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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
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[ ] 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
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Nocopi Technologies, Inc.
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(Name of small business issuer in its charter)
Maryland 87-0406496
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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. [ ]
<PAGE>
Form 10-KSB
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State issuer's revenues for its most recent fiscal year. $1,698,900
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State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer. $8,000,000 at March 31, 2000.
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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. 33,817,332 shares of Common
Stock, $.01 par value at March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
PART I
ITEM 1. BUSINESS
Background
Nocopi Technologies, Inc. (hereinafter "Nocopi" or "Registrant") was originally
organized in 1983 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 derives revenues by licensing its
technologies to end users and, secondarily, by selling products incorporating
its technologies and technical support services.
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 and product
authentication technologies have become the most substantial market for
Registrant. Sales are made either through licensees or directly to end-users.
Registrant's financial condition has deteriorated in recent years. Under its
prior management, Registrant sought to respond to this deterioration by reducing
its general and administrative, marketing and research and development expenses.
These actions significantly reduced operating costs, but also resulted in a
decline in revenues, with the result that Registrant's decline was not
stabilized.
Certain stockholders unhappy with the performance of Registrant's prior
management formed a stockholders committee known as the Nocopi Committee to
Maximize Our Return on Equity ("NoMore") during 1999. NoMore nominated a slate
of directors in opposition to the slate of directors proposed by management for
election as directors at Registrant's annual meeting of stockholders held on
December 15, 1999. NoMore's challenge to incumbent management was successful,
and its nominees were elected to fill five of the six available director
positions at the annual meeting. The sixth person elected, a nominee of prior
management, has since resigned and the vacancy created by his resignation has
been filled by the remaining directors.
Since Registrant's current board of directors was elected, Registrant has
focused on continued reduction of non-essential or unproductive expense,
refocusing marketing efforts, to the extent permitted by Registrant's limited
resources, in areas believed most likely to generate revenues in the near term,
and exploring options, including fundamental transactions, that may improve
Registrant's long term prospects or result in enhanced shareholder value. In
particular, individual members of Registrant's board of directors have expended
substantial time and effort in pursuing perceived opportunities to enhance
Registrant's revenues in the near term in order to stabilize and improve
Registrant's financial performance and in pursuing and evaluating potential
business combinations. Although Registrant believe that such efforts are
beginning to result in improved financial performance, it remains uncertain
whether such efforts ultimately will result in Registrant becoming profitable or
in Registrant's entering into any fundamental transaction.
Anti-Counterfeiting and Anti-Diversion Technologies and Products
Recent developments in copying and printing technologies have made it even
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. Product 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. 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
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(i.e. sale of legitimate products through unauthorized distribution channels or
in unauthorized markets). Registrant's invisible inkjet technology permits
manufacturers and distributors to track the movement of products from production
to ultimate consumption when coupled with proprietary software.
Document Security Products
Nocopi markets a line of burgundy colored papers that deter photocopying and
transmission by facsimile. This colored paper inhibits photocopier reproduction
at the cost of loss of easy legibility to the reader. Registrant currently
markets its copy resistant papers in three grades, each balancing improved copy
resistance against diminished legibility. Registrant also user defined,
pre-printed forms on which selected areas are colored to inhibit reproduction.
An example is a doctor's prescription form with the signature area protected.
This product line is called SELECTIVE NOCOPI(TM). Registrant also offers several
inks that impede photocopying by color copiers. This technology is called
COLORBLOC(R).
In late 1999 the Registrant became a distributor for the Wicker 2000 line of
security paper. This patented product, complementary to the Registrant's line of
security paper, produces a message, such as "unauthorized copy", when a copy of
an original document that was printed or typed on the Wicker 2000 paper, is
reproduced on a black & white or color photocopier.
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 1999 1998
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<S> <C> <C>
Anti-Counterfeiting & Anti-Diversion Technologies and Products 96% 97%
Document Security Products 4% 3%
</TABLE>
Marketing
The marketing approach of Registrant is to offer 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 several have been licensed. Within
North America, sales efforts include direct selling by company personnel to
create end user demand and selling through licensee sales forces and sales
agents 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.
Registrant's new management has refocused the company's marketing efforts
somewhat in view of the limited resources available to the Company for marketing
and the need to improve the Registrant's cash flow. Current marketing efforts
are focused on Registrant's more mature technologies that can be utilized by
customers with relatively less development efforts.
As continued improvements in color copier and desktop publishing technology make
counterfeiting and fraud opportunities less expensive and more available,
Registrant intends, to the extent feasible, 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, S.A. 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, S.A., an additional royalty stream from revenues generated in
Europe. The Registrant owns approximately an 18% interest in Euro-Nocopi, S.A.
and holds warrants permitting it to increase its interest to 55%. This
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warrant is 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. In addition, if no public
offering of Euro-Nocopi, S.A. has been made by January 2001, Registrant may
acquire all shares of Euro-Nocopi, S.A. not owned by the Registrant for
approximately one million shares of the Registrant's common stock. This call
right expires on December 31, 2001.
Major Customers
During 1999, Registrant made sales or obtained revenues equal to 10% or more of
Registrant's 1999 total revenues from one non-affiliated customer, Paxar
Corporation, which accounted for approximately 15% of 1999 revenues. Paxar
terminated its license arrangement with the Registrant in September 1999.
Outside Sales Agents
The Company has engaged outside sales agents who are paid commissions on sales
to various customers of the Company and may also receive retainers and
reimbursement for certain expenses. During 1999, the total payments to outside
sales agents was approximately $100,000 as compared to such payments of
approximately $170,000 in 1998.
Manufacturing
Nocopi has a small facility for the manufacture of its security inks. Except for
this facility, Registrant does not maintain manufacturing facilities. Registrant
presently subcontracts the manufacture of its applications (mainly printing and
coating) to third party manufacturers and expects to continue such
subcontracting. 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 established a quality control program that currently entails
laboratory analysis of developed technologies. When warranted, Registrant's
specially trained technicians travel to third party production facilities to
install equipment, train client staff and monitor the manufacturing process.
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 also
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 that 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.
As a result of the Registrant's deteriorating financial condition, the
Registrant wrote-off unamortized patent costs of $503,000 in the fourth quarter
of 1999 due to the uncertainty of their recoverability.
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Research and Development
Nocopi has been involved in research and development since its inception.
Although Registrant's deteriorating financial condition has forced it to reduce
funding for research and development in recent years, it 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 develop specific customer applications. Finally, if feasible, Registrant will
seek to expand its technology into new areas of implementation..
During the years ended December 31, 1999, and 1998, Nocopi expended
approximately $145,700 and $376,400, 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 gray 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 that 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 that has been developed to indicate
whether a document has been photocopied. Registrant also markets a product that
has similar features to the copy void technology.
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 2000, Registrant had six full-time employees. Registrant maintains
key-person life insurance of $1 million on Dr. Arshavir Gundjian, a consultant
and former executive officer. Registrant believes that its relations with its
employees are good.
Financial Information about Foreign and Domestic Operations
Certain information concerning Registrant's foreign and domestic operations is
contained in Note 9 to Registrant's Financial Statements included elsewhere in
this Annual Report on Form 10-KSB, and is incorporated herein by reference.
ITEM 2. PROPERTIES
Registrant's corporate headquarters, research and ink production 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 $8,500 subject to further annual increases on the anniversary date of
the lease in each of the next two 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 $5,300.
Registrant is currently seeking to sub-let the portion of its West Conshohocken
property that it considers to be in excess of its current needs due to the loss
of customers over the past year and the reduction in its number of employees.
There are no assurances that Registrant will be able to obtain a tenant willing
to enter into such a sublease on acceptable terms.
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ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, Registrant is not aware of any material pending
litigation (other than ordinary routine litigation incidental to its business
where, in management's view, the amount involved is less than 10% of
Registrant's current assets) to which Registrant is or may be a party, or to
which any of its properties is or may be subject, nor is it aware of any pending
or contemplated proceedings against it by any governmental authority. Registrant
knows of no material legal proceedings pending or threatened, or judgments
entered against, any director or officer of Registrant in his capacity as such.
On January 21, 2000, Michael McGovern, Registrant's former Chief Operating
Officer, initiated a proceeding before the Pennsylvania Human Relations
Commission ("PHRC") against the Registrant alleging that Registrant's
termination of his employment on December 16, 1999 constituted discrimination
against him based on his religious beliefs. The relief sought by Mr. McGovern is
unspecified. The Registrant has responded to Mr. McGovern's claim by denying
that it has discriminated against Mr. McGovern in any respect. Registrant
believes Mr. McGovern's claim to be entirely without basis and intends to
continue vigorously to defend against this claim. The PHRC conducted a hearing
on Mr. McGovern's claim on March 28, 2000 but has not yet issued any
determination with respect thereto. The PHRC has no authority to enter a
judgment determining Mr. McGovern's claim or holding Registrant liable for
damages. It may, however, issue a finding concerning whether or not Mr. McGovern
has cause to proceed with his discrimination claim and such a finding may be
admissible as evidence in litigation which may be initiated following the
issuance of such finding.
On November 4, 1999, Norman A. Gardner, Registrant's founder, its Chief
Executive Officer until 1997 and, until September 27, 1999, an employee of the
Registrant filed suit in the Court of Common Pleas of Montgomery County,
Pennsylvania against the Registrant, certain of its former officers and
directors and an associate of certain former directors. The complaint sought
damages in excess of $700,000 relating to the termination of Mr. Gardner's
employment. In February 2000, Registrant and Mr. Gardner reached a settlement of
the dispute pursuant to which Mr. Gardner has released all claims against the
Registrant and the other defendants, except for the associate of certain former
directors. Under the settlement, Registrant made a lump sum payment to Mr.
Gardner of $102,000.and agreed to pay him an additional $10,000 per month from
January 2000 through February 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Registrant was held on December 15, 1999.
At such meeting, the following persons were elected as directors of Registrant:
Michael Feinstein, Arshavir Gundjian, Richard Levitt, Waldemar Maya, Jr., Steven
Pinsk and Joel Pinsky. There were no directors (other than Arshavir Gundjian,
who was elected at the meeting) whose term in office continued after the
meeting.
The voting in the election of directors was as follows:
<TABLE>
<CAPTION>
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Name of Nomineee Votes For Votes Against or Withheld
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<S> <C> <C>
Michael Feinstein 14,454,349
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Richard Levitt 14,454,349
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Waldemar Maya, Jr. 14,454,349
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Steven Pinsk 14,454,349
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Joel Pinsky 14,454,349
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James Abrahart 5,901,542 (1)
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Susan Cox 5,901,542 (1)
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Arshavir Gundjian 5,901,542
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Jack Halperin 5,901,542 (1)
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Michael McGovern <5,901,542
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M. Kelly Tillery <5,901,542
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</TABLE>
(1) Withdrew prior to counting of the vote.
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At the Annual Meeting, the Stockholders also voted on the following proposals,
which received the votes indicated:
<TABLE>
<CAPTION>
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Proposal Votes For Votes Against Abstaining
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<S> <C> <C> <C>
to require stockholder approval of any 9,367,728 6,064,250 3,448,487
proposal which changes the conversion
rights of shareholders of Euro-Nocopi,
S.A. or changes any rights of the
Company with respect to such conversion
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to amend the Registrant's Articles of 8,918,008 6,408,570 3,553,597
Incorporation with respect to transactions
between the Registrant and its officers,
directors, affiliates and principal
stockholders
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to ratify the selection of BDO Seidman, 20,335,383 38,592 141,768
LLP to serve as the auditors for the
Company for the fiscal year ending
December 31, 1999
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</TABLE>
Each proposal was approved by the Registrant's stockholders.
The votes reported in the above tables are approximate based on the best
information currently available to Registrant. The person appointed by
Registrant's prior management to serve as the judge of the election at
Registrant's annual meeting has not filed her report in such capacity.
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, 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 31, 1999 $.16 $.08
April 1, 1999 to June 30, 1999 $.29 $.15
July 1, 1999 to September 30, 1999 $.24 $.08
October 1, 1999 to December 31, 1999 $.21 $.09
January 1, 2000 to March 31, 2000 $.35 $.16
As of March 31, 2000, 33,817,332 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 33,817,332 shares of Common Stock which are
outstanding, Registrant, at March 31, 2000, has reserved for issuance 14,343,983
shares of its Common Stock which underlie outstanding options 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.
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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 significantly affected by
changes in revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, 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 1999 were $1,698,900, a decline of 30% from $2,423,900 in
1998. Licenses, royalties and fees declined by 27% to $1,307,400 in 1999 from
$1,796,600 in 1998. The loss of $332,200 of license revenues from Paxar
Corporation, the Company's largest customer, due to lower volume in the first
six months of 1999 and the termination of the license in the third quarter of
1999, accounted for 68% of the $489,200 decline in licenses, royalties and fees.
Additionally, the termination or expiration of license agreements with seven
other licensees during 1998 and 1999 negatively impacted 1999 revenues from
licenses, royalties and fees partly offset by customers first entering into
license agreements during fiscal 1999. Product and other sales were $391,500 in
1999 compared to $627,300 in 1998, a decline of $235,800 or 38%. The decline
results primarily from lower sales of pressure sensitive labels in 1999 compared
to 1998 due to the termination in 1998 of a license and production agreement
with 3M Corporation.
Gross profit declined to $1,163,100 or 68% of revenues from $1,479,000 or
61% of revenues in 1998. The decline in gross profit, expressed in absolute
dollars, is due primarily to the substantial reduction in revenues derived from
licenses, royalties and fees. Certain components of cost of sales related to
licenses, royalties and fees, such as production labor and rent, are
substantially fixed. The variable component of these costs of sales, primarily
ink and chemicals, is a small percentage of the related revenues. As these
revenues decline, the gross profit is negatively impacted, both in absolute
dollars and as a percentage of revenues. Partially offsetting the decline in
gross margin due to lower revenues from licensees, royalties and fees is a
$128,500 one-time reduction in cost of sales resulting from the December 1999
renegotiation of a long-standing license agreement with a partner/supplier.
Under the terms of the agreement, on-going commissions due the partner/supplier
were lowered and previously unpaid commissions were settled at a reduced amount.
Accordingly, the Company reduced its accrued commissions at December 31, 1999
and recorded a $128,500 reduction in cost of sales. This reduction positively
impacted the gross profit, expressed as a percentage of revenues, by seven
percent. Product and other sales consisting primarily of manufactured products,
which incorporate the Company's technologies, equipment to support the
application of its technologies or other products purchased for re-sale, are
generally purchased from third-party vendors and sold to the end-user or
licensee. These products carry a significantly lower gross profit than licenses,
royalties and fees.
Research and development expenses declined to $145,700 in 1999 from
$376,400 in 1998. The reduction was due primarily to lower compensation expenses
resulting from modifications to compensation arrangements with certain
individuals and lower travel expenses.
Sales and marketing expenses declined to $604,300 in 1999 from $790,800 in
1998. The decline relates primarily to lower compensation expense resulting from
staff reductions, lower commission expense on the lower revenues and lower
travel expense in 1999 compared to 1998.
7
<PAGE>
General and administrative expenses declined to $699,000 in 1999 from
$733,600 in 1998. The decline is due in part to a reduction in salary expense of
$150,000 resulting primarily from the resignation of the Company's President and
Chief Executive Officer in February 1999. At the Company's Annual Meeting in
December 1999, a slate of directors nominated in opposition to the Company's
incumbent Board of Directors was elected by the stockholders. Incremental costs
borne by the Company (including reimbursement of the contesting nominees'
expenses), primarily legal, printing and proxy solicitation costs associated
with the contested election approximated $125,000.
In the fourth quarter of 1999, the Company wrote off $507,500 of intangible
assets, primarily patents, due to the uncertainty of their recoverability as a
result of the Company's adverse liquidity situation.
Severance expense of $394,300 relates principally to severance arrangements
with two individuals. In 1999, the Company paid $119,100 to its former President
and Chief Executive Officer under a severance agreement negotiated in February
1999 and later modified by mutual consent of the parties. In the fourth quarter
of 1999, a former employee filed a lawsuit against the Company, its directors
and chief operating officer seeking damages allegedly resulting from the
termination of his employment agreement by the Company. This lawsuit was settled
in February 2000. Under the terms of the agreement, $102,000 was paid at signing
with fourteen installments of $10,000 each payable monthly commencing January
2000. The Company also agreed to provide health care insurance through the term
of the agreement. In accordance with the severance agreement, a charge of
$265,000 was recorded at December 31, 1999 and is reflected as Accrued Severance
on the balance sheet.
Other income (expense) includes interest on the $125,000 Series B 9%
Subordinated Convertible Promissory Notes due March 31, 2000. The decline in
interest income to $45,700 in 1999 compared to $96,300 in 1998 relates to lower
levels of cash invested.
Equity in net income (loss) of unconsolidated affiliate represents the
proportionate share in the net income or loss of Euro-Nocopi attributable to the
Company's approximate 18% ownership share of Euro-Nocopi. In 1999, the Company's
proportionate share in Euro-Nocopi's net income was $92,900 compared to a loss
of $27,100 in 1998. The improved Euro-Nocopi financial results are attributable
in part to a one-time reduction in accrued commissions due a partner/supplier
resulting from the renegotiation of a license agreement in late 1999.
The net loss increased to $1,262,600 in 1999 from $548,800 in 1998 for
the reasons explained above.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $750,000 at December
31, 1999 from $1,372,900 at December 31, 1998. The cash was used primarily to
fund operations throughout the year.
In 1999, the Company's largest customer, Paxar Corporation, terminated its
license arrangement with the Company. As the loss of this customer had a
material adverse effect on the Company's results of operations and upon its
liquidity and capital resources, the Company believes that the condition arising
from this event raises substantial doubts about the Company's ability to
continue as a going concern. The Board of Directors of the Company is in the
process of reviewing strategic alternatives to provide increased liquidity,
improve cash flow and enhance stockholder value. These potential alternatives
include an investment in the Company by a strategic partner, the pursuit of
strategic alliances, acquisitions or the sale of all or part of the business.
There can be no assurances that the Company will be successful in accomplishing
such a transaction or, if so achieved, that the transaction will have a material
positive effect on the Company's business operations and cash flow. Accordingly,
the Company wrote off $507,500 of intangible assets, primarily patents, due to
the uncertainty of their recoverability.
The Company, in response to the adverse liquidity situation, has instituted
a cost reduction program including staff reductions and curtailment of
discretionary research and development and sales and marketing expenses.
The Company does not currently plan any significant capital investment over
the next twelve months.
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,
8
<PAGE>
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 that it believes
will enhance and expand its position in the anti-counterfeiting and
anti-diversion marketplace that 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 Prices. 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 do securities analysts and traders
extensively follow it. 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.
Adverse Liquidity. As a result of the loss of a number of customers during
the past two years including, in 1999, the Company's largest customer, the
Company is experiencing a period of adverse liquidity during which it will be
required to reduce expenses while the Company's Board of Directors explore
options to restructure the Company's operations, including seeking a potential
business combination. The requirements to conserve cash has causes the Company
to limit its discretionary research and development and sales and marketing
expenditures, thus impeding the Company's ability to develop new technologies
and markets. These factors may negatively impact the Company's efforts to
increase its customer base and revenues.
Forward-Looking Information
The foregoing contains forward-looking information within the meaning of
the Private Securities Litigation Act of 1995. Such forward-looking statements
involve certain risks and uncertainties including the particular factors
described in this Management Discussion and Analysis. In each case, actual
results may differ materially from such forward-looking statements. The Company
does not undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected results
(expressed or implied) will not be realized.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133 as amended by SFAS 137"). SFAS 137 delays the date of implementation
of SFAS 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the Company believes that adoption of SFAS 133 will
have no impact on its financial position or results of operations.
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.
9
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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.
Michael A. Feinstein, M.D., 53, Chairman of the Board of Directors since
December 1999 and Nocopi's acting Chief Executive Officer since February 2000,
has been a practicing physician in Philadelphia for more than twenty years,
serving for more than ten years as the President of a group medical practice
including three physicians. He is a Fellow of the American College of Obstetrics
and Gynecology and of the American Board of Obstetrics and Gynecology. He
received his B.A. from LaSalle College and his M.D. from Jefferson Medical
College. He has been an active private investor for more than thirty years,
during which he has consulted with the management of the companies in which he
invested on a number of occasions.
Franco Harris, 50, has been a director since February 2000. Since 1990, Mr.
Harris has served as President of Superbakers, Inc., a Pittsburgh, Pennsylvania
maker of vitamin fortified donuts and other nutritious bakery goods. Since 1996,
Mr. Harris has also served as Chief Executive Officer of Parks Sausage
Corporation, a manufacturer of sausages and other meat, beef and chicken
products. He is a graduate of the Pennsylvania State University.
Richard Levitt, 42, a director since December 1999, has been engaged in the
network services segment of the computer industry since 1988. In 1995, he
participated in the founding of XiTech Corporation, a Pittsburgh,
Pennsylvania-based provider of computing and computer networking hardware and
network design and implementation services which in five years has grown to over
100 employees and over $40 million in annual sales. Since founding XiTech, he
has served as one of its corporate principals as a Network Consultant and as the
Manager of its Network Sales force. In these capacities, Mr. Levitt played a
crucial role in the strategic and financial planning for XiTech, as well as the
development of new accounts. Before joining XiTech, Mr. Levitt served as a
network sales executive for Digital Equipment Corporation from 1988 to 1994 and
as a network consultant for TriLogic Corporation during 1994 and 1995. Mr.
Levitt holds a B.S. in Marketing from Kent State University.
Waldemar Maya, Jr., 49, a director since December 1999, has served since June
1999 as Director of Finance, Airplane Services for the Boeing Company. Before
joining Boeing, Mr. Maya had served from 1994 to 1998 as the Executive Vice
President, Treasurer and Secretary of N.J. Malin & Associates, a Texas-based
wholesaler of material handling equipment.
Steven Pinsk, 35, a director since December 1999, has engaged in business as an
independent financial analyst since 1998. Prior thereto, from 1997 to 1998, Mr.
Pinsk served the investment banking firm of Credit Suisse First Boston as a vice
president of equity research concentrating in the lodging industry. From 1993 to
1997, Mr. Pinsk was employed by another investment banking firm, Schroder & Co.
as an equity research analyst. Mr. Pinsk received his B.A. from Emory University
and his M.B.A. in Finance and Accounting from Columbia University.
Joel A. Pinsky, 64, rejoined the board of directors in December 1999. Mr. Pinsky
served as a director of the Company for more than five years until his
resignation in 1998 and as its corporate secretary and general counsel until his
resignation in February 1999. He has practiced business law with the firm of
Gross, Pinsky, Montreal, Canada, where he is a senior partner, for more than 30
years. Mr. Pinsky has also served as a director of numerous other companies
engaged in a variety of industries, all of which were privately held.
Rudolph A. Lutterschmidt, 53, has been employed as Vice President and Chief
Financial Officer of 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. In January 2000, Mr. Lutterschmidt joined Smart
& Associates, LLP, an accounting and professional services firm, where he serves
as a management consultant. He continues to serve the Company as its Vice
President and Chief Financial Officer on a part-time basis.
The terms of the current directors will expire at the 2000 annual meeting of
stockholders of the Company.
10
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires persons who become directors and/or
executive officers of a public company (such as Nocopi) to file reports with the
SEC regarding their beneficial ownership of the company's securities. A report
must be filed shortly after a person becomes an executive officer or director,
and shortly after an executive officer or director experiences a change in his
beneficial ownership of his company's securities. The initial report required to
be filed by each member of the current board of directors was filed later than
the time prescribed for the filing of such report under SEC rules. In addition,
director Feinstein filed late one report covering purchases of the Company's
common stock by him and director Harris filed late one report covering one
purchase of the Company's common stock by him. To the Company's knowledge, based
on information furnished to it by its directors and officers, all such persons
are now current in their filing obligations under Section 16 of the Exchange
Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for 1999,
1998 and 1997 paid to Richard A. Check, the Company's Chief Executive Officer
through February 24, 1999, and the only other executive whose total annual
salary and bonus for 1999 exceeded $100,000 (the "Named Executives"). The office
of Chief Executive Officer was vacant from the time of Mr. Check's departure
through the end of the Company's 1999 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------------
Payouts
--------------
Annual Compensation Awards
----------------------------------- ----------------------
Other Restricted Options LTIP Other
Salary Bonus Annual Stock SARs Payout Compensation
Name and Position Year ($) ($) Compensation Awards (#) ($) ($)
- ------------------------ ---- -------- ------- -------------- ---------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Check (1) 1999 23,014 120,900(2)
1998 149,599 10,800(3)
1997 60,211 1,800(3) 200,000
Michael P. McGovern (4) 1999 93,239 14,038(5)
Chief Operating 1998 84,000 13,625(5)
Officer 1997 82,384 4,250(6)
- ------------------------
</TABLE>
(1) Mr. Check resigned as President, Chief Executive Officer and a director on
February 24, 1999.
(2) Payments under severance agreement and reimbursement of automobile
expenses.
(3) Reimbursement of automobile expenses.
(4) Mr. McGovern's employment with the Company was terminated on December 16,
1999.
(5) Commission payments and reimbursement of automobile expenses.
(6) Commission payments.
The following table sets forth the aggregate number of shares of Common Stock
subject to options held by the Named Executives at December 31, 1999.
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
End End
Shares --------------------- ------------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
---- ------------- -------------- --------------------- ------------------
<S> <C> <C>
Richard A. Check................................. 200,000/- -/-
Michael P. McGovern.............................. 6,000/- -/-
</TABLE>
11
<PAGE>
Employment Contracts
Richard A. Check had been employed as President and Chief Executive Officer of
the Company under an Employment Agreement expiring in October 2000. Mr. Check
resigned as President, Chief Executive Officer and a director on February 24,
1999 and was paid $119,100 under a severance agreement negotiated at that time
and later modified by mutual consent of the parties.
Director Compensation
Jack H. Halperin, former Chairman of the Board of Directors, received 180,000
shares of the Company's Common Stock as compensation for his services as
Chairman from February 24, 1999 through December 15, 1999. Directors other than
Mr. Halperin have not been paid any fees for their services as such during the
year ended December 31, 1999. All directors have been and will be reimbursed for
reasonable expenses incurred in connection with attendance at Board of Directors
meetings or other activities undertaken by them on behalf of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000, 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
Beneficially Percentage of
Name of Beneficial Owner Owned Class (1)
- ------------------------ ------------- --------------
<S> <C> <C>
Michael A Feinstein, M.D. (2)................................................... 1,098,000 3.2%
Franco Harris (3)............................................................... 45,000 *
Richard Levitt (4).............................................................. 85,800 *
Waldemar Maya, Jr............................................................... 0 *
Steven Pinsk.................................................................... 0 *
Joel A. Pinsky (5).............................................................. 6,000 *
Richard A. Check (6)............................................................ 250,000 *
Michael P. McGovern (7)......................................................... 1,050 *
All Executive Officers and Directors as a Group (7 individuals)................. 1,262,650(8) 3.7%
</TABLE>
- ---------------
* Less than 1.0%.
(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 sixty 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) Includes 75,500 shares held by a pension plan of which Dr. Feinstein is a
trustee.
(3) Includes 25,000 shares held by a pension plan of which Mr. Harris is a
trustee.
(4) Includes 400 shares owned by Mr. Levitt's wife.
(5) Mr. Pinsky owns these shares indirectly through his ownership of Pinglick,
Inc., a holding company.
(6) Mr. Check resigned as President, Chief Executive Officer and a director
effective February 24, 1999. Includes presently exercisable options to
purchase a total of 200,000 shares.
(7) Mr. McGovern's employment with the Company ended on December 16, 1999.
(8) Includes presently exercisable options to purchase a total of 27,250
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.
12
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Susan A. Cox, a former 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 the fiscal year ended December 31, 1999. Fees for
1999 services were less than $60,000.
Norman A. Gardner, brother-in-law of Dr. Feinstein, had been employed under an
Employment Agreement expiring in October 2002. His employment was terminated by
the Company in September 1999. On November 4, 1999, Mr. Gardner filed suit in
the Court of Common Pleas of Montgomery County, Pennsylvania against the
Company, certain of its former officers and directors and an associate of
certain former directors. The complaint sought damages in excess of $700,000
relating to his termination. In February 2000, the Company and Mr. Gardner
reached a settlement of the dispute pursuant to which Mr. Gardner has released
all claims against the Company and the other defendants, except for the
associate of certain former directors. Under the settlement, the Company made a
lump sum payment to Mr. Gardner of $102,000.and agreed to pay him an additional
$10,000 per month from January 2000 through February 2001.
In December 1997, the Company entered into an employment agreement with Dr.
Arshavir Gundjian, then a director of the Company. Under this agreement, Dr.
Gundjian serves as a consultant through December 2002. He was paid consulting
fees of $82,500 in 1999 in accordance with the agreement. His compensation will
be $82,500 for the year 2000 and $62,500 per year for the final two years of the
agreement. The agreement provides for a cash bonus of up to $82,500 in the year
2000 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.
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 consulting fee
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.
Jack H. Halperin, former Chairman of the Board of Directors, acted as Securities
Counsel of the Company during a portion of 1999 and furnished legal services to
the Company during the fiscal year ended December 31, 1999. Fees for 1999 legal
services were less than $60,000. Mr. Halperin also received 180,000 shares of
the Company's Common Stock as compensation for his services as Chairman from
February 24, 1999 through December 15, 1999.
Joel A. Pinsky, elected a director on December 15, 1999, was Secretary and
General Counsel of the Company until February 24, 1999. He 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, 1999. Fees for 1999 services were less
than $60,000.
Neal Sroka, a former director, furnished consulting services to the Company
during the fiscal year ended December 31, 1999. Fees for 1999 services were less
than $60,000.
13
<PAGE>
PART IV
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, 1999 F-2
Statements of Operations for the Years ended
December 31, 1999 and 1998 F-3
Statements of Stockholders' Equity for the
Years ended December 31, 1999 and 1998 F-4
Statements of Cash Flows for the Years ended
December 31, 1999 and 1998 F-5
Notes to Financial Statements F-6 to F-12
(b) The Exhibit Index begins on Page 16 of this Annual Report on Form 10-KSB.
(c) The Registrant filed the following Current Report on Form 8-K during the
last quarter of the fiscal year covered by this Annual Report on Form
10-KSB.
December 22, 1999 - Change in Control of Registrant
14
<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 28, 2000 By: /s/ Michael A. Feinstein, M.D.
----------------------------------
Michael A. Feinstein, M.D.
Chairman of the Board
Dated: April 28, 2000 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 28, 2000 /s/ Michael A. Feinstein, M.D.
------------------------------
Michael A. Feinstein, M.D.,
Chairman of the Board
Date: April 28, 2000 /s/ Franco Harris
-----------------
Franco Harris, Director
Date: April 28, 2000 /s/ Richard Levitt
------------------
Richard Levitt, Director
Date: April 28, 2000 /s/ Waldemar Maya, Jr.
----------------------
Waldemar Maya, Jr., Director
Date: April 28, 2000 /s/ Steven Pinsk
----------------
Steven Pinsk, Director
Date: April 28, 2000 /s/ Joel A. Pinsky
------------------
Joel A. Pinsky, Director
15
<PAGE>
The following Exhibits are filed as part of this Annual Report on Form 10-KSB:
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 (6)
3.5 Amendments to Bylaws (7)
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 Nocopi Technologies, Inc. 1996 Stock Option Plan (4)
10.6 Settlement Agreement between Registrant and Euro-Nocopi S.A. (5)
10.7 Employment Agreement between Registrant and Dr. A. Gundjian (5)
10.8 Form of Common Stock Purchase Warrant (5)
10.9 Lease Agreement dated February 17, 1998 relating to premises
at 537 Apple Street, West Conshohocken, PA 19428 (5)
10.10 Nocopi Technologies, Inc. 1999 Stock Option Plan (6)
10.11 Amended Summary Plan Description for Nocopi Technologies, Inc.
401(k) Profit Sharing Plan (6)
10.12 Severance Agreement between Registrant and Richard A. Check (6)
10.13 Form of Series B Promissory Note due March 31, 2000 (6)
10.14 Director Indemnification Agreement (7)
10.15 Officer Indemnification Agreement (7)
10.16 Modification of Severance Agreement between Registrant and
Richard A. Check (8)
10.17 Severance Agreement between Registrant and Norman A.
Gardner (8)
23.1 Consent of BDO Seidman, LLP
27.0 Financial Data Schedule (8)
16
<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 Annual Report on Form 10-K for
the Year Ended December 31, 1997
(6) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1998
(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the Three Months Ended September 30, 1999
(8) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1999
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Nocopi Technologies, Inc.
West Conshohocken, Pennsylvania
We have audited the accompanying balance sheet of Nocopi Technologies, Inc. as
of December 31, 1999 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1999. 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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion,, the financial statements referred to above present fairly, in
all material respects, the financial position of Nocopi Technologies, Inc. at
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 11. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 24, 2000
F-1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31
1999
-----------
Assets
<S> <C>
Current assets
Cash and cash equivalents $ 750,000
Accounts receivable less $47,500 allowance
for doubtful accounts 108,600
Prepaid and other 113,900
-----------
Total current assets 972,500
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 461,500
-----------
501,000
Less: accumulated depreciation 423,100
-----------
77,900
Other assets
Investment in and advances to unconsolidated affiliate 295,800
-----------
$ 1,346,200
===========
Liabilities and Stockholders' Equity
Current liabilities
Current debt obligations $ 125,000
Accounts payable 156,600
Accrued expenses 219,500
Accrued severance 265,000
Deferred revenue 181,900
-----------
Total current liabilities 948,000
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 - 33,817,332 shares 338,200
Paid-in capital 10,434,600
Accumulated other comprehensive loss (39,500)
Accumulated deficit (10,335,100)
-----------
398,200
-----------
$ 1,346,200
===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
Nocopi Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Licenses, royalties and fees $1,307,400 $1,796,600
Product and other sales 391,500 627,300
---------- ----------
1,698,900 2,423,900
---------- ----------
Cost of sales
Licenses, royalties and fees 225,600 358,700
Product and other sales 310,200 586,200
---------- ----------
535,800 944,900
---------- ----------
Gross profit 1,163,100 1,479,000
---------- ----------
Operating expenses
Research and development 145,700 376,400
Sales and marketing 604,300 790,800
General and administrative 699,000 733,600
Related party expenses 198,300 156,600
Impairment of patents and other intangible assets 507,500 --
Severance expense 394,300 --
---------- ----------
2,549,100 2,057,400
---------- ----------
Loss from operations (1,386,000) (578,400)
---------- ----------
Other income (expenses)
Amortization of debt issuance costs (6,300)
Interest income 45,700 93,600
Interest and bank charges (15,200) (30,600)
Equity in net income (loss) of unconsolidated affiliate 92,900 (27,100)
---------- ----------
123,400 29,600
---------- ----------
Net loss $1,262,600) ($548,800)
========== ==========
Basic and diluted loss per common share ($.04) ($.02)
Weighted average common shares outstanding 33,693,999 33,587,332
</TABLE>
See notes to financial statements.
F-3
<PAGE>
Nocopi Technologies, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common stock Paid-in Comprehensive Accumulated Comprehensive
Shares Amount Capital Income (Loss) Deficit Loss
------ ------ ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 33,587,332 $335,900 $10,396,200 $(23,900) $(8,523,700)
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 (12,900) (9,072,500) ($537,800)
==========
Stock and stock options issued as
compensation 230,000 2,300 28,400
Net loss (1,262 600) ($1,262,600)
Translation adjustment (26,600) (26,600)
--------------------------------------------------------------------------------------
Balance - December 31, 1999 33,817,332 $338,200 $10,434,600 ($39,500) ($10,335,100) ($1,289,200)
========== ======== =========== ========= ============ ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1999 1998
---- ----
Operating Activities
<S> <C> <C>
Net loss ($1,262,600) ($548,800)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation 49,300 61,200
Amortization 49,400 64,600
Allowance for doubtful accounts, net 11,400
Equity in net (income) loss of unconsolidated affiliate (92,900) 27,100
Impairment of patents and other intangible assets 507,500
Stock and stock option compensation 30,700 10,000
----------- ----------
(718,600) (374,500)
(Increase) decrease in assets
Accounts receivable 22,200 25,200
Prepaid and other (61,500) 2,300
Increase (decrease) in liabilities
Accounts payable and accrued expenses 152,300 (121,700)
Deferred revenue 59,600 53,700
----------- ----------
172,600 (40,500)
----------- ----------
Cash (used in) operating activities (546,000) (415,000)
Investing Activities
Additions to fixed assets (22,500) (52,100)
Additions to patents (30,900) (36,600)
Advances to affiliate, net (23,500) (13,000)
----------- ----------
Cash (used in) investing activities (76,900) (101,700)
Financing Activities
Repayment of notes (825,000)
----------- ----------
Cash (used in) financing activities (825,000)
----------- ----------
Decrease in cash and cash equivalents (622,900) (1,341,700)
Cash and cash equivalents
Beginning of year 1,372,900 2,714,600
----------- ----------
End of year $ 750,000 $1,372,900
=========== ==========
Supplemental cash flow data
Interest paid $ 11,300 $ 22,300
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NOCOPI TECHNOLOGIES, INC.
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, 1999, Nocopi's investments in money market accounts amounted
to $737,800.
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
the technical dependence of Euro on the Company (See note 9).
Patents were stated at cost less amortization and were being amortized on
a straight-line basis over the lives of the patents (approximately fifteen
years). In the fourth quarter of 1999, as a result of the Company's
adverse liquidity situation, the Company wrote-off unamortized patent
costs of $503,000 due to the uncertainty of their recoverability and is
charging subsequent patent costs to expense as incurred.
F-6
<PAGE>
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 that may not be
realized in the future.
Loss per share - the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" resulting in the presentation of
basic and diluted earnings per share. Because the Company reported a net
loss in 1999 and 1998, common stock equivalents, including stock options,
warrants and convertible notes were anti-dilutive.
Comprehensive income (loss) - the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", and,
accordingly, reports all components of comprehensive income (loss) in the
accompanying statements of stockholders' equity.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133 as amended by SFAS 137"). SFAS 137 delays the date
of implementation of SFAS 133 to be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments
at fair market value. Presently, the Company does not use derivative
instruments either in hedging activities or as investments. Accordingly,
the Company believes that adoption of SFAS 133 will have no impact on its
financial position or results of operations.
3. Notes Payable and Stockholders' Equity
The Company had $125,000 of Series B 9% Subordinated Convertible
Promissory Notes outstanding. These notes were payable in full on March
31, 2000 and were convertible into 625,000 shares of the Company's common
stock. The carrying cost of the notes at December 31, 1999 approximated
their fair value because the interest rate approximated current market
rates. The Company repaid these notes at their maturity.
F-7
<PAGE>
The Company has 10,533,606 warrants, issued in 1997, outstanding. 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.
4. Income Taxes
At December 31, 1999 and 1998, the Company had net operating loss
carryforwards ("NOLs") approximating $10,000,000 and $8,700,000,
respectively. These operating losses are available to offset future
taxable income through the years 2015 and 2014, 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 of approximately
$4,000,000 at December 31, 1999 for the deferred tax assets due to the
uncertainty of their realization.
5. Related Party Transactions
Payments and payment commitments aggregating $198,300 and $156,600 in 1999
and 1998, respectively, were made to certain officers and directors and
firms employing certain officers and directors for legal fees, consulting
services and related expenses.
6. Severance
Severance expense of $394,300 relates principally to severance
arrangements with two individuals. In 1999, the Company paid $119,100 to
its former President and Chief Executive Officer under a severance
agreement negotiated in February 1999 and later modified by mutual consent
of the parties. In the fourth quarter of 1999, a former employee filed a
lawsuit against the Company, its directors and chief operating officer
seeking damages allegedly resulting from the termination of his employment
agreement by the Company. This lawsuit was settled in February 2000. Under
the terms of the agreement, $102,000 was paid at signing with fourteen
installments of $10,000 each payable monthly commencing January 2000. The
Company also agreed to provide health care insurance through the term of
the agreement. In accordance with the severance agreement, a charge of
$265,000 was recorded at December 31, 1999 and is reflected as Accrued
Severance on the balance sheet.
F-8
<PAGE>
7. 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, 1999 are:
$106,600 - 2000; $110,600 - 2001; $112,000 - 2002; and $18,400 - 2003.
Total rental expense under operating leases was $112,200 and $140,600 in
1999 and 1998, respectively. The Company has sub-let its former corporate
headquarters for the duration of the lease term at a monthly rental
approximating the Company's rental obligation.
The Company has a consulting agreement with a former executive officer and
director, the term of which expires at December 31, 2002. Future minimum
compensation payments under this agreement at December 31, 1999 are
$82,500 - 2000; $62,500 - 2001; and $62,500 - 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.
8. Stock Options and 401(k) Savings Plan
The 1996 and 1999 Stock Option Plans provide for the granting of up to
2,700,000 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.
F-9
<PAGE>
A summary of stock options under the Company's stock option plans follows:
<TABLE>
<CAPTION>
Exercise Weighted
Number of Price Range Average
Shares Per Share Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 783,066 $.30 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
Options granted 25,000 .30 .30
-------
Outstanding at December 31, 1999 879,100 $.30 to $4.35 $ .94
=======
<CAPTION>
Exercise Weighted
Option Price Range Average
Shares Per Share Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
Exercisable at year end:
1998 426,300 $.30 to $4.35 $1.52
1999 704,100 $.30 to $4.35 $1.06
Options available for future grant under all plans:
0
1998 1,975,000
1999
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Ranges
---------------------------------------
1996 and 1999 Plans Former Plans Total
------------------- ------------ -----
<S> <C> <C> <C>
Range of exercise prices $.30 to $.45 $3.10 to $4.35 $.30 to $4.35
------------ -------------- -------------
Number outstanding at December 31, 1999 725,000 154,100 879,100
------- ------- -------
Weighted average remaining contractual
life (years) 4.69 .79 4.00
---- ----- ----
Weighted average exercise price $.34 $3.75 $.94
---- ----- ----
Exercisable options:
Number outstanding at
December 31, 1999 550,000 154,100 704,100
------- ------- -------
Weighted average remaining
Contractual life (years) 4.19 .79 3.44
---- ----- ----
Weighted average exercise price $.31 $3.75 $1.06
---- ----- -----
</TABLE>
The weighted average fair value per share of options granted was $.19 in
1999 and 1998.
F-10
<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 are 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. Compensation costs for grants to employees and directors would be
determined based on the fair value at the date of grant in accordance with
SFAS No. 123 and would be amortized over the vesting period of the option
which is generally two years. 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 1999 and 1998 net loss
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss applicable to common stockholders
As reported ($1,262,600) ($548,800)
Pro forma ($1,262,600) ($616,000)
</TABLE>
There was no pro forma effect on the net loss per share applicable to
common shares for 1999 and 1998.
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 1999 and 1998, expected
volatility of 46%; risk free interest rate of 5.7% and expected lives of
two years.
At December 31, 1999, the Company has reserved 15,033,983 shares of common
stock for possible future issuance upon exercise of stock options,
warrants and convertible securities.
The Company sponsors a 401(k) savings plan, covering substantially all
employees, providing for employee and employer contributions. Employer
contributions are made at the discretion of the Company. There were no
contributions charged to expense during 1999 or 1998.
9. 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.
The Company holds an approximately 18% interest in Euro and a warrant
permitting it to increase its interest in Euro to 55%. This
F-11
<PAGE>
warrant, which expires on December 31, 2001, is 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. Additionally, the Company has a right, beginning on January 1,
2001, to acquire, under certain conditions, all shares of Euro not owned
by the Company for approximately one million shares of the Company's
common stock. This call right expires on December 31, 2001.
In 1999 and 1998, revenues totaling approximately $264,000 and $240,000,
respectively, were derived from Euro.
Condensed information on Euro follows:
(unaudited)
1999 1998
---- ----
Revenues $1,526,200 $1,376,400
Gross profit 1,604,500 796,400
Net income (loss) 531,000 (514,600)
10. Major Customer Information
The Company's largest non-affiliate customer accounted for approximately
15% and 24%, respectively, of 1999 and 1998 revenues and 2% of accounts
receivable at December 31, 1999. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company also maintains allowances for potential credit losses.
11. Going Concern
Since its inception, the Company has incurred significant losses and, as
of December 31, 1999, had accumulated losses of $10,335,100. For the
years ended December 31, 1999 and 1998, the Company's net losses were
$1,262,600 and $548,800, respectively. In addition, the Company had
working capital of $24,500 at December 31, 1999. The Company may incur
further operating losses and experience negative cash flow in the future.
Achieving profitability and positive cash flow depends on the Company's
ability to generate and sustain significant increases in revenues and
gross profits from its traditional business. There can be no assurances
that the Company will be able to generate sufficient revenues and gross
profits to achieve and sustain profitability and positive cash flow in
the future.
The Board of Directors of the Company is in the process of reviewing
strategic alternatives to provide increased liquidity, improve cash flow
and enhance stockholder value. These potential alternatives include an
investment in the Company by a strategic partner, the pursuit of
strategic alliances, acquisitions or the sale of all or part of the
business. There can be no assurances that the Company will be successful
in accomplishing such a transaction or, if so achieved, that the
transaction will have a material positive effect on the Company's
business operations and cash flow.
F-12
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Form S-8 (SEC File No.
33-84388 and 33-84402) of our report dated March 24, 2000, relating to the
financial statements of Nocopi Technologies, Inc. appearing in the Company's
Annual Report on Form 10-KSB/A for the year ended December 31, 1999.
BDO SEIDMAN, LLP
Philadelphia, PA
April 28, 2000
