON BEHALF OF A U.S. PERSON UNLESS
REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREOF IS AVAILABLE.
NOCOPI TECHNOLOGIES, INC.
VOID AFTER ______
CERTIFICATE NO. ______
CERTIFICATE FOR
COMMON STOCK PURCHASE WARRANTS
These securities are subject to certain restrictions
on exercise and transfer as indicated herein.
This certifies that FOR VALUE RECEIVED, _______________________________ or
permitted, registered assigns, is the owner of _______ Common Stock Purchase
Warrants ("Warrants"). Each Warrant initially entitles the Holder thereof,
subject to the terms and conditions hereinafter set forth, to purchase one (1)
fully paid and nonassessable share of Common Stock, par value $.01 of Nocopi
Technologies, Inc., a Maryland corporation (the "Company"), subject to
modification and adjustments as set forth herein, upon the presentation and
surrender of this Warrant Certificate with the Subscription Form attached hereto
duly executed, at any time after issuance, but not after the Expiration Date (as
hereinafter defined), at the office of the Company, 230 Sugartown Road, Wayne,
PA 19087 and upon payment therefor, in lawful money of the United States of
America in certified funds or cashier's check, bank
<PAGE>
draft or bank check made payable to the Company, at the purchase price of $.25
per whole share of Common Stock, subject to escalation, modification and
adjustment as set forth hereinbelow.
Prior to the exercise of any Warrant represented hereby, the Holder hereof
shall not be entitled to any rights of a shareholder of the Company, including,
without limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company.
Each Warrant is subject to the following additional terms, provisions and
conditions:
Section 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(A) "Common Stock" shall mean the Company's voting common stock, par
value $.01.
(B) "Corporate Office" shall mean the office of the Company, 230
Sugartown Road, Wayne, PA 19087.
(C) "Exercise Period" shall mean a period commencing on the date
hereof and continuing until the Expiration Date, unless extended in the sole
discretion of the Company.
(D) "Expiration Date" shall mean 5:00 p.m. (Eastern Daylight Savings
Time) on _____________ unless extended in the sole discretion of the Company.
(E) "Purchase Price" shall mean the price at which each Warrant holder
shall be entitled to purchase one (1) share of Common Stock. Each Warrant shall
permit the holder to purchase one (1) share of the Company's Common Stock at a
price of $0.25 per share, subject to escalation, modification and adjustment as
herein provided.
(F) "Registered Holder" shall mean the person in whose name this
Warrant Certificate shall be registered on the books maintained by the Company
pursuant to Section 4 hereof.
(H) "Warrant Shares" shall mean the Common Stock reserved for issuance
upon exercise of the Warrants represented by this Warrant Certificate.
Section 2. Exercise; Limitation on Exercise.
(A) Each Warrant represented hereby may be exercised at any time
before the Expiration Date, upon the terms and subject to the conditions set
forth herein. A Warrant shall be deemed to have been exercised immediately prior
to the close of business on the date of the surrender for exercise (the
"Exercise Date") of this Warrant Certificate with the exercise form thereon duly
executed by the Registered Holder hereof, or his attorney duly authorized in
writing, or his permitted, registered assigns, together with (i) payment to the
Company, either by a bank cashier's check, certified funds or bank check or bank
draft payable to the order of the Company, or lawful money of the United States
of America, in an amount equal to the aggregate Purchase Price payable upon such
exercise, and either (ii) written certification that the person exercising the
Warrant is not a U.S. Person and that the Warrant is not being exercised on
behalf of a U.S. Person, or (iii) a written opinion of counsel to the effect
that the Warrant and the securities delivered upon exercise thereof have been
registered under the Securities Act or are exempt from registration thereunder.
The person entitled to receive the Warrant Shares deliverable upon such exercise
shall be treated for all purposes as the holder of such Warrant Shares as of the
close of business on the Exercise Date, except for the payment of dividends and
voting rights which shall be governed by applicable corporate law. The Company
shall not be obligated to issue any fractional share interests in Warrant Shares
issuable or deliverable upon the exercise of any Warrant or Warrants. If more
than one (1) Warrant shall be exercised at one time by the same
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<PAGE>
Registered Holder, the number of full shares which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable upon such exercise. Any fractional shares shall be rounded to
the nearest whole share. Upon the exercise of any Warrant and the collection of
funds tendered in payment of the Purchase Price, the Company shall cause share
certificate(s) representing the Warrant Shares acquired upon such exercise to be
issued.
(B) Notwithstanding the foregoing, the Warrants represented hereby may
not be exercised if, in the opinion of counsel to the Company, the issuance and
sale of Warrant Shares upon such exercise would require registration of such
Warrant Shares under the Securities Act of 1933, as amended (the "Securities
Act"), or any applicable state law. The Company shall use its reasonable best
efforts to perfect any available exemption from the registration requirements of
such laws so as to permit the exercise of the Warrants, but shall not be
required to register Warrant Shares thereunder.
Section 3. Reservation of Shares; Payment of Taxes; Etc. The Company
covenants that it will at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issue upon exercise of the
Warrants, such number of shares of Common Stock as shall then be issuable upon
the exercise of all outstanding Warrants. The Company covenants that all Warrant
Shares which shall be issuable upon exercise of the Warrants shall be duly and
validly issued, fully paid and non-assessable, and free from all taxes, liens
and charges with respect to the issue thereof. Warrant Shares issued upon
exercise of Warrants shall be subject to certain restrictions on transfer as
specified in Section 5.
The Company shall pay all documentary, stamp or similar taxes and other
governmental charges that may be imposed with respect to the issuance of the
Warrants, or the issuance or delivery of any Warrant Shares upon exercise of the
Warrants. Warrant Shares shall be delivered only in the name of the Registered
Holder of the Warrant Certificate representing the Warrants being exercised.
Section 4. Registration of Transfer. This Warrant Certificate and the
Warrants represented hereby may be transferred, in whole or in part, subject to
Section 5 hereof. In connection with such transfer, this Warrant Certificate
shall be surrendered to the Company at its Corporate Office, and the Company
shall execute, issue and deliver in exchange herefor a Warrant Certificate of
like tenor which the transferee hereof shall be entitled to receive.
The Company shall keep, at its Corporate Office or such other place as may
be determined by its board of directors, books in which, subject to such
reasonable regulations as it may prescribe, it shall register this Warrant
Certificate and any permitted transfer hereof.
When presented for registration of transfer, or for exchange or exercise,
this Warrant Certificate and the subscription form attached shall be duly
endorsed, or be accompanied by a written instrument or instruments of transfer
and subscription in form satisfactory to the Company, duly executed by the
Registered Holder thereof or his attorney duly authorized in writing.
Prior to due presentment for registration of transfer thereof, the Company
may deem and treat the Registered Holder of this Warrant Certificate as the
absolute owner thereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing thereon made by anyone other than the
Company) for all purposes and shall not be affected by any notice to the
contrary.
Section 5. Restrictions on Transfer. The Warrants represented hereby have
been and are being issued, and the Warrant Shares will be issued, in an offering
conducted outside the United States pursuant to Regulation S promulgated under
the Securities Act. The Warrants and the Warrant Shares have not been registered
under the Securities Act or the securities laws of any state. Such securities
may not be offered, sold or transferred, directly or indirectly, unless such
securities have been registered under the Securities Act and any applicable
state law, or an exemption from the registration requirements of the Securities
Act and any applicable state law is available and
3
<PAGE>
the Company has received an opinion of counsel to such effect reasonably
satisfactory to it. Certificates representing Warrant Shares shall bear a legend
reflecting the foregoing restrictions on transfer.
Section 6. Loss or Mutilation. Upon receipt by the Company of evidence
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate, and (in the case of loss, theft or
destruction) of indemnity satisfactory to it, and (in the case of mutilation)
upon surrender and cancellation hereof, the Company shall execute, issue and
deliver in lieu hereof a new Warrant Certificate representing an equal aggregate
number of Warrants. Applicants for a substitute Warrant Certificate shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.
Section 7. Adjustment of Purchase Price and Number of Shares Deliverable.
The Purchase Price and the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be subject to adjustment as follows:
(A) (i) In the event that the Company shall issue any shares of its
Common Stock as a stock dividend or shall subdivide the number of outstanding
shares of its Common Stock into a greater number of shares, then, in either such
case, the Purchase Price in effect at, and after, the time of such action shall
be proportionately reduced and the number of shares at that time purchasable
upon the exercise of a Warrant shall be proportionately increased; and,
conversely, in the event that the Company shall reduce the number of outstanding
shares of Common Stock by combining such shares into a smaller number of shares,
then, in such case, the Purchase Price in effect at, and after, the time of such
action shall be proportionately increased and the number of shares of Common
Stock at the time purchasable upon the exercise of a Warrant shall be
proportionately decreased. Any dividend paid or distributed upon the Common
Stock in stock of any other class of securities convertible into shares of
Common Stock shall be treated as a dividend paid in Common Stock to the extent
that shares of Common Stock are issuable upon the conversion thereof. The
Purchase Price (computed to the nearest cent) shall be (a) the number of shares
of Common Stock outstanding immediately prior to such stock dividend or stock
split, divided by the number of shares of Common Stock outstanding immediately
after such stock dividend or stock split, multiplied by (b) the Purchase Price
in effect immediately prior to such stock dividend or stock split. The number of
shares purchasable upon the exercise of a Warrant shall be (a) the Purchase
Price in effect immediately prior to such stock dividend or stock split divided
by the Purchase Price as adjusted by this Section 7 in effect immediately
following the stock dividend or stock split, multiplied by (b) the number of
shares purchasable upon the exercise of a Warrant immediately prior to such
stock dividend or stock split.
(ii) In the event that the Company should at any time or from time
to time hereafter issue or sell any shares of Common Stock (other than under
circumstances requiring an adjustment pursuant to Section 7(A)(i)) for a
consideration per share less than the Purchase Price in effect immediately prior
to the time of such issue or sale, then forthwith upon such issue or sale, the
Purchase Price shall be adjusted to a price (computed to the nearest cent) equal
to (a) the sum of the number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the Purchase Price in effect
immediately prior to such issue or sale, and the consideration, if any, received
by the Company upon such issue or sale, divided by (b) the total number of
shares of Common Stock outstanding immediately after such issue or sale. The
number of shares purchasable upon the exercise of a Warrant after any such issue
or sale shall be (a) the Purchase Price in effect immediately prior to the issue
or sale divided by the Purchase Price as adjusted by this Section 7(A)(ii) in
effect immediately following the issue or sale, multiplied by (b) the number of
shares purchasable upon the exercise of a Warrant immediately prior to such
issue or sale.
(iii) In any case in which this Section 7(A) shall require that an
adjustment to the Purchase Price be made immediately following a record date,
the Company may elect to defer (but only until five (5) business days following
the receipt by the Company of the certificate of independent public accountants
described in subsection (i) of Section 7(D)) issuing to the holder of any
Warrant exercised after such record date the shares of Common Stock and other
capital stock of the Company issuable upon such exercise over and above the
shares of Common Stock and other capital stock of the Company issuable upon such
exercise on the basis of the Purchase Price prior to adjustment.
4
<PAGE>
(iv) No adjustment in the Purchase Price shall be required to be
made unless such adjustment would require an increase or decrease of at least
$0.01, provided, however, that any adjustments which by reason of this
subsection are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section shall
be made to the nearest cent or to the nearest one-hundredth of a share, as the
case may be, but in no event shall the Company be obligated to issue fractional
shares upon the exercise of any Warrant.
(v) No adjustment of the Purchase Price shall be made as a result
of or in connection with (a) the issuance of shares of Common Stock of the
Company pursuant to options, warrants and stock purchase agreements outstanding
or in effect on the date of this Certificate, (b) the granting of additional
options by separate agreements or pursuant to the stock option plans of the
Company as currently or hereafter in effect or as hereafter modified, renewed or
extended, or the issuance of shares of Common Stock of the Company upon exercise
of any such options, or (c) the issuance of shares of Common Stock to officers,
employees, consultants, advisors, attorneys or agents of the Company or any
Subsidiary, or under any circumstances other than those set forth in subsection
(i) and (ii) of this Section 7(A).
(vi) On the third anniversary of the date of issuance of the
Warrants represented hereby, the Purchase Price shall automatically increase to
an amount determined by multiplying (a) the Purchase Price in effect at the
close of business on the preceding day, by (b) 1.4.
(vii) In the event that at any time as a result of an adjustment
made pursuant to subsection (i) of this Section 7(A), the holder of any Warrant
thereafter exercised shall become entitled to receive any shares of the Company
other than shares of its Common Stock, thereafter the Purchase Price of such
other shares so receivable upon exercise of any Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in
subsections (i) through (v) of this Section 7(A).
(B) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), or in the case of any
consolidation, reorganization or merger of the Company with or into another
corporation (other than a merger with a Subsidiary in which merger the Company
is the continuing corporation and which does not result in any reclassification
or change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination)) or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then as a condition of such reclassification,
change, reorganization, consolidation, merger, sale or conveyance, the Company,
or such successor purchasing corporation, as the case may be, shall make lawful
and adequate provision whereby the holder of each Warrant then outstanding shall
have the right thereafter to receive on exercise of such Warrant the kind and
amount of shares of stock and other securities and property receivable upon such
reclassification, change, reorganization, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock issuable upon
exercise of such Warrant immediately prior to such reclassification, change,
reorganization, consolidation, merger, sale or conveyance and shall forthwith
file with the Company at the Corporate Office a statement signed by its
President or a Vice President and by its Treasurer or an Assistant Treasurer or
its Secretary or an Assistant Secretary evidencing such provisions. Such
provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
7. The above provisions of this Section 7(B) shall similarly apply to successive
reclassification and changes of shares of Common Stock and to successive
consolidations, reorganizations, mergers, sales or conveyances.
5
<PAGE>
(C) Before taking any action which would cause an adjustment reducing
the Purchase Price below the then par value of the shares of Common Stock
issuable upon exercise of the Warrants, the Company will endeavor to take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may issue fully paid and nonassessable shares of such Common
Stock at such adjusted Purchase Price.
(D) (i) Upon any adjustment of the Purchase Price required to be made
pursuant to this Section 7, the Company within thirty (30) days thereafter shall
(a) cause to be prepared a certificate of a firm of independent accountants
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based, which certificate shall be conclusive evidence
of the correctness of such adjustment, and (b) cause to be mailed to the
Registered Holder of this Warrant Certificate written notice of such adjustment.
Where appropriate, such notice may be given in advance and included and part of
the notice required to be mailed under the provisions of Subsection 7(D)(ii).
(ii) In case at any time:
(a) The Company shall declare any dividend upon its Common
Stock payable in Common Stock of the Company or otherwise than in cash; or
(b) The Company shall offer for subscription to the holders
of its Common Stock any additional shares of stock of any class or any other
securities convertible into shares of stock or rights to subscribe thereto; or
(c) There shall be any capital reorganization or
reclassification of the capital stock of the Company, or a sale of all or
substantially all of the assets of the Company, or a consolidation or merger of
the Company with another corporation (other than a merger with a Subsidiary in
which merger the Company is the continuing corporation and which does not result
in any reclassification or change of the then outstanding shares of Common Stock
or other capital stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of subdivision or combination)); or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Registered Holder of this Warrant Certificate, at the earliest practicable
time (and, in any event, not less than twenty (20) days before any record date
or other date set for definitive action), written notice of the date on which
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights, or such reorganization,
reclassification, sale, consolidation, merger, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also set
forth such facts and shall indicate the effect of such action (to the extent
such effect may be known at the date of such notice) on the Purchase Price and
the kind and amount of the shares of stock and other securities and property
deliverable upon exercise of the Warrants. Such notice shall also specify the
date as of which the holders of the Common Stock of record shall participate in
said dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise the Warrants shall terminate).
(iii) Without limiting the obligation of the Company to provide
notice to the Registered Holder of this Warrant Certificate of corporate actions
hereunder, it is agreed that failure of the Company to give notice shall not
invalidate such corporate action of the Company.
Section 8. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class, postage prepaid or delivered to a
telegraph office for transmission:
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<PAGE>
(i) if to the Registered Holder of this Warrant Certificate at the
address of such holder as shown on the registry books maintained by the Company;
or
(ii) if to the Company at Nocopi Technologies, Inc., 230 Sugartown
Road, Wayne, PA 19087, Attention: Mr. Norman A. Gardner, Chairman or at such
other address as may have been furnished to the Holder in writing by the
Company.
Section 9. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed as of the 19th day of November, 1997.
Attest: NOCOPI TECHNOLOGIES, INC.
By:
- ----------------------------- -------------------------------
Assistant Secretary Richard Check
President
(SEAL)
7
<PAGE>
NOCOPI TECHNOLOGIES, INC.
WARRANT SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder irrevocably elects to exercise
___________________ Warrants represented by this Warrant Certificate and to
purchase the shares of Common Stock issuable upon the exercise of such Warrants
and requests that certificates for such shares shall be issued in the name of
and delivered to the undersigned and, if such number of Warrants shall not be
all the Warrants evidenced by this Warrant Certificate, that a new Warrant
Certificate for the balance of such Warrants be registered in the name of, and
delivered to, the Registered Holder at the address stated below.
X
--------------------------------
(Signature)
Dated: X
----------------------- --------------------------------
(Signature)
----------------------------------
Address
----------------------------------
City, State, Zip Code
----------------------------------
Tax Identification Number
----------------------------------
Signature(s) Guaranteed
8
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Transfer Warrants
For Value received, hereby sell, assign and transfer unto:
--------------------
- -------------------------------------------------------------------------------
(Please Print or Type Name and Address)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Social Security or Tax Identification Number)
all of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitute and appoint Attorney to transfer this Warrant Certificate
on the books of the Company, with full power of substitution in the premises.
X
--------------------------------
(Signature)
Dated: X
----------------------- --------------------------------
(Signature)
- -----------------------------
Signature(s) Guaranteed
THE SIGNATURE TO THE SUBSCRIPTION OR THE TRANSFER FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY, OR BY A REGISTERED BROKER
DEALER.
9
LEASE AGREEMENT
1. Parties - This Agreement made the 17th day of February, one thousand nine
hundred and ninety eight (1998), by and between David F. Markel (Lessor) &
Nocopi Technologies, Inc. (A Maryland Corporation) Tax ID# 87-0406496 (Lessee).
2. Premises - Lessor does hereby demise and let unto the Lessee all that certain
premises designated as 537 Apple Street, West Conshohocken, containing approx.
14,688 SF building together with associated parking corner of Apple Street &
Simon Street (shown on Exhibit A - Premises) Montgomery County, State of
Pennsylvania, to be used and occupied as Corporate Headquarters and R&D
facility, light manufacturing and for no other purposes.
3. Term - The Term of this lease shall commence beginning the 1st day of March,
1998 (The Commencement Date) and end the 28th day of February, 2003 (The
Termination Date).
4. Minimum Rent - Lessee shall pay a minimum annual rent of:
Year 1 - March 1, 1998 - August 31, 1998 - $5,000/month
September 1, 1998 - February 28, 1999 - $7,000/month
without demand and without set off, in equal monthly installments of (SEE ABOVE)
in advance on the first day of each calendar month during the term of this
lease. Provided, however, that rent for the first and last full months shall be
paid upon the signing of this lease. The first rental payment to be made during
occupancy of the premises shall be adjusted to pro-rate a partial month of
occupancy, if any, at the inception of this lease. In the event any payment of
rent is received by Lessor after the 10th day of the month on which it is due,
such last payment shall be subject to a late charge equal to ten percent (10%)
of such payment.
The minimum rent for the term of the lease shall be:
Yr. 2 __03___/__01__/__99__ to __02__/__28__/__00__
at an annual rent of $96,000.00 ($8,000/month)
Yr. 3 __03___/__01__/__00__ to __02__/__28__/__01__
at an annual rent of $102,000.00 ($8,500/month)
Yr. 4 __03___/__01__/__01__ to __02__/___28_/__02__
at an annual rent of $105,000.00 ($8,750/month
Yr. 5 __03___/__01__/__02__ to __02__/___28_/__03__
at an annual rent of $108,000.00 ($9,000/month)
5. Additional Rent - Lessee is hereby informed that this lease is a NET lease
thereby obligating Lessee to pay a proportionate share of the following
expenses: real estate taxes, fire/extended coverage or all risk insurance, loss
of rent insurance, liability insurance in the minimum amount of $2,000,000, snow
removal, and lawn care. The proportionate share is determined to be One Hundred
Percent (100%). Of these expenses which is determined by dividing the square
footage leased to the Lessee by the entire square footage of the building.
Lessee is required to pay to Lessor, at the time when the monthly installment of
minimum rent is payable, an amount equal to one-twelfth (1/12th) of the
Additional Rent referenced above as estimated by Lessor. Lessee shall also pay
to Lessor, at least 30 days before any fine, penalty, interest or costs may be
added thereto for non-payment thereof, the amount by which the above referenced
Additional Rent becoming due exceeds the monthly payments on account thereof
previously made by Lessee. The amount paid by Lessee shall not be deemed to be
trust funds and no interest shall be payable thereon. An estimate of Additional
Rent referenced above is shown on Exhibit B attached.
Lessee agrees to pay as Additional Rent any and all sums which may become due by
reason of failure of Lessee to comply with all the covenants of this lease and
any and all direct damages, costs, and expenses which the Lessor may suffer or
incur by reason of any default of Lessee or failure of Lessee to comply with the
covenants of this lease, and also any and all damages to the demised premises
caused by any act or neglect of the Lessee. In no event shall the Lessee be
responsible for any indirect or consequential damages.
<PAGE>
Lessee further agrees to pay to Lessor as Additional Rent all increase or
increases in the fire/extended or all risk insurance premiums upon the demised
premises and/or buildings of which the demised premises is a part, due to an
increase in the rate of fire/extended coverage or all risk insurance in excess
of the rate on the demised premises at the time of the making of this lease, if
said increase is caused by any act or neglect of the Lessee or the nature of the
Lessee's business.
6. Place of Payment - All rents (Minimum Rents and Additional Rents) shall be
payable without prior notice or demand at the office of MDI Management, 4044
Skippack Pike, P.O. Box 1149, Skippack, PA 19474, or at such other place as
Lessor may from time to time designate by notice in writing.
7. Completion by Lessor - The premises shall be is complete and in good and
workmanlike manner.
8. Security Deposit - Lessee does herewith deposit with Lessor the sum of Five
Thousand and no/100 Dollars ($5,000.00) to be held as security for the full and
faithful performance by Lessee of Lessee's obligations under this lease and for
the payment of damages to the demised premises. Except for such sum as shall be
lawfully applied by Lessor to satisfy valid claims against Lessee arising from
defaults under this lease or by reason of damages to the demised premises, the
Security Deposit or Escrow Fund shall be returned to Lessee at the expiration of
the term of this lease or any renewal or extension thereof. It is understood
that no part of any security deposit or Escrow Fund is to be considered as the
last rental due under the terms of the lease.
9. Expenses Paid by Lessee - The following expenses shall be paid by the Lessee:
(a) All electric, oil, gas, water or sewer bills for service to the leased
premises which are separately metered.
(b) Reference Paragraph 33 of Lease Addendum.
(c) Liability for bodily injury (including death) or property damage in or
about the premises under a policy of comprehensive general public
liability insurance at no less than $500,000 for each person and
$2,000,000 for each occurrence of bodily injury (including death) and
$500,000 for property damage. Lessee shall maintain and keep in effect
throughout the term of this lease the above referenced insurance
policy and the comprehensive general public liability insurance shall
name Lessor, Lessee, and any Mortgagee of Lessor as the insured
parties. This policy shall state that it is not cancelable without at
least 30 days written notice to Lessor and to any Mortgagee named in
an endorsement and shall be issued by an insurer and in a form
satisfactory to the Lessor. At least ten (10) days before the
Commencement Date of this lease, a certificate of insurance shall be
delivered to the Lessor. If Lessee shall fail, refuse or neglect to
obtain or maintain any insurance that it is required to provide or to
furnish Lessor with satisfactory evidence of coverage, Lessor shall
have the right to purchase such insurance. All payments made by the
Lessor shall be recoverable by the Lessor from Lessee, together with
interest thereon, as Additional Rent promptly upon being billed
thereto.
10. Options - Lessor and Lessee hereby agree that Lessee may elect to activate
the following options:
Commencement Termination
Date of Option Date of Option
Option #1 _______/______/______ to ______/______/______
at an annual rent of $__________________________.
Option #2 _______/______/______ to ______/______/______
at an annual rent of $__________________________.
It is understood that should Lessee wish to activate Lessee's option, Lessee
must notify Lessor in writing of Lessee's desire 6 months prior to the "Commence
Date of Option". Should Lessee fail to activate an option, all subsequent
options are hereby terminated. Should Lessee activate an option all terms and
conditions of this lease agreement shall continue in full force and effect,
except for the new minimum rental prescribed by the option period.
11. Termination of Lease - It is hereby mutually agreed that either party hereto
may determine this lease at the end of said term by giving to the other party
written notice thereof at least six (6) months prior thereto, but in default of
such notice, this lease shall continue upon the same terms and conditions in
force immediately prior to the expiration of the term hereof as are herein
contained for a further period of one (1) year and so on from year to year
unless or until terminated by either party hereto, giving the other six (6)
months written notice for removal previous to expiration of the then current
term; PROVIDED, however, that should this lease be continued for a further
period under the terms herein-above mentioned, any allowances given Lessee on
the rent during the original term shall not extend beyond such original term,
and further provided, however, that if Lessor shall have given such written
notice prior to the expiration of any term hereby created, of his intention to
change the terms and conditions of this lease, and Lessee shall not within
thirty (30) days from such notice notify Lessor of Lessee's intention to vacate
the demised premises at the end of the then current term, Lessee shall be
considered as Lessee under the terms and conditions mentioned in such notice for
a further term as above provided, or for such further term as may be stated in
such notice. In the event that Lessee shall give notice, as stipulated in this
lease, of intention to vacate the demised premises at the end of the present
term, or any renewal or extension thereof, and shall fail or refuse so to vacate
the same on the date designated by such notice, then it is expressly agreed that
Lessor shall have the option either (a) to disregard the notice so given with
full force precisely
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as if such notice had not been given, or (b) Lessor may, at any time within
thirty days after the present term or any renewal or extension thereof, as
aforesaid, give the said Lessee ten days' written notice of his intention to
terminate the said lease; whereupon the Lessee expressly agrees to vacate said
premises at the expiration of the said period of ten days specified in said
notice. All powers granted to Lessor by this lease may be exercised and all
obligations imposed upon Lessee by this lease shall be performed by Lessee as
well during any extension of the original term of this lease as during the
original term itself.
12. Affirmative Covenants of Lessee - Lessee covenants and agrees that he will
without demand:
(a) Pay the rent and all other charges herein reserved as rent at the times and
at the place that the same are payable, without fail; and if Lessor shall at any
time or times accept said rent or rent charges after the same shall have become
delinquent, such acceptance shall not excuse delay upon subsequent occasions, or
constitute or be construed as a waiver of any of Lessor's rights. Lessee agrees
that any charge or payment herein reserved, included, or agreed to be treated or
collected as rent and/or any other charges, expenses, or costs herein agreed to
be paid by Lessee may be proceeded for and recovered by Lessor by legal process
in the same manner as rent due and in arrears.
(b) Keep the demised premises clean and free from all ashes, dirt and other
refuse matter; replace all glass windows, doors, etc., broken; keep all waste
and drain pipes open; repair all damage to plumbing and to the premises in
general caused by the lessee; keep the same in good order and repair as they are
now, reasonable wear and tear and damage by accidental fire or other casualty
not occurring through negligence of Lessee or those employed by or acting for
Lessee alone excepted. The Lessee agrees to surrender the demised premises in
the same condition in which Lessee has herein agreed to keep the same during the
continuance of this lease.
(c) Lessor shall comply with any requirements of any of the constituted public
authorities, and with the terms of any State or Federal statute or local
ordinance or regulation applicable to Lessee or his use of the demised premises.
(d) Use every reasonable precaution against fire.
(e) Comply with rules and regulations of Lessor promulgated as hereinafter
provided.
(f) Peaceably deliver up and surrender possession of the demised premises to the
Lessor at the expiration or sooner termination of this lease, promptly
delivering to Lessor at his office all keys for the demised premises.
(g) Give to Lessor prompt written notice of any accident, fire, or damage
occurring on or to the demised premises.
(h) Lessee shall be responsible during the term of this lease; shall keep the
pavement free from snow and ice; and shall be and hereby agrees that Lessee is
solely liable for any accidents, due or alleged to be due to their defective
condition, or to any accumulations of snow and ice.
(i) The Lessee agrees that if, with the permission in writing of Lessor, Lessee
shall vacate or decide at any time during the term of this lease, or any renewal
thereof, to vacate the herein demised premises prior to the expiration of this
lease, or any renewal hereof, Lessee will not cause or allow any other agent to
represent Lessee in any sub-letting or reletting of the demised premises other
than an agent approved by the Lessor and that should Lessee do so, or attempt to
do so, the Lessor may remove any signs that may be placed on or about the
demised premises by such other agent without any liability to Lessor or to said
agent, the Lessee assuming all responsibility for such action.
(j) Indemnify and save Lessor harmless from any and all loss occasioned by
Lessee's breach of any of the covenants, terms and conditions of this lease, or
caused by his family, guests, visitors, agents and employees.
13. Negative Covenants of Lessee - Lessee covenants and agrees that he will do
none of the following things without first obtaining the consent, in writing, of
Lessor, which consent Lessor shall not unreasonably withhold, and without
providing Lessor with reimbursement for any expenses incurred or incidental to
Lessee's proposed action:
(a) Occupy the demised premises in any other manner or for any other purpose
than as above set forth.
(b) Assign, mortgage or pledge this lease or under-let or sub-lease the demised
premises, or any part thereof, or permit any other person, firm or corporation
to occupy the demised premises or any part thereof; nor shall any assignee or
sub-lessee assign, mortgage or pledge this lease or such sub-lease, without an
additional written consent by the Lessor, and without such consent no such
assignment, mortgage or pledge shall be valid. If the Lessee becomes embarrassed
or insolvent, or makes an assignment for the benefit of creditors, or any such
petition or proceeding is not contested by the lessee by or against the Lessee
or a bill in equity or other proceeding for the appointment of a receiver for
the Lessee is filed, or if the real or personal property of the Lessee shall be
sold or levied upon by any Sheriff, Marshal or Constable, the same shall be a
violation of this covenant.
(c) Place or allow to be placed any stand, booth, sign or show case upon the
doorsteps, vestibules or outside walls or pavements of said premises, or paint,
place, erect or cause to be painted, placed or erected any sign, projection or
device on or in any part of the premises. Lessee shall remove any sign,
projection or device painted, placed or erected, if permission has been granted
and restore the walls, etc., to their former conditions, at or prior to the
expiration of this lease. In case of the breach of this covenant (in addition to
all other remedies given to Lessor in case of the breach of any conditions or
covenants of this lease) Lessor shall have the privilege of removing said stand,
booth, sign, show case, projection or device, and restoring said walls, etc., to
their former condition, and Lessee, at Lessor's option, shall be liable to
Lessor for any and all expenses so incurred by Lessor.
(d) Make any alterations, improvements, or additions to the demised premises.
All alterations, improvements, additions or fixtures, whether installed before
or after the execution of this lease, shall remain upon the premises at the
expiration or sooner determination of this lease and become the property of
Lessor, unless Lessor shall, prior to the
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determination of this lease, have given written notice to Lessee to remove the
same, in which event Lessee will remove such alterations, improvements and
additions and restore the premises to the same good order, and condition in
which they now are. Should Lessee fail so to do, Lessor may do so, collecting,
at Lessor's option, the cost and expense thereof from Lessee as additional rent.
(e) Use or operate any machinery that, in Lessor's opinion, is harmful to the
building or disturbing to other tenants occupying other parts thereof.
(f) Place any weights in any portion of the demised premises beyond the safe
carrying capacity of the structure.
(g) Do or suffer to be done, any act, matter or thing objectionable to the fire
insurance companies whereby the fire insurance or any other insurance now in
force or hereafter to be placed on the demised premises, or any part thereof, or
on the building of which the demised premises may be a part, shall become void
or suspended, or whereby the same shall be rated as a more hazardous risk than
at the date of execution of this lease, or employ any person or persons
objectionable to the fire insurance companies or carry or have any benzine or
explosive matter of any kind in and about the demised premises. In case of a
breach of this covenant (in addition to all other remedies given to Lessor in
case of the breach of any of the conditions or covenants of this lease) Lessee
agrees to pay to Lessor as additional rent any and all increase or increases of
premiums on insurance carried by Lessor on the demised premises, or any part
thereof, or on the building of which the demised premises may be a part, caused
in any way by the occupancy of Lessee.
(h) Remove, attempt to remove or manifest an intention to remove Lessee's goods
or property from or out of the demised premises otherwise than in the ordinary
and usual course of business without having first paid and satisfied Lessor for
all rent which may become due during the entire term of this lease.
(i) Vacate or desert said premises during the term of this lease, or permit the
same to be empty and unoccupied.
14. Lessor's Rights - Lessee covenants and agrees that Lessor shall have the
right to do the following things and matters in and about the demised premises:
(a) At all reasonable times by himself or his duly authorized agents to go upon
and inspect the demised premises with 48 hours notice to Lessee and every part
thereof and/or at his option to make repairs, alterations and additions to the
demised premises or the building of which the demised premises is a part.
(b)
(c) To display a "For Sale" sign at any time, and also, after notice from either
party of intention to determine this lease, or at anytime within three months
prior to the expiration of this lease, a "For Rent" sign, or both "For Rent" and
"For Sale" signs; and all of said signs shall be placed upon such part of the
premises as Lessor may elect and may contain such matter as Lessor shall
require. Persons authorized by Lessor may inspect the premises at reasonable
hours during the said periods.
(d) Lessor may discontinue at any time, any or all facilities furnished and
services rendered by Lessor not expressly covenanted for herein; it being
understood that they constitute no part of the consideration for this lease.
15. Responsibility of Lessee - (a) Lessee agrees to relieve and hereby relieves
the Lessor from all liability by reason of any injury or damage to any person or
property in the demised premises whether belonging to the Lessee or any other
person caused by any fire breakage or leakage in any part or portion of the
building of which the demised premises is a part of from water, rain or snow
that may leak into, issue or flow from any part of the said premises, or of the
building of which the demised premises is a part, from the drains, pipes, or
plumbing work of the same, or from any place or quarter, unless such breakage,
leakage, injury or damage be caused by or result from the negligence of Lessor
or its servants or agents.
(b) Lessee also agrees to relieve and hereby relieves Lessor from all liability
by reason of any damage or injury to any property or to Lessee or Lessee's
guests, servants or employees which may arise from or be due to the use, misuse
or abuse of all or any of the elevators, hatches, openings, stairways, hallways
of any kind whatsoever, which may exist or hereafter be erected or constructed
on the said premises or the sidewalks surrounding the building of which may
arise from defective construction, failure of water supply, light, power,
electric wiring, plumbing or machinery, wind, lightning, storm or any other
cause whatsoever on the said premises or the building of which the demised
premises is a part, unless such damage, injury, use, misuse or abuse be caused
by or result from the negligence of Lessor, its servants or agents.
16. Responsibility of Lessor - (a) In the event the demised premises are totally
destroyed or so damaged by fire or other casualty that, in the opinion of a
licensed architect retained by Lessor, the same cannot be repaired and restored
within ninety days from the happening of such injury this lease shall absolutely
cease. A decision within five (5) business days of said casualty must be
reached. If premises cannot be repaired and/or restored within ninety (90) days,
this lease shall be deemed terminated.
(b) If the damage be only partial and such that the premises can be restored, in
the opinion of a licensed architect retained by Lessor, to approximately their
former condition within thirty days from the date of the casualty loss Lessor
may, at Lessor's option, restore the same with reasonable promptness, reserving
the right to enter upon the demised premises for that purpose. Lessor also
reserves the right to enter upon the demised premises whenever necessary to
repair damage caused by fire or other casualty to the building of which the
demised premises is a part, even though the effect
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of such entry be to render the demised premises or a part thereof untenantable.
In either event, the rent shall be apportioned and suspended during the time
Lessor is in possession, taking into account the proportion of the demised
premises rendered untenantable and the duration of Lessor's possession. If a
dispute arises as to the amount of rent due under this clause, Lessee shall have
the right to proceed by law to recover the excess payment, if any. Lessor and
Lessee agree to allow law to decide what is due and what is in default and what
is a breach.
(c) Lessor shall make such election to repair the premises or terminate this
lease by giving notice thereof to lessee at the leased premises within thirty
days from the day Lessor received notice that the demised premises had been
destroyed or damaged by fire or other casualty.
(d) Except to the extent hereinbefore provided, Lessor shall not be liable for
any damage, compensation, or claim by reason of the necessity of repairing any
portion of the building, the interruption in the use of the premises, any
inconvenience or annoyance arising as a result of such repairs or interruption,
or the termination of this lease by reason of damage to or destruction of the
premises.
(e) Lessor has let the demised premises in their present "as is" condition and
without any representations, other than those specifically endorsed hereon by
Lessor through its officers, employees, servants, and/or agents. It is
understood and agreed that Lessor is under no duty to make repairs, alterations,
or decorations at the inception of this lease or at any time thereafter unless
such duty of Lessor shall be set forth in writing endorsed hereon.
(f) It is understood and agreed that the Lessor hereof does warrant that the
Lessee shall be able to obtain a permit under any Zoning Ordinance or Regulation
for such use as Lessee intends to make of the said premises. Lessor shall
communicate with all pertinent authorities.
17. Miscellaneous Agreements and Conditions - (a) No contract entered into or
that may be subsequently entered into by Lessor with Lessee, relative to any
alterations, additions, improvements or repairs, nor the failure of Lessor to
make such alterations, additions, improvements or repairs as required by any
such contract, nor the making by Lessor or his agent or contractors of such
alterations, additions, improvements or repairs shall in any way affect the
payment of the rent or said other charges at the time specified in this lease,
except to the extent and in the manner hereinbefore provided.
(b) It is hereby covenanted and agreed, any law, usage or custom to the contrary
notwithstanding, that Lessor shall have the right at all times to enforce the
covenants and provisions of this lease in strict accordance with the terms
hereof, notwithstanding any conduct or custom on the part of the Lessor in
refraining from so doing at any time or times; and, further, that the failure of
Lessor at any time or times to enforce his rights under said covenants and
provisions strictly in accordance with the same shall not be construed as having
created a custom in any way or manner contrary to the specific terms, provisions
and covenants of this lease or as having in any way or manner modified the same.
(c) This lease is granted upon the express condition that Lessee and/or the
occupants of the premises hereinleased shall not conduct themselves in a manner
which is improper or objectionable, and if at any time during the term of this
lease or any extension or continuation thereof Lessee or any occupier of the
said premises shall have conducted himself in a manner which is improper or
objectionable determined by law, Lessee shall be taken to have broken the
covenants and conditions of this lease, and Lessor will be entitled to all of
the rights and remedies granted and reserved herein, for the Lessee's failure to
observe all of the covenants and conditions of this lease. Lessor to provide
Lessee written notice of covenants and conditions deemed broken. Lessee shall
have thirty (30) days to remedy such default or omission.
(d) In the event of the failure of Lessee promptly to perform the covenants of
Section 12(b) hereof, Lessor may go upon the demised premises and perform such
covenants, the cost thereof, at the sole option of Lessor, to be charged to
Lessee as additional and delinquent rent.
(e) Lessor and Lessee hereby agree that all insurance policies which each of
them shall carry to insure the demised premises and the contents therein against
casualty loss and all liability policies which they carry pertaining to the use
and occupancy of the demised premises shall contain waivers of the right of
subrogation against Lessor and Lessee herein, their heirs, administrators,
successors, and assigns.
(f) Lessee hereby grants to Lessor a security interest limited to an amount
equal to six (6) months rent under the Uniform Commercial Code in all of
Lessee's goods and property in, on, or about the demised premises. Said security
interest shall secure unto Lessor the payment of all rent (and charges
collectible or reserved as rent) hereunder which shall become due under the
provisions of this lease. Lessee hereby agrees to execute, upon request of
Lessor, such financing statements as may be required under the provisions of the
said Uniform Commercial Code to perfect a security interest in Lessee's said
goods and property.
18. Remedies of Lessor - If the Lessee:
(a) Does not pay in full when due any and all installments of rent and/or any
other charge or payment herein reserved, included, or agreed to be treated or
collected as rent and/or any other charge, expense, or cost herein agreed to be
paid by the Lessee. Lessor shall notify Lessee in writing outlining default
complained of and Lessee shall be given a delay of five (5) business days to
remedy any monetary default, and a delay of thirty (30) days to remedy
non-monetary defaults. If a default which is non-monetary is not susceptible of
being remedied within thirty (30) days, then if Lessee has taken all necessary
steps to remedy the default, that should be sufficient if the default is
thereafter remedied in a reasonable time. Lessee shall be granted sufficient
time to contest any third party action provided in all instances that the Lessee
is continuing to pay all rent and additional rent that is due.
(b) Violates or fails to perform or otherwise breaks any covenant or agreement
herein contained; or
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(c) Vacates the demised premises or removes or attempts to remove or manifests
an intention to remove any goods or property therefrom otherwise than in the
ordinary and usual course of business without having first paid and satisfied
the Lessor in full for all rent and other charges then due or that may
thereafter become due until the expiration of the then current term, above
mentioned; or
(d) Becomes embarrassed or insolvent, or makes an assignment for the benefit of
creditors, or if a petition in bankruptcy is filed by or against Lessee or a
complaint in equity or other proceedings for the appointment of a receiver for
Lessee is filed, or if proceedings for reorganization or for composition with
creditors under any State or Federal law be instituted by or against Lessee, or
if the real or personal property of Lessee shall be levied upon or be sold, or
for any other reason Lessor shall, in good faith, believe that Lessee's ability
to comply with the covenants of this lease including the prompt payment of rent
hereunder, is or may become impaired.
thereupon:
(1) The whole balance of rent and other charges, payments, costs, and
expenses herein agreed to be paid by Lessee, or any part thereof, and also all
costs and officers' commissions including watchmen's wages shall be taken to be
due and payable and in arrears as if by the terms and provisions of this lease
said balance of rent and other charges, payment, taxes, costs and expenses were
on that date, payable in advance. Further, if this lease or any part thereof is
assigned, or if the premises, or any part thereof is sub-let, Lessee hereby
irrevocably constitutes and appoints Lessor as Lessee's agent to collect the
rents due from such assignee or sub'lessee and apply the same to the rent due
hereunder without in any way affecting Lessee's obligation to pay any unpaid
balance of rent due hereunder; or
(2) At the option of Lessor, this lease and the terms hereby created shall
determine and become absolutely void without any right on the part of Lessee to
reinstate this lease by payment of any sum due or by other performance of any
condition, terms, or covenant broken; whereupon, Lessor shall be entitled to
recover damages for such breach in an amount equal to the amount of rent
reserved for the balance of the term of this lease, less the fair rental value
of the said demised premises for the remainder of the lease term.
19. Further Remedies of Lessor - In the event of any default as above set forth
in Section 18 and provided that the default complained of is not remedied within
appropriate time periods, then Lessor, or anyone acting on Lessor's behalf, at
Lessor's option:
(a) May let said premises or any part or parts thereof to such person or persons
as may, in Lessor's discretion, be best; and Lessee shall be liable for any loss
of rent for the balance of the then current term. Any such re-entry or
re-letting by Lessor under the terms hereof shall be without prejudice to
Lessor's claim for actual damages, and shall under no circumstances, release
Lessee from liability for such damages arising out of the breach of any of the
covenants, terms, and conditions of this lease.
(b) May proceed as a secured party under the provisions of the Uniform
Commercial Code against the goods in which Lessor has been granted a security
interest pursuant to Section 17(f) hereof; and
(c) May have and exercise any and all other rights and/or remedies, granted or
allowed landlords by any existing or future Statute, Act of Assembly, or other
law of this state in cases where a landlord seeks to enforce rights arising
under a lease agreement against a tenant who has defaulted or otherwise breached
the terms of such lease agreement; subject, however, to all of the rights
granted or created by any such Statute, Act of Assembly, or other law of this
state existing for the protection and benefit of tenants; and
(d) May have and exercise any and all other rights and remedies contained in
this lease agreement, including the rights and remedies provided by Sections 20
and 21 hereof
20. Confession of Judgment for Money - Lessee covenants and agrees that if the
rent and/or any charges reserved in this lease as rent (including all
accelerations of rent permissible under the provisions of this lease) shall
remain unpaid five (5) business days after the same is required to be paid, then
and in that event, Lessor may cause Judgment to be entered against Lessee, and
for that purpose Lessee hereby authorizes and empowers Lessor or any
Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for
and confess judgment against Less and agrees that Lessor may commence an action
pursuant to Pennsylvania Rules of Civil Procedure No. 2950 et seq. For the
recovery from Lessee of all rent hereunder (including all accelerations of rent
permissible under the provisions of this lease) and/or for all charges reserved
hereunder as rent as well as for interest and costs and Attorney's commission,
for which authorization to confess judgment, this lease, or a true and correct
copy thereof, shall be sufficient warrant. Such Judgment may be confessed
against Lessee for the amount of rent in arrears (including all accelerations of
rent permissible under the provisions of this lease) and/or for all charges
reserved hereunder as rent, as well as for interest and costs; together with an
attorney's commission of five percent (5%) of the full amount of Lessor's claim
against Lessee. Neither the right to institute an action pursuant to
Pennsylvania Rules of Civil Procedure No. 2950 et seq. nor the authority to
confess judgment granted herein shall be exhausted by one or more exercises
thereof, but successive complaints may be filed and successive judgments may be
entered for the aforedescribed sums five (5) business days or more after they
become due as well as after the expiration of the original term and/or during or
after expiration of any extension or renewal of this lease.
21. Confession of Judgment for Possession of Real Property - Lessee covenants
and agrees that if this lease shall be terminated by final judgment of an
appropriate court (either because of condition broken during the term of this
lease or any renewal or extension thereof and/or when the term hereby created or
any extension thereof shall have expired) then, and in that event, Lessor may
cause a judgment in ejectment to be entered against Lessee for possession of the
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demised premises, and for that purpose Lessee hereby authorizes and empowers any
Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for
Lessee and to confess judgment against Lessee in Ejectment for possession of the
herein demised premises, and agrees that Lessor may commence an action pursuant
to Pennsylvania Rules of Procedure No. 2970 et seq. for the entry of an order in
Ejectment for the possession of real property, and Lessee further agrees that a
Writ of Possession pursuant thereto may issue forthwith, for which authorization
to confess judgment and for the issuance of a writ or writs of possession
pursuant thereto, this lease, or a true and correct copy thereof, shall be
sufficient warrant. Lessee further covenants and agrees, that if for any reason
whatsoever, after said action shall have commenced the action shall be
terminated and the possession of the premises demised hereunder shall remain in
or be restored to Lessee, lessor shall have the right upon any subsequent
default or defaults, or upon the termination of this lease as above set forth to
commence successive actions for possession of real property and to cause the
entry of successive judgments by confession in Ejectment for possession of the
premises demised hereunder.
22. Affidavit of Default - In any procedure or action to enter Judgment by
Confession for Money pursuant to Section 20 hereof, or to enter Judgment by
Confession in Ejectment for possession of real property pursuant to Section 21
hereof, if Lessor shall first cause to be filed in such action an affidavit or
averment of the facts constituting the default or occurrence of the condition
precedent, or event, the happening of which default, occurrence, or event
authorizes and empowers Lessor to cause the entry of judgment by confession,
such affidavit or averment shall be conclusive evidence of such facts, defaults,
occurrences, conditions precedent, or events; and if a true copy of this lease
(and of the truth of which such affidavit or averment shall be sufficient
evidence) be filed in such procedure or action, it shall not be necessary to
file the original as a Warrant of Attorney, any rule of court, custom, or
practice to the contrary notwithstanding. Lessor shall waive right to enter
judgment by affidavit in non-monetary breaches. A non-monetary breach, if
contested by Lessee, shall be decided by appropriate judicial authority.
23. Waivers by Lessee of Errors, Right of Appeal, Stay, Exemption, Inquisition -
In the event a Judgement against the Lessee is obtained, proceedings shall be
commenced to recover possession of the demised premises either at the end of the
term or sooner, termination of this lease, or for non-payment of rent, Lessee
specifically waives the right to the three (3) months notice to quit and/or the
fifteen (15) or thirty (30) days' notice to quit required by the Act of April 6,
1951, P.O. 69, as amended, and agrees that five (5) business days notice shall
be sufficient in either or any such case.
24. Right of Assignee of Lessor - The right to enter judgment against Lessee by
confession and to enforce all of the other provisions of this lease herein
provided for may at the option of any assignee of this lease, be exercised by
any assignee of the Lessor's right, title and interest in this lease in his,
her, or their own name, any statute, rule of court, custom, or practice to the
contrary notwithstanding.
25. Remedies Cumulative - All of the remedies hereinbefore given to Lessor and
all rights and remedies given to it by law and equity, shall be cumulative and
concurrent. No determination of this lease or the taking or recovering
possession of the premises shall deprive Lessor of any of its remedies or
actions against the Lessee for rent due at the time or which, under the terms
hereof would in the future become due as if there had been no determination, nor
shall the bringing of any action for rent or breach of covenant, or the resort
to any other remedy herein provided for the recovery of rent be construed as a
waiver of the right to obtain possession of the premises.
26. Condemnation - In the event that the premises demised herein, or any part
thereof, is taken or condemned for a public or quasi-public use which makes
premises untentable then the lease shall be so terminated, this lease shall, as
to the part so taken, terminate as of the date title shall vest in the
condemnor. In either event, the Lessee waives all claims against the Lessor by
reason of the complete or partial taking of the demised premises. Lessee
reserves right to claims against condemming authority.
27. Subordination
28. Notices - All notices may be faxed, followed by certified mail, return
receipt requested.
29. Lease Contains all Agreements - It is expressly understood and agreed by and
between the parties hereto that this lease and the riders attached hereto and
forming a part hereof set forth all the promises, agreements, conditions and
understandings between Lessor or his Agent and Lessee relative to the demised
premises, and that there are no promises, agreements, conditions or
understandings, either oral or written, between them other than herein set
forth. It is further understood and agreed that, except as herein otherwise
provided, no subsequent alteration, amendment, change or addition to this lease
shall be binding upon Lessor or Lessee unless reduced to writing and signed by
them.
30. Heirs and Assignees - All rights and liabilities herein given to, or imposed
upon, the respective parties hereto shall extend to and bind the several and
respective heirs, executors, administrators, successors and assigns of said
parties; and if there shall be more than one Lessee, they shall all be bound
jointly and severally by the terms, covenants and
7
<PAGE>
agreements herein, and the word "Lessee" shall be deemed and taken to mean each
and every person or party mentioned as a Lessee herein, be the same one or more;
and if there shall be more than one Lessee, any notice required or permitted by
the terms of this lease may be given by or to any one thereof, and shall have
the same force and effect as if given by or to all thereof. The words "his" and
"him" wherever stated herein, shall be deemed to refer to the "Lessor" or
"Lessee" whether such Lessor or Lessee be singular or plural and irrespective of
gender. No rights, however, shall inure to the benefit of any assignee of Lessee
unless the assignment to such assignee has been approved by Lessor in writing as
aforesaid.
31. Use and Occupancy Permit - Lessor will be responsible to obtain Use and
Occupancy permit prior to occupancy and shall submit copy to the Lessee.
- ------------------------------------ ---------------------------------------
WITNESS LESSEE (SEAL)
- ------------------------------------ ---------------------------------------
WITNESS LESSEE (SEAL)
- ------------------------------------ ---------------------------------------
WITNESS LESSOR (SEAL)
- ------------------------------------ ---------------------------------------
WITNESS LESSOR (SEAL)
- ------------------------------------ ---------------------------------------
WITNESS LESSOR (SEAL)
8
<PAGE>
ADDENDUM TO LEASE AGREEMENT DATED
LESSOR: David F. Markel
LESSEE: Nocopi Technologies, Inc. (A Maryland Corporation)
SPACE: Approx. 14,688 SF Building & Associated Parking corner of Apple St. &
Simon St., 537 Apple Street, West Conshohocken
- -------------------------------------------------------------------------------
32. Lessor has agreed to leave the following for use by Lessee: a) File
cabinets in outer area at executive offices; b) Phone system; c)
Reception desk (half round) on lobby level.
33. Lessee agrees to pay for all repairs needed to maintain premises in
proper and suitable condition consistent with present state of repair.
Lessee agrees to pay for all repairs other than those major repairs
outlined in Clause 34 (which are and remain the responsibility of the
lessor) needed to maintain the premises in proper and suitable
condition consistent with the present state of repair of premises.
34. Lessor shall be responsible for Major capital expenditures and
replacements such as, but not restricted to, the roof, outside walls,
heating/cooling units, elevator, plumbing within the walls, and parking
lot condition.
35. Lessor shall grant Lessee Right of First Refusal to purchase premises
in the event Lessor obtains an acceptable contract from an unrelated
third person to purchase, Lessor shall advise Lessee in writing at
which time Lessee shall have ten (10) business days to review said
contract. Should Lessee activate right of first refusal option, Lessor
may reasonably request updated financial information from Lessee to
determine viability of obtaining financing which may be included in
contract to purchase. If contract becomes null and void, Right of First
Refusal option shall reactivate.
36. Lessee shall assume all liability and shall hold Lessor harmless
pertaining to any toxic and/or chemical contamination affecting said
leased space or which occurs elsewhere on the property due to Lessee's
activities during the term of this lease and Lessee shall be solely
responsible for any cleanup required by any municipality or
governmental agency. Lessee responsibilities shall extend beyond the
length of this lease if said contamination was caused by Lessee's
activities or any subtenant of Lessee.
Date: LESSEE:
------------------------ --------------------------------
LESSEE:
--------------------------------
Date: LESSOR:
------------------------ --------------------------------
LESSOR:
--------------------------------
9
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Nocopi Technologies, Inc. on Form S-8 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 for the years ended
December 31, 1996 and 1995, which report is included in this Annual Report on
Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
April 13, 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Nocopi Technologies, Inc.
Conshohocken, PA.
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement on Form S-8 of our report
dated March 3, 1998, relating to the financial statements and schedule of Nocopi
Technologies,Inc. appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
BDO SEIDMAN, LLP
Philadelphia, PA.
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,714,600
<SECURITIES> 0
<RECEIVABLES> 211,500
<ALLOWANCES> 44,100
<INVENTORY> 5,500
<CURRENT-ASSETS> 2,936,700
<PP&E> 468,200
<DEPRECIATION> 354,400
<TOTAL-ASSETS> 3,813,600
<CURRENT-LIABILITIES> 1,629,100
<BONDS> 0
0
0
<COMMON> 335,900
<OTHER-SE> 1,848,600
<TOTAL-LIABILITY-AND-EQUITY> 3,813,600
<SALES> 3,046,000
<TOTAL-REVENUES> 3,046,000
<CGS> 1,541,500
<TOTAL-COSTS> 1,541,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23,200
<INTEREST-EXPENSE> (71,000)
<INCOME-PRETAX> (847,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (847,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (847,000)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
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