-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QKWtlpvX10IDp9eO5zfErKbbFV36KXMuVnNs69LoO+p9Q3lNyXF0tiiUngNapHQ9 uc30He8cfMWg7f8Zoc0jCw== 0000950115-97-000432.txt : 19970329 0000950115-97-000432.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950115-97-000432 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOCOPI TECHNOLOGIES INC/MD/ CENTRAL INDEX KEY: 0000888981 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SERVICES, NEC [8900] IRS NUMBER: 870406496 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20333 FILM NUMBER: 97567603 BUSINESS ADDRESS: STREET 1: 230 SUGARTOWN RD STREET 2: STE 100 CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106872000 MAIL ADDRESS: STREET 1: NOCOPI TECHNOLOGIES INC STREET 2: 230 SUGARTOWN RD STE 100 CITY: WAYNE STATE: PA ZIP: 19087 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X Annual report pursuant to section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 Fee Required] for the fiscal year ended December 31, 1996 or Transition report pursuant to section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 [No Fee Required] for the transition period from _____ to _____. Commission File Number 0-20333 NOCOPI TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 87-0406496 ---------------------------- ------------------- (State or other jurisdiction I.R.S. Employer of incorporation) Identification No.) 230 Sugartown Road, Wayne, Pennsylvania 19087 --------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Telephone Number, Including Area Code: (610) 687-2000 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None Not Applicable ------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value --------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant. $9,700,000 at March 14, 1997. (Applicable only to corporate registrants) Indicate the number of shares outstanding of each class of registrant's common stock, as of the latest practicable date. 14,080,654 Shares of Common Stock, $.01 par value at March 14, 1997. Documents Incorporated by Reference. Proxy Statement for the Annual Meeting of Shareholders to be Held June 9, 1997 (Part III). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _______ Exhibit Index Begins on Page 17. PART I ITEM 1. BUSINESS Background Nocopi Technologies, Inc. (hereinafter "Nocopi" or "Registrant") was organized to exploit a technology developed by its founders for impeding the reproduction of documents on office copiers. In its early stages of development, Nocopi's business consisted primarily of selling burgundy colored, copy resistant paper to protect corporate documents, that is, to provide document security. In the last several years, Registrant has continued to refine its document security technologies but has increasingly focused on developing and marketing technologies for document and product authentication which can reduce losses caused by fraudulent document reproduction and by product counterfeiting and/or diversion. Registrant is involved in the business of product and document authentication and security. It has developed and markets a variety of products--special inks and paper which deters photocopying and transmission by facsimile and proprietary inks which print invisibly until activated for the purpose of identifying counterfeit or diverted products. Registrant's document authentication products and technologies, over the last three years, have become the most substantial market for Registrant. Sales are made either through licensees or directly to end-users. Anti-Counterfeiting and Anti-Diversion Technologies and Products Recent developments in copying and printing technologies have made it ever easier to counterfeit a wide variety of documents. Lottery tickets, gift certificates, event and transportation tickets, travellers' checks and the like are all susceptible to counterfeiting, and Registrant believes that losses from such counterfeiting have increased substantially with improvements in technology. Counterfeiting has long caused losses to manufacturers of brand name products, and Registrant believes these losses have also increased as the counterfeiting of labeling and packaging has become easier. Registrant's document authentication technologies are useful to businesses desiring to authenticate a wide variety of printed materials and products. These include a technology with the ability to print invisibly on certain areas of a document which can be activated or revealed by use of a special highlighter pen when authentication is required. This is sold under the trade mark COPIMARK(TM). Other variations of the COPIMARK(TM) technology involve multiple color responses from a common pen, visible marks of one color that turn another color with the pen or visible and invisible marks that turn into a multicolored image. A related technology is Nocopi's RUB & REVEAL(R) system, which permits the invisible printing of an authenticating symbol or code that can be revealed by rubbing a fingernail over the printed area. These technologies provide users with the ability to authenticate documents and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as checks, travellers' checks, gift certificates and event tickets, and the authentication of product labelling and packaging. The Rub & Reveal(R) technology was enhanced during 1995 permitting its use in documents produced on laser printers, thus affording expanded market opportunities for this technology. When applied to product labels and packaging, such technologies can be used to detect counterfeit products whose labels and packaging would not contain the authenticating marks invisibly printed on the packaging or labels of the legitimate product, as well as to 2 combat product diversion (i.e., the sale of legitimate products through unauthorized distribution channels or in unauthorized markets). During 1993, Registrant developed its invisible inkjet technology which permits manufacturers and distributors to track the movement of products from production to ultimate consumption. During 1994, Registrant developed a new technology to address the widespread problem of counterfeiting in the apparel industry consisting of a reactive thread which can be woven into a label which is then sewn into a garment. The woven label can be activated in the same manner as a reactive paper label to reveal the authenticity of the garment. During 1995, Registrant developed a new covert authenticating technology which allows a manufacturer of compact discs to identify CD's produced by that manufacturer. Registrant believes that this technology will provide CD manufacturers and publishers a tool with which to combat the significant losses sustained as a result of illegal pirating and counterfeiting of data, music and video discs. Document Security Products The first product Nocopi developed was a burgundy colored paper that deterred photocopying and transmission by facsimile. The color was chosen and designed so that it absorbed most of the light projected on documents during photocopying except for light in the part of the spectrum the copy process is incapable of detecting. This colored paper exhibited the ability to inhibit reproduction at the cost of legibility to the reader. The darker it was, the better it worked. The trade-off was and is tied to security. If a client needed the security, he would put up with the diminished legibility. Registrant currently markets its copy resistant papers in three grades, each balancing improved copy resistance against diminished legibility. The next step in the evolution of Registrant's products was the development of a product which enables the user to select certain areas of a document for copy protection. This led to the development of user defined pre-printed forms on which certain areas were already activated, such as a doctor's prescription form with the signature area protected or a financial instrument exhibiting the same kind of protection. This product line is called SELECTIVE NOCOPI(TM). Registrant also developed several inks which impede photocopying by color copiers. This new technology is called COLOR BLOC(R). During 1993, Registrant developed a technology for providing secure faxes. Using this technology, a message printed by a receiving telecopier cannot be read until the paper has been activated by the recipient. This technology initially was available for use only in thermal facsimile machines, limiting its marketability. During 1996, Registrant developed a new technology to allow plain paper ink jet facsimile machines to receive confidential faxes. This new technology is called SECRETFAX(TM). An associated technology, called SECURPRINT(TM), enables an ink jet computer printer to produce documents in which, at the discretion of the author, a portion or all of the document can be rendered confidential until activation. Registrant is engaged in market investigations which it believes may lead to the commercial introduction of SECRETFAX(TM) and SECURPRINT(TM) during 1997. 3 The following table illustrates the approximate percentage of Registrant's revenues accounted for by each type of its products for each of the three last fiscal years: Year Ended December 31, ---------------------------- 1996 1995 1994 ---- ---- ---- Product Type ------------ Anti-Counterfeiting & Anti-Diversion Technologies and Products 97% 96% 94% Document Security Products 3% 4% 6% Marketing The marketing approach of Registrant is to have sufficient flexibility in its products and technologies so as to provide cost effective solutions to a wide variety of counterfeiting, diversion and copier fraud problems. As a technology company, Registrant generates revenues primarily by collecting license fees from market-specific manufacturers who incorporate Registrant's technologies into their manufacturing process and their products. Registrant also licenses its technologies directly to end users. Registrant has identified a number of major markets for its technologies and products, including security printers, manufacturers of labels and packaging materials and distributors of brand name products. Within each market, key potential users have been identified, and, in many cases, already licensed. Within North America, sales efforts include direct selling by company personnel to create end user demand and selling through licensee sales forces with support from company personnel. Registrant has determined that technical sales support by its personnel is of great importance to increasing its licensees' sales of products incorporating Registrant's technologies, and recently has significantly increased its commitment to providing such support. As continued improvements in color copier and desktop publishing technology make counterfeiting and fraud opportunities less expensive and more available, Registrant intends to maintain an interactive product development and enhancement program with the combined efforts of marketing, applications engineering and research and development. Registrant's objective is to concentrate efforts on developing market-ready products with the most beneficial ratios of market potential to development time and cost. Euro-Nocopi S.A. In 1994, the Registrant formed a European company, Euro-Nocopi S.A. to market the Company's technologies in Europe under an exclusive license agreement. Euro-Nocopi S.A., headquartered in Paris, has sales representatives in France, England and Germany. Euro-Nocopi sells the full range of Nocopi products and technologies in the European market, both to European-based companies and to subsidiaries of U.S.-based corporations. The Registrant receives an on-going royalty stream from revenues generated in Europe. The Registrant owns an approximately 18% interest in Euro-Nocopi and holds warrants permitting it to increase its interest to 55%. Beginning in August 1998, the Euro-Nocopi stock sold to investors may be converted into 4 approximately one million shares of the Registrant's common stock in the event that no public offering of Euro-Nocopi has been made by that date. Major Customers During 1996, Registrant made sales or obtained revenues equal to 10% or more of Registrant's 1996 total revenues from two customers, 3M Corporation and Paxar Corporation, which accounted for approximately 22% and 18%, respectively, of 1996 revenues. Registrant anticipates that its reliance on these customers will diminish as other licensees increase their sales of products incorporating Registrant's technologies. Manufacturing Nocopi does not have substantial manufacturing facilities. Registrant presently subcontracts the manufacture of its applications to third party manufacturers and expects to continue such subcontracting. Applications of Registrant's technology are effected mainly through printing and coating. The inks are custom manufactured by the Company. Since some of the processes that Nocopi uses in its applications are based on relatively common manufacturing technologies, there does not appear to be a technical or economic reason for Registrant to invest capital in its own manufacturing facilities. In the area of its proprietary inks, however, Registrant desires to control the manufacturing process for security purposes and has invested $75,000 to establish an ink making capacity capable of supplying commercial quantities of its security ink. Registrant has established a quality control program which currently entails laboratory analysis of developed technologies. Management intends to expand this program to include placing specially trained Nocopi technicians onsite at third party production facilities to monitor the manufacturing process, where warranted. There can be no assurance that Registrant will, in fact, so expand its quality control program. Patents Nocopi has received various patents and has patents pending in the United States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan, France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy, Sweden, Switzerland, Luxembourg, and Liechtenstein. Patent applications for Registrant's technology (including improvements in the technology) have been filed in numerous other jurisdictions where commercial usage is foreseen, including Europe, Japan, Australia, and New Zealand, and the rights under such applications have been assigned to Registrant. Registrant's patent counsel, which conducted the appropriate searches in Canada and the United States, has reviewed the results of searches conducted in Europe and advised management that effective patent protection for Registrant's technology should be obtainable in all countries in which the patent applications have been filed. There can be no assurance, however, that such protection will be obtained. When a new product or process is developed, the developer may seek to preserve for himself the economic benefit of the product or process by applying for a patent in each jurisdiction in which the product or process is likely to be exploited. Generally speaking, in order for a patent to be granted, the product or process must be new and be inventively different from what has been previously patented or otherwise known anywhere in the world. Patents generally have a duration of 17 years from the date of grant or 20 years from the date of application depending on the jurisdiction 5 concerned, after which time any person is free to exploit the product or process covered by a patent. A person who is the owner of a patent has, within the jurisdiction in which the patent is granted, the exclusive right to exploit the patent either directly or through licensees, and is entitled to prevent any person from infringing on the patent. The granting of a patent does not prevent a third party from seeking a judicial determination that the patent is invalid. Such challenges to the validity of a patent are not uncommon and are occasionally successful. There can be no assurance that a challenge will not be filed to one or more of Registrant's patents and that, if filed, such challenge(s) will not be successful. In the United States and Canada, the details of the product or process which is sought to be patented are not publicly disclosed until a patent is granted. However, in some other countries, patent applications are automatically published at a specified time after filing. Research and Development Nocopi has been involved in research and development since its inception, and intends to continue its research and development activities in three areas. First, Registrant will continue to refine its present family of products. Second, Registrant will seek to expand its technology into new areas of implementation. Third, Registrant will seek to develop specific customer applications. During the years ended December 31, 1994, 1995, and 1996, Nocopi expended approximately $742,100, $789,100 and $805,100, respectively, on research and development activities (excluding capital expenditures related to research and development activities). Competition Registrant is not aware of any competitors in the area of covert document and product authentication. Likewise, Registrant is not aware of any competitors that market paper which functions in the same way as Nocopi security papers, although management is aware of a limited number of competitors which are attempting different approaches to the same problems which Registrant's products address. Management is aware of a Japanese company that has developed a film overlay which is advertised as providing protection from photocopying. Management has examined the film overlay and believes that it has a limited number of applications. Nocopi security paper is also considerably less expensive than the film overlay. Other indirect competitors are marketing products utilizing the hologram and copy void technologies. The hologram, which has been incorporated into credit cards to foil counterfeiting, is considerably more costly than Registrant's technology. Copy void is a security device which has been developed to indicate whether a document has been photocopied. Registrant has limited resources, and there can be no assurance that businesses with greater resources than Registrant will not enter the market and compete with Registrant. Employees At March 1, 1997, Registrant had 16 employees, including management. 6 Financial Information about Foreign and Domestic Operations Certain information concerning Registrant's foreign and domestic operations is contained in Note 9 to Registrant's Financial Statements included elsewhere in this Annual Report on Form 10-K, and is incorporated herein by reference. ITEM 2. PROPERTIES Registrant's corporate headquarters are located at 230 Sugartown Road, Wayne, Pennsylvania 19087. Its telephone number at that location is (610) 687-2000. These premises consist of approximately 2,800 square feet of space leased from an unaffiliated third party under a lease expiring in July, 2001. Current monthly rental under this lease is $4,300. In 1992, Registrant established research facilities at One Great Valley Parkway, Malvern, Pennsylvania 19355. These facilities, currently consisting of approximately 5,000 square feet of space, have been outfitted with approximately $39,000 in leasehold improvements. The facilities are occupied by Registrant under a lease expiring in September, 1998 at a current monthly rent of $4,200 including common area charges. Registrant's European affiliate leases approximately 800 sq. ft. of office space at 30 rue Ste. Marc, Paris, France, under a lease expiring in July, 1998. Monthly rental under this lease is $1,200. Registrant believes its facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS Registrant is not aware of any material pending litigation (other than ordinary routine litigation incidental to its business where, in management's view, the amount involved is less than 10% of Registrant's current assets) to which Registrant is or may be a party, or to which any of its properties is or may be subject, nor is it aware of any pending or contemplated proceedings against it by any governmental authority. Registrant knows of no material legal proceedings pending or threatened, or judgments entered against, any director or officer of Registrant in his capacity as such. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1996, no matters were submitted to a vote of Registrant's security holders. 7 PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant's Common Stock is traded on the over-the-counter market and quoted on the NASD over-the-counter Bulletin Board under the symbol "NNUP". The table below presents the range of high and low bid quotations of Registrant's Common Stock by calendar quarter for the last two full fiscal years and for a recent date, as reported by the National Quotation Bureau, Inc. The quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, such quotations do not represent actual transactions. Quotations for periods before July 15, 1996, the date on which the Company amended its Bylaws to effect a one-for-five reverse split of its common stock, have been adjusted for the reverse split. High Bid Low Bid -------- ------- January 1, 1995 to March 31, 1995 $4.15 $ .35 April 1, 1995 to June 30, 1995 3.65 .65 July 1, 1995 to September 30, 1995 3.55 .65 October 1, 1995 to December 31, 1995 4.70 .65 January 1, 1996 to March 31, 1996 3.70 2.55 April 1, 1996 to June 30, 1996 4.60 2.65 July 1, 1996 to September 30, 1996 3.85 1.88 October 1, 1996 to December 31, 1996 2.50 1.00 January 1, 1997 to March 14, 1997 1.19 .75 As of March 14, 1997, 14,080,654 shares of Registrant's Common Stock were outstanding. The number of holders of record of Registrant's Common Stock was approximately 1,100. However, Registrant estimates that it has a significantly greater number of Common Stockholders because a number of shares of Registrant's Common Stock are held of record by broker-dealers for their customers in street name. In addition to the 14,080,654 shares of Common Stock which are outstanding, Registrant has reserved for issuance 2,664,472 shares of its Common Stock which underlie outstanding options and warrants to purchase Common Stock and securities issued by Registrant and Euro-Nocopi S.A., which may be converted into its common stock. Registrant has paid no cash dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. 8 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been has been derived from the Company's consolidated financial statements. The information set forth should be read in conjunction with the Company's Consolidated Financial Statements, the related notes and other financial information appearing elsewhere herein and Management's Discussion and Analysis of Results of Operations and Financial Condition. Selected Consolidated Financial Data
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Operating Data Revenues $ 3,640,300 $ 3,019,700 $ 1,761,700 $ 1,286,600 $ 354,800 Loss from operations (799,600) (644,700) (1,572,600) (1,288,400) (1,426,200) Net loss (408,300) (241,900) (1,419,200) (1,293,400) (1,330,900) Balance Sheet Data Total assets 3,532,500 4,465,200 4,299,400 3,265,500 2,573,200 Working capital 1,891,000 2,645,500 3,128,100 2,437,800 1,873,500 Notes payable 950,000 950,000 1,362,500 1,412,500 Ownership interest of others in consolidated entity 1,448,300 1,823,100 2,146,000 Shareholders' equity 172,200 572,700 255,600 1,642,300 2,269,000 Average common shares outstanding 14,067,606 14,006,254 13,878,593 13,719,036 13,520,095 Loss per common share $(.03) $(.02) ($.10) ($.09) ($.10)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues for the year ended December 31, 1996 were $3,640,300 compared to $3,019,700 in 1995 and $1,761,700 in 1994, representing increases of 21% and 71%, respectively. The increase in both 1996 and 1995 is attributable to the growing recognition by the international business community of the financial impact of product counterfeiting and product diversion, as well as the need and the ability to combat the problem through technologies such as those offered by the Company. During 1996 the Company produced its initial order of pressure sensitive security labels for 3M Corporation. These label sales are included in Product and other sales. During 1996, the Company also renegotiated its exclusive license agreement with Georgia-Pacific Corporation. The Company believes the new arrangement, combined with a technical development which has opened up the potential for an alternative method of applying the Company's technology to checks and other security documents, will allow it to broaden the distribution of its check printing technologies. The slower than anticipated revenue growth from Georgia-Pacific which led, in part, to the license renegotiation, negatively affected the Company's second half revenues compared to the second half of 1995. The Company and its affiliate, Euro-Nocopi S.A. (Euro-Nocopi) continued to sign licensees and end-user customers during the year and experienced growth in revenues from certain customers and licensees signed in earlier years. The Company's gross profit declined to $2,581,600 or 71% of sales from $2,620,900 or 87% of revenues and $1,473,300 in or 84% of revenues in 1994. The decline in gross profit in 1996 in both absolute dollars and as a percentage of revenues is due, in part, to the increase in sales of tangible products such as pressure sensitive labels which are manufactured or purchased for resale and carry a higher level of direct costs compared to the Company's license and royalty revenues. 9 Research and development costs increased to $805,100 in 1996 from $789,100 in 1995 and $742,100 in 1994. The increases in both 1996 and 1995 resulted from a staff addition in late 1995 and travel expenses to support European sales activity. Sales and marketing expenses declined to $1,494,100 in 1996 from $1,552,600 in 1995. The decline relates primarily to lower commission and compensation expenses experienced in 1996 compared to 1995. The increase in 1995 from $1,485,000 in 1994 is primarily attributable to the development of a sales and marketing organization in Europe where efforts intensified after 1994. Euro-Nocopi has full-time sales persons in France, England and Germany. As a significant amount of luxury products affected by counterfeiting and diversion are produced in Europe, the successful implementation of a sales organization in Europe was an important 1995 objective. This increase was partially offset by lower sales and marketing expenses in the United States resulting in a reduction of costs associated with a major sales and marketing program initiated in 1994 which included direct mail, public relations activities and participation in anti-counterfeiting trade shows and meetings. General and administrative expenses increased to $943,300 in 1996 from $781,500 and $652,100 in 1994 in 1994. The increase in 1996 is attributable to legal fees incurred relative to the Company's international patent activities and professional fees incurred by Euro-Nocopi. The increase in 1995 compared to 1994 was attributable to the accrual of incentive payments payable for the achievement of the Company's 1995 operating plan in that year and administrative costs associated with Euro-Nocopi. Other income (expenses) include interest on the Series B 7% Subordinated Convertible Promissory Notes issued in May 1993 and amortization of debt issue costs related to the Notes. The decrease in interest and amortization in 1995 reflects the conversion of $412,500 in principal amounts of these notes into common stock during that year. Interest income includes interest on funds invested in the U.S. as well as the investment of funds held by Euro-Nocopi. Ownership interest of others in consolidated entity represents the proportionate share in the loss of Euro-Nocopi attributable to the 82% ownership interest of the outside shareholders of that company. The net loss for 1996 was $408,300 compared to losses of $241,900 and $1,419,200 respectively in 1995 and 1994. The increase in the 1996 net loss compared to 1995 relates in part to the lower revenues realized from Georgia-Pacific compared to 1995 leading to the renegotiation of the Company's agreement with Georgia-Pacific as well as delays in the development of revenues in other areas of the Company's business. Also contributing to the 1996 increase in the net loss is the lower gross profit realized as a result of changes in product mix in favor of tangible products which carry a higher level of direct costs than licenses and royalties. The significant improvement in 1995 compared to 1994 is primarily attributable to U.S. revenue increases that year carrying a high gross profit margin as well as reductions in domestic overhead costs. Liquidity and Capital Resources The Company's consolidated cash position declined to $2,229,200 at December 31, 1996 from $2,982,100 at December 31, 1995. Included in the December 31, 1996 cash balance is $1,641,200 held by Euro-Nocopi. This amount is available primarily to fund Euro-Nocopi's operations. These funds were raised in 1994 to enable 10 this new entity to exploit the European market for Nocopi's technologies. The Company owns an approximate 18% interest in Euro-Nocopi with warrants which could increase its holding to 55%. Euro-Nocopi markets the Company's technologies in Europe under an exclusive licensing arrangement. Beginning in August 1998, the Euro-Nocopi stock sold to investors may be converted into approximately one million shares of the Registrant's common stock in the event that no public offering of Euro-Nocopi has been made by that date. The Company's domestic cash position decreased to $588,000 at December 31, 1995 from $827,900 at December 31, 1995. The decrease in cash resulted primarily from the use of cash required to fund domestic operations, payments in 1996 related to the acquisition of ink production equipment in late 1995 and incentive compensation paid for the achievement of the 1995 U.S. business plan, offset by the proceeds of stock option exercises. The Euro-Nocopi cash balance declined to $1,641,200 at December 31, 1996 from $2,075,000 at December 31, 1995. The decrease is attributable principally to funds required to support Euro-Nocopi's operations. Capital spending was $61,500 in 1996, $112,000 in 1995 and $56,900 in 1994. The Company has a $1 million short-term line of credit with a bank at prime. Collateral for the line of credit includes all assets of the Company along with personal assets pledged by two directors. No compensation is payable to these directors under this arrangement. The credit line, unless renewed, expires at December 31, 1997. There have been no borrowings under this line of credit. The Company intends to renew this line prior to its expiration. The Company believes that is has sufficient working capital and available credit to support its consolidated operations and debt service requirements over the next twelve months. The Company, on July 15, 1996, amended its Articles of Incorporation to effect a one-for-five reverse split of its common stock, increased the par value of its common stock from $.002 to $.01 and decreased the number of shares of common stock authorized under its Articles of Incorporation from 90,000,000 to 50,000,000. Factors That May Affect Future Growth and Stock Price The Company's operating results and stock price are dependent upon a number of factors, some of which are beyond the Company's control. These include: Uneven Pattern of Quarterly and Annual Operating Results. The Company's revenues, which are derived primarily from licensing and royalties, are difficult to forecast due to the long sales cycle for the Company's technologies, the potential for customer delay or deferral of implementation of the Company's technologies, the size and timing of inception of individual license agreements, the success of the Company's licensees and strategic partners in exploiting the market for the licensed products, modifications of customer budgets, and uneven patterns of royalty revenue and product orders. As the Company's revenue base is not substantial, delays in finalizing license contracts, implementing the technology to initiate the revenue stream and customer ordering decisions can have a material adverse effect on the Company's quarterly and annual revenue expectations and, as the Company's operating expenses are substantially fixed, income expectations will be subject to a similar adverse outcome. 11 New Business Opportunities. The Company, with limited research and development resources, is compelled to develop new technologies which it believes will enhance and expand its leadership position in the anti-counterfeiting and anti-diversion marketplace it serves. There can be no assurance that the considerable resources expended in this effort will generate significant revenues for the Company. Intellectual Property. The Company relies on a combination of protections provided under applicable international patent, trademark and trade secret laws. It also relies on confidentially, non-analysis and licensing agreements to establish and protect its rights in its proprietary technologies. While the Company actively attempts to protect these rights, the Company's technologies could possibly be compromised through reverse engineering or other means. There can be no assurance that the Company will be able to protect the basis of its technologies from discovery by unauthorized third parties, thus adversely affecting its customer and licensee relationships. Volatility of Stock Price. The market price for the Company's common stock has historically experienced significant fluctuations and may continue to do so. The Company has, since its inception, operated at a loss and has not produced revenue levels traditionally associated with publicly traded companies. The Company's common stock is not listed on a national or regional securities exchange and, consequently, receives limited public notice regarding its business achievements and prospects nor is it extensively followed by securities analysts and traders. The market price may be affected by announcements of new relationships or modifications to existing relationships. The stock prices of many developing public companies, particularly those with small capitalizations have experienced wide fluctuations not necessarily related to operating performance. Such fluctuations may adversely affect the market price of the Company's common stock. Recently Issued Accounting Standards In March 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997 (earlier application is not permitted). This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements of Registrant meeting the requirements of Regulation S-X (except section 210.3-05 and Article 11 thereof) are included herein beginning at page F-1 of this Annual Report on Form 10-K. For information required with respect to this Item 8, see "Consolidated Financial Statements and Schedules on pages F-1 through F- of this report. 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 13 PART III The information required by Part III, Items 10 through 13, inclusive of Form 10-K are incorporated by reference to Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for June 9, 1997, which shall be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following Financial Statements are filed as part of this Annual Report on Form 10-K PAGE ---- Report of Independent Accountants F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-3 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-5 Notes to Consolidated Financial Statements F-6 to F-16 Schedule II - Valuation and Qualifying Accounts and Reserves F-17 All other schedules are omitted because they are not required or are inapplicable. - ------------------------------- (b) The Exhibit Index appears on Page 17 of this Annual Report on Form 10-K. (c) Registrant has not filed any reports on Form 8-K during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. 15 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOCOPI TECHNOLOGIES, INC. Registrant Dated: March 27, 1997 By: /s/ Norman A. Gardner ------------------------------------ Norman A. Gardner President & Chief Executive Officer Dated: March 27, 1997 By: /s/ Rudolph A. Lutterschmidt ------------------------------------ Rudolph A. Lutterschmidt, Vice President, Chief Financial Officer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 1997 /s/ William F. Drake, Jr. ---------------------------------------- William F. Drake, Jr., Director Date: March 27, 1997 /s/ Norman A. Gardner ---------------------------------------- Norman A. Gardner, Director Date: March 27, 1997 /s/ Dr. Arshavir Gundjian ---------------------------------------- Dr. Arshavir Gundjian, Director Date: March 27, 1997 /s/ Ray B. Mundt ---------------------------------------- Ray B. Mundt, Director Date: March 27, 1997 /s/ Edward N. Patrone ---------------------------------------- Edward N. Patrone, Chairman of the Board of Directors Date: March 27, 1997 /s/ Joel A. Pinsky ---------------------------------------- Joel A. Pinsky, Director 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Nocopi Technologies, Inc. We have audited the accompanying consolidated financial statements and the financial statement schedule of Nocopi Technologies, Inc. listed on the index on page 15 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nocopi Technologies, Inc. as of December 31, 1996 and 1995 and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information required to be included herein. COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania March 7, 1997 F-1 Nocopi Technologies, Inc. Consolidated Balance Sheets
December 31 1996 1995 ---- ---- Assets Current assets Cash and cash equivalents $2,229,200 $2,982,100 Accounts receivable less allowances (1996-$37,100; 1995-$21,000) 513,400 667,700 Inventory 5,100 22,200 Prepaid and other 105,300 93,900 ----------- ----------- Total current assets 2,853,000 3,765,900 Fixed assets Leasehold improvements 43,200 55,300 Furniture, fixtures and equipment 435,000 381,100 ----------- ----------- 478,200 436,400 Less: accumulated depreciation 296,600 231,600 ----------- ----------- 181,600 204,800 Other assets Patents, net of accumulated amortization (1996 - $214,300; 1995 - $171,200) 452,000 419,800 Debt issuance costs, net of accumulated amortization (1996 - $156,500; 1995 - $131,200) 31,600 56,900 Other 14,300 17,800 ----------- ----------- 497,900 494,500 ----------- ----------- $3,532,500 $4,465,200 =========== =========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $539,800 $398,100 Accrued expenses 139,900 258,700 Accrued commissions 118,100 182,500 Deferred revenue 164,200 280,100 ----------- ----------- Total current liabilities 962,000 1,119,400 Long-term notes payable 950,000 950,000 Commitments and contingencies Ownership interest of others in consolidated entity 1,448,300 1,823,100 Shareholders' equity Series A preferred stock $1.00 par value Authorized - 300,000 shares Issued and outstanding - none Common stock, $.01 par value Authorized - 50,000,000 shares Issued and outstanding 1996 - 14,080,654 shares 140,800 1995 - 14,044,166 shares 140,400 Paid-in capital 7,651,000 7,522,900 Currency translation adjustment 57,100 177,800 Accumulated deficit (7,676,700) (7,268,400) ----------- ----------- 172.200 572,700 ----------- ----------- $3,532,500 $4,465,200 =========== ===========
F-2 See notes to consolidated financial statements. Nocopi Technologies, Inc. Consolidated Statements of Operations
Years ended December 31 1996 1995 1994 ---- ---- ---- Revenues Licenses, royalties and fees $3,036,800 $2,878,500 $1,610,800 Product and other sales 603,500 141,200 150,900 ---------- ---------- ---------- 3,640,300 3,019,700 1,761,700 Cost of sales Licenses, royalties and fees 496,900 273,200 150,100 Product and other sales 561,800 125,600 138,300 ---------- ---------- ---------- 1,058,700 398,800 288,400 ---------- ---------- ---------- Gross profit 2,581,600 2,620,900 1,473,300 Operating expenses Research and development 805,100 789,100 742,100 Sales and marketing 1,494,100 1,552,600 1,485,600 General and administrative 943,300 781,500 652,100 Other expenses 138,700 142,400 166,100 ---------- ---------- ---------- 3,381,200 3,265,600 3,045,900 ---------- ---------- ---------- Loss from operations (799,600) (644,700) (1,572,600) Other income (expenses) Amortization of debt issuance costs (25,300) (28,880) (37,600) Interest income 113,900 189,300 74,800 Interest and bank charges (72,100) (80,600) (101,800) Ownership interest of others in loss of consolidated entity 374,800 322,900 218,000 ---------- ---------- ---------- 391,300 402,800 153,400 ---------- ---------- ---------- Net loss ($408,300) ($241,900) ($1,419,200) ========== ========== =========== Net loss per common share ($.03) ($.02) ($.10) Average common shares outstanding 14,067,606 14,006,254 13,878,593
See notes to consolidated financial statements. F-3 Nocopi Technologies, Inc. Consolidated Statements of Shareholders' Equity
Currency Common stock Paid-in Treasury Translation Accumulated Shares Amount Capital Stock Adjustment Deficit Total ------ ------ ------- ----- ---------- ------- ----- Balance-January 1, 1994 13,789,048 $137,900 $7,111,700 $(5,607,300) $1,642,300 Acquisition of treasury stock (34,000) $(68,000) (68,000) Exercise of stock options 140,000 1,100 900 68,000 70,000 Conversion of Series B note 14,536 100 50,700 50,800 Net loss (1,419,200) (1,419,200) Translation adjustment $(20,300) (20,300) ---------------------------------------------------------------------------------------------- Balance-December 31, 1994 13,909,584 139,100 7,163,300 (20,300) (7,026,500) 255,600 Exercise of stock options 15,000 100 28,900 29,000 Conversion of Series B notes, net of expenses 119,582 1,200 330,700 331,900 Net loss (241,900) (241,900) Translation adjustment 198,100 198,100 ---------------------------------------------------------------------------------------------- Balance-December 31, 1995 14,044,166 140,400 7,522,900 177,800 (7,268,400) 572,700 Exercise of stock options 36,488 400 128,100 128,500 Net loss (408,300) (408,300) Translation adjustment (120,700) (120,700) ---------------------------------------------------------------------------------------------- Balance-December 31, 1996 14,080,654 $140,800 $7,651,000 $57,100 $(7,676,700) $172,200 ==============================================================================================
See notes to consolidated financial statements. F-4 Nocopi Technologies, Inc. Consolidated Statements of Cash Flows
Years ended December 31 1996 1995 1994 ---- ---- ---- Operating Activities Net loss ($408,300) ($241,900) ($1,419,200) Adjustments to reconcile net loss to cash used by operating activities Depreciation 84,200 68,600 51,100 Amortization 71,900 70,400 70,900 Allowance for doubtful accounts, net 16,100 7,400 9,000 Ownership interest of others in loss of consolidated entity (374,800) (322,900) (218,000) Other 6,000 ---------- ---------- ---------- (610,900) (412,400) (1,506,200) Changes in working capital Accounts receivable 132,800 (230,400) (329,400) Inventory 17,100 (8,600) 5,200 Prepaid and other (14,000) (17,000) (21,900) Accounts payable and accrued expenses (30,200) 280,400 307,200 Deferred revenue (113,000) 235,300 18,800 ---------- ---------- ---------- (7,300) 259,700 (20,100) ---------- ---------- ---------- Cash used by operating activities (618,200) (152,700) (1,526,300) Investing Activities Additions to fixed assets (61,500) (112,000) (56,900) Additions to patents (75,300) (125,800) (84,000) ---------- ---------- ---------- Cash used by investing activities (136,800) (237,800) (140,900) Financing Activities Exercise of stock options 128,500 29,000 70,000 Issue of stock in Euro-Nocoopi, S.A., net of issue costs 2,310,200 Acquisition of treasury stock (68,000) ---------- ---------- ---------- Cash provided by financing activities 128,500 29,000 2,312,200 Effect of exchange rate changes on cash (126,400) 206,000 33,000 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents (752,900) (155,500) 678,000 Cash and cash equivalents Beginning of year 2,982,100 3,137,600 2,459,600 ---------- ---------- ---------- End of year $2,229,200 $2,982,100 $3,137,600 ========== ========== ========== Supplemental cash flow data Interest paid $66,500 $74,700 $98,000 Additional common stock was issued upon conversion of Series B notes Conversion of Series B notes, net of debt issuance and conversion costs $331,900 $50,800
See notes to consolidated financial statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. Organization of the Company Nocopi Technologies, Inc. (the Company) is organized under the laws of the State of Maryland. Its main business activities are the development and distribution of document security products and the licensing of its patented authentication technologies in the United States and foreign countries. 2. Significant Accounting Policies Principles of consolidation - The financial statements include the accounts of the Company and Euro-Nocopi S.A., the European affiliate of the Company. The Company has an approximately 18% interest in Euro-Nocopi and holds warrants permitting it to increase its interest to 55%. The Company's operational and financial control of Euro-Nocopi requires Euro-Nocopi's operations be included in the Consolidated Financial Statements. The 82% equity interest of shareholders other than the Company is shown as "Ownership interest of others in consolidated entity" in the Consolidated Statements of Operations and Consolidated Balance Sheets. All significant intercompany accounts and transactions have been eliminated. Principles of accounting - The Company's financial statements are prepared on a basis in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Cash and cash equivalents - Cash equivalents consist principally of time deposits and highly liquid investments with an original maturity of three months or less placed with major banks and financial institutions. The investments are in excess of the FDIC insurance limit. Temporary cash investments are carried at the lower of cost, plus accrued interest, or market value. The amount included in the Consolidated Balance Sheets for "Cash and temporary cash investments" includes $1.6 and $2.1 million in cash and temporary cash investments of Euro-Nocopi at December 31, 1996 and 1995, respectively. These amounts are available primarily to fund European operations. F-6 Inventory, is valued at the lower of cost or market, determined on a first-in, first-out basis or net realizable value. Income taxes are accounted for in accordance with SFAS 109, "Accounting for Income Taxes". Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Fixed assets are carried at cost less accumulated depreciation and amortization. Furniture, fixtures and equipment are generally depreciated on the straight-line method over their estimated service lives. Leasehold improvements are amortized on a straight-line basis over five years or the term of the lease, if shorter. Major renovations and betterments are capitalized. Maintenance, repairs and minor items are expensed as incurred. Upon disposal, assets and related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income. Patents are stated at cost less amortization and are being amortized on a straight-line basis over the life of the patent (approximately fifteen years). Debt issuance costs are costs incurred in connection with the issuance of long-term debt which have been capitalized and are being amortized over the life of the related debt agreement. Revenue, consisting primarily of license fees and royalties, is recorded as earned over the license term. Product sales are recognized primarily upon shipment of products. Loss per share of common stock is computed utilizing the weighted average number of shares outstanding during the year including dilutive common stock equivalents after deducting dividends on preferred stock. Fully diluted per share amounts are not presented because they are anti-dilutive. Recoverability of Long Lived Assets - Effective January 1, 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to the Company's quarterly or annual financial statements. Accounting for Stock-Based Compensation - Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of the grant over the amount the employee is required to pay to acquire the stock (the intrinsic value method under Accounting Principles Board Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. Effective January 1, 1996 the Company implemented SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement encourages employers to account for stock compensation awards based on their fair value on their date of grant. Entities may choose not to apply the new accounting method but instead, disclose in the notes to the financial statements the pro forma effects on net income and earnings per share as if the new method had been applied. The Company has adopted the disclosure-only approach of the Standard. F-7 Recently Issued Accounting Standards In March 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997 (earlier application is not permitted). This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 3. Long-term Notes, Shareholders' Equity and Credit Arrangements. The Company has $950,000 Series B 7% Subordinated Convertible Promissory Notes (the B Notes) outstanding. Interest on the B notes is payable on a semi-annual basis. The B Notes are payable in full on March 31, 1998, may be prepaid at any time and are convertible into common stock of the Company at a conversion price of $3.50 per share. The carrying cost of the B Notes at December 31, 1996 and 1995 approximates their fair value. Debt issuance costs of $188,200 related to the notes are being amortized to other expense under the straight line method over the term of the B Notes. The Company, on July 15, 1996, amended its Articles of Incorporation to effect a one-for-five reverse split of its common stock, to increase the par value of its common stock from $.002 to $.01 and to decrease the number of shares of common stock authorized under its Articles of Incorporation from 90,000,000 to 50,000,000. All applicable share and per share data have been adjusted for the reverse stock split. During the first quarter of 1994, the Company provided a $30,000 short-term loan to a director arising from his exercise of 60,000 stock options which was repaid in full in the second quarter. Additionally, the Company acquired 34,000 shares of common stock from this director for $68,000 which was reissued in connection with the exercise of stock options by another individual. F-8 The Company has a $1 million short-term line of credit with a bank at prime. Collateral for the line of credit includes all assets of the Company along with personal assets pledged by two directors. No compensation will be paid to these directors under this arrangement. The credit line, unless renewed, expires at December 31, 1997. There have been no borrowings under this line of credit. The Company intends to renew this line prior to its expiration. 4. Income Taxes On December 31, 1996 and 1995, the Company had operating loss carryforwards totaling approximately $7,395,000 and $7,209,000, respectively. These operating losses are available to offset future taxable income through the years 2012 and 2011, respectively. A valuation allowance has been provided against the deferred tax assets due to uncertainty of realization. The following is a summary of the significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and December 31, 1995. December 31, 1996 ---------------------------------- Deferred Tax Deferred Tax Asset Liability ----- --------- Allowance for bad debts $ 12,700 Excess tax amortization and depreciation on intangible and fixed assets $17,700 Inventory reserve 3,900 Net operating losses 2,638,900 Research and development credits 140,600 ----------- ------- 2,796,100 Valuation allowance (2,778,400) ----------- ------- Total deferred tax assets and liabilities $ 17,700 $17,700 =========== ======= F-9 December 31, 1996 ---------------------------------- Deferred Tax Deferred Tax Asset Liability ----- --------- Allowance for bad debts $ 7,100 Excess tax amortization and depreciation on intangible and fixed assets $29,800 Inventory reserve 22,100 Net operating losses 2,567,000 Research and development credits 99,500 ---------- ------- 2,695,700 Valuation allowance (2,665,900) ---------- ------- Total deferred tax assets and liabilities $ 29,800 $29,800 ========== ======= 5. Related Party Transactions During 1996, 1995 and 1994, payments of $138,700, $142,400 and $166,100, respectively, were made to firms employing certain officers and directors for legal, consulting and research services. In 1995, $50,000 was charged to paid-in capital for services in connection with debt conversions in that year. 6. Commitments and Contingencies The Company conducts its operations in leased facilities and leases equipment under leases expiring at various dates to 2001. Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 1996 are: $116,800 - 1997; $98,000 - 1998; $67,000 - 1999; $63,200 - 2000; and $38,500 - 2001. Total rental expense under operating leases was $149,600 in 1996, $125,100 in 1995 and $114,400 in 1994. From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to any present actions will not materially affect the financial position or results of operations of the Company. F-10 7. Stock Options and 401(k) Savings Plan In accordance with the 1986 Incentive Stock Option Plan, the Company was authorized through June 1996 to issue options to purchase up to 300,000 common shares to management and key employees of the Company. The exercise price of the options granted must be equal to the fair market value of such shares on the date of grant. The term of each option and the manner in which it may be exercised was determined by the Company, subject to the requirement that no option may be exercisable more than ten years after the date of grant. With respect to any incentive stock option granted to a participant who owns more than 10% of the voting rights of the Company's capital stock on the date of grant, the exercise price of the option must be at least equal to 110% of the fair market value on the date of grant and the option may not be exercisable for more than five years from the date of grant. In accordance with the 1986 Non-Qualified Stock Option Plan, the Company was authorized through June 1996 to issue options to purchase up to 700,000 common shares to certain key employees, independent contractors, technical advisors and directors of the Company. The difference between fair market value and the option price for grants made under the non-qualified plan is charged to income as compensation expense over the vesting periods of the related options. The 1996 Stock Option Plan was approved by the shareholders of the Company in June 1996. The Plan provides for the granting of up to 700,000 incentive and non-qualified stock options to employees, non-employee directors, consultants and advisors to the Company. In the case of options designated as incentive stock options, the exercise price of the options granted must be not less than the fair market value of such shares on the date of grant. Non-qualified stock options may be granted at any amount established by the Stock Option Committee or, in the case of Discounted Options issued to non-employee directors in lieu of any portion of an Annual Retainer, in accordance with a formula designated in the Plan. The difference between fair market value and the option price for non-qualified options granted made under the plan is charged to income as compensation expense over the vesting periods of the related options. No options were granted in 1996 under this plan. F-11 A summary of stock options under these plans follows: Outstanding at December 31, 1993 657,412 $.50 to $3.80 Options granted 270,000 2.20 to 2.80 Options exercised (140,000) .50 Options canceled (321,206) 3.00 to 3.80 -------- Outstanding at December 31, 1994 466,206 .75 to 3.75 Options granted 295,200 3.25 to 4.05 Options exercised (15,000) 1.30 and 2.25 Options canceled (63,706) 3.25 to 4.05 -------- Outstanding at December 31, 1995 682,700 .75 to 4.05 Options granted 43,000 3.10 and 4.35 Options exercised (36,488) 3.00 to 3.75 Options canceled (8,846) 3.00 to 4.05 -------- Outstanding at December 31, 1996 680,366 $.75 to $4.35 ======== Exercisable at December 31, 1996 574,466 $.75 to $4.35 ======== The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized in connection with stock option grants under the plans. Had compensation expense been determined based on the fair value on the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net loss and net loss per common share would have been reported as the pro forma amounts below: 1996 1995 ---- ---- Net loss As reported ($408,300) ($241,900) Pro forma ($470,400) ($629,200) Loss per common share As reported ($.03) ($.02) Pro forma ($.03) ($.04) The fair value of each option granted is estimated on the day of grant based on a modified Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 76% and 50%; risk free interest rates of 6.1% to 6.3% and 5.7% to 6.6% and expected lives of two years. At December 31, 1996, the Company has reserved 2,733,072 shares of common stock for possible future issuance upon exercise of stock options, warrants and convertible securities. The Company sponsors a 401(k) savings plan, covering substantially all employees, providing for employee and employer F-12 contributions. Employer contributions are made at the discretion of the Company. There were no contributions charged to expense during 1996, 1995 or 1994. 8. Euro-Nocopi, S.A. Euro-Nocopi, S.A. was formed in 1994 to market the Company's technologies in Europe under an exclusive license arrangement. Euro-Nocopi's Board of Directors is composed of five members who are members of the Company's Board of Directors and two outsiders. Euro-Nocopi was capitalized through a European private placement which allows those investors to convert the Euro-Nocopi stock into approximately one million shares of Nocopi Technologies, Inc. common stock beginning in August 1998 in the event that no public offering of Euro-Nocopi has been made by that date. F-13 9. Segment, Geographic and Major Customer Information The Company operates in one principal industry segment - the development and distribution of security products and the licensing of its patented authentication technologies. The Company's technologies and products are sold principally to the corporate market. Geographic financial information is as follows:
1996 1995 1994 ---------- ---------- ----------- Revenues from unaffiliated customers: United States $2,604,900 $2,198,700 $ 1,467,900 Europe 872,300 720,500 217,200 Other foreign 163,100 100,500 76,600 ---------- ----------- ----------- Total revenues $3,640,300 $3,019,700 $ 1,761,700 ========== ========== =========== Transfers between geographic segments (eliminated in consolidation): United States $ 150,200 $ 109,600 $ 27,800 Europe 48,000 44,900 ---------- ---------- ----------- Total transfers $ 198,200 $ 154,500 $ 27,800 ========== ========== =========== Loss from operations: United States $ (276,300) $ (109,400) $(1,142,300) Europe (523,300) (535,300) (430,300) ---------- ---------- ----------- Total loss from operations $ (799,600) $ (644,700) $(1,572,600) ========== ========== =========== Identifiable assets: United States $1,673,300 $2,250,400 $ 1,868,200 Europe 1,857,100 2,209,300 2,426,200 Other foreign 2,100 5,500 5,000 ---------- ---------- ----------- Total assets $3,532,500 $4,465,200 $ 4,299,400 ========== ========== ===========
Revenues from unaffiliated customers are based on the location of the customers. Transfers between geographic areas are recorded according to contractual arrangements. Loss from operations consists of total revenue less operating expenses and does not include either interest or other expenses, net. Identifiable assets of geographic areas are those assets used in the Company's operations in each area. The Company's two largest customers accounted for approximately 40%, 37% and 52% of revenues in 1996, 1995 and 1994, respectively, and approximately 35%, 39% and 61% of accounts receivable at December 31, 1996, 1995 and 1994, respectively. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company also maintains allowances for potential credit losses. F-14 10. Quarterly Financial Data (unaudited)
Quarter Ended Mar. 31 Jun. 30 Sep. 30 Dec. 31 ------- ------- ------- ------- 1996 ---- Revenues $875,500 $936,200 $951,200 $877,400 Gross profit 705,300 673,900 604,300 598,100 Net loss (10,800) (34,600) (163,400) (199,500) Loss per share (1) (.00) (.00) (.01) (.01) 1995 ---- Revenues $653,200 $743,100 $782,100 $841,300 Gross profit 556,500 650,400 710,700 703,300 Net earnings (loss) (168,800) (60,800) (22,200) 9,900 Earnings (loss) per share (1) (.01) (.00) (.00) .00
(1) Quarterly earnings (loss) per share are based on the weighted average number of shares outstanding for each quarter and, as a result, the quarterly earnings (loss) per share do not add to the annual amount. F-15 NOCOPI TECHNOLOGIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance Additions Beginning Charged to Balance of Year Operations Deductions End of Year ------- ---------- ---------- ----------- DESCRIPTION Year ended December 31, 1994 Allowance for doubtful accounts $12,800 $9,000 $21,800 Inventory reserve 89,500 $12,900 76,600 Income tax valuation allowance 1,797,700 645,700 2,443,400 Year ended December 31, 1995 Allowance for doubtful accounts $21,800 $9,600 $10,400 $21,000 Inventory reserve 76,600 11,600 65,000 Income tax valuation allowance 2,443,400 222,500 2,665,900 Year ended December 31, 1996 Allowance for doubtful accounts $21,000 $18,300 $ 2,200 $37,100 Inventory reserve 65,000 53,500 11,500 Income tax valuation allowance 2,665,900 112,500 2,778,400
F-16 The following Exhibits are filed as part of this Annual Report on Form 10-K: Exhibit Number Description ------- ----------- 3.1 Articles of Incorporation(1) 3.2 Bylaws(1) 3.3 Articles of Amendment to Articles of Incorporation 10.1 Amended and Restated Non-Qualified Stock Option Plan(3) 10.2 Amended and Restated Incentive Stock Option Plan(3) 10.3 Employment Agreement between Registrant and Dr. A. Gundjian 10.4 Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing Plan(2) 10.5 License Agreement between Registrant and Euro-Nocopi S.A.(3) 10.6 Service Agreement between Registrant and Euro-Nocopi S.A.(3) 10.7 Memorandum of Agreement between Registrant and Euro-Nocopi S.A.(3) 10.8 Nocopi Technologies, Inc. 1996 Stock Option Plan 21.1 List of Subsidiaries 23.1 Consent of Coopers & Lybrand L.L.P. 27.0 Financial Data Schedule - ---------- (1) Incorporated by reference to Registrant's Registration Statement on Form 10, as filed with the Commission on or about August 19, 1992 (2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1993 (3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1994 17 EX-3.1 2 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION NOCOPI TECHNOLOGIES, INC. ARTICLES OF AMENDMENT to ARTICLES OF INCORPORATION NOCOPI TECHNOLOGIES, INC., a Maryland corporation having its principal office in Baltimore City, Maryland (the "Corporation") hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended (a) by deleting the first sentence of Article V thereof and replacing such sentence with the following: "The aggregate number of shares which the corporation shall have authority to issue is Fifty Million (50,000,000) shares of common stock having a par value of $.01 per share and Three Million (3,000,000) shares of preferred stock having a par value of $1.00 per share." and (b) by adding the following at the end of Article V thereof: "Upon the filing of this Amendment (the "Effective Time"), each five (5) shares of common stock, par value $.002 then outstanding or in treasury shall, without further action by the corporation or any shareholder, be converted into one share of common stock, par value $.01; provided that fractional shares shall not be issued and, in lieu of issuing any fractional shares, the corporation shall purchase each such fractional share for a price determined by multiplying the Fair Market Value (as hereinafter defined) of one share of common stock, par value $.01 at the Effective Time by a fraction, the numerator of which is the interest in the corporation represented by such fractional share and the denominator of which is the interest in the corporation represented by one whole share of such common stock, in each case, rounded to the nearest one-thousandth of one percent (.001%). For the purpose of the preceding sentence, the term Fair Market Value shall mean an amount determined by multiplying Five (5) by either (i) the closing selling price of the corporation's common stock, par value $.002 on the day preceding the date of the Effective Time, or (ii) if no sale of such common stock occurred on such date, the mean average of the closing high bid and low asked prices of such common stock on the day preceding the date of the Effective Time. From and after the Effective Time, each certificate evidencing shares of common stock, par value $.002 of the corporation outstanding or in treasury at the Effective Time shall thereafter evidence (x) that number of shares of common stock, par value $.01 of the corporation as is determined by dividing the number of shares of common stock, par value $.002 of the corporation specified on such certificate by Five (5) and, if the result thus obtained shall not be a whole number, by reducing such result to the next smaller whole number, and (y) the right to receive payment for any fractional share as hereinabove provided." SECOND: The amendment of the Charter of the Corporation as hereinabove set forth has been duly advised by the board of directors and approved by the stockholders of the Corporation. THIRD: Prior to the amendment, the total number of shares of all classes which the Corporation had authority to issue was Ninety Three Million (93,000,000), consisting of Ninety Million (90,000,000) shares of common stock, par value $.002 per share, and Three Million (3,000.000) shares of preferred stock, par value $1.00 per share, and the aggregate par value of all shares of all classes was $3,180,000. Subsequent to the amendment, the total number of shares of all classes which the Corporation had authority to issue was Fifty Three Million (53,000,000), consisting of Fifty Million (50,000,000) shares of common stock, par value $.01 per share, and Three Million (3,000,000) shares of preferred stock, par value $1.00 per share, and the aggregate par value of all shares of all classes was $3,500,000. The information required by subsection (b)(2)(i) of Section 2-607 of the Maryland General Corporation Law was not changed by the amendment. -2- IN WITNESS WHEREOF, Nocopi Technologies, Inc. has caused these presents to be signed in its name and on its behalf by its President and attested by its Assistant Secretary on the 2nd day of July, 1996. NOCOPI TECHNOLOGIES, INC. By: /s/ Norman A. Gardner ------------------------------ Norman A. Gardner, President Attest: /s/ Donna Ciavarelli - ------------------------------------- Donna Ciavarelli, Assistant Secretary THE UNDERSIGNED, President of Nocopi Technologies, Inc., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Norman A. Gardner ------------------------------- Norman A. Gardner -3- EX-10.8 3 1996 STOCK OPTION PLAN NOCOPI TECHNOLOGIES, INC. 1996 STOCK OPTION PLAN 1. Name, Purpose and Eligibility. This plan shall be known as the Nocopi Technologies, Inc. 1996 Stock Option Plan (the "Plan"). The purpose of the Plan is to advance the interests of Nocopi Technologies, Inc. (the "Company") by encouraging the acquisition of its common stock by directors and key employees of the Company and its subsidiaries upon whose judgment and ability the Company depends for its long term growth and development. Accordingly, the Plan is intended to promote a close identity of interests between the Company and its directors and employees as well as a means to attract and retain outstanding management. All salaried employees of the Company and its subsidiaries and non-employee directors of the Company ("Eligible Employees") shall be eligible to receive options under and in accordance with the terms of the Plan. In addition, consultants and advisers to the Company may receive options under the Plan to the extent that such persons are deemed to be employees for the purposes of registering shares issuable upon the exercise of options under the Securities Act of 1933 (the "Act") through the use of Form S- 8 promulgated thereunder. 2. Plan Administration. (a) The Plan shall be administered by a committee (the "Committee") which shall consist of not less than two non-employee directors appointed by the Company's Board of Directors (the "Board"). No member of the Committee shall be, or within one year before having become a member thereof shall have been, eligible for selection as a person to whom stock options may be granted by the Committee under the Plan. Non-employee directors, including members of the Committee, may, however, participate under the Plan to the extent, and on the terms, specified in Section 7 hereof. (b) Subject to the terms of the Plan, the Committee shall have the authority, in its sole discretion and from time to time, to: (i) designate the Eligible Employees (other than non-employee directors) to whom options to purchase ("Options") the Company's common stock, par value $.01 per share (such common stock, and any other common stock or other securities which may be issuable upon the exercise of Options granted hereunder by virtue of any adjustment made pursuant to Section 11 hereof is herein referred to as "Common Stock") shall be granted under the Plan; (ii) grant Options provided for in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions upon any such Option as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other actions necessary and advisable for the administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to this Plan or any award hereunder. 3. Types of Options Under Plan. The Committee may designate Options granted to a person who (i) is an employee of the Company or a subsidiary of the Company and (ii) does not own stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company as "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). A stock option agreement for any Option intended to qualify as an incentive stock option shall contain a statement of such intent. All Options granted under the Plan which are not designated as incentive stock options shall be non-qualified stock options. 4. Shares Subject to the Plan. The aggregate number of shares of the Company's common stock, par value $.01 per share which may be issued upon the exercise of Options granted under the Plan is 700,000 subject to adjustment as provided in Section 11 hereof. Such shares may be authorized and unissued shares or may be treasury shares. If an Option expires or terminates for any reason during the term of the Plan and prior to its exercise in full, the number of shares previously subject to but not delivered under such Option shall again be available for the grant of Options thereafter. 5. Effective Date and Term of Plan. The Plan shall become effective at such time as there shall have been filed and become effective articles of amendment to the Company's articles of incorporation effecting a one for five reverse stock split, setting the number of authorized shares of the Company's common stock at 50,000,000, and setting the par value of such shares at $.01 per share, provided that on such date, the adoption of the Plan shall have been approved by the affirmative vote of the holders of a majority of the Company's Common Stock present or represented and entitled to vote at a meeting duly held in accordance with the provisions of the Maryland General Corporation Law, as amended, and shall remain in effect for a period of ten years thereafter, or until termination by the Board, whichever occurs first. The effectiveness of the Plan shall constitute its adoption for the purposes of Section 422A of the Code. -2- 6. Stock Options. (a) Options granted under the Plan shall be evidenced by stock option agreements in such form, not inconsistent with this Plan, as the Committee shall approve from time to time. At the time of the grant the Committee shall determine for each Option the exercise period, which shall not continue for more than ten years from the date of Option grant, the appropriate Option price (as specified below) and such other conditions to or restrictions on the exercise of the Option, including but not limited to vesting provisions, if any, as the Committee deems appropriate. (b) The per share price at which a share of Common Stock may be purchased upon the exercise of an Option (the "Option Price") shall be determined as follows: (i) In the case of an Option designated as an incentive stock option, the Option Price shall be not less than 100% of the fair market value (on the date such Option is granted) of the Common Stock issuable upon the exercise thereof, as determined by the Committee in the reasonable exercise of its discretion. (ii) In the case of a non-qualified Option, the Option Price shall be any amount established by the Committee in its discretion or, in the case of Discounted Options (as hereafter defined), the amount determined in accordance with Section 7(a)(iii) of this Plan. (c) The aggregate Option Price payable to the Company in connection with the exercise of Option(s) may be paid in cash or, in whole or in part, with unrestricted shares of Company Common Stock, as the Committee may determine. 7. Non-Employee Director Options. (a) If, during the term of this Plan, the Company shall adopt a policy of compensating non-employee directors for their service as directors on an annual basis, the Company shall issue discounted options ("Discounted Options") to any non-employee director of the Company electing to receive such Discounted Options in lieu of the payment to said non-employee director of any specified portion of the Annual Retainer (as defined hereinbelow) otherwise payable to such non-employee director, provided that in the particular case all of the limitations and provisions of this Section shall have been complied with: -3- (i) A Discounted Option shall be issued automatically on June 1 (or if June 1 is not a business day, on the next succeeding business day) of each year to any non-employee director who, prior to January 1 of such year, files with the Committee or its designee an irrevocable, written election to receive such Discounted Option in lieu of all or a specified portion of the Annual Retainer to be earned in such year by such non-employee director. (ii) The number of shares subject to a Discounted Option issued to a non-employee director pursuant to this Section shall be equal to the nearest number of whole shares determined in accordance with the following formula: Dollar Amount of Annual Retainer to be Received as Discounted Option = Number Fair Market Value of Common Stock of Shares on Date of Issue - Per Share Option Price "Annual Retainer" shall mean the amount which the non-employee director will be entitled to receive for serving as a director in the relevant calendar year, but shall not include fees or expenses for attendance at meetings of the Board or any committee of the Board or for any other services to be provided to the Company. (iii) The Option price per share for the shares covered by Discounted Options issued in accordance with this Section shall be Seventy Five Percent (75%) of the fair market value of the Common Stock. For the purpose of this subsection 7(a)(iii), the fair market value of the Common Stock shall be deemed to be the closing selling price of the Common Stock on the trading day immediately preceding the date on which the Discounted Option is issued, or, if no sale of Common Stock occurred on such day, the mean average of the low "asked" and high "bid" prices for the Common Stock on such day, in either case, as reported by the National Quotation Bureau, Inc. (iv) No Discounted Option issued under this Section may be exercised before the first anniversary of the date upon which it was issued; provided, however, that any Discounted Option so issued shall become exercisable upon the retirement of the non-employee director because of age or upon the death or disability of the director, as provided in paragraphs (v) and (vi) of this Section. No Discounted Option issued under this Section shall be exercisable after the expiration of ten years from the date upon which such Discounted Option is issued. Each Discounted Option shall be subject to termination before its date of expiration as hereinafter provided. -4- (v) Except as herein provided, the rights of a non-employee director in a Discounted Option issued under this Section shall not terminate upon such director's termination as a director for any reason (including death, retirement or disability). That portion of any Discounted Option granted under this Section which is attributable to a portion of an Annual Retainer which is not earned due to termination as a director (for any reason) shall automatically abate and be canceled. (vi) Any Discounted Option issued to a non- employee director and outstanding on the date of his or her death may be exercised by the administrator of such director's estate, the executor under his or her will, or the person or persons to whom such Discounted Option shall have been validly transferred by such executor or administrator pursuant to the will of the deceased non-employee director or the laws of intestate succession (but not beyond the specified expiration date of such Discounted Option). (vii) Discounted Options issued under this Section may be exercised only by written notice to the Company accompanied by payment in cash of the full consideration for the shares as to which they are exercised. (b) The provisions of this Section shall apply only to Discounted Options issued or to be issued to non-employee directors, and shall not be deemed to modify, limit or otherwise apply to any other provision of this Plan or any Option issued under this Plan to a participant who is not a non-employee director of the Company. 8. Termination of Employment. Except as the Committee otherwise determines in a particular case, Options held by a participant whose employment with the Company or a subsidiary terminates for reasons other than (i) retirement at the normal retirement date then in effect for employees of the Company or such subsidiary, (ii) early retirement with the consent of the Board, (iii) disability, or (iv) death shall terminate upon the expiration of thirty days after such participant's termination of employment. This Section shall not apply to Discounted Options awarded to non-employee directors. 9. Death of a Participant. In the event of the death of a participant, if the deceased participant holds Options some portion of one or more of which is exercisable at the time of his or her death, the administrator of such participant's estate, the executor under his or her will, or the person or persons to whom -5- such Options shall have been validly transferred by such executor or administrator pursuant to the participant's will or the laws of intestate succession shall have the right, within twelve months from the date of such participant's death, to exercise all Options (or any portion thereof) held by such participant on the date of death which were then exercisable, but not yet exercised; provided, however, that no Option shall be exercised after its specified expiration date. 10. Retirement and Disability. In the event of termination of the employment of a participant (or the termination of a participant's service as a non-employee director) due to retirement at the normal retirement date then in effect for employees or non-employee directors of the Company or early retirement with the consent of the Board, or in the event a participant becomes disabled, a participant who, upon retirement or disability, holds Options some portion of one or more of which is then exercisable shall have the right, within three years of the date of such retirement or disability, to exercise all Options (or any portion thereof) held by such participant on the date of retirement or disability which were then exercisable but not yet exercised; provided, however, that no Option shall be exercised after its specified expiration date. 11. Changes in Capitalization. The (i) total number of shares of Common Stock of the Company for which Options may be granted, (ii) number of shares subject to each outstanding Option, and (iii) Option prices and Discount Option prices per share shall be subject to appropriate adjustment by the Committee for any changes in the number of outstanding shares of Common Stock resulting from a merger, recapitalization, stock split, stock dividend or other change in the Company's corporate or capital structure. 12. Withholding Taxes. Whenever shares of Company Common Stock are to be issued or delivered upon the exercise of Options granted hereunder, the Committee shall have the right, at or prior to the delivery of any certificate or certificates for shares, to require the exercising participant to remit to the Company, in cash, in shares of Company Common Stock, or in other consideration deemed satisfactory to the Committee, as the Committee may determine, an amount sufficient to satisfy withholding requirements, with respect to federal, state and local income and employment taxes. 13. Employment. The establishment of the Plan and awards hereunder shall not be construed as conferring on any participant any right to continued employment, and the employment of any participant may be terminated without regard to the effect which such action might have upon him or her as a participant. -6- 14. Transferability. (a) Options are not transferable other than by will, by the laws of intestate succession or pursuant to a qualified domestic relations order. No transfer shall be effective to bind the Company unless the Committee shall have been furnished with a copy of the deceased participant's will and such other evidence as the Committee may deem necessary to establish the validity of the transfer or, if applicable, a certified copy of such qualified domestic relations order. (b) Only the participant or his or her guardian, or in the event of death, his or her legal representative or beneficiary, may exercise Options or Discounted Options and receive deliveries of shares. 15. Non-Uniform Determinations. The Committee's determinations under this Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing the same, and the establishment of performance standards) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 16. Effect on Other Plans. Participation in this Plan shall not affect a participant's eligibility to participate in any other benefit or incentive plan of the Company. 17. Amendment, Modification, and Termination. The Board, at any time, may terminate and in any respect amend or modify the Plan; provided, however, that no such action by the Board, without approval of the Company's shareholders, may (i) increase the total number of shares of Common Stock available under the Plan in the aggregate (except as otherwise provided in Section 11), (ii) materially increase the benefits accruing to participants under the Plan, or (iii) materially modify the requirements as to eligibility for participation under the Plan. No amendment, modification or termination of the Plan shall in any manner adversely affect the rights of any participant under an award previously granted. Section 7 of this Plan shall not be amended more than once in any six month period, except to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended. 18. Governing Law. This Plan shall be governed by the laws of the State of Maryland. -7- EX-11.1 4 COMPUTATION OF LOSS PER COMMON SHARE NOCOPI TECHNOLOGIES, INC. COMPUTATION OF LOSS PER COMMON SHARE EXHIBIT 11.1
1996 1995 1994 ---- ---- ---- Primary Net loss applicable to common shares $ (408,300) $ (241,900) $(1,419,200) ========== ========== ========== Weighted average common shares outstanding 14,067,606 14,006,254 13,878,593 Dilutive shares - based on the treasury stock method using the average market price (1) 34,780 83,586 17,535 ---------- ---------- ---------- 14,102,386 14,089,840 13,896,128 ========== ========== ========== Per share amount applicable to net loss ($.03) ($.02) ($.10) 1996 1995 1994 ---- ---- ---- Fully diluted Net loss $ (408,300) $ (241,900) $(1,419,200) Add interest on Series B notes 66,500 74,700 98,000 Deduct ownership interest of others in loss of consolidated entity (374,800) (322,900) (218,000) ---------- ---------- ---------- Net loss applicable to common shares $(716,600) $(490,100) $(1,539,200) ========== ========== ========== Weighted average common shares outstanding 14,067,606 14,006,254 13,878,593 Dilutive shares - based on the treasury stock method using the greater of the period-end market price or the average market price (2) 1,336,461 1,411,382 934,978 ---------- ---------- ---------- 15,404,067 15,417,636 14,813,571 ========== ========== ========== Per share amount applicable to net loss ($.05) ($.03) ($.10)
(1) represents shares resulting from stock options and warrants. (2) represents shares resulting from stock options, warrants and the assumed conversion of convertible notes and Euro-Nocopi S.A. stock. EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT NOCOPI TECHNOLOGIES, INC. SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Registrant has the following subsidiaries: Name Jurisdiction Where Organized ---- ---------------------------- Euro-Nocopi S.A. (1) France Nocopi (UK) Limited (2) Great Britain (1) Registrant holds an approximate 18% interest in Euro-Nocopi S.A. together with warrants which, if exercised, would result in Registrant owning an approximate 55% equity interest. In addition, Registrant has the power to appoint a majority of the Board of Directors of Euro-Nocopi S.A. (2) Nocopi (UK) Limited is a wholly owned subsidiary of Euro-Nocopi S.A. EX-23.1 6 CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Nocopi Technologies, Inc. on Form S-8 (Files No. 33-84388 and 33-84402) of our report dated March 7, 1997, on our audits of the consolidated financial statements and financial statement schedule of Nocopi Technologies, Inc. as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania March 27, 1997 EX-27 7 FDS
5 12-MOS DEC-31-1996 DEC-31-1996 2,229,200 0 550,500 37,100 5,100 2,853,000 478,200 296,600 3,532,500 962,000 950,000 0 0 140,800 31,400 3,532,500 3,640,300 3,640,300 1,058,700 1,058,700 0 18,300 66,500 (408,300) 0 (408,300) 0 0 0 (408,300) (0.03) (0.05)
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