Form 10-KSB
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended ___December 31, 1998_______________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________________
Commission file number _______0-20333_____________________________________
____________________________Nocopi Technologies, Inc._________________________
(Name of small business issuer in its charter)
____________Maryland____________ ____________87-0406496______________
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
537 Apple Street, West Conshohocken, PA 19428
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (610) 834-9600
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None Not Applicable
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Securities registered under section 12(g) of the Exchange Act:
Common Stock $.01 par value
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(Title of class)
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
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Form 10-KSB
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State issuer's revenues for its most recent fiscal year. $2,423,900
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State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer. $5,000,000 at March 26, 1999.
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 33,587,332 shares of Common
Stock, $.01 par value at March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
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None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No |X|
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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, travelers' 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, travelers' checks, gift certificates and event tickets, and the
authentication of product labeling 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 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. Registrant has not
developed substantial revenues from the woven label or CD technologies.
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.
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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). Applications utilizing this technology enable
an ink jet 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 and 1998, Registrant engaged in market studies of the
potential for these technologies, one of which was intended to be marketed under
the name SECRETPRINT(TM). These market studies included the investigation of
potential relationships with manufacturers of inkjet computer printers as well
as authors and publishers of computer software for applications which might
benefit from the use of these technologies. Registrant has obtained no
commitment for the use or sale of products incorporating these technologies, and
there can be no assurance that sales will be realized.
The following table illustrates the approximate percentage of Registrant's
revenues accounted for by each type of its products for each of the two last
fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
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Product Type 1998 1997
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<S> <C> <C>
Anti-Counterfeiting & Anti-Diversion Technologies and Products 97% 97%
Document Security Products 3% 3%
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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 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.
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Beginning in August 1999, 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.
If no public offering of Euro-Nocopi has been made by January 2001, Registrant
may acquire, at the same conversion rate available to Euro-Nocopi investors, any
Euro-Nocopi shares not previously converted. This call right expires
December 31, 2001.
Major Customers
During 1998, Registrant made sales or obtained revenues equal to 10% or more of
Registrant's 1998 total revenues from two customers, Paxar Corporation and 3M
Corporation, which accounted for approximately 24% and 20%, respectively, of
1998 revenues. The license agreement with 3M Corporation was mutually terminated
in April 1998.
Outside Sales Agents
The Company has engaged outside sales agents who are paid commissions on sales
to various customers of the Company and also receive payment for certain
expenses. During 1998 the total payments to outside sales agents was
approximately $170,000 as compared to such payments of approximately $200,000 in
1997.
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. Registrant has a $75,000 investment
in equipment which is 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 other countries in Europe, Japan, Australia, and New Zealand, and the
rights under such applications have been assigned to Registrant. Registrant's
patent counsel, which conducted the appropriate searches in Canada and the
United States, has reviewed the results of searches conducted in Europe and
advised management that effective patent protection for Registrant's technology
should be obtainable in all countries in which the patent applications have been
filed. There can be no assurance, however, that such protection will be
obtained.
When a new product or process is developed, the developer may seek to preserve
for 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.
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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, 1998, and 1997, Nocopi expended
approximately $376,400 and $480,500, 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. These include, among others, biological DNA codes,
microtaggants, thermochronic, UV and infrared inks as well as encryption, 2D
symbology and laser engraving. 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.
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 31, 1999, Registrant had 9 full-time employees, including management.
Registrant maintains key-person life insurance of at least $1 million on each
of the following executives and consultants: Richard A. Check, Norman A. Gardner
and Dr. Arshavir Gundjian.
Financial Information about Foreign and Domestic Operations
Certain information concerning Registrant's foreign and domestic operations is
contained in Note 8 to Registrant's Financial Statements included elsewhere in
this Annual Report on Form 10-KSB, and is incorporated herein by reference.
ITEM 2. PROPERTIES
Registrant's corporate headquarters and research facilities 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 $8,000
subject to further annual increases on the anniversary date of the lease in each
of the next four years. Registrant is also responsible for the operating costs
of the building.
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 $5,000.
Registrant believes its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Registrant is not aware of any material pending litigation (other than ordinary
routine litigation incidental to its business where, in management's view, the
amount involved is less than 10% of Registrant's current assets) to which
Registrant is or may be a party, or to which any of its properties is or may be
subject, nor is it aware of any pending or contemplated proceedings against it
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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, 1998, no matters
were submitted to a vote of Registrant's security holders.
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.
High Bid Low Bid
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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 31, 1998 $.25 $.16
April 1, 1998 to June 30, 1998 $.44 $.17
July 1, 1998 to September 30, 1998 $.21 $.08
October 1, 1998 to December 31, 1998 $.16 $.07
January 1, 1999 to March 26, 1999 $.16 $.08
As of March 26, 1999, 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, at March 26, 1999, has reserved for issuance 15,033,983
shares of its Common Stock which underlie outstanding options (including the two
million share 1999 Stock Option Plan approved by the Board of Directors in
February 1999) and warrants to purchase Common Stock of the Registrant and
securities issued by Euro-Nocopi, S.A., which may be converted into Registrant's
common stock.
Registrant has paid no cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, such as 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.
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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, certain
customers have, from time to time, 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 1998 were $2,423,900, a decline of 20% from $3,046,000 in 1997.
Licenses, royalties and fees declined by 14% to $1,796,600 in 1998 from
$2,085,300 in 1997. The $288,700 decline is due in part to lower license fees
and royalties from certain U.S. customers resulting primarily from the
re-negotiation in early 1997 of an exclusive license with 3M Corporation. The
license was mutually terminated effective April 30, 1998. Fees of $90,000 were
derived from 3M Corporation in 1998 compared to $210,000 in 1997. Product and
other sales were $627,300 in 1998 compared to $960,700 in 1997, a decline of
$333,400 or 35%. The decline results from lower sales of pressure-sensitive
labels and inkjet equipment in 1998 compared to 1997.
Gross profit declined to $1,479,000 or 61% of revenues in 1998 from $1,504,500,
or 49% of revenues in 1997. The gross profit, expressed in absolute dollars, was
negatively affected by the $288,700 decline in licenses, royalties and fees.
Partially offsetting the decline was a non-recurring charge in 1997 related to
the settlement with Euro-Nocopi during the first half of 1997. The settlement
involved a dispute with Euro-Nocopi whereby, in the second quarter of 1997, the
Company agreed to credit Euro-Nocopi $154,500 as its share of certain minimum
royalties under a worldwide agreement with a manufacturer who distributed
products incorporating the Company's technologies.
Research and development expenses declined to $376,400 in 1998 from $480,500 in
1997. The decline relates primarily to a cost containment program, including
staff reductions, implemented during 1997, the full impact of which was
experienced in 1998.
Sales and marketing expenses increased to $790,800 in 1998 from $662,900 in
1997. During 1997, the Company reduced its sales and marketing expenses through
staff reductions and lower discretionary sales promotion expenses as the Company
sought to conserve cash during a period of adverse liquidity. The increase in
1998 reflects the Company's commitment to develop new markets for its
technologies.
General and administrative expenses declined to $733,600 in 1998 from $903,600
in 1997 due primarily to lower professional fees incurred in 1998.
Other income (expenses) include interest on the Series B 7% Subordinated
Convertible Promissory Notes issued in May 1993 and amortization of debt issue
costs related to the notes. The reduction in interest expense in 1998 compared
to 1997 reflects the repayment of $825,000 principal amount of notes in 1998.
The $125,000 balance was extended for a period of two years to March 31, 2000 at
an interest rate of 9% and are convertible into 625,000 shares of the Company's
common stock. Interest income increased in 1998 compared 1997 due to the
investment of funds raised in the private placement completed in late 1997.
Equity in net loss of affiliate represents the proportionate share in the net
loss of Euro-Nocopi attributable to the Company's approximate 18% ownership
share of Euro-Nocopi.
The net loss for 1998 was $548,800 compared to $847,000 in 1997, a reduction of
$298,200 or 35%, for the reasons explained above.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $1,372,900 at December 31,
1998 from $2,714,600 at December 31, 1997. The cash was used primarily to fund
operations throughout the year and repay $825,000 principal amount of its Series
B 7% Subordinated Convertible Promissory Notes due March 31, 1998.
In the first quarter of 1998, the Company relocated its Corporate headquarters
to a new location and relocated its research facilities to this location in
August 1998. The Company has invested approximately $40,000 in leasehold
improvements at this location in which it conducts all of its business
operations.
The Company does not currently plan any significant capital investment over the
next twelve months.
The Company believes that it has sufficient working capital to support its
operations and debt service requirements over the next twelve months.
The Company is aware of Year 2000 potential problems. These potential problems
exist because many computer software applications use two digits to designate a
year. Any computer hardware and programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
inability to properly process dates beyond 1999 may cause computer systems to
process information incorrectly or not at all. As its internal information
systems consist primarily of third party software systems, the Company intends
to purchase and install available Year 2000 compliant upgrade versions by
mid-1999. The Company has determined that the vendor's upgrade software is
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available and is Year 2000 compliant. The Company estimates the costs to
purchase and install the upgrades at less than $10,000. The Company continues to
communicate with vendors, financial institutions and others to assure their
compliance to Year 2000 issues. However, there can be no assurance that the
systems of other companies on which the Company relies will be converted in a
timely manner.
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's 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.
Factors That May Affect Future Growth and Stock Price
The Company's operating results and stock price are dependent upon a number of
factors, some of which are beyond the Company's control. These include:
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle for the Company's
technologies, the potential for customer delay or deferral of implementation of
the Company's technologies, the size and timing of inception of individual
license agreements, the success of the Company's licensees and strategic
partners in exploiting the market for the licensed products, modifications of
customer budgets, and uneven patterns of royalty revenue and product orders. As
the Company's revenue base is not substantial, delays in finalizing license
contracts, implementing the technology to initiate the revenue stream and
customer ordering decisions can have a material adverse effect on the Company's
quarterly and annual revenue expectations and, as the Company's operating
expenses are substantially fixed, income expectations will be subject to a
similar adverse outcome.
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 confidentiality, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. There
can be no assurance that the Company will be able to protect the basis of its
technologies from discovery by unauthorized third parties, thus adversely
affecting its customer and licensee relationships.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, 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 Standard
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for periods ending
after June 15, 1999, establishes standards for disclosing information about
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Because the Company does not engage
in derivative instruments and hedging activities, adoption of this statement is
not expected to impact financial statements or disclosures of the Company.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of Registrant meeting the requirements of Regulation S-B
(except section 228.310 and Article 11 of Regulation S-X thereof) are included
herein beginning at page F-1 of this Annual Report on Form 10-KSB.
For information required with respect to this Item 7, see "Financial Statements
and Schedules on pages F-1 through F-12 of this report.
7
<PAGE>
ITEM 8. 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.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With section 16(a) of the Exchange Act.
The directors and officers of the Company, their ages, present positions with
the Company, and a summary of their business experience are set forth below.
Susan A. Cox, 45, a director, has been, since May 1994, a director of American
Equities Overseas (UK) Ltd., London, a wholly owned subsidiary of American
Equities Overseas Inc., a private securities brokerage and corporate finance
firm, after having served as a consultant to the UK company from March 1981.
Previously Ms. Cox was employed by EF Hutton and Oppenheimer & Co. Ms.
Cox is also a director of Euro-Nocopi, S.A.
Dr. Arshavir Gundjian, 63, was Senior Vice President, Technology & Technical
Sales Worldwide from 1995 until January 1, 1999 and a director (since 1991) of
the Company. Dr. Gundjian held a teaching and research position in the
specialized areas of electronic semi-conductors and laser optics at McGill
University in Montreal, Quebec since 1965, and has published more than 25 papers
in these areas. He was Chairman of Graduate Studies of the McGill University
Department of Electrical Engineering until 1989. Dr. Gundjian is also Chairman
of the International Electro-Technical Commission Canadian Subcommittee on laser
equipment. He is a member of the Optical Society of America and the New York
Academy of Sciences. Dr. Gundjian now serves as a consultant to the Company.
Jack H. Halperin, 52, Interim Chairman of the Board of Directors, has been
engaged in the practice of Corporate and Securities Law for 26 years. He holds
an A.B. degree (summa cum laude) from Columbia College and a J.D. degree from
New York University School of Law where he was Note-and-Comment Editor of the
Law Review. Mr. Halperin is also a director of AccuMed International, Inc.,
I-Flow Corporation and Memry Corporation.
Neal Sroka, 46, a director, was President of Sroka Associates, Inc. an
investigative consulting firm, from 1991 to 1997. From 1997 to the present, he
has been Chairman and Chief Executive Officer of Management Services
International.
Rudolph A. Lutterschmidt, 52, Vice President and Chief Financial Officer (since
1994) of the Company, has been employed by the Company for more than five years.
He is a member of the Financial Executives Institute, the Institute of
Management Accountants and is a Certified Management Accountant.
As reported on a Form 8-K filed on June 22, 1998, due to their relationship with
the European investors and American Equities Overseas Inc., the placement agent
in the 1997 private placement, Ms. Cox and Messrs. Halperin and Sroka may be
deemed to be in control of the Registrant to the extent that they agree on a
particular matter or matters affecting the Registrant.
8
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for 1998,
1997 and 1996 earned by or paid to Richard A. Check, the Company's Chief
Executive Officer, and the only other executives whose total annual salary and
bonus for 1998 exceeded $100,000 (the "Named Executives").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
------------------------------------------
Payouts
-------------
Annual Compensation Awards
------------------------------ ---------------------------- All
Other Restricted Options LTIP Other
Salary Bonus Annual Stock SARs Payout Compensation
Name and Position Year ($) ($) Compensation Awards (#) ($) ($)
- ------------------- ------ -------- ------ ------------ ---------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Check(2) 1998 149,599 10,800(1)
1997 60,211 1,800(1) 200,000
Norman A. Gardner(3) 1998 173,983 10,800(1) 325,000
1997 168,448 8,930(1) 200,000
1996 195,000 13,458(1)
Dr. Arshavir 1998 128,931 10,000(1)
Gundjian 1997 142,341 14,333(4)
Sr. VP 1996 165,000 21,500(4) 20,000
Technology &
Technical Sales
Worldwide
- -------------------
</TABLE>
(1) Reimbursement of automobile expense.
(2) Mr. Check resigned as President and Chief Executive Officer and a director
on February 24, 1999.
(3) Mr. Gardner resigned as President & Chief Executive Officer effective
October 24, 1997 and resigned as a director effective March 27, 1998.
(4) Reimbursement of automobile expenses and expense allowances related to
extended foreign travel.
The following table furnishes information concerning stock options granted
during 1998.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------
% of Total Potential Realizable Value
Securities Options/ At Assumed Annual Rates of
Underlying SARs Stock Price Appreciation
Options/ Granted Exercise For Option Term(1)
SARs To All Of Base -----------------------------------
Granted Employees In Price Expiration
Name (#) Fiscal Year ($/SH) date 5%($) 10% ($)
---- ----------- ------------ ---------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Norman A. Gardner 125,000 31.3 0.30 3/2006 17,900 42,900
Norman A. Gardner 200,000 50.0 0.45 3/2006 42,900 103,000
- -------------------
</TABLE>
(1) As required by the rules of the Securities and Exchange Commission, the
dollar amounts reflected in these columns represent the hypothetical gain
that would exist for the options based on assumed 5% and 10% annual
compounded rates of stock price appreciation over the full option term.
These assumed rates would result in a Common Stock price on March 26, 2006,
the date the options first listed above expire, of $.44 and $.64
respectively. If these price appreciation assumptions are applied to all of
the Company's outstanding Common Stock on the grant date, such Common stock
would appreciate in the aggregate by approximately $5 million and $11
million, respectively, over the same term. These prescribed rates are not
intended to forecast possible future appreciation, if any, of the Common
Stock.
The following table sets forth the aggregate number of shares of Common stock
subject to options held by the Named Executives at December 31, 1998.
9
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-
Unexercised Money
Options at Options at
Fiscal Year Fiscal Year
Shares End End
Acquired on ----------------- ---------------
Exercise Value Exercisable/ Exercisable/
Name (#) Realized Unexercisable Unexercisable
---- ----------- -------- ----------------- ---------------
<S> <C> <C>
Richard A. Check................................. 100,000/100,000 -/-
Norman A. Gardner.............................. -/325,000 -/-
Arshavir Gundjian................................. 53,250/- -/-
Employment Contracts
</TABLE>
In October 1997 the Company entered into an Employment Agreement with Richard A.
Check pursuant to which he served as President and Chief Executive Officer of
the company. The Agreement had a three-year term and provided for base
compensation at the rate of $180,000 per annum. Mr. Check's agreement also
provided for a bonus equal to 10% of the excess, if any, or the Company's net
income before taxes for any year over $250,000. By agreement in 1998, Mr. Check
was paid at the rate of $150,000 per annum because of the Company's cash
constraints. Mr. Check resigned as President, Chief Executive Officer and a
director on February 24, 1999. Mr. Check will remain as a consultant to the
Company through December 31, 1999 and will be paid at the rate of $150,000 per
annum during the consultancy period.
Norman A. Gardner entered into an Employment Agreement dated October 24, 1997,
initially having a three-year term. The Agreement was amended effective March
27, 1998. The Agreement, as amended, provides for Mr. Gardner to serve as Senior
Advisor to the Company with a salary at the rate of $180,000 per annum. Mr.
Gardner's agreement also provides for a bonus equal to 10% of the excess, if
any, of the Company's net income before taxes for any year over $250,000. The
bonus may not exceed $125,000 for any year. The term of the Agreement, as
amended, expires on October 31, 2002. Mr. Gardner also received stock options to
purchase 125,000 and 200,000 shares at exercise price of $0.30 and $0.45 per
share, respectively..
The Agreement is terminable for cause consisting of (i) breach by Mr. Gardner of
his obligations under the Agreement or (ii) that Mr. Gardner has committed an
act of dishonesty, moral turpitude or theft.
The Company employed Dr. Arshavir Gundjian through December 31, 1998 under an
agreement that provided for a base salary of $165,000 per annum. By agreement in
1998, Dr. Gundjian was paid at the rate of $130,000 per annum due to the
Company's cash constraints. Under the terms of the agreement, the Company
elected not to renew Dr. Gundjian's employment beyond December 31, 1998, and
thereby exercised its option to retain Dr. Gundjian as a consultant to the
Company for a period of four years under which he will be compensated at the
rate of $82,500 per annum for two years and $62,500 per annum for the final two
years of the agreement. The agreement provides for a cash bonus of up to $82,500
in each of the first two years of the consulting period if certain financial
goals of the Company are met. In addition, the Company has agreed to pay Dr.
Gundjian's lodging and automobile expenses in Pennsylvania, as well as the cost
of travel between the Company's headquarters in West Conshohocken, Pennsylvania
and Dr. Gundjian's home in Montreal, Quebec.
Dr. Gundjian has recently been diagnosed with a serious illness. It is likely
that the illness and the associated treatment will make him unable to perform
services for the Company for a period of three months. The Company cannot
predict any further impact that such illness will have on Dr. Gundjian's
ability to render services to the Company.
The agreement may be terminated by the Company for legal cause, or upon Dr.
Gundjian's death or disability. In the event that Dr. Gundjian's employment is
terminated without cause as a result of his disability or death, Dr. Gundjian
(or his estate) is entitled to receive the balance of the base salary payable to
him through the remaining term of the agreement. The agreement confirms the
Company's ownership of all intellectual property developed during Dr. Gundjian's
employment, and contains his undertaking not to compete with the Company for a
period of three years from the termination of his employment.
Director Compensation
Directors have not been paid any fees for their services as such during the year
ended December 31, 1998. All directors have been and will be reimbursed for
reasonable expenses incurred in connection with attendance at Board of
Directors' meetings.
10
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 26, 1999, The stock ownership of each
person known by the Company to be the beneficial owner of more than 5% of the
Company's Common Stock.
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number
Of Shares
Beneficially Percentage
Name and Address of Beneficial Owners Owned Of Class
- ---------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Daniel Benasutti, 2002 Kerwood Drive, Broomall, PA 19008............. 537,000 1.6
Ross L Campbell, 675 Lewis Lane, Ambler, PA 19002.................... 959,150 2.9
Joseph Falcone, Wyntrelea Drive, Bryn Mawr, PA........................ 130,000 *
Michael A. Feinstein, M.D., P.C., 801 Spruce Street, 3rd Floor, 518,500 1.5
Philadelphia, PA 19107
Stanley Knowlton, 12 Egypt Close, East Hampton, NY 11937............. 559,000 1.7
Michael Voticky, 610 Brazos, #300, Austin, TX 78721.................. 1,000 *
----------- ----------
2,704,650 8.1
</TABLE>
According to a joint filing on Schedule 13D dated February 20, 1999, the
above-named individuals possess voting and disposative power with respect
thereto.
The following table sets forth, as of March 26, 1999, the stock ownership of
each director and Named Executive (as set forth under the heading `Executive
Compensation") individually, and of all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Common Stock
---------------------------
Number
Of Shares Percentage
Beneficially of
Name of Beneficial Owner Owned Class (1)
- ------------------------ ----- ---------
<S> <C> <C>
Susan A. Cox(2)...................................................... 0 *
Dr. Arshavir Gundjian(3)............................................. 135,750 *
Jack H. Halperin..................................................... 0 *
Neal Sroka........................................................... 0 *
Richard A. Check(4).................................................. 150,000 *
Norman A. Gardner(5)................................................. 880,000 2.61
All Executive Officers and Directors as a Group (5 individuals)...... 163,600(6) *
- ---------------
* Less than 1.0%.
</TABLE>
(1) Where the Number of Shares Beneficially Owned (reported in the preceding
column) includes shares which may be purchased upon the exercise of
outstanding stock options which are or within 60 days will become
exercisable ("presently exercisable options") the percentage of class
reported in this column has been calculated assuming the exercise of such
presently exercisable options.
(2) Does not include 780,267 Warrants to purchase a like number of shares of
common stock owned by American Equities Overseas, Inc.
(3) Includes presently exercisable stock options to purchase 53,250 shares.
(4) Mr. Check resigned as President, Chief Executive Officer and as a director
effective February 24, 1999. Includes presently exercisable options to
purchase a total of 100,000 shares.
(5) Includes presently exercisable options to purchase a total of 150,000
shares.
(6) Includes presently exercisable options to purchase a total of 80,500
shares.
Except as stated herein, there are no arrangements known to the Company which
may result in a change in control of the Company and each stockholder has sole
voting and investment power with respect to the Company's common shares included
in the above table.
11
<PAGE>
Item 12. Certain Relationships and Related Transactions
Joel A. Pinsky, Secretary, General Counsel and a director of the Company until
March 27, 1998, is a partner in the Montreal law firm of Gross Pinsky, which
rendered legal services to the Company during the fiscal year ended December 31,
1998. Fees for 1998 services were $61,000. Mr. Pinsky resigned as Secretary and
General Counsel on February 24, 1999.
William F. Drake, a director of the Company until March 27, 1998, is of counsel
to the law firm of Montgomery, McCracken, Walker & Rhoads, Philadelphia,
Pennsylvania. Such law firm furnished legal services to the Company during the
fiscal year ended December 31, 1998. Fees for 1998 services were less than
$60,000.
Jack H. Halperin, Interim Chairman of the Board of Directors and Securities
Counsel, furnished legal services to the Company during the fiscal year ended
December 31, 1998. Fees for 1998 services were less than $60,000.
Susan A. Cox, a director, is employed by American Equities Overseas (UK) Ltd., a
wholly owned subsidiary of American Equities Overseas, Inc., an investment
banking firm. American Equities provided financial public relations services to
the Company during fiscal year ended December 31, 1998. Fees for 1998 services
were less than $60,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Financial Statements are filed as part of this Annual Report
on Form 10-KSB
PAGE
----
Report of Independent Certified Public
Accountants F-1
Balance Sheet as of December 31, 1998 F-2
Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-3
Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-5
Notes to Financial Statements F-6 to F-12
(b) The Exhibit Index begins on Page 14 of this Annual Report on Form 10-KSB.
(c) Registrant has not filed any reports on Form 8-K during the last quarter of
the fiscal year covered by this Annual Report on Form 10-KSB.
12
<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 14, 1998 By: /s/ Jack H. Halperin
------------------------
Jack H. Halperin
Interim Chairman of the Board
Dated: April 14, 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 14, 1998 /s/ Susan Cox
-------------------------------
Susan Cox, Director
Date: April 14, 1998 /s/ Dr. Arshavir Gundjian
-------------------------------
Dr. Arshavir Gundjian, Director
Date: April 14, 1998 /s/ Jack H. Halperin
-------------------------------
Jack H. Halperin, Interim Chairman of the Board
Date: April 14, 1998 /s/ Neal Sroka
-------------------------------
Neal Sroka, Director
13
<PAGE>
The following Exhibits are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Articles of Amendment to Articles of Incorporation(4)
3.4 Article of Amendment to Articles of Incorporation
10.1 Amended and Restated Non-Qualified Stock Option Plan(3)
10.2 Amended and Restated Incentive Stock Option Plan(3)
10.3 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.(6)
10.9 Employment Agreement between Registrant and Richard A. Check(6)
10.10 Employment Agreement between Registrant and Norman A. Gardner(6)
10.11 Employment Agreement between Registrant and Dr. A. Gundjian(6)
10.12 Form of Common Stock Purchase Warrant(6)
10.13 Lease Agreement dated February 17, 1998 relating to premises at
537 Apple Street, West Conshohocken, PA 19428(6)
10.14 Nocopi Technologies, Inc. 1999 Stock Option Plan
10.15 Amended Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing Plan
10.16 Amendment to Employment Agreement between Registrant and Norman A. Gardner.
10.17 Severance Agreement between Registrant and Richard A. Check
10.18 Form of Series B Promissory Note due March 31, 2000
16.1 Letter dated August 25, 1997 from Coopers & Lybrand L.L.P. re: Change in Certifying Accountant(5)
23.1 Consent of BDO Seidman, LLP
27.0 Financial Data Schedule
</TABLE>
14
<PAGE>
(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
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1997
15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Nocopi Technologies, Inc.
W. Conshohocken, Pennsylvania
We have audited the accompanying balance sheet of Nocopi Technologies, Inc. as
of December 31, 1998 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 presentation of the financial
statements and schedule. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of Nocopi
Technologies, Inc. at December 31, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 5, 1999
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
December 31
1998
-----------
Assets
Current assets
Cash and cash equivalents $1,372,900
Accounts receivable less $55,500 allowance
for doubtful accounts 130,800
Prepaid and other 52,400
-----------
Total current assets 1,556,100
Fixed assets
Leasehold improvements 39,100
Furniture, fixtures and equipment 439,400
-----------
478,500
Less: accumulated depreciation 373,800
-----------
104,700
Other assets
Investment in and advances to unconsolidated 206,000
affiliate
Patents, net of $321,300 accumulated amortization 518,900
Other 7,100
-----------
732,000
-----------
$2,392,800
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $219,900
Accrued expenses 142,600
Accrued commissions 126,300
Deferred revenue 122,300
-----------
Total current liabilities 611,100
Long-term notes payable 125,000
Commitments and contingencies
Stockholders' equity
Series A preferred stock $1.00 par value
Authorized - 300,000 shares
Issued and outstanding - none
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 33,587,332 shares 335,900
Paid-in capital 10,406,200
Accumulated other comprehensive loss (12,900)
Accumulated deficit (9,072,500)
-----------
1,656,700
-----------
$2,392,800
===========
See notes to financial statements.
F-2
<PAGE>
Nocopi Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
---------- ----------
Revenues
<S> <C> <C>
Licenses, royalties and fees $1,796,600 $2,085,300
Product and other sales 627,300 960,700
---------- ----------
2,423,900 3,046,000
Cost of sales
Licenses, royalties and fees 358,700 582,900
Product and other sales 586,200 958,600
---------- ----------
944,900 1,541,500
---------- ----------
Gross profit 1,479,000 1,504,500
Operating expenses
Research and development 376,400 480,500
Sales and marketing 790,800 662,900
General and administrative 733,600 903,600
Related party expenses 156,600 197,100
---------- ----------
2,057,400 2,244,100
---------- ----------
Loss from operations (578,400) (739,600)
Other income (expenses)
Amortization of debt issuance costs (6,300) (25,300)
Interest income 93,600 27,800
Interest and bank charges (30,600) (71,000)
Equity in loss of unconsolidated affiliate (27,100) (38,900)
---------- ----------
29,600 (107,400)
---------- ----------
Net loss ($548,800) ($847,000)
========== ==========
Basic and diluted loss
per common share ($.02) ($.05)
Weighted average common shares outstanding 33,587,332 17,192,323
</TABLE>
See notes to financial statements.
F-3
<PAGE>
Nocopi Technologies, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common stock Paid-in Accumulated Comprehensive Comprehensive
Shares Amount Capital Deficit Income (Loss) Loss
------ ------ ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1997 14,080,654 $ 140,800 $ 7,651,000 ($7,676,700) 57,100
Deconsolidation of Euro-Nocopi S.A. 377,300
Private placement, net of expenses 19,506,678 195,100 2,352,900
Stock options issued as compensation 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 (8,523,700) (23,900) ($928,000)
=========
Stock options issued as compensation 10,000
Net loss (548,800) ($548,800)
Translation adjustment 11,000 11,000
---------- --------- ----------- ----------- -------- ---------
Balance-December 31, 1998 33,587,332 $ 335,900 $10,406,200 ($9,072,500) ($12,900) ($537,800)
========== ========= =========== =========== ======== =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net loss ($ 548,800) ($ 847,000)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation 61,200 73,300
Amortization 64,600 81,200
Allowance for doubtful accounts, net 11,400 7,000
Equity in loss of unconsolidated affiliate 27,100 38,900
Stock option compensation 10,000 18,000
----------- -----------
(374,500) (628,600)
Decrease in assets
Accounts receivable 25,200 187,600
Prepaid and other 2,300 95,900
Increase (decrease) in liabilities
Accounts payable and accrued expenses (121,700) 131,800
Deferred revenue 53,700 (6,600)
----------- -----------
(40,500) 408,700
----------- -----------
Cash (used in) operating activities (415,000) (219,900)
Investing Activities
Additions to fixed assets (52,100) (19,500)
Additions to patents (36,600) (137,300)
Cash of Euro, beginning of year (1,641,200)
Advances to affiliate, net (13,000) (44,700)
----------- -----------
Cash (used in) investing activities (101,700) (1,842,700)
Financing Activities
Repayment of notes (825,000)
Issuance of common stock 2,548,000
----------- -----------
Cash (used in) provided by financing activities (825,000) 2,548,000
----------- -----------
Increase (decrease) in cash and cash equivalents (1,341,700) 485,400
Cash and cash equivalents
Beginning of year 2,714,600 2,229,200
----------- -----------
End of year $ 1,372,900 $ 2,714,600
=========== ===========
Supplemental cash flow data
Interest paid $ 22,300 $ 66,500
Deconsolidation of Euro-Nocopi S.A $ 377,300
</TABLE>
See notes to financial statements.
F-5
<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. The Company operates in one principal industry segment.
2. Significant Accounting Policies
Estimates - The preparation of the financial statements in conformity with
Generally Accepted Accounting Principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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. Cash
equivalents are carried at the lower of cost, plus accrued interest, or
market value and are held in money market accounts at local banks. At
December 31, 1998, Nocopi's investments in money market accounts amounted
to $1,343,700.
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. 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.
Investment in Affiliate - The Company's investment, approximately 18%, in
Euro-Nocopi, S.A. (Euro) is accounted for under the equity method due to
its representation on Euro's Board of Directors and the technical
dependence of Euro on the Company. (See note 8.)
Patents are stated at cost less amortization and are being amortized on a
straight-line basis over the lives of the patents (approximately fifteen
years).
Revenues, consisting primarily of license fees and royalties, are recorded
as earned over the license term. Product sales are recognized upon shipment
of products.
Income taxes - Deferred income taxes are provided for all temporary
differences and net 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.
Fair value - The carrying amounts reflected in the balance sheets for cash,
cash equivalents, accounts receivable, and accounts payable approximate
fair value due to the short maturities of these instruments. The fair
values represent estimates of possible value which may not be realized in
the future.
Loss per share - the Company adopted SFAS No. 128, "Earnings Per Share"
resulting in the presentation of basic and diluted earnings per share.
Because the Company reported a net loss in 1998 and 1997, common stock
equivalents, including stock options, warrants and convertible notes were
anti-dilutive.
Recoverability of Long Lived Assets - Long-lived assets and certain
identifiable intangibles, such as patents, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
F-6
<PAGE>
amount of the asset may not be recoverable. The Company is not aware of any
events or circumstances which indicate the existence of an impairment that
would be material to the Company's quarterly or annual financial
statements.
Comprehensive income (loss) - the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", and, accordingly, reports all components of
comprehensive income (loss) in the accompanying statement of stockholders'
equity.
Recently Issued Accounting Standard
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), effective for
periods ending after June 15, 1999, establishes standards for disclosing
information about derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Because the Company does not engage in derivative instruments and hedging
activities, adoption of this statement is not expected to impact financial
statements or disclosures of the Company.
3. Long-term Notes and Stockholders' Equity
During 1998, the Company repaid $825,000 of its $950,000 Series B 7%
Subordinated Convertible Promissory Notes which were payable on March 31,
1998. The remaining $125,000 was extended to March 31, 2000. Under the
extension arrangement, these notes bear interest at 9% and are convertible
into 625,000 shares of the Company's common stock. The carrying cost of the
notes at December 31, 1998 approximates their fair value because the
interest rate approximates current market rates.
During 1998, the Company amended its Articles of Incorporation to increase
the number of authorized shares of common stock from 50,000,000 to
75,000,000.
During 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) 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, warrants for 780,267 shares, 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, 1998 and 1997, the Company had net operating loss
carryforwards ("NOLs") approximating $8,700,000 and $8,200,000,
respectively. These operating losses are available to offset future taxable
income through the years 2014 and 2013, respectively. As a result of the
sale of the Company's common stock in an equity offering in late 1997 and
the issuance of additional shares, the amount of the NOL's carryforwards
may be limited. Additionally, the utilization of these NOL's if available,
to reduce the future income taxes will depend on the generation of
sufficient taxable income prior to their expiration. The Company has
established a 100% valuation allowance for the deferred tax assets due to
uncertainty of their realization.
5. Related Party Transactions
Payments and payment commitments aggregating $156,600 and $472,000 in 1998
and 1997, respectively, were made to firms employing certain officers and
directors for legal fees, consulting services and related expenses. 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 wholly-owned
subsidiary of the Placement Agent was appointed to the Company's Board of
Directors as a representative of the European investors in that private
placement.
F-7
<PAGE>
6. Commitments and Contingencies
The Company conducts its operations in leased facilities and leases
equipment under non-cancelable operating leases expiring at various dates
to 2003.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 1998 are:
$100,800 - 1999; $105,400 - 2000; $110,600 - 2001; $112,000 - 2002; and
$18,400 - 2003.
Total rental expense under operating leases was $140,600 and $123,100 in
1998 and 1997, respectively. The Company has sub-let its former corporate
headquarters for the duration of the least term at a monthly rental
approximating the Company's rental obligation.
The Company has employment and consulting agreements with certain current
and former executive officers and employees, the terms of which expire at
various dates through 2002. Future minimum compensation payments under
these agreements at December 31, 1998 are: $412,500 - 1999; $262,500 -
2000; $242,500 - 2001; and $212,500 - 2002.
From time to time, the Company may be subject to legal proceedings and
claims that 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
The 1996 Stock Option 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.
A summary of stock options under these plans follows:
F-8
<PAGE>
<TABLE>
<CAPTION>
Exercise Weighted
Number of Price Range Average
Shares Per Share Exercise Price
--------- ------------ --------------
<S> <C> <C> <C>
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 .75 to 4.35 1.40
Options granted 400,000 .30 and .45 .38
Options canceled (328,966) .30 to 4.05 1.30
-------
Outstanding at December 31, 1998 854,100 $.30 to $4.35 $ .96
=======
</TABLE>
<TABLE>
<CAPTION>
Exercise Weighted
Option Price Range Average
Shares Per Share Exercise Price
------- ------------ --------------
<S> <C> <C> <C>
Exercisable at year end:
1997 377,666 $.30 to $4.35 $2.44
1998 426,300 $.30 to $4.35 $1.52
Options available for future grant
under all plans:
1997 175,000
1998 0
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Ranges
--------------------------------
1996 Plan Former Plans Total
Range of exercise prices $.30 to $.45 $3.10 to $4.35 $.30 to $4.35
------------ -------------- -------------
<S> <C> <C> <C>
Number outstanding at December 31,
1998 700,000 154,100 854,100
------- ------- -------
Weighted average remaining
contractual life (years) 5.81 1.79 5.08
---- ---- ----
Weighted average exercise price
$.34 $3.79 $.96
---- ----- ----
Exercisable options:
Number outstanding at
December 31, 1998 275,000 151,300 426,300
------- ------- -------
Weighted average remaining
contractual life (years) 3.73 1.77 3.03
---- ---- ----
Weighted average exercise price $.30 $3.74 $1.52
---- ----- -----
</TABLE>
The weighted average fair value per share of options granted was $.19 and $.16
in 1998 and 1997, respectively.
F-9
<PAGE>
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Compensation costs for shares issued under performance share plans is
recorded based upon the current market value of the Company's stock at the end
of each period. The Company has adopted the disclosure-only provisions of
Statement of Financial accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation" for employees and employee-directors as defined in
SFAS No. 123. Accordingly, no compensation cost has been recognized for stock
option and warrant grants that occurred in 1998 and 1997. Had compensation cost
for the Company's stock option grants to employees and employee-directors been
determined based on the fair value at the date of grants in accordance with the
provisions of SFAS No. 123, the Company would have amortized the cost over the
vesting period of the option. The Company's 1998 and 1997 net loss per common
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss applicable to common stockholders
As reported ($548,800) ($847,000)
Pro forma ($616,000) ($929,700)
Loss per share applicable to common shares
As reported ($.02) ($.05)
Pro forma ($.02) ($.06)
</TABLE>
F-10
<PAGE>
The fair value of each option granted is estimated on the date of grant
based on a modified Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997,
respectively: expected volatility of 46% and 46%; risk free interest rates
of 5.7% and 6.0% to 7.2% and expected lives of two years.
At December 31, 1998, the Company has reserved 13,033,983 shares of common
stock for possible future issuance upon exercise of stock options, warrants
and convertible securities. Subsequent to 1998, the Company's Board of
Directors approved the 1999 Stock Option Plan consisting of two million
shares of common stock.
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 1998 or 1997.
8. Affiliate
The Company's affiliate, 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 1999 in the event that no public offering of Euro has been made by
that date.
The Company holds an approximately 18% interest in Euro and warrants
permitting it to increase its interest in Euro to 55%. Prior to 1997, the
Company exercised operational and financial control over Euro and,
accordingly, consolidated the accounts of Euro with those of the Company.
During 1997, however, the Company ceased to exercise effective control over
Euro resulting from a dispute between the Company and Euro under the
license agreement 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 accordance with a 1997 settlement, the Company agreed to
credit Euro $154,500 as Euro's share of previously collected minimum
royalties 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 was charged to cost of sales in 1997.
In connection with the settlement agreement, 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 at the same conversion
rate available to Euro's European investors. This call right expires
December 31, 2001.
The licensing agreement between the two companies was also 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.
Subsequently, a Euro director was appointed to Nocopi'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
approximate 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.
In 1998 and 1997, revenues totaling approximately $240,000 and $200,000,
respectively, were derived from Euro.
F-11
<PAGE>
9. Major Customer Information
The Company's two largest customers accounted for approximately 24% and
20%, respectively, of 1998 revenues, approximately 26% and 20%,
respectively, of 1997 revenues and approximately 29% and 0%, respectively,
of accounts receivable at December 31, 1998. 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-12
<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)
3.4 Article of Amendment to Articles of Incorporation*
10.1 Amended and Restated Non-Qualified Stock Option Plan(3)
10.2 Amended and Restated Incentive Stock Option Plan(3)
10.3 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.(6)
10.9 Employment Agreement between Registrant and Richard A. Check(6)
10.10 Employment Agreement between Registrant and Norman A. Gardner(6)
10.11 Employment Agreement between Registrant and Dr. A. Gundjian(6)
10.12 Form of Common Stock Purchase Warrant(6)
10.13 Lease Agreement dated February 17, 1998 relating to premises
at 537 Apple Street, West Conshohocken, PA 19428(6)
10.14 Nocopi Technologies, Inc. 1999 Stock Option Plan*
10.15 Amended Summary Plan Description for Nocopi Technologies, Inc. 401(k)
Profit Sharing Plan*
10.16 Amendment to Employment Agreement between Registrant and Norman A.
Gardner.*
10.17 Severance Agreement between Registrant and Richard A. Check*
10.18 Form of Series B Promissory Note due March 31, 2000*
16.1 Letter dated August 25, 1997 from Coopers & Lybrand L.L.P. re: Change
in Certifying Accountant(5)
23.1 Consent of BDO Seidman, LLP
27.0 Financial Data Schedule*
<PAGE>
(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
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1997
NOCOPI TECHNOLOGIES, INC.
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
NOCOPI TECHNOLOGIES, INC., a Maryland corporation having its principal
office in Baltimore City, Maryland (the "Corporation") hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended by deleting the
first sentence of Article V thereof and replacing such sentence with the
following:
"The aggregate number of shares which the corporation shall have authority
to issue is Seventy-Five Million (75,000,000) shares of common stock having
a par value of $.002 per share and Three Million (3,000,000) shares of
preferred stock having a par value of $1.00 per share."
SECOND: The amendment of the Charter of the Corporation as hereinabove set
forth has been duly advised by the board of directors and approved by the
stockholders of the Corporation.
THIRD: Prior to the amendment, the total number of shares of all classes
which the Corporation had authority to issue was Fifty-Three Million
(53,000,000), consisting of Fifty Million (50,000,000) shares of common stock,
par value $.002 per share, and Three Million (3,000,000) shares of preferred
stock, par value $1.00 per share, and the aggregate par value of all shares of
all classes was 3,500,000. Subsequent to the amendment, the total number of
shares of all classes which the Corporation had authority to issue was
Seventy-Five Million (75,000,000) shares of common stock, par value $.002 per
share, and Three Million (3,000,000) shares of preferred stock, par value $1.00
per share, and the aggregate par value of all shares of all classes was
$3,750,000. The information required by subsection (b) (2) (i) of Section 2-607
of the Maryland General Corporation Law was not changed by the amendment.
<PAGE>
IN WITNESS WHEREOF, Nocopi Technologies, Inc. has caused these presents to
be signed in its name and on its behalf by its president and attested by its
Assistant Secretary on the day of June 1998.
NOCOPI TECHNOLOGIES, INC.
By: /s/ Richard A. Check
---------------------------
Richard A. Check
President
Attest:
/s/ Joyce Csanady
- ----------------------------------
Joyce Csanady, Assistant Secretary
THE UNDERSIGNED, President of Nocopi Technologies, Inc., who executed on
behalf of said corporation the foregoing Articles of Amendment, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles of Amendment to be the corporate act of
said corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Richard A. Check
------------------------
Richard A. Check
2
NOCOPI TECHNOLOGIES, INC.
1999 STOCK INCENTIVE PLAN
1. Name, Purpose and Eligibility. This plan shall be known as the Nocopi
Technologies, Inc. 1999 Stock Incentive Plan (the "Plan"). The purpose of the
Plan is to advance the interests of Nocopi Technologies, Inc. (the "Company") by
encouraging the acquisition of its common stock by directors and key employees
of the Company and its subsidiaries upon whose judgment and ability the Company
depends for its long term growth and development. Accordingly, the Plan is
intended to promote a close identity of interests between the Company and its
directors and employees as well as a means to attract and retain outstanding
management. All salaried employees of the Company and its subsidiaries and all
non-employee directors of the Company shall be eligible to receive options under
and in accordance with the terms of the Plan. In addition, consultants and
advisors to the Company may receive options under the Plan to the extent that
such persons are deemed to be employees for the purposes of registering shares
issuable upon the exercise of options under the Securities Act of 1933 (the
"Act") through the use of Form S-8 promulgated thereunder. Persons who may
receive options granted under this Plan are hereinafter referred to as "Eligible
Persons."
ARTICLE I
EFFECTIVE DATE AND TERM OF PLAN
1.1 Term of Plan. This Plan became effective as of the Effective Date and
shall continue in effect until the Expiration Date, at which time this Plan
shall automatically terminate.
1.2 Effect on Awards. Awards may be granted during the Plan Term, but no
Awards may be granted after the Plan Term. Notwithstanding the foregoing, each
Award properly granted under this Plan during the Plan Term shall remain in
effect after termination of this Plan until such Award has been exercised,
terminated, or expired in accordance with its terms and the terms of this Plan.
<PAGE>
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Number of Shares. The maximum number of shares of Common Stock that may
be issued pursuant to Awards granted under this Plan shall be 2,000,000, subject
to adjustment as set forth in Section 2.4.
2.2 Source of Shares. The Common Stock to be issued under this Plan will be
made available, at the discretion of the Board, either from authorized but
unissued shares of Common Stock or from previously issued shares of Common Stock
reacquired by the Company, including without limitation shares purchased on the
open market.
2.3 Availability of Unused Shares. Shares of Common Stock subject to
unexercised portions of any Award granted under this Plan that expire, terminate
or are cancelled, and shares of Common Stock issued pursuant to an Award under
this Plan that are reacquired by the Company pursuant to the terms of the Award
under which such shares were issued, will again become available for the grant
of further Awards under this Plan.
2.4 Adjustment Provisions.
If (i) the outstanding shares of Common Stock of the Company are
increased, decreased or exchanged for a different number or kind of
shares or other securities, or if additional shares or new or
different shares or other securities are distributed in respect of
such shares of Common Stock (or any stock or securities received with
respect to such Common Stock), through merger, consolidation, sale or
exchange of all or substantially all of the properties of the Company,
reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, spin-off or other distribution with
respect to such shares of Common Stock (or any stock or securities
received with respect to such Common Stock), or (ii) the value of the
outstanding shares of Common Stock of the Company is reduced by reason
of an extraordinary cash dividend, an appropriate and proportionate
adjustment may be made in (1) the maximum number and kind of shares
subject to this Plan as provided in Section 2.1, (2) the number and
kind of shares or other securities subject to then outstanding awards,
and/or (3) the
2
<PAGE>
price for each share or other unit of any other securities subject to
then outstanding Awards.
(b) No fractional interests will be issued under the Plan resulting
from any adjustments.
(c) To the extent any adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Administering
Body, whose determination in that respect shall be final, binding
and conclusive.
(d) The grant of an Award pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve,
liquidate or sell, or transfer all or any part of its business or
assets.
(e) No adjustment to the terms of an Incentive Stock Option shall be
made unless such adjustment either (i) would not cause the Option
to lose its status as an Incentive Stock Option or (ii) is agreed
to in writing by the Administering Body and the Recipient.
2.5 Reservation of Shares. The Company will at all times reserve and keep
available such number of shares of Common Stock as shall equal at least the
number of shares of Common Stock subject to then outstanding Awards issuable in
shares of Common Stock under this Plan.
3
<PAGE>
ARTICLE III
ADMINISTRATION OF PLAN
3.1 Administering Body.
(a) Subject to the provisions of Section 3.1(b)(ii), this Plan shall
be administered by the Board or by a Committee of the Board
appointed pursuant to Section 3.1(b).
(b)(i) The Board in its sole discretion may from time to time appoint
a Committee of not less than two Board members to administer
this Plan and, subject to applicable law, to exercise all of
the powers, authority and discretion of the Board under this
Plan. The Board may from time to time increase or decrease (but
not below two) the number of members of the Committee, remove
from membership on the Committee all or any portion of its
members, and/or appoint such person or persons as it desires to
fill any vacancy existing on the Committee, whether caused by
removal, resignation or otherwise. The Board may disband the
Committee at any time and revest in the Board the
administration of this Plan.
(ii) Notwithstanding the foregoing provisions of this Section
3.1(b) to the contrary, as long as the Company is an Exchange
Act Registered Company, (1) the Board shall appoint the
Committee, (2) this Plan shall be administered by the
Committee, and (3) each of the Committee's members shall be
Disinterested Directors, and in additions, if Awards are to be
made to persons subject to Section 162(m) of the IRC and such
Awards are intended to constitute Performance Based
Compensation, then each of the Committee's members shall, in
addition to being a Disinterested Director, shall also be an
Outside Director.
4
<PAGE>
(iii) The Committee shall report to the Board the names of Eligible
Persons granted Awards, the number of shares of Common Stock
covered by each Award, and the terms and conditions of each
such Award.
3.2 Authority of Administering Body.
(a) Subject to the express provisions if this Plan, the Administering
Body shall have the power to interpret and construe this Plan and
any Award Documents or other documents defining the rights and
obligations of the Company and Recipients hereunder and
thereunder to determine all questions arising hereunder and
thereunder, to adopt and amend such rules and regulations for the
administration hereof and thereof as it may deem desirable, and
otherwise to carry out the terms of this Plan and such Award
Documents and other documents. The interpretation and
construction by the Administering Body of any provisions of this
Plan or any Award shall be conclusive and binding. Any action
taken by, or inaction of, the Administering Body relating to this
Plan or any Awards shall be within the absolute discretion of the
Administering Body and shall be conclusive and binding upon all
persons. Subject only to compliance with the express provisions
hereof, the Administering Body may act in its absolute discretion
in matters related to this Plan and any and all Awards.
(b) Subject to the express provisions of this Plan, the Administering
Body may from time to time in its discretion select the Eligible
Persons to whom, and the time or times at which, Incentive Awards
shall be granted or sold, the nature of each Incentive Award, the
number of shares of Common Stock or the number of rights that
make up or underlie each Incentive Award, the period for the
exercise of each Incentive Award, and such other terms and
conditions applicable to each individual Incentive Award as the
Administering Body shall determine. The Administering Body may
grant at any time new Incentive Awards to an
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Eligible Person who has previously received Incentive Awards or
other grants (including other stock options) whether such prior
Incentive Awards or other grants (including other stock options)
whether such prior Incentive Awards or such other grants are
still outstanding, have previously been exercised as a whole or
in part, or are cancelled in connection with the issuance of new
Incentive Awards. The Administering Body may grant Incentive
Awards singly or in combination or in tandem with other Incentive
Awards as it determines in its discretion. The purchase price,
exercise price, initial value and any and all other terms and
conditions of the Incentive Awards may be established by the
Administering Body without regard to existing Incentive Awards or
other grants.
(c) Any action of the Administering Body with respect to the
administration of this Plan shall be taken pursuant to a majority
vote of the authorized number of members of the Administering
Body or by the unanimous written consent of its members;
provided, however, that (i) if the Administering Body is the
Committee and consists of two members, then actions of the
Administering Body must be unanimous, and (ii) if the
Administering Body is the Board, actions taken at a meeting of
the Board shall be valid if approved by directors constituting a
majority of the required quorum for such meeting.
3.3 No Liability. No member of the Board or the Committee or any designee
thereof will be liable for any action or inaction with respect to this Plan or
any Award or any transaction arising under this Plan or any Award except in
circumstances constituting bad faith of such member.
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3.4 Amendments.
(a) The Administering Body may, insofar as permitted by applicable
law, rule or regulation, from time to time suspend or discontinue
this Plan or revise or amend it in any respect whatsoever, and
this Plan as so revised or amended will govern all Awards
hereunder, including those granted before such revision or
amendment; provided, however, that no such revision or amendment
shall alter, impair or diminish any rights or obligations under
any Award theretofore granted under this Plan without the written
consent of the Recipient to whom such Award was granted. Without
limiting the generality of the foregoing, the Administering Body
is authorized to amend this Plan to comply with or take advantage
of amendments to applicable laws, rules or regulations, including
amendments to the Securities Act, Exchange Act the IRC or any
rules or regulations promulgated thereunder. No stockholder
approval of any amendment or revision shall be required unless
(i) such approval is required by applicable law, rule or
regulation or (ii) an amendment or revision to this Plan would
materially increase the number of shares subject to this Plan (as
Adjusted under Section 4.4), materially modify the requirements
as to eligibility for participation in this Plan, extend the
final date upon which Awards may be granted under this Plan, or
otherwise materially increase the benefits accruing to Recipients
in a manner not specifically contemplated herein, or affect this
Plan's compliance with Rule 16b-3 or applicable provisions of or
regulations under the IRC, and stockholder approval of the
amendment or revision is required to comply with Rule 16b-3 or
applicable provisions of or rules under the IRC.
(b) The Administering Body may, with the written consent of a
Recipient, make such modifications in the terms and conditions of
an Incentive Award as it deems advisable. Without limiting the
generality of the foregoing, the Administering Body may, in its
discretion with the written consent of the Recipient, at any time
and from time to time
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after the grant of any Incentive Award accelerate or extend the
vesting or exercise price of Incentive Awards held by such
Recipient by cancellation of such Incentive Awards and granting
of Incentive Awards at lower purchase or exercise prices or by
modification, extension or renewal of such Incentive Awards. In
the case of Incentive Stock Options, Recipients acknowledge that
extensions of the exercise period may result in the loss of the
favorable tax treatment afforded incentive stock options under
Section 422 of the IRC.
(c) Except as otherwise provided in this Plan or in the applicable
Award Document, no amendment, revision, suspension or termination
of this Plan will, without the written consent of the Recipient,
alter, terminate, impair or adversely affect any right or
obligation under any Award previously granted under this Plan.
3.5 Other Compensation Plans. The adoption of this Plan shall not affect
any other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, whether or not approved by stockholders.
3.6 Plan Binding on Successors. This Plan shall be binding upon the
successors and assigns of the Company.
3.7 References to Successor Statutes, Regulations and Rules. Any reference
in this Plan to a particular statute, regulation or rule shall also refer to any
successor provision of such statute, regulation or rule.
3.8 Issuances for Compensation Purposes Only. This Plan constitutes an
"employee benefit plan" as defined in Rule 405 promulgated under the Securities
Act. Awards to eligible employees or directors shall be made for any lawful
consideration, including compensation for services rendered, promissory notes or
otherwise. Awards to consultants and advisors shall be made only in exchange for
bona fide services rendered by such consultants or advisors and such services
must be in connection with the offer and sale of securities in a capital-raising
transaction.
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3.9 Invalid Provisions. In the event that any provisions of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision were not contained herein.
3.10 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the State of Maryland, without giving
effect to the principles of the conflicts of laws thereof.
ARTICLE IV
GENERAL AWARD PROVISIONS
4.1 Participation in Plan.
(a) A person shall be eligible to receive grants of Incentive Awards
under this Plan if, at the time of the grant of the Incentive
Award, such person is an Eligible Person.
(b) Incentive Stock Options may be granted only to Eligible Persons
meeting the employment requirements of Section 422 of the IRC.
(c) Notwithstanding anything to the contrary herein, the
Administering Body may, in order to fulfill the purposes of this
Plan, modify grants of Incentive Awards to Recipients who are
foreign nationals or employed outside of the United States to
recognize differences in applicable law, tax policy or local
custom.
4.2 Award Documents.
(a) Each Award granted under this Plan shall be evidenced by an
agreement duly executed on behalf of the Company and by the
Recipient or, in the Committee's discretion, a confirming
memorandum issued by the Company to the Recipient, setting forth
such terms and conditions applicable to the Award as the
Committee may in its discretion
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determine. Award Documents may but need not be identical and
shall comply with and be subject to the terms and conditions of
this Plan, a copy of which shall be provided to each Recipient
and incorporated by reference into each Award Document. Any Award
Document may contain such other terms, provisions and conditions
not inconsistent with this Plan as may be determined by the
Committee.
(b) In case of any conflict between this Plan and any Award Document,
this Plan shall control.
4.3 Exercise of Stock Options. No Stock Option shall be exercisable except
in respect of whole shares, and fractional share interests shall be disregarded.
Not less than 100 shares of Common Stock (or such other amount as is set forth
in the applicable Award Documents) may be purchased at one time and Stock
Options must be exercised in multiples of 100 unless the number purchased is the
total number at the time available for purchase under the terms of the Stock
Option. A Stock Option shall be deemed to be exercised when the Secretary or
other designated official of the Company receives written notice of such
exercise from the Recipient, together with payment of the exercise price made in
accordance with Section 4.4 and any amounts required under Section 4.11.
Notwithstanding any other provision of this Plan, the Administering Body may
impose, by rule and/or in Award Documents, such conditions upon the exericise of
Stock Options (including without limitation conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including without limitation Rule 16b-3 and Rule 10b-5
under the Exchange Act, and any amounts required under Section 4.12 or other
applicable section of or regulation under the IRC.
4.4 Payment For Awards.
(a) Payment of Exercise Price. The exercise price or other payment
for an Award shall be payable upon the exercise of a Stock Option
or upon other purchase of shares pursuant to an Award granted
hereunder by delivery of legal tender of the United States or
payment of such other consideration as the Administering Body may
from time to time deem acceptable in any particular instance.
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(b) The Company may assist any person to whom an Award is granted
hereunder (including without limitation any officer or eligible
director of the Company) in the payment of the purchase price or
other amounts payable in connection with the receipt or exercise
of that Award, by lending such amounts to such person on such
terms and at such rates of interest and upon such security (if
any) as shall be approved by the Administering Body.
(c) In the discretion of the Administering Body, Awards may be
exercised by capital stock of the Company delivered in transfer
to the Company by or on behalf of the person exercising the Award
and duly endorsed in blank or accompanied by stock powers duly
endorsed in blank, with signatures guaranteed in accordance with
the Exchange Act if required by the Administering Body, or
retained by the Company from the stock otherwise issuable upon
exercise or surrender of vested and/or exercisable Awards or
other equity incentive awards previously granted to the Recipient
and being exercised (if applicable) (in either case valued at
Fair Market Value as of the exercise date); or such other
consideration as the Administering Body may from time to time in
the exercise of its discretion deem acceptable in any particular
instance; provided, however, that the Administering Body may, in
the exercise of its discretion, (i) allow exercise of an Award in
a broker-assisted or similar transaction in which the exercise
price is not received by the Company until promptly after
exercise, and/or (ii) allow the Company to loan the exercise
price to the person entitled to exercise the Award, if the
exercise will be followed by a prompt sale of some or all of the
underlying shares and a portion of the sale proceeds is dedicated
to full payment of the exercise price and amounts required
pursuant to Section 4.11.
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4.5 No Employment Rights. Nothing contained in this Plan (or in Award
Documents or in any other documents related to this Plan or to Awards granted
hereunder) shall confer upon any Eligible Person or Recipient any right to
continue in the employ of the Company or any Affiliated Entity or constitute any
contract or agreement of employment or engagement of such Eligible Person or
Recipient, with or without cause. Except as expressly provided in this Plan or
in any statement evidencing the grant of an Award pursuant to this Plan, the
Company shall have the right to deal with each Recipient in the same manner as
if this Plan and any such statement evidencing the grant of an Award pursuant to
this Plan did not exist, including without limitation with respect to all
matters related to the hiring, discharge, compensation and conditions of the
employment or engage of the Recipient. Any question(s) as to whether and when
there has been a termination of a Recipient's employment or engagement, the
reason (if any) for such termination, and/or the consequences thereof under the
terms of this Plan or any statement evidencing the grant of an Award pursuant to
this Plan shall be determined by the Administering Body and the Administering
Body's determination thereof shall be final and binding.
4.6 Restrictions Under Applicable Laws and Regulations.
(a) All Awards granted under this Plan shall be subject to the
requirement that, if at any time the Company shall determine, in
its discretion, that the listing, registration or qualification
of the shares subject to Awards granted under this Plan upon any
securities exchange or under any federal, state or foreign law,
or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection
therewith, such Award may not be exercised as a whole or in part
unless and until such listing, registration, qualification,
consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Company. During the term of
this Plan, the Company will use its reasonable efforts to seek to
obtain from the appropriate regulatory agencies any requisite
qualifications, consents, approvals or authorizations in order to
issue and sell such number of shares of its Common Stock as shall
be sufficient to satisfy the requirements of this Plan. The
inability of the Company to obtain from any
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such regulatory agency having jurisdiction thereof the
qualifications, consents, approvals or authorizations deemed by
the Company to be necessary for the lawful issuance and sale of
any shares of its Common Stock hereunder shall relieve the
Company of any liability in respect of the nonissuance or sale of
such stock as to which such requisite authorization shall not
have been obtained.
(b) The Company shall be under no obligation to register or qualify
the issuance of Awards or underlying shares under the Securities
Act or applicable state securities laws. Unless the issuance of
Awards and underlying shares have been registered under the
Securities Act and qualified or registered under applicable state
securities laws, the Company shall be under no obligation to
issue any Awards or underlying shares of Common Stock covered by
any Award unless the Awards and underlying shares may be issued
pursuant to applicable exemptions from such registration or
qualification requirements. In connection with any such exempt
issuance, the Administering Body may require the Recipient to
provide a written representation and undertaking to the Company,
satisfactory in form and scope to the Company and upon which the
Company may reasonably rely, that such Recipient is acquiring
such Awards and underlying shares for such Recipient's own
account as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares of stock,
and that such person will make no transfer of the same except in
compliance with any rules and regulations in force at the time of
such transfer under the Securities Act and other applicable law,
and that if shares of stock are issued without such registration,
a legend to this effect (together with any other legends deemed
appropriate by the Administering Body) may be endorsed upon the
securities so issued. The Company may also order its transfer
agent to stop transfers of such shares. The Administering Body
may also require the Recipient to provide the Company such
information and other documents as the Administering Body may
request in order to satisfy
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the Administering Body as to the investment sophistication and
experience of the Recipient and as to any other conditions for
compliance with any such exemptions from registration or
qualification.
4.7 Additional Conditions. Any Incentive Award may also be subject to such
other provisions (whether or not applicable to any other Award or Recipient) as
the Administering Body determines appropriate including without limitation
provisions to assist the Recipient in financing the purchase of Common Stock
through the exercise of Stock Options, provisions for the forfeiture of or
restrictions on resale or other disposition of shares of Common Stock acquired
under any form of benefit in the event the Recipient elects to dispose of such
shares, and provisions to comply with federal and state income tax withholding
requirements.
4.8 No Privileges of Stock Ownership. Except as otherwise set forth herein,
a Recipient or a permitted transferee of an Award shall have no rights as a
stockholder with respect to any shares issuable or issued in connection with the
Award until the date of the receipt by the Company of all amounts payable in
connection with exercise of the Award and performance by the Recipient of all
obligations thereunder. Status as an Eligible Person shall not be construed as a
commitment that any Award will be granted under this Plan to an Eligible Person
or to Eligible Persons generally. No person shall have any right, title or
interest in any fund or in any specific asset (including shares of capital
stock) of the Company by reason of any Award granted hereunder. Neither this
Plan (or any documents related hereto) nor any action taken pursuant hereto
shall be construed to create a trust of any kind or a fiduciary relationship
between the Company and any person. To the extent that any person acquires a
right to receive an Award hereunder, such right shall be no greater than the
right of any unsecured general creditor of the Company.
4.9 Nonassignability. No Award granted under this Plan shall be assigned or
transferable except (i) by will or by the laws of descent and distribution, or
(ii) subject to the final sentence of this Section 5.9, upon dissolution of
marriage pursuant to a qualified domestic relations order or, in the discretion
of the Administering Body and under circumstances that would not adversely
affect the interests of the Company, pursuant to a nominal transfer that does
not result in a change in beneficial ownership.
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During the lifetime of a Recipient, an Award granted to such person shall be
exercisable only by Recipient (or the Recipient's permitted transferee) or such
person's guardian or legal representative. Notwithstanding the foregoing, (i) no
Award owned by a Recipient subject to Section 16 of the Exchange Act may be
assigned or transferred in any manner inconsistent with Rule 16b-3, and (ii)
Incentive Stock Options (or other Awards subject to transfer restrictions under
the IRC) may not be assigned or transferred in violation of Section 422(b)(5) of
the IRC (or any comparable or successor provision) or the regulations
thereunder, and nothing herein is intended to allow such assignment or transfer.
4.10 Information To Recipients.
(a) The Administering Body in its sole discretion shall determine
what, if any, financial and other information shall be provided
to Recipients and when such financial and other information shall
be provided after giving consideration to applicable federal and
state laws, rules and regulations, including without limitation
applicable federal and state securities laws, rules and
regulations.
(b) The furnishing of financial and other information that is
confidential to the Company shall be subject to the Recipient's
agreement that the Recipient shall maintain the confidentiality
of such financial and other information, shall not disclose such
information to third parties, and shall not use the information
for any purpose other than evaluating an investment in the
Company's securities under this Plan. The Administering Body may
impose other restrictions on the access to and use of such
confidential information and may require a Recipient to
acknowledge the Recipient's obligations under this Section
4.10(b) (which acknowledgment shall not be a condition to
Recipient's obligations under this Section 4.10(b).
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4.11 Withholding Taxes. Whenever the granting, vesting or exercise of any
Award granted under this Plan, or the transfer of any shares issued upon
exercise of any Award, gives rise to tax withholding liabilities or obligations,
the Administering Body shall have the right to require the Recipient to remit to
the Company an amount sufficient to satisfy any federal, state and local
withholding tax requirements prior to issuance of such shares. The Administering
Body may, in the exercise of its discretion, allow satisfaction of tax
withholding requirements by accepting delivery of stock of the Company or by
withholding a portion of the stock otherwise issuable in connection with an
Award.
4.12 Legends on Awards and Stock Certificates. Each Award Document and each
certificate representing shares acquired upon vesting or exercise of an Award
shall be endorsed with all legends, if any, required by applicable federal and
state securities and other laws to be placed on the Award Document and/or the
certificate. The determination of which legends, if any, shall be placed upon
Award Documents or the certificates shall be made by the Administering Body in
its sole discretion and such decision shall be final and binding.
4.13 Effect of Termination of Employment on Incentive Awards.
(i) Termination for Just Cause. Subject to subsection (iii) below,
and except as otherwise provided in a written agreement between
the Company and Recipient, which may be entered into at any time
before or after termination of employment, in the event of a Just
Cause Dismissal of a Recipient all of the Recipient's unexercised
Stock Options, whether or not vested, shall expire and become
unexercisable as of the date of such Just Cause Dismissal.
(ii) Termination other than for Just Cause. Subject to subsection
(iii) below, and except as otherwise provided in a written
agreement between the Company and the Recipient, which may be
entered into at any time before or after termination of
employment, in the event of a Recipient's termination of
employment for:
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(A) any reason other than for Just Cause Dismissal, death,
Permanent Disability or normal retirement, the Recipient's
Stock Options, whether or not vested, shall expire and
become unexercisable as of the earlier of (1) the date such
Stock Options would expire in accordance with their terms
had the Recipient remained employed and (2) thirty days
after the date of employment termination.
(B) death, Permanent Disability or normal retirement, the
Recipient's unexercised Options shall, whether or not
vested, expire and become unexercisable as of the earlier of
(1) the date such Stock Options would expire in accordance
with their terms had the Recipient remained employed and (2)
six months after the date of employment termination.
(iii) Alteration of Vesting and Exercise Periods. Notwithstanding
anything to the contrary in subsections (i) or (ii) above, the
Administering Body may in its discretion designate shorter or
longer periods to exercise Stock Options following a Recipient's
termination of employment; Provided, however, that any shorter
periods determined by the Administering Body shall be effective
only if provided for in the instrument that evidences the grant
to the recipient of such Stock Options or if such shorter period
is agreed to in writing by the Recipient. Notwithstanding
anything to the contrary herein, Stock Options shall be
exercisable by a Recipient (or the Recipient's successor in
interest) following such Recipient's termination of employment
only to the extent that installments thereof had become
exercisable on or prior to the date of such termination;
provided, however, the Administering Body may, in its
discretion, elect to accelerate the vesting of all or any
portion of any Stock Options that had not become exercisable on
or prior to the date of such termination.
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(iv) Leave of Absence. In the case of any employee on an approved
leave of absence, the Administering Body may make such provision
respecting continuance of a Stock Option as the Administering
Body in its discretion deems appropriate, except that in no
event shall a Stock Option be exercisable after the date such
Stock Options would expire in accordance with its terms had the
Recipient remained continuously employed.
4.15 Limits on Awards to Certain Eligible Persons. Notwithstanding any
other provisions of this Plan, no one Eligible Person shall be granted any
Awards with respect to more then 200,000 shares of Common Stock in any one
calendar year; Provided, however, that this limitation shall not apply if it is
not required in order for the compensation attributable to Awards hereunder to
qualify as Performance-Based Compensation. The limitation set forth in this
Section 4.15 shall be subject to adjustment as provided in Section 2.4 or under
Article VII, but only to the extent such adjustment would not affect the status
of compensation attributable to Awards hereunder as Performance-Based
Compensation.
ARTICLE V
INCENTIVE AWARDS
6.1 Stock Options.
(a) Nature of Stock Options. Stock Options may be Incentive Stock
Options or Nonqualified Stock Options.
(b) Option Exercise Price. The exercise price for each Stock Option
shall be determined by the Administering Body as of the date such
Stock Option is granted. The exercise price may be greater than
or less than the Fair Market Value of the Common Stock subject to
the Option, provided that in no event shall the exercise price be
less than the par value of the shares of Common Stock subject to
the Stock Option. The Administering Body may, with the consent of
the Recipient and subject to the compliance with statutory or
administrative requirements applicable to Incentive Stock
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Options, amend the terms of any Stock Option to provide that the
exercise price of the shares remaining subject to the Stock
Option shall be re-established at a price not less than 100% of
the Fair Market Value of the Common Stock on the effective date
of the amendment. No modification of any term or of any Stock
Option which is amended in accordance with the foregoing shall be
required, although the Administering Body may, in its discretion,
make such further modifications of any such Stock Option as are
not inconsistent with this Plan.
(c) Option Period and Vesting. Stock Options granted hereunder shall
vest and may be exercised as determined by the Administering
Body, except that exercise of such Stock Options after
termination of the Recipient's employment shall be subject to
Section 4.13. Each Stock Option granted hereunder and all rights
or obligations thereunder shall expire on such date as shall be
determined by the Administering Body, but no later than 10 years
after the date the Stock Option is granted and shall be subject
to earlier termination as provided herein or in the Award
Document. The Administering Body may in its discretion at any
time and from time to time after the grant of a Stock Option
accelerate vesting of such Option as a whole or part by
increasing the number of shares then purchasable, provided that
the total number of shares subject to such Stock Option may not
be increased. Except as otherwise provided herein, a Stock Option
shall become exercisable, as a whole or in part, on the date or
dates specified by the Administering Body and thereafter shall
remain exercisable until the expiration or earlier termination of
the Stock Option.
(d) Special Provisions Regarding Incentive Stock Options.
(i) Notwithstanding anything in this Section 5.1 to the
contrary, the exercise price and vesting period of any Stock
Option intended to qualify as an Incentive Stock Option
shall comply with the provisions of Section 422 of the IRC
and the regulations
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thereunder. As of the Effective Date, such provisions
require, among other matters, that (A) the exercise price
must not be less than the Fair Market Value of the
underlying stock as of the date the Incentive Stock Option
is granted, and not less than 110% of the Fair Market Value
as of such date in the case of a grant to a Significant
Stockholder; and (B) at the Incentive Stock Option not be
exercisable after the expiration of five years from the date
of grant in the case of an Incentive Stock Option granted to
a Significant Stockholder.
(ii) The aggregate Fair Market Value (determined as of the
respective date or dates of grant) of the Common Stock for
which one or more Options granted to any Recipient under
this Plan (or any other option plan of the Company or any or
its subsidiaries or affiliates) may for the first time
become exercisable as Incentive Stock Options under the
federal tax laws during any one calendar year shall not
exceed $100,000.
(iii) Any Options granted as Incentive Stock Options pursuant to
this Plan that for any reason fail or cease to qualify as
such shall be treated as Nonqualified Stock Options.
5.2 Restricted Stock.
(a) Award of Restricted Stock. The Administering Body shall determine
the Purchase Price (if any), the terms of payment of the Purchase
Price, the restrictions upon the Restricted Stock, and when such
restrictions shall lapse.
(b) Requirements of Restricted Stock. All shares of Restricted Stock
granted or sold pursuant to this Plan will be subject to the
following conditions:
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(i) No Transfer. The shares may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed
of, alienated or encumbered until the restrictions are
removed or expire;
(ii) Certificates. The Administering Body may require that
the certificates representing Restricted Stock granted
or sold to a Recipient pursuant to this Plan remain in
the physical custody of an escrow holder or the Company
until all restrictions are removed or expire;
(iii) Restrictive Legends. Each certificate representing
Restricted Stock granted or sold to a Recipient pursuant
to this Plan will bear such legend or legends making
reference to the restrictions imposed upon such
Restricted Stock as the Administering Body in its
discretion deems necessary or appropriate to enforce
such restrictions; and
(iv) Other Restrictions. The Administering Body may impose
such other conditions on Restricted Stock as the
Administering Body may deem advisable including without
limitation restrictions under the Securities Act, under
the Exchange Act, under the requirements of any stock
exchange upon which such Restricted Stock or shares of
the same class are then listed and under any blue sky or
other securities laws applicable to such shares.
(c) Lapse of Restrictions. The restrictions imposed upon Restricted
Stock will lapse in accordance with such terms or other
conditions as are determined by the Administering Body.
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(d) Rights of Recipient. Subject to the provisions of Section 5.2(b)
and any restrictions imposed upon the Restricted Stock, the
Recipient will have all rights of a stockholder with respect to
the Restricted Stock granted or sold to such Recipient under this
Plan, including without limitation the right to vote the shares
and receive all dividends and other distributions paid or made
with respect thereto.
(e) Termination of Employment. Unless the Administering Body may at
any time and from time to time approve the grant to Eligible
Persons of Stock Appreciation Rights, related or unrelated to
Stock Options.
5.3 Stock Appreciation Rights.
(a) Granting of Stock Appreciation Rights. The Administering Body may
at any time and from time to time approve the grant to Eligible
Persons of Stock Appreciation Rights, related or unrelated to
Stock Options.
(b) SARs Related to Options.
(i) A Stock Appreciation Right granted in connection with a
Stock Option granted under this Plan will entitle the
holder of the related Stock Option, upon exercise of the
Stock Appreciation Right, to surrender such Stock
Option, or any portion thereof to the extent previously
vested but unexercised, with respect to the numbner of
shares as to which such Stock Appreciation Right is
exercised, and to receive payment of an amount computed
pursuant to Section 5.3(b)(iii). Such Stock Option will,
to the extent surrendered, then cease to be exercisable.
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(ii) A Stock Appreciation Right granted in connection with a
Stock Option hereunder will be exercisable at such time
or times, and only to the extent that, the related Stock
Option is exercisable, and will not be transferable
except to the extent that such related Stock Option may
be transferable.
(iii) Upon the exercise of a Stock Appreciation Right related
to a Stock Option, the Recipient will be entitled to
receive payment of an amount determined by multiplying:
(i) the difference obtained by subtracting the exercise
price of a share of Common Stock specified in the
related Stock Option from the Fair Market Value of a
share of Common Stock on the date of exercise of such
Stock Appreciation Right (or as of such other date or as
of the occurrence of such event as may have been
specified in the instrument evidencing the grant of the
Stock Appreciation Right), by (ii) the number of shares
as to which such Stock Appreciation Right is exercised.
(c) SARs Unrelated to Options. The Administering Body may grant Stock
Appreciation Rights unrelated to Stock Options to Eligible
Persons. Section 5.3(b)(iii) shall be used to determine the
amount payable at exercise under such Stock Appreciation Right,
except that in lieu of the Option the initial base amount
specified in the Incentive Award shall be used.
(d) Limits. Notwithstanding the foregoing, the Administering Body, in
its discretion, may place a dollar limitation on the maximum
amount that will be payable upon the exercise of a Stock
Appreciation Right under this Plan.
(e) Payments. Payment of the amount determined under the foregoing
provisions may be made solely in whole shares of Common Stock
valued at their Fair Market Value on the date of exercise of the
Stock Appreciation Right or, alternatively, at the sole
discretion of the Administering
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Body, in cash or in a combination of cash and shares of Common
Stock as the Administering Body deems advisable. The
Administering Body has full discretion to determine the form
in which payment of a Stock Appreciation Right will be made
and to consent to or disapprove the election of a Recipient to
receive cash in full or partial settlement of a Stock
Appreciation Right. If the Administering Body decides to make
full payment in shares of Common Stock, and the amount payable
results in a fractional share, payment for the fractional
shares will be made in cash.
(f) Rule 16b-3. The Administering Body may, at the time a Stock
Appreciation Right is granted, impose such conditions on the
exercise of the Stock Appreciation Right as may be required to
satisfy the requirements of Rule 16b-3 (or any other comparable
provisions in effect at the time or times in question).
5.4 Stock Payments. The Administering Body may approve Stock Payments of
the Company's Common Stock to any Eligible Person for all or any portion of the
compensation (other than base salary) or other payment that would otherwise
become payable by the Company to the Eligible Person in cash.
5.5 Dividend Equivalents. The Administering Body may grant Dividend
Equivalents to any Recipient who has received a Stock Option, SAR or other
Incentive Award denominated in shares of Common Stock. Such Dividend Equivalents
shall be effective and shall entitle the recipients thereof to payments during
the Applicable Dividend Period. Dividend Equivalents may be paid in cash, Common
Stock or other Incentive Awards; the amount of Dividend Equivalents paid other
than in cash shall be determined by the Administering Body by application of
such formula as the Administering Body may deem appropriate to translate the
cash value of dividends paid to the alternative form of payment of the Dividend
Equivalent. Dividend Equivalents shall be computed as of each dividend record
date and shall be payable to recipients thereof at such time as the
Administering Body may determine.
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5.6 Stock Bonuses. The Administering Body may issue shares of Common Stock
to Eligible Persons as bonuses for services rendered or for any other valid
consideration on such terms and conditions as the Administering Body may
determine.
5.7 Stock Sales. The Administering Body may sell to Eligible Persons shares
of Common Stock on such terms and conditions as the Administering Body may
determine.
5.8 Phantom Stock. The Administering Body is authorized to grant Awards of
Phantom Stock. Phantom Stock is a cash bonus granted under this Plan measured by
the Fair Market Value of a specified number of shares of Common Stock on a
specified date, or measured by excess of such Fair Market Value over a specified
minimum, which may but need not include a Dividend Equivalent.
5.9 Other Stock-Based Benefits. The Administering Body is authorized to
grant Other Stock-Based Benefits. Other Stock-Based Benefits are any
arrangements granted under this Plan not otherwise described above which (i) by
their terms might involve the issuance or sale of Common Stock or (ii) involve a
benefit that is measured, as a whole or in part, by the value, appreciation,
dividend yield or other features attributable to a specified number of shares of
Common Stock.
ARTICLE VI
REORGANIZATIONS
6.1 Corporate Transactions Not Involving a Change In Control. If the
Company shall consummate any Reorganization not involving a Change in Control in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any securities, cash or other consideration (including without
limitation a different number of shares of Common Stock), each Award outstanding
under this Plan shall thereafter be exercisable, in accordance with this Plan,
only for the kind and amount of securities, cash and/or other consideration
receivable upon such Reorganization by a holder of the same number of shares of
Common Stock as are subject to that Award immediately prior to such
Reorganization, and any adjustments will be made in the sole discretion of the
Administering
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Body to the terms of the Award as the Administering Body may deem appropriate to
give effect to the Reorganization.
6.2 Corporate Transactions Involving a Change in Control. As of the
effective time and date of any Change in Control this Plan and any then
outstanding Awards (whether or not vested) shall automatically terminate unless
(i) provision is made in writing in connection with such transaction for the
continuance of this Plan and for the assumption of such Awards, or for the
substitution for such Awards of new awards covering the securities of a
successor entity or an affiliate thereof, with appropriate adjustments as to the
number and kind of securities and exercise prices, in which event this Plan and
such outstanding Awards shall continue or be replaced, as the case may be, in
the manner and under the terms so provided; or (ii) the Board otherwise shall
provide in writing for such adjustments as it deems appropriate in the terms and
conditions of the then-outstanding Awards, and/or (B) providing for the
cancellation of Awards and their automatic conversion into the right to receive
the securities, cash or other consideration that a holder of the shares
underlying such Awards would have been entitled to receive upon consummation of
such Change in Control had such shares been issued and outstanding immediately
prior to the effective date and time of the Change in Control (net of the
appropriate option exercise prices). If, pursuant to the foregoing provisions of
this Section 6.2, this Plan and the Awards shall terminate by reason of the
occurrence of a Change in Control without provision for any of the action(s)
described in clause (i) or (ii) hereof, then any Recipient holding outstanding
Awards shall have the right, at such time immediately prior to the consummation
of the Change in Control as the Board shall designate, to exercise the
Recipient's Awards to the full extent not theretofore exercised, including any
installments which have not yet become vested.
ARTICLE VII
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined shall have
the meanings set forth below:
"Administering Body" shall mean the Board as long as no Committee has been
appointed and is in effect and shall mean the Committee once the Committee has
been appointed and is in effect.
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"Affiliated Entity" means any Parent Corporation or Subsidiary Corporation.
"Applicable Dividend Period" means (i) the period between the date a
Dividend Equivalent is granted and the date the related Stock Option, SAR, or
other Incentive Award is exercised, terminates, or is converted to Common Stock,
or (ii) such other time as the Administering Body may specify in the written
instrument evidencing the grant of the Dividend Equivalent.
"Award" means any Incentive Award.
"Award Document" means the agreement or confirming memorandum setting forth
the terms and conditions of an Award.
"Board" means the Board of Directors of the Company.
"Change in Control" means the following and shall be deemed to occur if any
of the following events occur:
(i) Any Person becomes the beneficial owner (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 50% or more of
either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding
securities entitled to vote generally in the election of
directors; or
(ii) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company ("Incumbent Board") cease for
any reason to constitute at least a majority of the Board of
Directors of the Company, provided that any individual who
becomes a director after the effective date hereof whose
election, or nomination for election by the Company's
stockholders, is approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered
to be a member of the Incumbent Board unless that individual was
nominated or elected by any Person having the power to exercise,
through beneficial
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<PAGE>
ownership, voting agreement and/or proxy, 20% or more of
either then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of
directors, in which case that individual shall not be
considered to be a member of the Incumbent Board unless such
individual's election or nomination for election by the
Company's stockholders is approved by a vote of at least
two-thirds of the directors then comprising the Incumbent
Board; or
(iii) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets
or a Reorganization of the Company with any other person,
corporation or other entity, other than
(A) a Reorganization that would result in the voting securities
of the Company outstanding immediately prior thereto (or, in
the case of a reorganization or merger or consolidation that
is preceded or accomplished by an acquisition or series of
related acquisitions by any Person, by tender or exchange
offer or otherwise, of voting securities representing 5% or
more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first
acquisition in such series of acquisitions) continuing to
represent, either by remaining outstanding or by being
converted into voting securities of another entity, more
than 50% of the combined voting power of the voting
securities of the Company or such other entity outstanding
immediately after such securities of the Company or such
other entity outstanding immediately after such
reorganization or merger or consolidation (or series of
related transactions involving such a reorganization or
merger or consolidation), or
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(B) a Reorganization effected to implement a recapitalization or
reincorporation of the Company (or similar transaction) that
does nor result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(iv) Approval by the stockholders of the Company or an order by a
court of competent urisdiction of a plan of liquidation of the
Company.
"Commission" means the Securities and Exchange Commission.
"Committee" means the committee appointed by the Board to administer this
Plan pursuant to Section 3.1.
"Common Stock" means the common stock of the Company, par value $0.01 per
share, as constituted on the Effective Date of this Plan, and as thereafter
adjusted as a result of any one or more events requiring adjustment of
outstanding Awards under Section 2.4 above.
"Company" means Nocopi Technologies, Inc., a Maryland corporation.
"Disinterested Director" means any non-employee director of the Company who
qualifies as "disinterested" within the meaning of Rule 16b-3.
"Dividend Equivalent" means a right granted by the Company under Section
5.5 to a holder of a Stock Option, Stock Appreciation Right or other Incentive
Award denominated in shares of Common Stock to receive from the Company during
the Applicable Dividend Period payments equivalent to the amount of dividends
payable to holders of the number of shares of Common Stock underlying such Stock
Option, Stock Appreciation Right, or other Incentive Award.
"Effective Date" means February 24, 1999, which is the date this Plan
was adopted by the Board.
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"Eligible Person" shall include directors, officers, employees, consultants
and advisors of the Company or of any Affiliated Entity; provided, however, that
Disinterested Directors shall not be Eligible Persons at any time the Company is
an Exchange Act Registered Company.
"ERISA" means the Employee Retirement Income Act of 1974, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Act Registered Company" means that the Company has any class of
any equity security registered pursuant to Section 12 of the Exchange Act.
"Expiration Date" means the tenth anniversary of the Effective Date.
"Fair Market Value" of a share of the Company's capital stock of a
particular date shall be: if the stock is listed on an established stock
exchange or exchanges (including or this purpose, the Nasdaq National Market),
the mean between the highest and lowest sale prices of the stock quoted for such
date in the Transactions Index of each such exchange as averaged with such mean
price as reported on any and all other exchanges, as published in The Wall
Street Journal and determined by the Administering Body, or if no sale price was
quoted in any such Index for such date, then as of the next preceding date on
which such a sale price was quoted; or (ii) if the stock is not then listed on
an exchange or the Nasdaq National Market, the average of the closing bid and
asked prices per share or the stock in the over-the-counter market as quoted on
The Nasdaq Small Cap Market on such date (in the case of (i) or (ii), subject to
adjustment as and if necessary and appropriate to set an exercise price not less
than 100% of the fair market value of the stock on the date an option is
granted); or (iii) if the stock is not then listed on an exchange or quoted in
the over-the-counter market, am amount determined in good faith by the
Administering Body; provided, however, that (A) when appropriate, the
Administering Body in determining Fair Market Value of capital stock of the
Company may take into account such other factors as it may deem appropriate
under the circumstances and (B) if the stock is traded in the Nasdaq Small Cap
Market and both sales prices and bid and asked prices are quoted or
30
<PAGE>
available, the Administering Body may elect to determine Fair Market Value under
either clause (i) or (ii) above. Notwithstanding the foregoing, the Fair Market
Value of capital stock for purposes of grants of Incentive Stock Options shall
be determined in compliance with applicable provisions of the IRC. The Fair
Market Value of rights or property other than capital stock of the Company means
the fair market value thereof as determined by the Committee on the basis of
such factors as it may deem appropriate.
"Incentive Award" means any Stock Option, Restricted Stock, Stock
Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock,
Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible
Person under this Plan.
"Incentive Stock Option" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC.
"IRC" means the Internal Revenue Code of 1986, as amended.
"Just Cause Dismissal" shall mean a termination of a Recipient's employment
for any of the following reasons: (i) the Recipient violated any reasonable rule
or regulation of the Board, the Company's Chief Executive Officer or the
Recipient's superiors that results in damage to the Company or which, after
written notice to do so, the Recipient fails to correct within a reasonable
time; (ii) any willful misconduct or gross negligence by the Recipient in the
responsibilities assigned to the Recipient (iii) any willful failure to perform
the Recipient's job as required to meet Company objectives; (iv) any wrongful
conduct of a Recipient which has an adverse impact on the Company or which
constitutes a misappropriation of Company assets; (v) the Recipient is employed
by the Company, without the written approval of the Chief Executive Officer of
the Company; or (vi) any other conduct that the Administering Body determined
constitutes Just Cause for Dismissal; provided, however, that if a Recipient is
party to an employment agreement with the Company providing for just cause
dismissal (or some comparable notion) of Recipient from Recipient's employment
with the Company, "Just Cause Dismissal" for purposes of this Plan shall have
the same meaning as ascribed thereto or to such comparable notion in such
employment agreement.
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<PAGE>
"Nonqualified Stock Option" means a Stock Option that is not an Incentive
Stock Option.
"Other Stock-Based Benefits" means an Incentive Award granted under Section
5.9 if this Plan.
"Outside Director" means an "outside director" as defined in Section 424(e)
of the IRC.
"Parent Corporation" means any Parent Corporation as defined in Section
424(e) of the IRC.
"Payment Event" means the event or events giving rise to the right to
payment of a Performance Award.
"Performance-Based Compensation" means performance-based compensation as
described in Section 162(m) of the IRC.
"Person" means any person, entity or group, within the meaning of Section
13(d) of the Exchange Act, but excluding (i) the Company and its subsidiaries,
(ii) any employee stock ownership or other employee benefit plan maintained by
the Company that is qualified under ERISA and (iii) an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof.
"Permanent Disability" shall mean that the Recipient becomes physically or
mentally incapacitated or disabled so that the Recipient is unable to perform
substantially the same services as the Recipient performed prior to incurring
such incapacity or disability (the Company, at its option and expense, being
entitled to retain a physician to confirm the existence of such incapacity or
disability, and the determination of such physician to be binding upon the
Company and the Recipient), and such incapacity or disability continues for a
period of three consecutive months or six months in an 12-month period or such
other period(s) as may be determined by the Committee with respect to any Award,
provided that for purposes of determining the period during which an Incentive
Stock Option may be exercised pursuant to Section 4.13(ii) hereof, Permanent
Disability shall mean "permanent and total disability" as defined in Section
22(e) of the IRC.
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<PAGE>
"Phantom Stock" means an Incentive Award granted under Section 5.8 of this
Plan.
"Plan" means this 1998 Stock Incentive Plan of the Company.
"Plan Term" means the period during which this Plan remains in effect
(commencing the Effective Date and ending on the Expiration Date).
"Purchase Price" means the purchase price (if any) to be paid by a
Recipient for Restricted Stock as determined by the Committee (which price shall
be at least equal to the minimum price required under applicable laws and
regulations for the issuance of Common Stock which is nontransferable and
subject to a substantial risk of forfeiture until specific conditions are met.
"Recipient" means a person who has received an Award under this Plan.
"Reorganization" means any merger, consolidation or other reorganization.
"Restricted Stock" means Common Stock that is the subject of an Award made
under Section 5.2 and which is nontransferable and subject to substantial risk
of forfeiture until specific conditions are net as set forth in this Plan and in
any statement evidencing the grant of such Incentive Award.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Stockholder" is an individual who, at the time a Stock Option
is granted to such individual under this Plan, owns more than ten percent (10%)
of the combined voting power of all classes of stock of the Company or of any
Parent Corporation or Subsidiary Corporation (after application of the
attribution rules set forth in Section 424(d) of the IRC).
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<PAGE>
"Stock Appreciation Right" or "SAR" means a right granted under Section 5.3
to receive a payment that is measured with reference to the amount by which the
Fair Market Value of a specified number of shares of Common Stock appreciates
from a specified date, such as the date of grant of the SAR, to the date of the
exercise.
"Stock Bonus" means an issuance or delivery of unrestricted or restricted
shares of Common Stock under Section 5.6 of this Plan as a bonus for services
rendered or for any other valid consideration under applicable law.
"Stock Payment" means a payment in shares of the Company's Common Stock to
replace all or any portion of the compensation (other than base salary) that
would otherwise become payable to a Recipient.
"Stock Option" means a right to purchase stock of the Company granted under
Section 5.1 of this Plan.
"Stock Sale" means a sale of Common Stock to a Eligible Person under
Section 5.7 of this Plan.
"Subsidiary Corporation" means any Subsidiary Corporation as defined in
Section 425(f) of the IRC.
34
Summary Plan Description
Prepared for
Nocopi Technologies, Inc.
<PAGE>
Introduction
Effective 01-01-1998, Nocopi Technologies, Inc. has amended the Nocopi
Technologies, Inc. 401(k) Plan designed to help you meet your financial needs
during your retirement years. The Plan was originally effective on 04-01-1993
and its plan sequence number is 001. The plan sequence number identifies the
number of qualified plans that Nocopi Technologies, Inc. currently maintains or
has previously maintained.
To become a Participant in the Plan, you must meet the Plan's eligibility
requirements. Once you become a Participant, Nocopi Technologies, Inc. will
maintain an Individual Account for you. Each Plan Year your account will be
adjusted to reflect contributions, gains, losses, etc. The percentage of your
account to which you will be entitled when you terminate employment depends on
the Plan's vesting schedule. These features are explained further in the
following pages.
The actual Plan is a complex legal document that has been written in the manner
required by the Internal Revenue Service (IRS) and is referred to as the Basic
Plan Document. This document is called a Summary Plan Description (SPD) and
explains and summarizes the important features of the Basic Plan Document.
Nocopi Technologies, Inc. may make contributions to this Plan. In addition, you
may be able to elect to reduce your annual taxable income by deferring a portion
of your Compensation into the Plan as Employee 401(k) Contributions. You should
consult the Basic Plan Document for technical and detailed Plan provisions. The
legal operation of the Plan is controlled by the Basic Plan Document and not
this SPD.
If at any time you have specific questions about the Plan as it applies to you,
please bring them to the attention of the Plan Administrator whose address and
telephone number appear in Section One of this SPD. You may also examine the
Basic Plan Document itself at a reasonable time by making arrangements with the
Plan Administrator.
<PAGE>
Contents of the Summary Plan Description
SECTION ONE DEFINITIONS
SECTION TWO ELIGIBILITY AND PARTICIPATION
Information in this section includes:
Eligible Classes of Employees
Age and Service Requirements
How Hours of Service Are Counted
When You Can Participate in the Plan
SECTION THREE FUNDING AND ADMINISTRATION OF THE PLAN
Information in this section includes:
Plan Contribution Sources, Allocationsand
Limitations Compensation
Plan Administration and Management
Self Direction of Investments
SECTION FOUR DISTRIBUTION OF BENEFITS AND VESTING
Information in this section includes:
Benefit Eligibility
Distribution of Benefits
How Your Vested Amount is Determined
Restrictions or Penalties on Distributions
Payouts to Your Beneficiaries
SECTION FIVE CLAIMS PROCEDURE
Information in this section includes:
What to do to Receive Benefits
How to File a Claim
SECTION SIX MISCELLANEOUS
Information in this section includes:
Borrowing From the Plan
Break in Service Situations
Plan Termination
SECTION SEVEN RIGHTS UNDER ERISA
Information in this section includes:
The Rights and Protections a Plan Participant
is Entitled to Under the Employee Retirement
Income Security Act
2
<PAGE>
SECTION ONE: DEFINITIONS
The following definitions are used in the text of this SPD. These words and
phrases are capitalized throughout the SPD for ease of reference.
Compensation - means the earnings paid to you by Nocopi Technologies, Inc.
Employee - means any person employed by Nocopi Technologies, Inc.
Employee 401(k) Contributions - means the dollars you put into the Plan through
before-tax payroll deductions.
Employer - means Nocopi Technologies, Inc., the corporation maintaining this
Plan.
Employer Contribution - means the amount contributed to the Plan on your behalf
by Nocopi Technologies, Inc.
Individual Account - means the contribution account established and maintained
for you which is made up of all contributions made by you or on your behalf.
Participant - means an Employee who has met the eligibility requirements, has
entered the Plan, and has become eligible to make or receive a contribution to
his or her Individual Account.
Payroll Deduction Form - means the agreement you sign to authorize Nocopi
Technologies, Inc. to deduct your Employee 401(k) Contributions from your
Compensation and put them into the 401(k) Plan.
Plan - means the specific retirement Plan Nocopi Technologies, Inc. has set up.
The Plan is governed by a legal document containing various technical and
detailed provisions. The Plan Administrator has a copy of the Plan document.
Plan Administrator - The Plan Administrator is responsible for directly
administering the Plan. Nocopi Technologies, Inc. is the Plan Administrator of
this Plan and is therefore responsible for the day-to-day administration and
management of the Plan. To ensure efficient and sound operation and management
of the Plan, Nocopi Technologies, Inc. has the discretionary authority to
appoint other persons as may be necessary to act on its behalf or assist in
performing these responsibilities. The address and phone number of Nocopi
Technologies, Inc. are listed below.
Nocopi Technologies, Inc.
537 Apple Street
West Conshohocken, PA 19428
610-834-9600
Plan Year - means the calendar year.
SECTION TWO: ELIGIBILITY AND PARTICIPATION
ELIGIBLE CLASSES OF EMPLOYEES
You will generally be eligible to become a Participant in the Plan after having
satisfied the age and service requirements. Even if you satisfy the eligibility
criteria, however, you are not eligible to participate if you are covered by a
collective bargaining agreement (e.g., union agreement) unless the agreement
requires you to be eligible. In addition, you are ineligible if you are a
nonresident alien and receive no earned income from Nocopi Technologies, Inc.
within the United States.
3
<PAGE>
AGE AND SERVICE REQUIREMENTS
Employee 401(k) Contributions
You will become eligible to enter the Plan and make Employee 401(k)
Contributions when you attain age 21. You need not perform a minimum amount of
service to become eligible to participate.
Profit Sharing Contributions
You will become eligible to enter the Plan and receive profit sharing
contributions when you attain the age of 21. You need not perform a minimum
amount of service to become eligible to participate.
HOW HOURS OF SERVICE ARE COUNTED
Your hours of service are generally counted on the basis of the actual number of
hours you work or for which you are entitled to Compensation. Instead of
counting hours of service for purposes of determining your number of Years of
Eligibility Service, however, you will receive credit for the period of time
during which you are paid or entitled to pay from Nocopi Technologies, Inc. for
each type of contribution for which you are required to perform a fractional
Year of Eligibility Service.
However, since this is an amendment and restatement of an existing Plan, you
will not be required to satisfy the eligibility requirements stated above if you
were a Participant in the prior Plan.
WHEN YOU CAN PARTICIPATE IN THE PLAN
After you have met the eligibility requirements, you will become a Participant
in the Plan on the applicable entry date(s). During each Plan Year there are
generally at least two entry dates. Nocopi Technologies, Inc. has designated the
first day of each month as the entry date(s) for this Plan. You will continue to
participate in the Plan as long as you do not incur a break in service. A break
in service is a period of at least 12 consecutive months during which you do not
perform services for Nocopi Technologies, Inc. However, no break in service will
occur if the reason you did not work was because of certain absences due to
birth, pregnancy or adoption of children, military service or other service
during a national emergency during which your re-employment under a federal or
state law is protected and you do, in fact, return to work within the time
required by law.
SECTION THREE: PLAN FUNDING AND ADMINISTRATION
PLAN CONTRIBUTION SOURCES, ALLOCATIONS AND LIMITATIONS
Employee 401(k) Contributions
Effective 08-06-1998 (or the date you begin participating in the Plan, if
later), you may make before-tax contributions to the Plan through payroll
deduction. Such contributions are called Employee 401(k) Contributions.
To begin making Employee 401(k) Contributions, you must complete and sign a
Payroll Deduction Form. Once you become eligible to participate in the Plan,
Nocopi Technologies, Inc. will provide you with such form.
For example, assume your compensation is $15,000. For Plan Year 1998, you wish
to make an Employee 401(k) Contribution to the Plan and sign a Payroll Deduction
Form authorizing an Employee 401(k) Contribution of 5% of your Compensation. As
a result, Nocopi Technologies, Inc. will pay you $14,250 as gross taxable income
and will deposit your 5% Employee 401(k) Contribution (i.e., $750) into the Plan
for you.
4
<PAGE>
Limits on Employee 401(k) Contributions
Federal tax laws and plan documents govern the amount of Employee 401(k)
Contributions which you may make. Specifically, federal law places two annual
limits on the amount you may defer into a 401(k) plan - an individual limit and
an average limit.
Individual Limit
Federal tax law limits the amount you can put into the Plan during each of your
tax years (generally, a calendar year). For 1997, the limit was $9,500. For
1998, the limit is $10,000. This amount is indexed periodically for changes in
the cost-of-living index. This limit applies to all Employee 401(k)
Contributions you make during your tax year to any 401(k) plans maintained by
your present or former employers.
If you defer more than you are allowed, you must submit in writing for the
return of the excess to Nocopi Technologies, Inc. no later than March 1.
The excess amount and any earnings you may have received on the excess must be
taken out of the Plan by April 15 of the year following the year the money went
into the Plan. The excess amounts will appear on your Form W-2 and will be
taxable income for the year in which you put the excess into the Plan. If the
excess is not removed from the Plan by April 15, you will have to pay additional
income tax.
EXAMPLE: You deferred $100 more than the law allows in 1998 and you had earnings
of $10 on the excess. You removed your $100 excess and the $10 earnings by April
15, 1999. The excess will be reported on your 1998 Form W-2 and you will pay
income tax on that amount.
Average Limits
Tax law defines a group of an employer's employees known as highly compensated
employees. Highly compensated employees making Employee 401(k) Contributions are
limited in the percent of their compensation which they defer based on the
average percent of compensation deferred by the non-highly compensated group of
employees during the Plan Year. If these limits apply to you, Nocopi
Technologies, Inc. can give you additional information about them.
Plan Specific Limitations
Upon completion of a Payroll Deduction Form, your compensation will be reduced
each pay period by the percent you specify. Nocopi Technologies, Inc. permits
you to defer a percentage of your Compensation from 1% to 15% in increments of
1% each Plan Year.
To change the amount of your Employee 401(k) Contributions, you must complete
and sign a revised Payroll Deduction Form and return it to Nocopi Technologies,
Inc. at least 30 days before the change will take effect or a lesser number of
days if Nocopi Technologies, Inc. permits. Nocopi Technologies, Inc. will
establish uniform and nondiscriminatory rules regarding when you may change your
Payroll Deduction form.
To discontinue making Employee 401(k) Contributions, you must complete and
sign a revised Payroll Deduction Form. Nocopi Technologies, Inc. will establish
uniform and nondiscriminatory rules regarding when you may resume making
deferrals if you stop.
Profit Sharing Contributions
Each year, the managing body of Nocopi Technologies, Inc. will determine the
amount, if any, which it will contribute to the Plan. Employer Contributions to
a profit sharing plan in general can range from 0% to 15% of participants'
compensation each year.
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There is no minimum hours of service required for contribution purposes if you
are employed on the last day of the Plan Year. However, you must work at least
500 hours of service during the Plan Year in order to receive a profit sharing
contribution if you separate from service before the end of the Plan Year. The
hour of service requirement will be waived, however, if you die, or if you
separate from service after attaining normal retirement age or after becoming
disabled.
If you satisfy the requirements and are entitled to a profit sharing
contribution, you will receive a pro rata allocation based on your Compensation
in relation to the Compensation of all Participants entitled to profit sharing
contributions.
For example, assume you are one of 10 Participants in the Plan and your
Compensation is $10,000. Assume further the Compensation of all Participants
when added together equals $100,000. The ratio of your Compensation ($10,000) to
that of all Participants ($100,000) is 1/10. Therefore, 1/10 of the contribution
made by your Employer to the Plan will be allocated to your account.
Rollover Contributions
Nocopi Technologies, Inc. allows you to make rollover contributions,
regardless of whether you have become a Participant in the Plan. You are 100%
vested in your rollover contributions at all times and may withdraw them from
the Plan at any time.
Annual Additions Limitation
In spite of the contribution/allocation formulas described earlier, federal law
limits the annual amount which may be allocated to your account to the lesser of
$30,000 or 25% of your Compensation.
COMPENSATION
The definition of compensation for plan purposes can vary for many reasons. For
example, federal tax law may require use of one definition of compensation for
nondiscrimination testing and another definition for contribution allocation
purposes. In addition, federal tax law permits employers such as Nocopi
Technologies, Inc. to choose the definition of compensation which will be used
for other purposes. Regardless of the various definitions of compensation which
may be required or allowed, however, in the event your Compensation exceeds
$150,000 per year, only the first $150,000 will be counted as Compensation under
the Plan. This $150,000 cap will be adjusted periodically by the Internal
Revenue Service for increases in the cost-of-living. (For Plan Years beginning
on or after January 1, 1997, the $150,000 cap is increased to $160,000.)
Also, if you satisfy the eligibility requirements and enter the Plan on a date
other than the first day of the year over which your Compensation is to be
determined, the Compensation earned during the year, but prior to your entry
into the Plan will be included.
Nocopi Technologies, Inc. has elected to use your Plan Year W-2 compensation for
purposes of this Plan. Your Compensation, however, will be adjusted as
described below.
For purposes of determining your Compensation, elective deferrals you make to a
Nocopi Technologies, Inc. cafeteria, 401(k), salary deferral SEP or tax
sheltered annuity plan will be included.
PLAN ADMINISTRATION AND MANAGEMENT
All contributions made to the Plan on your behalf will be placed in a trust fund
established to hold dollars for the benefit of all Participants. Nocopi
Technologies, Inc. will establish and maintain an Individual Account for you and
all Participants. Your Individual Account will be used to track your share in
the total trust fund.
This Plan allows you to direct the investment of the assets in your Individual
Account. Nocopi Technologies, Inc. will establish uniform and nondiscriminatory
policies describing how and when you may provide investment directions. You will
be responsible for any expenses and losses resulting from your choice of
investments.
SECTION FOUR: DISTRIBUTION OF BENEFITS AND VESTING
6
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BENEFIT ELIGIBILITY
Certain events must occur before you can withdraw money from the Plan. In
general, benefits may be withdrawn upon termination of employment after
attaining normal retirement age or upon Plan termination. Normal retirement age
under this Plan is age 65.
You may withdraw all or a portion of the vested Employer Contributions if you:
o terminate employment before attaining normal retirement age
o become disabled
o attain normal retirement age but continue to work
In addition, you may withdraw your Employee 401(k) Contributions if you:
o attain age 59 1/2 but continue to work
o incur a financial hardship
Under your Plan, the only financial needs which are considered to meet the
financial hardship requirements are the following items: deductible medical
expenses for you or your immediate family, purchase of your principal residence,
payment of tuition for the next quarter or semester for you or your immediate
family, or to prevent eviction from your home or foreclosure upon your principal
residence. A hardship distribution cannot exceed the amount of your immediate
and heavy financial need and you must have obtained all distributions and all
nontaxable loans from all Plans maintained by Nocopi Technologies, Inc. prior to
qualifying for a hardship distribution. Hardship distributions are subject to a
10% penalty tax if received before you reach age 59 1/2.
Form of Payment
Payments from the Plan that are eligible rollover distributions can be taken in
two ways. You may have all or any portion of your eligible rollover distribution
either (1) paid in a direct rollover to an IRA or another employer plan or (2)
paid to you. If you choose to have your Plan benefits paid to you, you will
receive only 80% of the payment, because Nocopi Technologies, Inc. is required
to withhold 20% of the payment and send it to the IRS as income tax withholding
to be credited against your taxes.
Nocopi Technologies, Inc. will give you more information about your options
around the time you request your payout from the Plan. That information will,
among other things, define an eligible rollover distribution.
If your vested Individual Account (i.e., the amount of money in the Plan you are
entitled to) is no more than $5,000, your benefits will be paid, either directly
to you or as a direct rollover to an IRA or another plan, in a single lump sum
payment.
If your vested Individual Account balance is more than $5,000, your payouts will
be in the form of an annuity, unless the annuity option is waived. An annuity
will provide you with a series of periodic payments, usually monthly. The
annuity must be purchased from an insurance company. The size of the payments
you receive from the annuity will depend upon many factors including the value
or your vested Individual Account balance.
If you are married, the annuity will provide monthly payments for as long as you
or your spouse live. This type of annuity is called a joint and survivor
annuity. If you die before your spouse, the monthly payments to your spouse will
be a percentage of the payments you had been receiving before your death. The
survivor annuity is equal to 50%.
If you are not married, the type of annuity you will receive will provide you
with monthly payments for as long as you live.
If you do not want an annuity payout, you may choose other types of payments. To
waive the annuity option, you must fill out and sign a waiver form. If you are
married, your spouse must consent to and sign the waiver form in the presence of
a notary public. You and your spouse may sign the waiver form any time within 90
days of the start of your payments.
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EXAMPLE: Bill wants to start receiving money on March 31,1998. He and his spouse
can sign the waiver form any time from January 1 through March 31, 1998. Bill
can now take his money in another form, such as a single lump sum payment.
Contributions made to the Plan by you or on your behalf may be used to purchase
units in various investment funds. The value of these funds can change daily.
Because the value of your units can change daily, the value shown on your
statement(s) may be different than the actual amount you receive for a payout.
Timing of Benefit Payments
If the value of your Individual Account is no more than $5,000, Nocopi
Technologies, Inc. may direct that your benefits be paid within 90 days after
the end of the Plan Year in which you become eligible to receive them.
If your account is more than $5,000, your funds may be left in the Plan until
you submit a written request to Nocopi Technologies, Inc. for payment. However,
you must begin taking required minimum distributions at age 70 1/2 if you are a
five percent or more owner of your Employer. If you are not a five percent or
more owner, you must begin taking required minimum distributions from the Plan
by April 1 of the year after the year in which you turn age 70 1/2 or , if
later, April 1 of the year after the year in which you separate from service.
Nocopi Technologies, Inc. can provide you with the proper request forms. Once
you have returned the completed request to Nocopi Technologies, Inc., payment
will be made no later than 90 days after the close of the Plan Year in which
Nocopi Technologies, Inc. received your request.
Required Minimum Distributions
The tax laws and regulations require you to start taking minimum distributions
from the Plan by April 1 of the year after the year in which you turn 70 1/2
years of age if you are a five percent or more owner of your Employer. If you
are not a five percent or more owner, you must begin taking minimum
distributions from the Plan by April 1 of the year after the year in which you
turn age 70 1/2 or, if later, April 1 of the year after the year in which you
separate from service. Minimum distributions must continue every year thereafter
and must be taken by December 31. In general, the amount of the annual minimum
distribution is determined by dividing the balance in your Individual Account by
your life expectancy or the joint life expectancy of you and your Plan
beneficiary.
DETERMINING YOUR VESTED AMOUNT
Amount of Benefit
Whether you receive the full value of your account(s) depends on the reason you
are receiving the distribution and your vested percentage in your contributions.
Your distribution will be the full value of your Individual Account (that is,
you will be 100% vested) if you reach normal retirement age, Nocopi
Technologies, Inc. terminates this Plan, there is a complete discontinuance of
contributions to the Plan, you die, become disabled or you satisfy the early
retirement age provisions.
However, if you terminate employment and thus become eligible for a distribution
from the Plan, your distribution will be only the vested amount in your
Individual Account. Loss, denial or reduction of anticipated benefits may occur
if you terminate employment before becoming fully vested, or if all or a portion
of your benefit is set aside for an alternate payee under a qualified domestic
relations order (QDRO). You may also lose your benefit if you cannot be located
when a benefit becomes payable to you.
However, the vested amount of your Individual Account will depend upon the types
of contributions made to your account. You will be fully vested at all times in
all Employee 401(k) Contributions.
Your vested amount is determined by multiplying the value of your Individual
Account subject to the plan's vesting schedule by the applicable percentage from
the vesting schedule. The vesting schedule determines how rapidly your
Individual Account balance becomes nonforfeitable based on years of service.
EXAMPLE: Assume you have $10,000 attributable to employer profit sharing
contributions in your Account and you terminate employment when you are 40%
vested. Your vested amount of the profit sharing would be $4,000 (.40 x
$10,000).
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To this sum, you would add those contributions which you made to your 401(K).
Thus, if you have deferred $3,000 and the vested portion of your profit
sharing is $4,000, the total value of your account when you terminate would be
$7,000.
However, you will always be 100% vested in your Individual Account derived from
profit sharing contributions and forfeitures.
Vesting Schedule for Top-Heavy Plans
A top-heavy plan is one in which more than 60% of the value of the plan assets
is credited to the accounts of certain officers, shareholders and highly paid
Participants. These individuals are called key employees.
The top-heavy vesting schedule will not apply if the vesting schedule selected
by your Employer provides for faster vesting. For example, if Nocopi
Technologies, Inc. has selected the 100% vesting schedule (under which all
Participants are 100% vested at all times) and the Plan becomes top-heavy, that
vesting schedule selected by Nocopi Technologies, Inc. will remain in effect
because it provides for more rapid vesting.
RESTRICTIONS OR PENALTIES ON DISTRIBUTIONS
If you receive a distribution before reaching age 59 1/2, you must pay an
additional 10% penalty tax on dollars included in income. There are, however,
exceptions to the 10% early distribution penalty. Your tax advisor can assist
you in determining if one of the exceptions applies to your distribution.
PAYOUTS TO YOUR BENEFICIARIES
Your beneficiary will receive the total value of your Individual Account when
you die. If you are married, your spouse will automatically be your beneficiary.
To choose another beneficiary, you must sign a written form listing a nonspouse
beneficiary. Your spouse must give written consent to this in the presence of a
notary public. Contact Nocopi Technologies, Inc. if you wish to choose a
nonspouse beneficiary. If the vested value of your Individual Account is no more
than $5,000, your beneficiary will receive a lump sum payment of the entire
amount.
If the value of your Individual Account is greater than $5,000, your beneficiary
will get the money in periodic payments from an insurance company unless a
special form is signed. These periodic payments will usually be made on a
monthly basis for as long as your beneficiary lives.
If you want to give your beneficiary a choice as to how he or she wants to
receive the money, you must sign a special form. This form must also be signed
by your spouse in the presence of a notary public. If you are under age 35 when
you sign this form, you must sign a new form once you reach age 35.
EXAMPLE: Clarence, age 38, signs the waiver form. Mildred, his wife, signs
the waiver form in the presence of a notary public. Clarence dies two years
later. Mildred now has a choice of payments. She can, for example, take all the
money in a single lump sum payment and put it into her IRA.
NOTE: Contact Nocopi Technologies, Inc. if you wish to preserve the option
of taking payouts in a form other than an annuity.
9
<PAGE>
SECTION FIVE: CLAIMS PROCEDURE
WHAT TO DO TO RECEIVE BENEFITS
You or your beneficiary must file a written request with the Plan Administrator
in order to start receiving benefits when you become eligible for them or when
you die.
HOW TO FILE A CLAIM
A claim should be filed with Nocopi Technologies, Inc. You may claim a benefit
to which you think you are entitled by filing a written request with Nocopi
Technologies, Inc. The claim must set forth the reasons you believe you are
eligible to receive benefits and authorize Nocopi Technologies, Inc. to conduct
such examinations and take such steps as may be necessary to evaluate the claim.
If your claim is turned down, Nocopi Technologies, Inc. will provide you or your
beneficiary with a written notice of the denial within 60 days of the date your
claim was filed. This notice will give you the specific reasons for the denial,
the specific provisions of the Plan upon which the denial is based, and an
explanation of the procedures for appeal. You or your beneficiary will have 60
days from receipt of the notice of denial in which to make written application
for review by Nocopi Technologies, Inc. You may request that the review be in
the nature of a hearing. You may be represented by an attorney if you so desire.
Nocopi Technologies, Inc. will issue a written decision on this review within 60
days after receipt of the application for review.
SECTION SIX: MISCELLANEOUS
BORROWING FROM THE PLAN
Effective Date
As a Participant in this Plan, you may be able to borrow a portion of your
vested account balance. The loan program adopted by Nocopi Technologies, Inc. is
effective 01-01-1998 and is available on a uniform basis to all parties in
interest to the Plan who meet loan qualification requirements.
Loan Program Administrator
If you have questions regarding the loan program you should contact Rudy
Lutterschmidt, the person responsible for administering your loan program. You
may reach Rudy Lutterschmidt, the loan program administrator, at (610) 834-9600.
Loan Application Procedure
To apply for a loan under this Plan, you must complete and return to Rudy
Lutterschmidt a Loan Application Form, furnishing all information requested and
pay any required loan application processing fees.
Collateral Pledge
A percentage of your vested account balance equal to the amount borrowed divided
by your vested account balance is pledged as security for repayment of loans
under this program.
Limitations on Loan Types
Loans from this Plan may be used for any purpose.
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Loan Approval Standards
Decisions approving or denying loans from this Plan will be based on the value
of your vested individual account balance.
Loan Principal Limitations
The minimum amount you may borrow from this Plan is $500.00. The maximum amount
you may borrow from this Plan is one-half of your vested account balance or
$50,000.
Interest Calculations
Interest on Loans from this Plan will be equal to the prime rate as of the first
day of each month plus 2%.
Default Provisions
You will be deemed to have defaulted on your loan if you fail to remit payment
in a timely manner as required under the Loan Agreement, breach any of your
obligations or duties under the Loan Agreement, or terminate employment.
Upon default, Rudy Lutterschmidt is entitled to foreclose its security interest
in your vested account balance pledged for repayment upon the occurrence of an
event which triggers a distribution of your benefits. In addition, Rudy
Lutterschmidt will report as taxable any amounts which are deemed distributed as
a result of failing to make loan payments.
PLAN TERMINATION
Nocopi Technologies, Inc. expects to continue the Plan indefinitely. However, in
the unlikely event Nocopi Technologies, Inc. must terminate the Plan, you will
become 100% vested in the aggregate value of your Individual Account regardless
of whether your vesting years of service are sufficient to make you 100% vested
under the vesting schedule(s).
If the Plan terminates, benefits are not insured by the Pension Benefit Guaranty
Corporation (PBGC). Under the law, PBGC insurance does not cover the type of
plans called defined contribution plans. This Plan is a defined contribution
plan and, therefore, is not covered.
BREAK IN SERVICE SITUATIONS
If you quit your job, incur a break in service and then return to work, your
date of participation depends on whether you had a vested interest in
contributions (other than your Employee 401(k) Contributions) at the time you
quit and incurred a break in service.
If you had a vested interest, you will participate again upon your return to
employment. In addition, your vesting years of service accumulated prior to the
time you quit and incurred a break in service will be counted in figuring your
vested interest.
If you did not have a vested interest, any eligibility years of service
occurring before the break in service will be taken into account and you will
begin to participate again upon your return to service unless the number of
consecutive one year breaks in service equals or exceeds the greater of five
years, or the aggregate number of eligibility years of service preceding the
breaks in service. If your period of consecutive breaks in service exceeds your
period of prior service, you will be treated as a new employee and will
participate again when you satisfy the Plan's eligibility requirements. In
addition, any vesting years of service occurring before the break in service
will be taken into account in computing your vested interest under the Plan
unless the number of consecutive one year breaks in service equals or exceeds
the greater of five years or the aggregate number of vesting years of service
preceding the breaks in service. For example, if you work for two years, quit
without being vested, and then return to employment after a break of two years
or more, the Plan will give you vesting credit for the initial two year period.
SECTION SEVEN: RIGHTS UNDER ERISA
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THE RIGHTS AND PROTECTIONS A PLAN PARTICIPANT IS ENTITLED TO UNDER THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT
As a Participant in this Plan, you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA provides that all Plan Participants shall be entitled to do the following:
1. Examine, without charge, at the Plan Administrator's office and at other
specified locations, such as worksites and union halls, all Plan documents,
including insurance contracts, collective bargaining agreements and copies
of all documents filed by Nocopi Technologies, Inc. with the U.S.
Department of Labor, such as detailed annual reports and Plan descriptions.
2. Obtain copies of all Plan documents and other Plan information upon written
request to Nocopi Technologies, Inc. Nocopi Technologies, Inc. may make a
reasonable charge for the copies.
3. Receive a summary of the Plan's annual financial report. Nocopi
Technologies, Inc. is required by law to furnish each participant with a
copy of this Summary Annual Report.
4. Obtain, once a year, a statement of the total pension benefits accrued and
the nonforfeitable (vested) pension benefits (if any) or the earliest date
on which benefits will become nonforfeitable (vested). The Plan may require
a written request for this statement, but it must provide the statement
free of charge.
In addition to creating rights for Plan Participants, ERISA imposes duties upon
the people who are responsible for the operation of the employee benefit plan.
The people who operate your Plan, called fiduciaries of the Plan, have a duty to
do so prudently and in the interest of you and other Plan Participants and
beneficiaries. No one, including Nocopi Technologies, Inc., your union, or any
other person, may fire you or otherwise discriminate against you in any way to
prevent you from obtaining a pension benefit or exercising your rights under
ERISA.
If your claim for a benefit is denied in whole or in part, you must receive a
written explanation of the reason for the denial. You have the right to have
Nocopi Technologies, Inc. review and reconsider your claim. Under ERISA, there
are steps you can take to enforce the above rights. For instance, if you request
materials from Nocopi Technologies, Inc. and do not receive them within 30 days,
you may file suit in a federal court. In such a case, the court may require
Nocopi Technologies, Inc. to provide the materials and pay you up to $100 a day
until you receive the materials, unless the materials were not sent because of
reasons beyond the control of Nocopi Technologies, Inc. If you have a claim for
benefits which is denied, or ignored, in whole or in part, you may file suit in
a state or federal court. If it should happen that Plan fiduciaries misuse the
Plan's money, or if you are discriminated against for asserting your rights, you
may seek assistance from the U.S. Department of Labor, or you may file suit in a
federal court. The court will decide who should pay court costs and legal fees.
If you are successful, the court may order the person you have sued to pay the
costs and fees. If you lose, the court may order you to pay these costs and
fees. For example, if the court finds your claim is frivolous, expenses may be
assessed against you.
If you have any questions about your Plan, you should contact Nocopi
Technologies, Inc. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest area office of the U.S.
Labor-Management Services Administration, Department of Labor.
Further, if this Plan is maintained by more than one employer, you can obtain,
in writing, information as to whether a particular employer is participating in
this Plan and, if so, the participating Employer's address. In addition, you may
request, in writing, a complete list of Employers participating in this Plan.
You may obtain such information by making a written request to Nocopi
Technologies, Inc. Nocopi Technologies, Inc. is the most significant (parent)
employer of the group of employers maintaining this Plan.
12
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Employer Information
Name: Nocopi Technologies, Inc.
Address: 537 Apple Street
West Conshohocken, PA 19428
Business Telephone: 610-834-9600
Employer Identification Number: 87-0406496
Employer's Income Tax Year End: 12-31
Agent for Service of Legal Process
The Agent for Service of Legal Process is the person upon whom any legal papers
can be served. Service of legal process may be made upon a Plan Trustee, the
Employer or the Plan Administrator.
Name: Rudy Lutterschmidt
Address: 537 Apple Street, West Conshohocken, PA 19428
13
AMENDMENT
TO EMPLOYMENT AGREEMENT
This is an Amendment (hereinafter called "Amendment") to an Employment Agreement
entered into on March 27, 1997, by and between Norman Gardner (hereinafter
called the "Executive") whose address is 529 Righter's Mill Road, Penn Valley,
PA 19072, and Nocopi Technologies, Inc. (hereinafter called "Company") having
its principal offices at 537 Apple Street, W. Conshohocken, PA 19428-2903. (The
Employment Agreement of March 27, 1997, shall hereinafter be referred to as the
"Agreement".)
The EXECUTIVE has agreed to resign as Chairman of the Board of Directors of
The COMPANY and as a Director of The COMPANY, the whole to take effect on March
27, 1998.
Notwithstanding the EXECUTIVE's decision, the Company is desirous to make
secure for itself the experience and outstanding abilities and services of the
EXECUTIVE for the period until October 31, 2002.
Therefore in consideration of the EXECUTIVE's continued employment with the
Company and in consideration of the terms and conditions under which the
EXECUTIVE shall provide services to the Company and of the mutual promises in
this Amendment, the EXECUTIVE and the Company agree as follows:
1. The first preamble of the Agreement is hereby deleted;
2. Clauses 1.1, 1.2, 1.3 and 1.4 of the Agreement are deleted and shall be
replaced by the following clauses:
1.1 The COMPANY agrees to and does hereby employ the EXECUTIVE as
Senior Advisor to the Company for the period commencing April 1,
1998 and terminating on October 31, 2002 (hereinafter called the
"EMPLOYMENT PERIOD").
1.2 The EXECUTIVE agrees to perform such sales and marketing
activities in promoting the sales of the COMPANY'S products and
services as the EXECUTIVE has performed prior to the date hereof
or such other duties as may be determined and assigned to the
EXECUTIVE by the Chief Executive Officer of the COMPANY
(hereinafter referred to as "CEO"). In addition, the EXECUTIVE
agrees to perform such public relations functions as he has
previously performed for the COMPANY which shall include
discussions and meetings with shareholders and investment
companies and stock brokerage companies. It is understood that
the EXECUTIVE shall not be called upon to perform services which
would require him to be employed in a manner inconsistent with
the duties that he has heretofore carried on (other than his past
duties as Chairman of the COMPANY or as Chief Executive Officer
or as Chief Operating Officer).
1.3 The COMPANY acknowledges that the foregoing statement contained
in clause 1.2 is of the essence of this Agreement without which
the EXECUTIVE would not have resigned his position as Chairman
and as a Director of the COMPANY. Moreover, the COMPANY agrees
that the EXECUTIVE shall occupy the same private office that he
presently enjoys at the facilities of the COMPANY located at 537
Apple Street, West Conshohocken, Pennsylvania. Should the
facilities of the COMPANY change during the Employment Period,
then the EXECUTIVE shall be assigned a comparable office within
the COMPANY'S then facilities.
<PAGE>
2. Clause 2.1 of the Agreement is deleted and replaced with the following:
2.1 Subject to the provisions of Clause 2.3, the COMPANY shall pay to
the EXECUTIVE, and the 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 AND
EIGHTY THOUSAND DOLLARS ($180,000.00) per annum, payable in
weekly or semi-monthly installments.
3. Clause 3.1 is amended by adding the phrase "as authorized by the CEO"
and will read as follows:
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, as authorized by the CEO.
4. Clause 9.1 of the Agreement is amended by increasing the number of
shares to which the EXECUTIVE is entitled to three hundred twenty-five
thousand (325,000) shares and accordingly the first paragraph of
Clause 9.1 and sub-clauses a) and b) and l) of Clause 9.1 shall now
read as follows:
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 THREE
HUNDRED & TWENTY-FIVE THOUSAND (325,000) shares of its par value
common stock, exercisable upon the following terms and conditions
and in accordance with the Stock Option Plan of the COMPANY, the
option to be an Incentive Stock Option to the extent permitted
under the Internal Revenue Code.
a) The option price shall be thirty cents ($0.30) per common share
as to one hundred and twenty-five thousand (125,000) shares and
forty-five cents ($0.45) as to two hundred thousand (200,000)
shares.
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 & FIFTY THOUSAND (150,000) of the
said THREE HUNDRED & TWENTY-FIVE THOUSAND (325,000) 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 ONE HUNDRED & SEVENTY-FIVE THOUSAND
(175,000) of the said THREE HUNDRED & TWENTY-FIVE THOUSAND
(325,000) shares less such number of shares as may have been
taken down by the EXECUTIVE hereunder prior thereto;
iii) Nothing contained in this Agreement is intended, or shall be
construed, to deprive the EXECUTIVE of the full benefits of
this option for THREE HUNDRED & TWENTY-FIVE THOUSAND
(325,000) shares in the event of the discharge of the
EXECUTIVE by the COMPANY or other breach of this agreement
by the COMPANY.
<PAGE>
Save and except for the foregoing, the Agreement is hereby confirmed by both
parties.
IN WITNESS WHEREOF the parties hereto have executed this Agreement this 27th day
of March, 1998.
NOCOPI TECHNOLOGIES, INC.
Per:
-------------------------
Richard A. Check
Dated: March 27, 1998
"The COMPANY"
-------------------------
Norman A. Gardner
Dated: March 27, 1998
"EXECUTIVE"
NOCOPI TECHNOLOGIES, INC.
537 Apple Street
W. Consohocken, PA 19428-2903
February __, 1999
Mr. Richard A. Check
Nocopi Technologies, Inc.
537 Apple Street
W. Consohocken, PA 19428-2903
Re: Severance of Employment with Nocopi Technologies, Inc. (the "Company")
Dear Mr. Check:
Reference is made to that certain Employment Agreement, dated October 27,
1997, by and between the Company and yourself (the "Agreement"). Terms used but
not defined herein shall have the meanings as set forth in the Agreement. This
will confirm our understanding and agreement of the terms and conditions of the
termination of your employment as Executive under the Agreement.
1. Effective February 24, 1999 (the "Resignation Date") you have resigned
as Chairman, Chief Executive Officer and President and a director of
the Company. Until that time you were a full-time employee of the
Company and devoted such of your business time as was required under
the Agreement to the Company. Effective on the Resignation Date your
employment as Executive under the Agreement terminated, and the
Agreement terminated except for Section 5 thereof "Restrictive
Covenant," and Section 6 thereof "Secret Processes."
2. Effective on the Resignation Date you have agreed to serve as a
consultant to the Company to perform such services, primarily related
to business development, as the Board of Directors of the Company or
the Interim Chairman of the Board, shall determine. For the first
three months of the Consulting Period you shall be available to the
Company for a 4 hour period per week.
3. You shall be compensated for consulting services hereunder at the rate
of $150,000 per year (the applicable salary under the Agreement)
payable in the same manner specified in the Agreement. The consulting
period shall extend from February 24, 1999 through December 31, 1999
(the "Consulting Period") unless earlier terminated by agreement of
the parties. During the Consulting Period, the Company shall continue
to provide you with health insurance at its expense and shall continue
to make the $900 per month car allowance payment as provided to you
under the Agreement. You have returned all Company credit cards to
Rudolph Lutterschmidt, Chief Financial Officer of the Company, and you
agree that you are not authorized in incur expenses on behalf of the
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Company without the prior authorization of the Board of Directors or
the Interim Chairman.
4. For good and value consideration, receipt of which is acknowledged,
you and the Company each hereby release, remise, and forever discharge
the other from any and all claims and causes of action that each had,
have or may make, now and forevermore, against the Company, its
successors and assigns, and their respective affiliates, shareholders,
employees, officers, directors, agents or representatives, including,
but not limited to, all claims under the Agreement or for vacation,
severance or breach of express or implied contract or wrongful
termination or discharge. You further agree not to make any
disparaging remarks, whether or not true, or otherwise disparage the
name or reputation of the Company. The only exceptions to the
foregoing releases shall be claims based on fraud or criminal conduct
and claims under this Agreement.
5. The Company shall also indemnify you for your services to it in all
capacities to the full extent permitted by law and you shall be
covered under the Company's Insurance Policy for your service as a
director or officer in accordance with the terms of the policy as in
effect from time to time and for so long as the Company maintains such
coverage.
The rights, benefits, duties and obligations under this agreement shall
inure to, and be binding upon, the Company, its successors and assigns.
Notwithstanding anything to the contrary in the Agreement, this agreement and
the Agreement shall be governed by, and construed and enforced in accordance
with the laws of the State of Pennsylvania and shall be enforceable in the
courts of the State and the Federal Courts located in that State. The Agreement
and this agreement constitute our entire agreement with respect to your
employment and termination of employment with the Company. Any terms of this
agreement inconsistent with those of the Agreement shall supersede and replace
those set forth in the Agreement.
Please indicate your agreement to the foregoing by signing the enclosed
copy of this letter and returning it to the undersigned.
Very truly yours,
AGREED TO AND ACCEPTED: Nocopi Technologies, Inc.
By
- ---------------------- -------------------------
Richard A. Check Jack H. Halperin
Interim Chairman
Of the Board
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES ACT OF ANY STATE. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED FOR VALUE,
PLEDGED, HYPOTHECATED OR OTHERWISE ENCUMBERED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OF THEM UNDER THE SECURITIES ACT OF 1933 AND/OR THE SECURITIES ACT
OF ANY STATE OR IN THE ABSENCE OF AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER
THAT SUCH REGISTRATION UNDER SUCH ACT OR ACTS IS NOT REQUIRED.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES OF SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES ("STATE ACT"), OR THE SECURITIES LAWS OF CANADA OR ANY
PROVINCE THEREOF ("CANADIAN ACT"). SUCH SECURITIES MAY NOT BE OFFERED, SOLD OR
TRANSFERRED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OF AMERICA ("UNITED
STATES") OR IN CANADA, OR IN THEIR JURISDICTION (COLLECTIVELY "NORTH AMERICA"),
OR TO OR FOR THE BENEFIT OF ANY PERSON WHO IS A NATIONAL, CITIZEN, OR RESIDENT,
OR NORMALLY A RESIDENT, THEREOF, THE ESTATE OF SUCH PERSON, OR ANY CORPORATION
OR OTHER ENTITY CREATED OR ORGANIZED UNDER ANY LAW OF THE UNITED STATES OR
CANADA OR ANY POLITICAL SUBDIVISION THEREOF (COLLECTIVELY REFERRED TO AS "NORTH
AMERICAN PERSONS") AT ANY TIME PRIOR TO THE EARLIER OF (i) THAT DATE ON WHICH
THE SECURITIES BECOME REGISTERED UNDER THE SECURITIES ACT, ANY APPLICABLE STATE
ACT, AND ANY APPLICABLE CANADIAN ACT; OR (ii) 40 DAYS AFTER TERMINATION OF THIS
OFFERING PROVIDED THAT AS OF THE DATE OF TRANSFER, THE SECURITIES ARE DULY
REGISTERED UNDER THE SECURITIES ACT, ANY APPLICABLE STATE ACT, AND ANY
APPLICABLE CANADIAN ACT, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT, ANY APPLICABLE STATE ACT, AND ANY APPLICABLE CANADIAN ACT IS AVAILABLE, AND
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT REASONABLY
SATISFACTORY TO IT.
NOCOPI TECHNOLOGIES, INC.
SERIES B PROMISSORY NOTE
Due March 31, 2000
No. 52 $50,000.00
FOR VALUE RECEIVED, the undersigned, Nocopi Technologies, Inc., a Maryland
corporation (hereinafter "Maker"), promises to pay to Egger & Co. or order
(hereinafter "Payee"), at Chase Manhattan Bank, 4 New York Plaza-11th Floor, New
York, NY 10004 or at such other place as the holder of this Note may from time
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to time designate, the principal sum of Fifty Thousand Dollars ($50,000.00),
payable as hereinafter provided, in such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts.
This Note is one of two Notes, designated the Series B Extended Notes,
aggregating One Hundred and Twenty-Five Thousand Dollars ($125,000), issued by
the Maker. All Series B Extended Notes shall rank pari passu in respect of
payment of principal and interest and upon any dissolution, liquidation or
winding-up of the Maker.
The principal sum hereof shall be payable on March 31, 2000 (the "Maturity
Date"), when all unpaid principal and interest shall become due and payable.
Interest at the rate of Nine Percent (9%) per annum on the outstanding
balance shall be payable semi-annually on September 30 and March 31 of each
year, commencing on September 30, 1998, to the person in whose name this Note is
registered at the close of business on the preceding August 15 or February 15,
as the case may be. Interest shall accrue from the most recent date to which
interest has been paid or duly provided for, or, if no interest has been paid or
duly provided for, from the date of issuance of this Note. Interest hereon shall
be computed on the basis of a 365-day year.
IT IS FURTHER AGREED:
1. Conversion Privilege.
(a) The holder of this Note shall have the right, at such holder's
option (but if such Note is called for redemption at the election of the Maker,
then in respect of such amount called for redemption or exchange, only to and
including but not after the close of business on (i) the fifth calendar day
before the date fixed for such redemption, provided that no default by the Maker
in payment of the applicable Redemption Price) (including any accrued and unpaid
dividends) or in the exchange of such Note, as the case may be, shall have
occurred and be continuing) to convert this Note, or any portion of the
principal amount thereof which is $25,000 or an integral multiple thereof, and
accrued but unpaid interest thereon, into that number of fully paid and
non-assessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) obtained by dividing the amount of principal and
accrued interest being converted by the Conversion Price then in effect. The
Conversion Price shall initially be equal to Twenty Cents ($0.20) per share.
(b) In order to exercise the conversion privilege, the holder shall
surrender this Note, accompanied by a proper assignment thereof to the Maker or
in blank, at any of the offices or agencies maintained for such other purpose by
the Maker ("Conversion Agent") and shall give written notice to the Maker at
such Conversion Agent that the holder elects to convert this Note or a specified
portion thereof. Such notice shall also state the name(s), together with
address(es), in which the certificate(s) for shares of Common Stock which shall
be issuable on such conversion shall be issued. As promptly as practicable after
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the surrender of this Note as aforesaid, the Maker shall issue and shall deliver
at such Conversion Agent to such holder, or on his written order, a
certificate(s) for the number of full shares of Common Stock issuable upon such
conversion in accordance with the provisions hereof and any fractional interest
in respect of a share of Common Stock arising upon such conversion shall be
settled as provided in subparagraph (c) below. Such conversion shall be deemed
to have been effected immediately prior to the close of business on the date on
which this Note shall have been so surrendered and such notice received by the
Maker as aforesaid, and the person(s) in whose name(s) any certificate(s) for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder(s) of record of the Common Stock represented thereby at
such time, unless the stock transfer books of the Maker shall be closed on the
date on which this Note is so surrendered for conversion, in which event such
conversion shall be deemed to have been effective immediately prior to the close
of business on the next succeeding day on which such stock at the close of
business on such later day. In either circumstance, such conversion shall be at
the Conversion Price in effect on the date upon which this Note shall have been
surrendered and such notice received by the Maker.
(c) In case this Note shall be surrendered for conversion of only a
portion of the principal amount thereof, the Maker shall execute and deliver to
the holder of this Note, at the expense of the Maker, a new Note in the
denomination or denominations ($50,000 and integral multiples thereof, plus one
Note in a lesser denomination, if required) as such holder may request in an
aggregate principal amount equal to the unconverted portion of this Note.
In the event the holder of this Note shall be entitled to receive a
fractional interest in a share of Common Stock, except as otherwise provided
herein the Maker shall either, in the sole discretion of its Board of Directors,
(i) round such fractional interest up to the next whole share of common stock,
or (ii) deliver cash in the amount of the fair market value of such fractional
interest.
If, in lieu of fractional interest in a share of Common Stock which would
otherwise be deliverable upon the conversion of this Note, or any portion
thereof, the Maker, pursuant to the terms of this subparagraph (c), shall
deliver cash, the fair market value of a share of Common Stock shall be as
determined by the Board of Directors of the Maker. The determination of the
Board of Directors shall be conclusive and not subject to challenge by the
holder of this Note. If more than one Series B Note shall be surrendered for
conversion at one time by the same holder, the number of full shares issuable
upon conversion thereof shall be computed on the basis of the aggregate
principal and/or interest amount to be converted pursuant to all Series B
Extended Notes so surrendered by such holder.
(d) The Conversion Price shall not be adjusted for (i) the grant or
exercise of any stock option under either the Maker's Incentive Stock Option
Plan or Stock Incentive Plan as in effect on May 15, 1998, or as thereafter
amended, or (ii) the exercise of any other options, warrants or rights to
acquire Common Stock granted by the Maker on or prior to May 15, 1998; provided
that the Conversion Price shall be adjusted in other cases from time to time as
follows:
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(i) In case the Maker shall pay or make a dividend or other
distribution on any class of capital stock of the Maker in Common Stock, the
Conversion Price in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such Conversion
Price by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of shares and
the total number of shares constituting such dividend or other distribution,
such reduction to become effective immediately after the opening of business on
the day following the date fixed for such determination. For the purposes of
this subparagraph (i), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Maker but shall
include all shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Maker will not pay any dividend or make
any distribution on shares of Common Stock held in the treasury of the Maker.
(ii) In case the Maker shall issue rights or warrants to all holders
of its Common Stock (not being available on an equivalent basis to holders of
the Series B Extended Notes upon conversion) entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the current
market price per share (determined as provided in subparagraph (vi) below) of
the Common Stock on the date fixed for the determination of stockholders
entitled to receive such rights or warrants (other than pursuant to a dividend
reinvestment plan), the Conversion Price in effect at the opening of business on
the day following the date fixed for such determination shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
current market price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For the purposes of this subparagraph (ii), the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Maker but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Maker
will not issue any rights or warrants in respect of shares of Common Stock held
in the treasury of the Maker.
(iii) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and, conversely,
in case outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
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<PAGE>
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(iv) In case the Maker shall, by dividend or otherwise, distribute
to all holders of its Common Stock evidences of its indebtedness or assets
(including securities, but excluding any rights or warrants referred to in
subparagraph (ii) above, any dividend or distribution paid in cash out of the
earned surplus of the Maker and any dividend or distribution referred to in
subparagraph (i) above), the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution by a
fraction of which the numerator shall be the current market price per share
(determined as provided in subparagraph (vi) below) of the Common Stock on the
date fixed for such determination less the fair market value (as determined by
the Board of Directors, whose determination shall be conclusive and shall be
described in a statement filed with any Conversion Agent) of the portion of the
assets or evidences of indebtedness so distributed applicable to one share of
Common Stock and the denominator shall be such current market price per share of
the Common Stock, such adjustment to become effective immediately prior to the
opening of business on the day following the date fixed for the determination of
stockholders entitled to receive such distribution. The foregoing provisions
shall also be applicable to any rights plan of the Maker. In any case in which
this subparagraph (iv) is applicable, subparagraph (ii) shall not be applicable.
(v) The reclassification of Common Stock into securities including
securities other than Common Stock (other than any reclassification upon a
consolidation or merger to which subparagraph (ix) below applies) shall be
deemed to involve (A) a distribution of such securities other than Common Stock
to all holders of Common Stock (and the effective date of such reclassification
shall be deemed to be "the date fixed for the determination of stockholders
entitled to receive such distribution" and the "date fixed for such
determination" within the meaning of subparagraph (iv) above), and (B) a
subdivision or Common Stock outstanding immediately prior to such
reclassification shall be deemed to the "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective,"
as the case may be, and "the day upon which such subdivision or combination
becomes effective" within the meaning of subparagraph (iii) above).
(vi) For the purpose of any computation under subparagraphs (ii) and
(iv) above, the current market price per share of Common Stock on any day shall
be deemed to be the average of the daily closing prices for the five consecutive
trading days selected by the Board of Directors commencing not more than twenty
trading days before, and ending not later than, the earlier of the day in
question and the day before the "ex" date with respect to the issuance or
distribution requiring such computation. For this purpose, the term "ex" date,
when used with respect to any issuance or distribution shall mean the first date
on which the Common Stock trades regular way on the applicable exchange or in
the applicable market without the right to receive such issuance or
distribution. The closing price for each day shall be the reported last sale
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
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on the New York Stock Exchange or, if the Common Stock is not listed or admitted
to trading on such Exchange, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, on the National
Association of Securities Dealers Automated Quotations National Market System
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on such National Market System, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm selected from time to time by the Board of
Directors for that purpose or, if the bid and asked prices in the
over-the-counter market are not reported, the current market price per share of
Common Stock shall be determined by the Board of Directors and such
determination shall be final and conclusive.
(vii) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least 1% of such
price; provided, however, that any adjustments which by reason of this
subparagraph (vii) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment, and provided further, that
adjustment shall be required and made in accordance with the provisions hereof
not later than such time as may be required in order to preserve the tax-free
nature (for purposes of United States Federal tax purposes) of a distribution to
the holder of this Note or the holders of the Common Stock. All calculations
shall be made to the nearest cent or to the nearest 1/100th of a share, as the
case may be. The Maker may make such reductions in the Conversion Price, in
addition to those required by subparagraphs (i), (ii), (iii) and (iv) above, as
it considers to be advisable in order to avoid or diminish any income tax (for
purposes of United States Federal Income Tax) to any holders of shares of Common
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes or for any other reasons. The Maker shall have the power
to resolve any ambiguity or correct any error with regard to the preceding
sentence and its actions in so doing shall be conclusive and binding.
(viii) Whenever the Conversion Price is adjusted as herein provided,
(A) the Maker shall promptly file with any Conversion Agent a certificate of the
Maker's Chief Financial Officer setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment and the manner of computing the same, which certificate shall be
conclusive evidence of the correctness of such adjustment, and (B) a notice
stating that the Conversion Price has been adjusted and setting forth the
adjusted Conversion Price shall be given by the Maker to any Conversion Agent
and mailed by the Maker to the holder of this Note at his last address as the
same appears on the books of the Maker.
(ix) In the case of any consolidation of the Maker with, or merger
of the Maker into, any other entity, any merger which does not result in any
reclassification, conversion, exchange, or cancellation of outstanding shares of
Common Stock of the Maker) or any sale or transfer of all or substantially all
of the assets of the Maker, the holder of this Note shall have the right
thereafter to convert this Note, or any portion of the principal thereof and
accrued interest thereon, only into the kind and amount of securities, cash and
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other property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock of the Maker into which this
Note, or portion thereof, might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common Stock of
the Maker is not an entity with which the Maker consolidated or into which the
Maker merged or which merged into the Maker or to which such sale or transfer
was made, as the case may be ("constituent entity"), or an affiliate of a
constituent entity, and failed to exercise his rights of election, if any, to
the kind or amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (provided that if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock of the Maker
held immediately prior to such consolidation, merger, sale or transfer by others
than a constituent entity or an affiliate thereof and in respect of which such
rights of election shall not have been exercised ("non-electing share"), then
for the purpose of this subparagraph (ix) the kind and amount of securities,
cash and other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in application of the provisions set forth
herein with respect to the rights and interests thereafter of the holder of this
Note, to the end that the provisions set forth herein shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock or other securities or property thereafter deliverable on
the conversion of this Note. Any such adjustment shall be evidenced by a
certificate of the Chief Financial Officer of the Maker and a notice of such
adjustment filed and mailed in the manner set forth in subparagraph (viii)
above, and each containing the information set forth in such subparagraph
(viii); and any adjustment so certified shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment. The above provisions
shall similarly apply to successive consolidations, mergers, sales or transfers.
For purposes of this paragraph 2, "Common Stock" includes any stock of
any class of the Maker which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Maker and which is not subject to redemption by
the Maker. However, subject to the provisions of subparagraph (ix) above, shares
issuable on conversion of this Note shall include only shares of the class
designated as Common Stock of the Maker at the date of issuance of this Note or
shares of any reclassifications thereof and which have no preference in respect
of dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Maker and which are not subject to
redemption by the Maker; provided that if at any time there shall be more than
one such resulting class, the shares of each such class then so issuable shall
be substantially in the proportion which the total number of shares of such
class resulting from all such classifications bears to the total number of
shares of all such classes resulting from all such reclassifications.
In case:
(A) the Maker shall declare a dividend (or any other distribution)
on its Common Stock payable otherwise than in cash out of its
earned surplus; or
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(B) the Maker shall authorize the granting to the holders of its
Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights;
or
(C) of any reclassification of the Common Stock of the Maker (other
than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation, merger or share exchange
to which the Maker is a party and for which approval of any
stockholders of the Maker is required, or of the sale or
transfer of all or substantially all of the assets of the Maker;
or
(D) of the voluntary or involuntary dissolution, liquidation, or
winding up of the Maker;
then the Maker shall cause to be filed with any Conversion Agent, and shall
cause to be mailed to the holder of this Note at such holder's last address as
the same appears on the books of the Maker, at least twenty (20) days (or at
least ten (10) days in any case specified in clause (A) or (B) above) prior to
the applicable record or effective date hereinafter specified, a notice stating
(A) the date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined, or (B) the date
on which such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities cash or other property deliverable upon such reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution, liquidation
or winding up. Neither the failure to give such notice nor any defect therein
shall affect the legality or validity of the proceedings described in clauses
(A) through (D) above.
(e) Not less than seven (7) days prior to the Distribution Date, the
Maker shall cause to be filed with any Conversion Agent, and shall cause to be
mailed to the holder of this Note at such holder's last address as the same
appears on the books of the Maker, a notice stating the date on which the
Distribution Date is to occur, and briefly describing the import thereof.
Neither the failure to give such notice nor any defect therein shall affect the
legality or validity of the proceedings described herein.
(f) The Maker will pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of Common
Stock on conversions of this Note or any portion thereof pursuant hereto;
provided, however, that the Maker shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of the holder of this Note and
no such issue or delivery shall be made unless and until the person requesting
such issue or delivery has paid to the Maker the amount of any such tax has been
paid.
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(g) The Maker covenants that all shares of Common Stock which may be
delivered upon conversions of this Note or portions thereof will upon delivery
be duly and validly issued and fully paid and non-assessable, free of all liens
and charges and not subject to any preemptive rights.
(h) The Maker covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock, for the purpose of effecting conversions of
this Note, the full number of shares of Common Stock deliverable upon the
conversion of the total principal amount of this Note, plus accrued interest
thereon, not theretofore converted. The issuance of shares of Common Stock upon
conversion of this Note is authorized in all respects.
(i) Prior to the conversion of this Note, the holder of this Note shall
not be entitled to any rights of a stockholder of the Maker, including without
limitation the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Maker, except as provided herein.
2. Subordination.
(a) The indebtedness evidenced by this Note, including the principal
hereof and interest thereon, shall be subordinate and subject in right of
payment, to the extent and in the manner hereinafter set forth, to the prior
payment in full of all Senior Debt of Maker as hereinafter defined, whether now
outstanding or hereafter incurred, and any holder of this Note, by acceptance
hereof, agrees to and shall be bound by the provisions of this paragraph. As
used in this Note, the term "Senior Debt" shall mean not more than $2,000,000 in
the aggregate of principal, premium if any, and interest on all indebtedness of
the Maker regardless of whether incurred on, before or after the date of
issuance of this Note (i) for money borrowed from any bank or similar financial
institution, and evidenced by notes, bonds, debentures or other written
obligations and such notes, bonds, debentures or other written obligations are
interest bearing securities only and are not convertible or issued in connection
with the issue of warrants or options, whether separate or attached, or some
other rights to receive stock or participate in the earnings of the Maker in any
form, including dividend distributions, and (ii) in connection with any renewals
or extensions of any indebtedness described in (i) above; provided, however,
that the terms does not include indebtedness which by the terms of the
instrument creating or evidencing it is subordinated to or on a parity with the
Series B Notes.
(b) Upon any payment or distribution of assets of Maker of any kind or
character, whether in cash, property, or securities, to creditors upon any
dissolution or winding-up or total or partial liquidation or reorganization of
Maker whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all principal, premium if any, and interest
due upon all Senior Debt shall first be paid in full, or payment thereof
provided for in money or money's worth, before the holder of this Note shall be
entitled to retain any assets so paid or distributed in respect thereof (for
principal or interest); and upon any such dissolution or winding-up or
liquidation or reorganization, any payment or distribution of assets of Maker of
9
<PAGE>
any kind or character whether in cash, property, or securities, to which the
holder of this Note would be entitled, except for the provisions hereof, shall
be paid by Maker or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other person making such payment or distribution, or by the holder of
this Note, if received by such holder, direct to the holders of Senior Debt (pro
rata to each such holder on the basis of the respective amounts of Senior Debt
held by each such holder) or their representatives, to the extent necessary to
pay all Senior Debt in full, in money or money's worth, after giving effect to
any concurrent payment or distribution to or for the holders of Senior Debt,
before any payment or distribution is made to the holder of this Note.
(c) Subject to the payment in full of all Senior Debt, the holder of
this Note shall be subrogated pro rata (based on respective amounts paid over
for the benefit of the holders of Senior Debt as provided in subparagraph (b),
above), with the holders of any other subordinated indebtedness of Maker that by
its terms ranks pari passu with this Note and is entitled to like rights of
subrogation, to the rights of holders of Senior Debt to receive payments or
distribution of assets of Maker applicable to the Senior Debt until the
principal of and interest on this Note shall be paid in full; and no payments or
distributions on the Senior Debt pursuant to this paragraph shall, as between
Maker, its creditors other than the holders of Senior Debt, and the holder this
Note, be deemed to be a payment by Maker to or on account of this Note, it being
understood that the provisions of this paragraph are and are intended solely for
the purpose of defining the relative rights of the holder of this Note and the
holders of the Senior Debt.
(d) Nothing contained in this paragraph or elsewhere in this Note is
intended to or shall impair the obligation of Maker which is absolute and
unconditional, to pay to the holder of this Note the principal of and interest
on this Note, as and when the same shall become due and payable in accordance
with its terms, or to affect the relative rights of the holder of this Note and
creditors of Maker other than the holders of the Senior Debt, nor shall anything
herein or therein prevent the holder of this Note from exercising all remedies
otherwise permitted by applicable law upon default under this Note, subject to
the rights, if any, under this paragraph of the holders of Senior Debt in
respect of cash, property, or securities of Maker otherwise payable or delivered
to such holder upon the exercise of any such remedy.
(e) No payments on account of the principal or interest on this Note, or
on account of the purchase or other acquisition of this Note if its maturity
shall have been accelerated, shall be made, and no holder of this Note shall be
entitled to receive any such payment, unless full payment of amounts then due
for principal, premium if any, and interest on Senior Debt has been made or duly
provided for in money or money's worth. No payment on account of principal or
interest on this Note, or on account of the purchase or other acquisition of
this Note if its maturity shall have been accelerated, shall be made, and no
holder of this Note shall be entitled to receive any such payment, if, at the
time of such payment or immediately after giving effect thereto, there shall
exist under any Senior Debt or any agreement pursuant to which any Senior Debt
is issued, any default or any condition, event or act, which, with notice or
lapse of time, or both, would constitute a default or any such default or
condition, event or act shall be the subject of a judicial proceeding, unless
10
<PAGE>
and until such default or event of default shall have been cured or waived or
shall have ceased to exist, or such Senior Debt shall have been paid in full.
(f) The provisions of this paragraph constitute a continuing offer to
all persons who, in reliance upon such provisions, become holders of Senior
Debt; and such provisions are made for the benefit of the holders of Senior Debt
and such holders are hereby made obligees hereunder to the same extent as if
their names were written herein as such, and they and/or each of them may
proceed to enforce such provisions. In furtherance of the foregoing, each holder
of Senior Debt (i) is hereby irrevocably authorized and empowered but shall not
be obligated to demand, sue for, collect, receive and receipt for such holder's
ratable share of all payments and distributions in respect of this Note which
are required to be paid or delivered to holders of Senior Debt as provided
herein, and to file and prove all such claims and take all such other action in
the name of the holder of this Note or otherwise, as such holder of Senior Debt
may determine to be necessary or appropriate for the enforcement of the rights
provided herein, and (ii) may require the delivery to him by the holder of this
Note of such other instruments conforming such authorizations and such powers of
attorney, proofs of claim, assignments of claim and other instruments, and the
taking of all such other action, as he may request in order to enable such
holder of Senior Debt to enforce such holder's ratable share of all payments and
distributions in respect to this Note. No present or future holder of Senior
Debt shall be prejudiced in any way in the rights of such holder to enforce
subordination of this Note by any act or failure to act on the part of Maker or
any such holder.
3. Redemption upon Change in Control.
(a) In the event of any Change in Control, the holder of this Note shall
have the right, at such holder's option, to require the Maker to redeem, and
upon the exercise of such right the Maker shall redeem, all or any part of this
Note (in increments of Fifty Thousand Dollars ($50,000) principal amount) on the
date (the "Redemption Date") that is 100 calendar days after the date of such
Change in Control at a price equal to the principal amount purchased plus
accrued and unpaid interest to the Redemption Date.
(b) On or before the 30th calendar day after any Change in Control, the
Maker shall give notice thereof and of the redemption right set forth herein
arising as a result thereof by first-class mail, postage pre-paid, to the holder
of this Note at such holder's address appearing in the books of the Maker.
Each notice of a redemption right shall state:
(i) the Redemption Date,
(ii) the redemption price,
(iii) the date by which the redemption right must be exercised,
and
11
<PAGE>
(iv) a description of the procedure which the holder must
follow to exercise a redemption right.
No failure of the Maker to give the foregoing notice shall limit any
holder's right to exercise a redemption right.
(c) To exercise a redemption right, the holder shall deliver to the
Maker (or an agent designated by the Maker for such purposes in the notice
referred to above) on or before the 90th calendar day after the Change in
Control (i) written notice of the holder's exercise of such right, which notice
shall set forth the name of the holder, the principal amount to be redeemed and
a statement that the option to exercise the redemption right is being made
thereby, and (ii) this Note, duly endorsed for transfer to the Maker. Such
written notice shall be irrevocable.
In the event a redemption right shall be exercised in accordance with the
terms hereof, the Maker shall pay or cause to be paid the price payable with
respect to the principal amount as to which the redemption right has been
exercised in cash to the holder on the Redemption Date. In the event that a
redemption right is exercised with respect to less than the total principal
amount of this Note, the Maker shall cause to be issued a new Note representing
the principal amount of this Note which is not redeemed.
(d) As used herein, (i) an "Affiliate" of or a Person "affiliated"
with, a specified Person, is a person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by or is under common control
with, the Person specified; (ii) an "Associate" of, or a Person "associated"
with, any Person, means (1) any corporation or organization (other than the
Maker or a subsidiary of the Maker) of which such person is an officer, employee
or partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities, (2) any trust or other estate in which such
Person has substantial beneficial interest or as to which such Person serves as
trustee or in a similar fiduciary capacity, and (3) any relative or spouse of
such Person or who is a director or officer of such Person or any of its parents
or subsidiaries; (iii) the term "beneficial owner" shall be determined in
accordance with Rule 13d-3, as in effect on May 15, 1998, promulgated by the
Securities and Exchange Commission under the Securities and Exchange Act of
1934; (iv) a "Change in Control" of the Maker shall be deemed to have occurred
at such time as any Person, together with any Affiliates or Associates, (other
than Norman A. Gardner or entitles controlled by him, is or becomes the
beneficial owner, directly or indirectly, of shares of stock of the Maker
entitling such Person to exercise 55% or more of the total voting power of all
classes of stock or the Maker entitled generally to vote in elections of
directors; provided that such acquisition shall not be deemed to be a Change in
Control if such acquisition results from a business combination, including a
merger or consolidation or sale of all or substantially all assets, and
following such business combination this Note thereafter is convertible solely
into Common Stock (or like equity securities, exclusive of cash for fractional
shares) of the Maker, or of the then ultimate parent company of the Maker, which
Common Stock (or like equity securities) is publicly traded; and (v) "Person"
means any individual, corporation, partnership, joint venture, association,
join-stock company, trust, unincorporated organization or government or any
12
<PAGE>
agency or political subdivision thereof. Notwithstanding the provisions
contained in this paragraph 3(d), the distribution, sale or exchange of shares
of Common Stock which, at the date of issuance of this Note, are owned by Norman
A. Gardner or entities controlled by him shall not constitute a "Change in
Control" as defined above.
Except where inconsistent with the provisions of this paragraph 3, the
prepayment provisions of paragraph 1 shall be applicable to redemptions under
this paragraph 3.
4. Events of Default. If one or more of the following events of default
shall have occurred and be continuing,
(a) default in the payment of any installment of interest or principal
as and when the same shall become due and payable, and continuation of such
default for a period of ninety (90) days; or
(b) failure on the part of Maker duly to perform any other covenant or
agreement on the part of Maker contained in this Note for a period of sixty (60)
days after the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to Maker by the holder of this Note; or
(c) entry of a decree or order by a court having jurisdiction in the
premises adjudging Maker a bankrupt or insolvent, or approving as properly filed
a petition seeking a reorganization of Maker under any applicable federal or
state law relating to bankruptcy, and continuation of such decree or order
undischarged or unstayed for a period of ninety (90) days; or
(d) entry of a decree or order by a court having jurisdiction in the
premises for the appointment of a receiver or trustee or assignee in insolvency,
bankruptcy or reorganization of Maker or of its property, or for the winding up
or liquidation of its affairs, and continuation of such decree or order in force
undischarged or unstayed for a period of ninety (90) days;
then, and in each and every such case, the holder of this Note may declare the
principal of this Note to be due and payable immediately, and payment of such
principal debt, or the unpaid principal balance thereof, and all accrued and
unpaid interest thereon, together with all other sums due under the terms
hereof, may be enforced and recovered at once.
5. Payment of Expenses. Maker promises to pay all reasonable costs and
expenses (including reasonable attorneys' fees) incurred in connection with the
collection of this Note upon a default by Maker and declaration by the holder of
this Note that the principal balance hereof is immediately due and payable.
6. Covenants of Maker.
(a) Maker will pay all taxes, assessments and governmental charges
lawfully levied or assessed upon it or its property, or any part thereof, or
upon its
13
<PAGE>
income or profits, or any part thereof, before the same shall become delinquent,
and will duly observe and conform to all lawful requirements of any government
authority relative to any of its property, and all covenants, terms and
conditions upon or under which any of its property is held; provided, however,
that Maker shall have the right to pay such taxes, assessments or charges under
protest and shall have the right to contest the amount of or validity of any
such tax, assessment or charge by appropriate legal proceeding.
(b) Maker will maintain its corporate existence and right to carry on
its business and duly procure all necessary renewals and extensions thereof and
use its best efforts to maintain, preserve and renew all rights, powers,
privileges and franchises; provided, however, that nothing herein contained
shall be construed to prevent the Maker from ceasing or omitting to exercise any
rights, powers, privileges or franchises the continuing exercise of which in the
opinion of Maker is no longer in the best interest of Maker.
(c) Maker will keep and maintain all buildings, plants, motor vehicles
and other property owned by it in such good condition, repair and working order
and supplied with all such necessary equipment as in the judgment of Maker may
be necessary, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing herein contained shall prevent Maker from selling, abandoning or
otherwise disposing of any building, plant, motor vehicle or other property
whenever in the opinion of Maker the retention thereof is inadvisable or not
necessary to the business of Maker.
(d) Maker will insure and keep insured in a reasonable amount with
reputable insurance companies so much of its properties as companies engaged in
a similar business and to the extent such companies in accordance with good
business practice customarily insure properties of a similar character against
loss by fire or from other causes and, in addition, Maker will maintain in
effect such public liability and property damage insurance as is customarily
maintained in accordance with good business practice by companies engaged in
similar business; or, in lieu thereof, Maker may maintain a system or systems of
self-insurance which will accord with the approved practices of companies owning
or operating properties of a similar character and maintaining such systems.
(e) Maker covenants and agrees to provide to the holder of this Note
copies of its annual financial statements, audited by independent certified
public accountants, no later than fifteen (15) days after such annual reports
are available for distribution.
(f) Maker covenants and agrees to provide to the holder of this Note,
within fifty (50) days after the close of each of its interim fiscal quarters,
unaudited income statements and balance sheets relating to its operations during
the previous quarter.
7. Restriction on Transfer. This Note has not been registered under the
Securities Act of 1933 and cannot be transferred without either registration or
exemption from registration under that act and regulations promulgated
thereunder.
14
<PAGE>
8. Waivers. Maker as maker of this Note waives presentment, demand, protest
and notice of dishonor and protest.
9. Notice. Any notice required or permitted to be given hereunder shall be
deemed sufficiently given as of the date it is mailed, first-class mail, postage
prepaid, if to the Maker to Nocopi Technologies, Inc., 537 Apple Street, W.
Conshohocken, PA 19428-2903 with a copy to Jack H. Halperin, Esq. 317 Madison
Ave., Suite 1421, New York, NY 10017 and if to Payee, to such address as appears
in the Register of Series B Extended Notes maintained by the Maker. Notice of
any change in address shall be deemed sufficiently given if given in accordance
herewith.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the day of
May, 1998.
NOCOPI TECHNOLOGIES, INC.
a Maryland corporation
ATTEST: By:
-------------------------
Richard A. Check,
President
By:
------------------------------
Joel A. Pinsky, Secretary
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Nocopi Technologies, Inc.
West Conshohocken, PA
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement on Form S-8 (SEC File No.
33-84388 and 33-84402) of our report dated March 5, 1999, relating to the
financial statements of Nocopi Technologies, Inc. appearing in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
BDO SEIDMAN, LLP
Philadelphia, PA
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,372,900
<SECURITIES> 0
<RECEIVABLES> 186,300
<ALLOWANCES> 55,500
<INVENTORY> 9,200
<CURRENT-ASSETS> 1,556,100
<PP&E> 478,500
<DEPRECIATION> 373,800
<TOTAL-ASSETS> 2,392,800
<CURRENT-LIABILITIES> 611,100
<BONDS> 125,000
0
0
<COMMON> 335,900
<OTHER-SE> 1,320,800
<TOTAL-LIABILITY-AND-EQUITY> 2,392,800
<SALES> 2,423,900
<TOTAL-REVENUES> 2,423,900
<CGS> 944,900
<TOTAL-COSTS> 944,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 30,600
<INCOME-PRETAX> (548,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (548,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (548,800)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
