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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended ___December 31, 2001_______________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________
Commission file number 0-20333
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Nocopi Technologies, Inc.
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(Name of small business issuer in its charter)
Maryland 87-0406496
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
537 Apple Street, West Conshohocken, PA 19428
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (610) 834-9600
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None Not Applicable
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Securities registered under section 12(g) of the Exchange Act:
Common Stock $.01 par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No _.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $772,100.
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State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the issuer. $3,900,000 at March 31, 2002.
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 41,438,908 shares of Common
Stock, $.01 par value at March 31, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Current Report dated April 3, 2002 on Form 8-K/A as filed
with the Securities and Exchange Commission is incorporated in response to Part
II, Item 8.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. BUSINESS
Background
Nocopi Technologies, Inc. (hereinafter "Nocopi", "Registrant" or the "Company")
was organized in 1983 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 copy resistant
paper to protect corporate documents and information. More recently, Registrant
has increasingly focused on developing and marketing technologies for document
and product authentication which can reduce losses caused by fraudulent document
reproduction and by product counterfeiting and/or diversion. Registrant derives
revenues by licensing its technologies, both to end-users and to value-added
resellers, and by selling products incorporating its technologies and technical
support services.
Registrant's financial condition has been deteriorating in recent years and
continued to deteriorate during the year ended December 31, 2001. For several
years, Registrant has sought to respond to this deterioration by reducing its
general and administrative, marketing and research and development expenses.
These actions significantly reduced operating costs, but also resulted in a
decline in revenues. During 2001, Registrant sought to address its declining
revenues by hiring a new Vice President of Sales and commencing a comprehensive
review of its marketing and sales practices and a re-direction of its marketing
efforts.
The decline in Registrant's financial condition has not stabilized or been
reversed. By the end of 2001, this decline had led to a severe working capital
deficiency and adverse liquidity that threatened and continues to threaten to
require the imminent cessation of Registrant's operations. During 2001 and the
first quarter of 2002, Registrant received new capital investments totaling
$556,000 from a variety of sources including a licensee and current shareholders
and the funds invested have permitted Registrant to continue in operation in the
near term. However, Registrant believes that, to continue to conduct business
operation in the immediate future, it must obtain additional capital immediately
to fund continuing operating deficits. Additional capital is also needed to fund
programs and activities designed to increase Registrant's operating revenues to
levels that will sustain its operations.
Registrant is currently involved in a substantial legal dispute with
Euro-Nocopi, S.A., its former European licensee, the cost of which has
contributed substantially to Registrant's continuing losses, working capital
deficit and adverse liquidity. Expenses associated with this dispute are
expected to continue at current levels or increase during the balance of 2002.
It remains highly uncertain whether Registrant can achieve positive cash flow
before its adverse liquidity forces it to cease or suspend operations.
Registrant's management intends to seek additional capital and may continue to
explore possible business combination opportunities as such opportunities are
presented.
Anti-Counterfeiting and Anti-Diversion Technologies and Products
Continuing developments in copying and printing technologies have made it ever
easier to counterfeit a wide variety of documents. Lottery tickets, gift
certificates, event and transportation tickets, travelers' checks and the like
are all susceptible to counterfeiting, and Registrant believes that losses from
such counterfeiting have increased substantially with improvements in these
technologies. Product counterfeiting has long caused losses to manufacturers of
brand name products, and Registrant believes these losses have also increased as
the counterfeiting of labeling and packaging has become easier.
Registrant's document authentication technologies are useful to businesses
desiring to authenticate a wide variety of printed materials and products. These
include a technology with the ability to print invisibly on certain areas of a
document. The invisible printing can be activated or revealed by use of a
special highlighter pen when authentication is required. This technology is
marketed 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 &
1
REVEAL(R) system, which permits the invisible printing of an authenticating
symbol or code that can be revealed by rubbing a fingernail over the printed
area. These technologies provide users with the ability to authenticate
documents and detect counterfeit documents. Applications include the
authentication of documents having intrinsic value, such as checks, travelers'
checks, gift certificates and event tickets, and the authentication of product
labeling and packaging. When applied to product labels and packaging, such
technologies can be used to detect counterfeit products whose labels and
packaging would not contain the authenticating marks invisibly printed on the
packaging or labels of the legitimate product, as well as to combat product
diversion (i.e. sale of legitimate products through unauthorized distribution
channels or in unauthorized markets). Registrant's related invisible inkjet
technology permits manufacturers and distributors to track the movement of
products from production to ultimate consumption when coupled with proprietary
software. Management believes that the "track and trace" capability provided by
this technology is attractive to brand owners and marketers.
Document Security Products
Registrant continues to offer a line of burgundy colored papers that deter
photocopying and transmission by facsimile. This colored paper inhibits
photocopier reproduction at the cost of loss of easy legibility to the reader.
Registrant currently offers its copy resistant papers in three grades, each
balancing improved copy resistance against diminished legibility. Registrant
also sells user defined, pre-printed forms on which selected areas are colored
to inhibit reproduction. An example is a doctor's prescription form with the
signature area protected. This product line is called SELECTIVE NOCOPI(TM).
Registrant also offers several inks that impede photocopying by color copiers.
This technology is called COLORBLOC(R).
Since late 1999, Registrant has, in addition to marketing its own technologies
and products, acted as a distributor for the Panograph line of security paper.
This patented product, complementary to the Registrant's line of security paper,
produces a message, such as "unauthorized copy", when a copy of an original
document that was printed or typed on the Panograph paper, is reproduced on a
photocopier.
The following table illustrates the approximate percentage of Registrant's
revenues accounted for by each type of its products for each of the two last
fiscal years:
Year Ended December 31,
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Product Type 2001 2000
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Anti-Counterfeiting & Anti-Diversion Technologies and Products 83% 90%
Document Security Products 17% 10%
Marketing
The marketing approach of Registrant is to offer sufficient flexibility in its
products and technologies so as to provide cost effective solutions to a wide
variety of counterfeiting, diversion and copier fraud problems. As a technology
company, Registrant generates revenues primarily by collecting license fees from
market-specific manufacturers who incorporate Registrant's technologies into
their manufacturing process and their products. Registrant also licenses its
technologies directly to end-users.
Registrant has identified a number of major markets for its technologies and
products, including security printers, manufacturers of labels and packaging
materials and distributors of brand name products. Within each market, key
potential users have been identified, and several have been licensed. Within
North America, sales efforts include direct selling by company personnel to
create end user demand and selling through licensee sales forces and sales
agents with support from company personnel. Registrant has determined that
technical sales support by its personnel is of great importance to increasing
its licensees' sales of products incorporating Registrant's technologies and,
therefore, seeks to maintain its commitment to providing such support.
2
Since 1999, Registrant's management has refocused the Company's marketing
efforts somewhat in view of the limited resources available to the Company for
marketing and the need to improve the Registrant's cash flow. Current marketing
efforts are focused on Registrant's more mature technologies that can be
utilized by customers with relatively less development efforts.
As continued improvements in color copier and desktop publishing technology make
counterfeiting and fraud opportunities less expensive and more available,
Registrant intends, to the extent feasible, to maintain an interactive product
development and enhancement program with the combined efforts of marketing,
applications engineering and research and development. Registrant's objective is
to concentrate its efforts on developing market-ready products with the most
beneficial ratios of market potential to development time and cost.
Except in Europe, Registrant has historically sought to market its technologies
through its own employees and through independent sales representatives. In
1994, the Registrant formed a European company, Euro-Nocopi, S.A., to market the
Company's technologies in Europe under an exclusive licensing arrangement. The
Registrant owns approximately an 18% interest in Euro-Nocopi, S.A. In December
2000, Registrant terminated its licensing arrangement with Euro-Nocopi, S.A. due
to its commencement of proceedings to liquidate and dissolve and to its failure
to pay license fees and other amounts due to Registrant under the licensing
arrangement. Registrant currently is seeking to exploit the European market for
its technologies directly, through an independent sales agent, and through its
association with another licensee.
Registrant has recently taken several steps to improve the marketing of its
technologies. These include the implementation of a new web site and online
store designed both to more effectively promote the Company's products and to
provide for smoother online ordering of certain products, and the establishment
of new programs to expand its network of authorized dealers and sales agents.
Major Customers
During 2001, Registrant made sales or obtained revenues equal to 10% or more of
Registrant's 2001 total revenues from one non-affiliated customer, Ciba Vision
Corporation, which accounted for approximately 16% of 2001 revenues.
Outside Sales Agents
Registrant has engaged outside sales agents who are paid commissions on sales to
various customers of Registrant and may also receive retainers and reimbursement
for certain expenses. During 2001 the total payments to outside sales agents was
approximately $26,000 as compared to such payments of approximately $40,000 in
2000.
Manufacturing
Registrant has a small facility for the manufacture of its security inks. Except
for this facility, Registrant does not maintain manufacturing facilities.
Registrant presently subcontracts the manufacture of its applications (mainly
printing and coating) to third party manufacturers and expects to continue such
subcontracting. Because some of the processes that Nocopi uses in its
applications are based on relatively common manufacturing technologies, there
appears to be no technical or economic reason for Registrant to invest capital
in its own manufacturing facilities.
Registrant has established a quality control program that currently entails
laboratory analysis of developed technologies. When warranted, Registrant's
specially trained technicians travel to third party production facilities to
install equipment, train client staff and monitor the manufacturing process.
Patents
Nocopi has received various patents and has patents pending in the United
States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan,
France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy,
Sweden, Switzerland, Luxembourg, and Liechtenstein. Patent applications for
Registrant's technology (including improvements in the technology) have also
been filed in numerous other jurisdictions where commercial usage is foreseen,
including other countries in Europe, Japan, Australia, and New Zealand, and the
rights under such applications have been assigned to Registrant. Registrant's
patent counsel, which conducted the appropriate searches in Canada and the
United States, has reviewed the results of searches conducted in Europe and
advised management that effective patent protection for Registrant's technology
should be obtainable in all countries in which the patent applications have been
filed. There can be no assurance, however, that such protection will be
obtained.
3
When a new product or process is developed, the developer may seek to preserve
for itself the economic benefit of the product or process by applying for a
patent in each jurisdiction in which the product or process is likely to be
exploited. Generally speaking, in order for a patent to be granted, the product
or process must be new and be inventively different from what has been
previously patented or otherwise known anywhere in the world. Patents generally
have a duration of 17 years from the date of grant or 20 years from the date of
application depending on the jurisdiction concerned, after which time any person
is free to exploit the product or process covered by a patent. A person who is
the owner of a patent has, within the jurisdiction in which the patent is
granted, the exclusive right to exploit the patent either directly or through
licensees, and is entitled to prevent any person from infringing on the patent.
The granting of a patent does not prevent a third party from seeking a judicial
determination that the patent is invalid. Such challenges to the validity of a
patent are not uncommon and are occasionally successful. There can be no
assurance that a challenge will not be filed to one or more of Registrant's
patents and that, if filed, such challenge(s) will not be successful.
In the United States and Canada, the details of the product or process that is
the subject of a patent application are not publicly disclosed until a patent is
granted. However, in some other countries, patent applications are automatically
published at a specified time after filing.
As a result of the Registrant's deteriorating financial condition, the
Registrant wrote-off unamortized patent costs of $503,000 in the fourth quarter
of 1999 due to the uncertainty of their recoverability and charges current
patent costs to expense as incurred. The adverse liquidity situation has also
caused the Company, in the first quarter of 2002, to fail to make annuity
payments aggregating more than $25,000 necessary to keep in force a number of
patents, primarily in Europe, that it had previously been granted. There are
limited grace periods during which payments necessary to keep these patents in
effect, including penalties, can be made. If such payments are not made within
the applicable grace periods, (or if annuity payments becoming due during the
balance of 2002 are not made) the Company will lose the protection of the
particular patents in the relevant jurisdictions. The Company has not conducted
an analysis concerning the technologies and markets that will be affected by the
loss of these patents if such loss occurs, but intends to make the payments
necessary to avoid the losses of such patents, if funds for such purpose can be
obtained, of which there can be no assurances. Management believes that the
funds necessary to continue any existing patent protection for the Company's
technologies can be obtained only through new capital investment.
Research and Development
Nocopi has been involved in research and development since its inception.
Although Registrant's deteriorating financial condition has forced it to reduce
funding for research and development in recent years, it intends to continue its
research and development activities in three areas, to the extent feasible.
First, Registrant will seek to continue to refine its present family of
products. Second, Registrant will seek to develop specific customer
applications. Finally, Registrant will seek to expand its technology into new
areas of implementation. There can be no assurances that Registrant will be able
to obtain funds necessary to continue its research and development activities.
During the years ended December 31, 2001, and 2000, Nocopi expended
approximately $251,600 and $203,400 respectively, on research and development
activities (excluding capital expenditures related to research and development
activities, which were nominal).
4
Competition
In the area of document and product authentication and serialization, Registrant
is aware of other technologies, both covert and overt surface marking
techniques, requiring decoding implements or analytical methods to reveal the
relevant information. These technologies are offered by other companies for the
same anti-counterfeiting and anti-diversion purposes the Registrant markets its
covert technologies. These include, among others, biological DNA codes,
microtaggants, thermochronic, UV and infrared inks as well as encryption, 2D
symbology and laser engraving. Registrant believes its patented and proprietary
technologies provide a unique and cost-effective solution to the problem of
counterfeiting and gray marketing in the document and product authentication
markets it has traditionally sought to exploit. Registrant knows of one large
company that recently began to offer an expanding portfolio of product security
solutions, some of which may be competitive with Registrant's authentication
technologies. In order both to minimize the adverse effect of this new
competition and to participate in the competitor's success, it has entered into
a license agreement with this competitor so that products incorporating
Registrant's technologies can be offered as part of this portfolio.
Registrant is not aware of any competitors that market paper which functions in
the same way as Nocopi security papers, although management is aware of a
limited number of competitors which are attempting different approaches to the
same problems which Registrant's products address. Registrant is aware of a
Japanese company that has developed a film overlay that is advertised as
providing protection from photocopying. Registrant has examined the film overlay
and believes that it has a limited number of applications. Nocopi security paper
is also considerably less expensive than the film overlay.
Other indirect competitors are marketing products utilizing the hologram and
copy void technologies. The hologram, which has been incorporated into credit
cards to foil counterfeiting, is considerably more costly than Registrant's
technology. Copy void is a security device that has been developed to indicate
whether a document has been photocopied. Registrant also markets a product that
has similar features to the copy void technology.
There can be no assurance that other businesses will not enter Registrant's
markets and seek to compete with Registrant.
Euro-Nocopi, S.A.
Registrant formed Euro-Nocopi, S.A. in 1994, to market the Company's
technologies in Europe under an exclusive licensing arrangement. Registrant
currently owns approximately an 18% interest in Euro-Nocopi, S.A. During 2000,
there arose between Registrant and Euro-Nocopi, S.A. a number of areas of
conflict and dispute, leading each party to the licensing arrangement to assert
informally that the other was in breach of its obligations under that
arrangement. The parties initially sought to resolve their differences by
negotiating a transaction in which Euro-Nocopi, S.A. would have purchased from
Registrant its entire equity interest as well as the paid-up European rights to
Registrant's technologies. These negotiations terminated without agreement early
in December 2000.
Following the termination of the transaction negotiations, Registrant was
informed by Euro-Nocopi, S.A. that it had adopted resolutions to liquidate and
dissolve. In December 2000, Registrant terminated its license agreement with
Euro-Nocopi, S.A. in accordance with its terms and discontinued the provision of
support (including the sale of proprietary inks) to Euro Nocopi, S.A. and its
customers. Euro-Nocopi S.A. responded by denying that Registrant's termination
of the licensing agreement was permissible or effective, and by asserting a
claim that, as a result of alleged breaches of the licensing arrangement by
Registrant, it was entitled to a royalty-free license to exploit Registrant's
technologies in Europe.
Promptly thereafter, Euro-Nocopi, S.A. commenced an action before a court in
Paris, France in which it sought the entry of an order, in the nature of a
preliminary injunction, to compel Registrant to honor the license agreement
pending judicial or arbitral resolution of the dispute between the parties under
the license agreement. Notably, in the French litigation, Euro-Nocopi S.A. did
not seek an adjudication on the merits of the underlying dispute. In March 2001,
the Emergency Judge hearing the action issued a decision denying the relief
requested by Euro-Nocopi, S.A. and the shareholders. The decision, which does
not purport to be a final adjudication of the merits of the controversy but only
of Euro-Nocopi's request for preliminary relief, held that Euro-Nocopi S.A. was
not entitled to the requested order because Registrant had validly terminated
the licensing arrangement in mid-December, and also ordered Euro-Nocopi, S.A. to
pay into escrow the approximately $125,000 that Registrant claimed was due and
owing under the licensing arrangement.
5
In March 2001, Euro-Nocopi, S.A. commenced an arbitration proceeding before the
American Arbitration Association in New York, NY against Registrant. In this
proceeding, Euro-Nocopi, S.A. has not asserted a claim for damages but has
asserted a claim for an award in the nature of a declaratory judgment to the
effect that, because Registrant has (allegedly) breached the license agreement,
Euro-Nocopi, S.A. is entitled to a perpetual royalty-free license to exploit
Registrant's technologies in Europe. These proceedings remain pending and are
described below under the heading "Litigation."
Following its termination of the licensing arrangement with Euro-Nocopi, S.A.,
Registrant has moved to directly exploit the European marketplace for its
technologies. It intends, to the extent permitted by its financial condition, to
continue to exploit that market either directly, or by means of an arrangement
with another licensee.
Employees
At March 31, 2002, Registrant had six full-time employees. Registrant believes
that its relations with its employees are good.
Financial Information about Foreign and Domestic Operations
Certain information concerning Registrant's foreign and domestic operations is
contained in Note 9 to Registrant's Financial Statements included elsewhere in
this Annual Report on Form 10-KSB.
ITEM 2. PROPERTIES
Registrant's corporate headquarters, research and ink production facilities are
located at 537 Apple Street, West Conshohocken, Pennsylvania 19428. Its
telephone number at that location is (610) 834-9600. These premises consist of
approximately 14,800 square feet of space leased from an unaffiliated third
party under a lease expiring in February 2003. Current monthly rental under this
lease is $9,000. Registrant is also responsible for the operating costs of the
building. Registrant does not presently intend to renew this lease at its
expiration.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, Registrant is not aware of any material pending
litigation (other than ordinary routine litigation incidental to its business
where, in management's view, the amount involved is less than 10% of
Registrant's current assets) to which Registrant is or may be a party, or to
which any of its properties is or may be subject, nor is it aware of any pending
or contemplated proceedings against it by any governmental authority. Registrant
knows of no material legal proceedings pending or threatened, or judgments
entered against, any director or officer of Registrant in his capacity as such.
In December 2000, Euro-Nocopi, S.A, Registrant's former European licensee,
commenced proceedings against Registrant in a court in Paris, France. These
proceedings are described above under the heading "Euro-Nocopi, S.A." In March
2001, Euro-Nocopi, S.A. commenced arbitration proceedings against Registrant
before the American Arbitration Association in New York, NY. In these
proceedings, Euro-Nocopi, S.A. has sought an award in the nature of a
declaratory judgment to the effect that, due to alleged breaches by Registrant
of the licensing arrangement between Registrant and Euro-Nocopi. S.A., it is
entitled to a royalty-free license to exploit Registrant's technologies in
Europe. Euro-Nocopi, S.A. has not sought an award of money damages.
Euro-Nocopi's demand appears to allege that Registrant has committed numerous
breaches of the licensing arrangement between the parties, notably by failing to
disclose certain technical information, by failing to provide technical support,
services and products to Euro-Nocopi, S.A., by entering into a licensing
agreement with a third party allegedly violating the exclusivity provisions of
the Euro-Nocopi, S.A. licensing arrangement and by terminating the license
agreement in December 2000.
6
Registrant has filed a response to Euro-Nocopi's demand denying that Euro-Nocopi
is entitled to the relief requested and has filed a counter-demand contending
that it has validly terminated the Euro-Nocopi licensing arrangement and seeking
to recover in excess of $125,000 owed to it by Euro-Nocopi, S.A. under the
terminated licensing arrangement. To the extent permitted by its financial
condition, registrant intends to defend itself against Euro-Nocopi's claims and
to assert its counterclaim vigorously. The arbitration currently is scheduled to
be heard by the arbitrators late in 2002.
In March 2001 certain shareholders of Euro-Nocopi, S.A. filed suit in a court in
Paris, France against certain current and former officers and directors of
Registrant, and against a licensee of Registrant. Registrant is not named as a
defendant in the suit. The suit seeks damages in excess of $7 million from the
defendants for various alleged acts of oppression, self-dealing and fraud in
connection with the organization and capitalization of Euro-Nocopi, S.A., the
management of that company and Registrant's management of its relationship with
that company. The defendants in this litigation have denied any liability to the
plaintiffs and have claimed indemnification from the Company in connection with
the lawsuit, and Registrant has advanced certain funds toward payment of the
costs of defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2001, no matters
were submitted to a vote of Registrant's security holders.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the over-the-counter market and quoted on
the NASD over-the-counter Bulletin Board under the symbol "NNUP". The table
below presents the range of high and low bid quotations of Registrant's Common
Stock by calendar quarter for the last two full fiscal years and for the first
quarter of 2002, as reported by the National Quotation Bureau, Inc. The
quotations represent prices between dealers and do not include retail markup,
markdown, or commissions; hence, such quotations do not represent actual
transactions.
High Bid Low Bid
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January 1, 2000 to March 31, 2000 $.35 $.16
April 1, 2000 to June 30, 2000 $.26 $.15
July 1, 2000 to September 30, 2000 $.22 $.14
October 1, 2000 to December 31, 2000 $.17 $.06
January 1, 2001 to March 31, 2001 $.20 $.11
April 1, 2001 to June 30, 2001 $.15 $.08
July 1, 2001 to September 30, 2001 $.15 $.06
October 1, 2001 to December 31, 2001 $.14 $.05
January 1, 2002 to March 31, 2002 $.16 $.10
As of March 31, 2002, 41,438,908 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 41,438,908 shares of Common Stock which are
outstanding, Registrant, at March 31, 2002, has reserved for issuance 14,989,278
shares of its Common Stock which underlie outstanding options and warrants to
purchase Common Stock of the Registrant.
Registrant has paid no cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Forward-Looking Information
The information in this Management's Discussion and Analysis of Results of
Operations and Financial Condition contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
or industry results to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
7
statements. Such factors include those described in "Factors That May Affect
Future Growth and Stock Price." The forward-looking statements included in this
report may prove to be inaccurate. In light of the significant uncertainties
inherent in these forward-looking statements, you should not consider this
information to be a guarantee by us or any other person that our objectives and
plans will be achieved. The Company does not undertake to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results (expressed or implied) will not be realized.
Results of Operations
The Company's revenues are derived from royalties paid by licensees of the
Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, such as pressure sensitive labels. Royalties consist of guaranteed
minimum royalties payable by the Company's licensees in certain cases and
additional royalties which typically vary with the licensee's sales or
production of products incorporating the licensed technology. Service fee and
sales revenues vary directly with the number of units of service or product
provided.
Because the Company has a relatively high level of fixed costs, its operating
results are substantially dependent on revenue levels. Because revenues derived
from licenses and royalties carry a much higher gross profit margin than other
revenues, operating results are also significantly affected by changes in
revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of relatively substantial customers rather than a
large number of small customers. Accordingly, changes in the revenue received
from a significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, certain
customers have, from time to time, sought to renegotiate certain provisions of
their license agreements and, when the Company agrees to revise terms, revenues
from the customer may be affected.
Revenues for 2001 were $772,100, a decline of 37% from $1,230,700 in 2000.
Licenses, royalties and fees declined in 2001 by 41% to $498,300 from $838,500
in 2000. The reduction in licenses, royalties and fees is due primarily to the
termination or non-renewal of license arrangements with five licensees,
including the Company's former exclusive European licensee, during 2000 and
2001. Product and other sales were $273,800 in 2001 compared to $392,200 in
2000. In 2000, the Company sold and installed an ink-jet printing system to a
new licensee. The $118,400 (30%) decline in product sales is attributable to the
non-recurrence of this one-time sale offset in part by increased sales of the
Company's security papers and inks in 2001.
Gross profit declined to $405,900 or 53% of revenues in 2001 from $620,800 or
50% of revenues in 2000. The decline in gross profit, expressed in absolute
dollars, is due primarily to the substantial reduction in revenues derived from
licenses, royalties and fees. Certain components of cost of sales related to
licenses, royalties and fees, such as production labor and rent, are
substantially fixed. The variable component of these costs of sales, primarily
ink and chemicals, is a small percentage of the related revenues. As these
revenues decline, the gross profit is negatively impacted, both in absolute
dollars and as a percentage of revenues. The gross profit related to product and
other sales increased in absolute dollars in 2001 compared to 2000 as a result
of changes in the mix of products sold.
Research and development expenses increased to $251,600 in 2001 from $203,400 in
2000. The increase relates primarily to higher compensation expense, as the
addition of an applications chemist was required in the second quarter of 2001
to support the Company's existing technologies and new product developments.
Sales and marketing expenses increased to $251,700 in 2001 from $192,000 in
2000. The increase reflects the hiring of a sales executive in the fourth
quarter of 2001, fees paid to sales agents and consultants and increased travel
during the first half of 2001 related to the Company's initiative to market its
technologies directly to European users.
8
General and administrative expenses increased to $690,300 in 2000 from $432,800
in 2000. The increase of $257,500 results principally from higher professional
fees incurred in 2001 compared to 2000 due in part to litigation and arbitration
proceedings with the Company's former European exclusive licensee. The Company's
professional expenses were $386,500 or 50% of revenues, in 2001 compared to
$189,500, or 15% of revenues, in 2000.
Other income (expense) includes interest income on funds invested. The decline
in interest income to $3,400 in 2001 compared to $18,600 in 2000 resulted from
lower levels of cash invested.
Equity in net income of unconsolidated affiliate represented the proportionate
share in the net income or loss of Euro-Nocopi attributable to the Company's
approximate 18% ownership share of Euro-Nocopi. For the first nine months of
2000, during which the Company accounted for its investment in Euro-Nocopi on
the equity method, the Company's proportionate share in Euro-Nocopi's net income
was $35,000. The Company changed its method of accounting for its investment in
Euro-Nocopi to the cost method effective October 1, 2000 and recorded the
carrying value at that date as the cost of its investment. During the fourth
quarter of 2000, the Company wrote down its investment in Euro-Nocopi by
$110,000 due to the uncertainty of its recoverability and recorded a charge of
$68,600 resulting from the transfer of foreign currency translation adjustments
to net income.
The net loss increased to $828,600 in 2001 from $382,700 in 2000. The $445,900
increase in the net loss in 2001 from the prior year resulted primarily from
reductions in revenue and gross profit as the Company's business has continued
to contract, the loss of licensing revenues from the Company's former European
exclusive licensee, and higher audit expenses and increased legal fees incurred
in litigation and arbitration proceedings with this former licensee and factors
related to the Company's adverse liquidity situation.
Plan of Operation, Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $100 at December 31, 2001
from $186,900 at December 31, 2000. During 2001, the Company sold 5,304,909
shares of its common stock to a licensee and both existing and new individual
investors for $431,000 ($417,000 net of expenses) and used such amounts to fund
operations over the year then ended.
The loss of a number of customers during the past three years and the
termination of the Company's exclusive European licensee in 2000 has had a
material adverse effect on the Company's results of operations and upon its
liquidity and capital resources. The Company believes that the conditions
arising from these circumstances will make it impossible for the Company to
continue in operation as a going concern unless it receives substantial new
capital investment in the immediate future. During 2001 and early 2002, the
receipt of funds in conjunction with the sale of approximately 23% of the
Company's common stock has permitted the Company to continue in operation. In
addition, the Company's increasing illiquidity has forced it to follow a policy
of deferring payment to its vendors, even where such deferral has not been
agreed to by the vendors. As a result, the Company's trade payables have
increased to $237,400 at December 31, 2001 from $153,000 at December 31, 2000.
Accordingly, the Company is currently in default of the payment terms extended
by certain of its professional service providers and other vendors. The adverse
liquidity situation has also caused the Company, in the first quarter of 2002,
to defer making annuity payments on a number of patents, primarily in Europe,
that it had previously been granted. If payment, including penalties, is not
made within a specific grace period, the Company will lose the protection of the
particular patent in the relevant jurisdiction.
Management of the Company believes that, to survive, it must obtain additional
capital immediately to reduce its substantial obligations, fund continuing
operating deficits and fund investment needed to increase its operating revenues
to levels that will sustain its operations. If the Company fails to
significantly increase its cash balances through further equity investment, for
which it has no commitments and only very limited prospects, it will be forced
to cease operations due to a lack of cash early in the second quarter of 2002.
There can be no assurances that the Company will be able to secure additional
equity investment before it is forced to cease operations.
The Company, in response to the ongoing adverse liquidity situation, has
maintained a cost reduction program including staff reductions, where possible,
and curtailment of discretionary research and development and sales and
marketing expenses; however, during 2001, replacement positions consisting of a
sales executive and an applications chemist were filled.
9
The Company does not currently plan any significant capital investment over the
next twelve months.
Factors That May Affect Future Growth and Stock Price (Risk Factors)
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:
Inability to Continue in Operation Without Immediate New Equity Investment. The
Company had a negative working capital of $499,900 at December 31, 2001 and
experienced negative cash flow from operations of $603,800 in the year ended
December 31, 2001. Management does not believe the Company can significantly
improve its negative cash flow in the near future. Since year-end 2001, the
Company continued to experience negative cash flow and, at the present time is
in need of immediate equity or other investment; otherwise, it will be forced to
cease operations due to a lack of cash early in the second quarter of 2002. It
is uncertain whether the Company's assets will retain any value if the Company
ceases operations. There are no assurances that the Company will be able to
secure additional equity investment before it is forced to cease operations.
Continuing Euro-Nocopi Litigation. The Company is currently expending sums
representing a substantial portion of it revenues for professional fees and
costs relating to legal disputes between the Company and its former affiliate,
Euro-Nocopi, S.A. as described under the heading "Litigation." Management
believes that successful resolution of the disputes between it and Euro-Nocopi
is necessary for the Company to be able to license its technologies to European
users and that the ability to license European users (including as part of
worldwide license arrangements) is necessary for the viability of its business.
The Company cannot continue to pay the costs of this dispute unless it can
obtain substantial new capital investment, of which there can be no assurances,
and the Company will not prevail in this dispute if it cannot continue to pay
such costs. Even if the Company is able to continue its dispute with Euro-Nocopi
through resolution, there can be no assurance that the resolution will be a
successful one for the Company.
Possible Inability to Develop New Business. Even if the Company is able to raise
cash through additional equity investment or otherwise, it must quickly improve
its operating cash flow. Because the Company has already significantly reduced
its operating expenses, Management believes that any significant improvement in
the Company's cash flow must result from increases in its revenues from
traditional sources and from new revenue sources. The Company's ability to
develop new revenues may depend on the extent of both its marketing activities
and its research and development activities. While the Company has, since
mid-September of 2001, hired a new sales executive, initiated a dealer sales
program and completed a licensing agreement for the use of its technologies in
the gaming industry. There are no assurances that the resources the Company can
devote to marketing and to research and development will be sufficient to
increase the Company's revenues to levels resulting in positive cash flow.
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 of 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.
10
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, the Company receives limited publicity regarding its
business achievements and prospects, nor do securities analysts and traders
extensively follow it. The market price may be affected by announcements of new
relationships or modifications to existing relationships. The stock prices of
many developing public companies, particularly those with small capitalizations,
have experienced wide fluctuations not necessarily related to operating
performance. Such fluctuations may adversely affect the market price of the
Company's common stock.
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentiality, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. In
addition, the Company's ability to enforce its intellectual property rights
through appropriate legal action has been and will continue to be limited by the
Company's adverse liquidity. There can be no assurances that the Company will be
able to protect the basis of its technologies from discovery by unauthorized
third parties or to preclude unauthorized persons from conducting activities
that infringe on the Company's rights. The Company's adverse liquidity situation
has also impacted its ability to obtain patent protection on its intellectual
property and to maintain protection on previously issued patents. There can be
no assurances that the Company will be able to continue to prosecute new patents
and maintain issued patents. In all events, the Company's customer and licensee
relationships could be adversely affected.
Recently Issued Accounting Standards
The following recently issued accounting pronouncements are currently not
applicable to the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("Statement 141"), effective for all business
combinations initiated after June 30, 2001. Statement 141 requires all business
combinations to be accounted for under the purchase method. Statement 141
supersedes APB Opinion No. 16, "Business Combinations," and Statement No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises."
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"), effective for fiscal
years beginning after December 15, 2001. Statement 142 addresses the financial
accounting and reporting for acquired goodwill and other intangible assets.
Under the new rules, the Company is no longer required to amortize goodwill and
other intangible assets with indefinite lives, but will be subject to periodic
testing for impairment. Statement 142 supersedes APB Opinion No. 17, "Intangible
Assets."
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Obligations Associated with the Retirement of Long-Lived Assets"
("Statement 143"), effective in fiscal years beginning after June 15, 2002, with
early adoption permitted. Statement 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation and its associated
asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement
144"), effective in fiscal years beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied prospectively. Statement
144 establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. Statement 144 superseded
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
11
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of Registrant meeting the requirements of Regulation S-B
(except section 228.310 and Article 11 of Regulation S-X thereof) are included
herein beginning at page F-1 of this Annual Report on Form 10-KSB.
For information required with respect to this Item 7, see "Financial Statements
and Schedules on pages F-1 through F-14 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 23, 2002, Registrant engaged the accounting firm Cogen Sklar, LLP to
audit Registrant's financial statements for the year ended December 31, 2001.
The engagement of BDO Seidman, LLP which had been engaged by Registrant to audit
its financial statements for prior years was not renewed. Such firm had not
submitted a resignation, nor had it formally declined to stand for re-election
as Registrant's auditor. This event is more fully described in Registrant's
Current Reports on Form 8-K and 8-K/A dated March 23, 2002 and April 3, 2002,
respectively, which are incorporated herein by reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and officers of the Company, their ages, present positions with
the Company, and a summary of their business experience are set forth below.
Michael A. Feinstein, M.D., 55, Chairman of the Board of Directors since
December 1999 and Nocopi's acting Chief Executive Officer since February 2000,
has been a practicing physician in Philadelphia for more than twenty years,
serving for more than ten years as the President of a group medical practice
including three physicians. He is a Fellow of the American College of Obstetrics
and Gynecology and of the American Board of Obstetrics and Gynecology. He
received his B.A. from LaSalle College and his M.D. from Jefferson Medical
College. He has been an active private investor for more than thirty years,
during which he has consulted with the management of the companies in which he
invested on a number of occasions.
Franco Harris, 52, has been a director since February 2000. Since 1990, Mr.
Harris has served as President of Superbakers, Inc., a Pittsburgh, Pennsylvania
maker of vitamin-fortified donuts and other nutritious bakery goods. Since 1996,
Mr. Harris has also served as Chief Executive Officer of Parks Sausage
Corporation, a manufacturer of sausages and other meat, beef and chicken
products. He is a graduate of the Pennsylvania State University.
Stanley G. Hart, 41, was elected a director in March 2001. He has been President
of Westvaco Brand Security, Inc., a wholly owned subsidiary of Westvaco
Corporation, since its formation in September 2000. Prior thereto, Mr. Hart
served Westvaco corporation (parent company of Westvaco Brand Security, Inc.)
for more than ten years in various capacities, most recently as General Manager
and Director of Westvaco's subsidiaries in Hong Kong, Shanghai and Taipei.
Richard Levitt, 44, a director since December 1999, has been engaged in the
network services segment of the computer industry since 1988. In 1995, he
participated in the founding of XiTech Corporation, a Pittsburgh,
Pennsylvania-based provider of computing and computer networking hardware and
network design and implementation services which in five years has grown to over
100 employees and over $40 million in annual sales. Since founding XiTech, he
has served as one of its corporate principals as a Network Consultant and as the
Manager of its Network Sales force. In these capacities, Mr. Levitt played a
crucial role in the strategic and financial planning for XiTech, as well as the
development of new accounts. Before joining XiTech, Mr. Levitt served as a
network sales executive for Digital Equipment Corporation from 1988 to 1994 and
as a network consultant for TriLogic Corporation during 1994 and 1995. Mr.
Levitt holds a B.S. in Marketing from Kent State University.
12
Waldemar Maya, Jr., 51, a director since December 1999, currently is a private
business consultant. He served from 1999 to 2001 as Director of Finance,
Airplane Services for the Boeing Company. Before joining Boeing, Mr. Maya had
served from 1994 to 1998 as the Executive Vice President, Treasurer and
Secretary of N.J. Malin & Associates, a Texas-based wholesaler of material
handling equipment.
John F. O'Brien III, 58, a director since June 2000, has been a partner in the
law firm of O'Brien & Ryan for more than five years. Mr. O'Brien served as Chief
of Narcotics and Drug Investigations, U. S. Department of Justice, Organized
Crime Strike Force from 1967 to 1980 and as the Congressional Liaison to the
U.S. Senate and House of Representatives from 1978 to 1980. He continues to
serve as counsel to the Federal Law Enforcement Officers Association, as he has
done since 1980. Mr. O'Brien is a member of the ABA Committee on Law and
Medicine and is an expert on Civil and Medical Litigation and Commercial
Contract Litigation.
Rudolph A. Lutterschmidt, 55, has been Vice President and Chief Financial
Officer of the Company for more than five years, serving in this capacity on a
part-time basis since January 2000. Since January 2002, Mr. Lutterschmidt has
been employed by CitySort, LP, a pre-sort mailing business as its Chief
Financial Officer. From January 2000 through November 2001, he had been employed
as a management consultant by Smart & Associates, LLP, an accounting and
professional services firm. He is a member of Financial Executives
International, the Institute of Management Accountants and is a Certified
Management Accountant.
The terms of the current directors will expire at the 2002 annual meeting of
stockholders of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires persons who become directors and/or
executive officers of a public company (such as Nocopi) to file reports with the
SEC regarding their beneficial ownership of the company's securities. A report
must be filed shortly after a person becomes an executive officer or director,
and shortly after an executive officer or director experiences a change in his
beneficial ownership of his company's securities. Except as set forth below, to
the Company's knowledge, all of its executive officers and directors are current
in their filing obligations under Section 16 of the Exchange Act. During the
fourth quarter of 2001, Dr. Feinstein purchased 416,667 shares of common stock
from the Company and each of Mr. Harris and Mr. Levitt purchased 200,000 shares
of common stock from the Company in separate, private transactions. The Company
is not aware that any of them has yet filed a report of the changes in their
respective beneficial ownership resulting from these transactions.
ITEM 10. EXECUTIVE COMPENSATION
During 2001, the Company did not pay any compensation to Dr. Feinstein, who has
served since February 2000 as the Company's acting Chief Executive Officer, and
no other executive officer of the Company received compensation equal to or
greater than $100,000. The Company does reimburse the expenses incurred by its
officers in the performance of their duties.
Director Compensation
Directors have not been paid any fees for their services as such during the year
ended December 31, 2001. All directors have been and will be reimbursed for
reasonable expenses incurred in connection with attendance at Board of Directors
meetings or other activities undertaken by them on behalf of the Company.
13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2002, the stock ownership of
each director and Named Executive (as set forth under the heading "Executive
Compensation") individually, and of all directors and executive officers of the
Company as a group.
Common Stock
--------------------------------
Number
Of Shares
Beneficially Percentage of
Name of Beneficial Owner Owned Class (1)
------------------------ ------------ -------------
Michael A Feinstein, M.D. (2)....................................... 1,514,667 3.7%
Franco Harris (3)................................................... 245,000 *
Stanley G. Hart (4)................................................. 0 *
Richard Levitt (5).................................................. 285,800 *
Waldemar Maya, Jr. ................................................. 0 *
John F. O'Brien III................................................. 0 *
All Executive Officers and Directors as a Group (7 individuals)..... 2,046,067 4.9%
----------------
* Less than 1.0%.
(1) Where the Number of Shares Beneficially Owned (reported in the
preceding column) includes shares which may be purchased upon the
exercise of outstanding stock options which are or within sixty days
will become exercisable ("presently exercisable options") the
percentage of class reported in this column has been calculated
assuming the exercise of such presently exercisable options.
(2) Includes 75,500 shares held by a pension plan of which Dr. Feinstein is
a trustee.
(3) Includes 25,000 shares held by a pension plan of which Mr. Harris is a
trustee.
(4) Does not include 3,917,030 shares of Common Stock owned by Westvaco
Brand Security, Inc., of which Mr. Hart is President
(5) Includes 400 shares owned by Mr. Levitt's wife.
Except as stated herein, there are no arrangements known to the Company which
may result in a change in control of the Company and each stockholder has sole
voting and investment power with respect to the Company's common shares included
in the above table.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Rudolph A. Lutterschmidt, an officer, was employed by Smart & Associates, LLP,
an accounting and professional services firm through November 2001. Smart &
Associates, LLP provided financial consulting services to the Company during the
fiscal year ended December 31, 2001. Fees for 2001 services were less than
$60,000.
14
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Financial Statements are filed as part of this Annual Report
on Form 10-KSB
PAGE
----
Reports of Independent Certified Public Accountants F-1 and F-2
Balance Sheet as of December 31, 2001 F-3
Statements of Operations for the Years ended
December 31, 2001 and 2000 F-4
Statements of Stockholders' Equity (Deficiency) for
the Years ended December 31, 2001 and 2000 F-5
Statements of Cash Flows for the Years ended
December 31, 2001 and 2000 F-6
Notes to Financial Statements F-7 to F-14
(b) The Exhibit Index begins on Page 17 of this Annual Report on Form 10-KSB.
(c) The Registrant filed the following Current Reports on Form 8-K during the
last quarter of the fiscal year covered by this Annual Report on Form
10-KSB.
October 9, 2001 - Press Release dated October 9, 2001
October 30, 2001 - Press Release dated October 30, 2001
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: April 15, 2002 By: /s/ Michael A. Feinstein, M.D.
----------------------------------
Michael A. Feinstein, M.D.
Chairman of the Board
Dated: April 15, 2002 By: /s/ Rudolph A. Lutterschmidt
--------------------------------
Rudolph A. Lutterschmidt
Vice President, Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April 15, 2002 /s/ Michael A. Feinstein, M.D.
------------------------------
Michael A. Feinstein, M.D., Chairman of
the Board
Date: April 15, 2002 /s/ Franco Harris
-----------------
Franco Harris, Director
Date: April 15, 2002 /s/ Stanley G. Hart
-------------------
Stanley G. Hart, Director
Date: April 15, 2002 /s/ Richard Levitt.
-------------------
Richard Levitt, Director
Date: April 15, 2002 /s/ Waldemar Maya, Jr.
----------------------
Waldemar Maya, Jr., Director
Date: April 15, 2002 ______________________
John F. O'Brien III, Director
16
The following Exhibits are filed as part of this Annual Report on Form 10-KSB:
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
3.3 Articles of Amendment to Articles of Incorporation (3)
3.4 Article of Amendment to Articles of Incorporation (5)
3.5 Amendments to Bylaws (6)
10.1 Summary Plan Description for Nocopi Technologies, Inc. 401(k)
Profit Sharing Plan (2)
10.2 Nocopi Technologies, Inc. 1996 Stock Option Plan (3)
10.3 Employment Agreement between Registrant and Dr. A. Gundjian (4)
10.4 Form of Common Stock Purchase Warrant (4)
10.5 Lease Agreement dated February 17, 1998 relating to premises at
537 Apple Street, West Conshohocken, PA 19428 (4)
10.6 Nocopi Technologies, Inc. 1999 Stock Option Plan (5)
10.7 Amended Summary Plan Description for Nocopi Technologies, Inc.
401(k) Profit Sharing Plan (5)
10.8 Director Indemnification Agreement (6)
10.9 Officer Indemnification Agreement (6)
10.10 License Agreement with Westvaco Brand Security, Inc. (7)
10.11 Amendment to Westvaco License Agreement (7)
10.12 Amendment (No. 2) to Westvaco License Agreement (7)
10.13 Stock Purchase Agreement with Westvaco Brand Security, Inc. (7)
10.14 Registration Rights Agreement with Westvaco Brand Security,
Inc. (7)
10.15 Collateral Assignment of Patent Rights to Westvaco Brand
Security, Inc. (7)
10.16 Escrow Agreement with Westvaco Brand Security, Inc. (7)
16.1 Letter dated March 27, 2002 from BDO Seidman, LLP re: Change in
Certifying Accountant (8)
17
(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, 1996
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the Year Ended December 31, 1997
(5) Incorporated by reference to Registrant's Annual Report on Form 10-KSB
for the Year Ended December 31, 1998
(6) Incorporated by reference to Registrant's Quarterly Report on Form
10-QSB for the Three Months Ended September 30, 1999
(7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB
for the Year Ended December 31, 2000
(8) Incorporated by reference to Registrant's Current Report on Form 8-K/A
dated April 3, 2002
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Nocopi Technologies, Inc.
West Conshohocken, Pennsylvania
We have audited the accompanying balance sheet of Nocopi Technologies, Inc. as
of December 31, 2001 and the related statements of operations, stockholders'
equity (deficiency), and cash flows for the year then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nocopi Technologies, Inc. at
December 31, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 10. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COGEN SKLAR, LLP
Bala Cynwyd, Pennsylvania
March 27, 2002
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Nocopi Technologies, Inc.
West Conshohocken, Pennsylvania
We have audited the accompanying statements of operations, stockholders' equity
(deficiency), and cash flows of Nocopi Technologies, Inc. for the year ended
December 31, 2000. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Nocopi
Technologies, Inc. for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 10. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 30, 2001
F-2
Nocopi Technologies, Inc.
Balance Sheet
December 31
2001
------------
Assets
Current assets
Cash and cash equivalents $ 100
Accounts receivable less $21,200 allowance
for doubtful accounts 39,600
Prepaid and other 22,700
------------
Total current assets 62,400
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 476,200
------------
515,700
Less: accumulated depreciation and amortization 483,000
------------
32,700
Other assets
Investment in unconsolidated affiliate - net 110,600
------------
$ 205,700
============
Liabilities and Stockholders' Deficiency
Current liabilities
Accounts payable $ 237,400
Accrued expenses 261,900
Deferred revenue 63,000
------------
Total current liabilities 562,300
Commitments and contingencies
Stockholders' deficiency
Series A preferred stock $1.00 par value
Authorized - 300,000 shares
Issued and outstanding - none
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 39,122,241 shares 391,200
Paid-in capital 10,798,600
Accumulated deficit (11,546,400)
------------
(356,600)
------------
$ 205,700
============
The accompanying notes are an integral part of these financial statements.
F-3
Nocopi Technologies, Inc.
Statements of Operations
Years ended December 31
2001 2000
---- ----
Revenues
Licenses, royalties and fees $498,300 $838,500
Product and other sales 273,800 392,200
---------- ----------
772,100 1,230,700
---------- ----------
Cost of sales
Licenses, royalties and fees 215,800 299,200
Product and other sales 150,400 310,700
---------- ----------
366,200 609,900
---------- ----------
Gross profit 405,900 620,800
---------- ----------
Operating expenses
Research and development 251,600 203,400
Sales and marketing 251,700 192,000
General and administrative 690,300 432,800
Related party expenses 42,500 43,800
---------- ----------
1,236,100 872,000
---------- ----------
Loss from operations (830,200) (251,200)
---------- ----------
Other income (expenses)
Interest income 3,400 18,600
Interest and bank charges (1,800) (6,500)
Impairment of investment in unconsolidated affiliate (178,600)
Equity in net income of unconsolidated affiliate 35,000
---------- ----------
1,600 (131,500)
---------- ----------
Net loss ($828,600) ($382,700)
========== ==========
Basic and diluted loss per common share ($.02) ($.01)
Weighted average common shares outstanding 37,386,574 33,817,332
The accompanying notes are an integral part of these financial statements.
F-4
Nocopi Technologies, Inc.
Statements of Stockholders' Equity (Deficiency)
Accumulated
Other
Common stock Paid-in Comprehensive Accumulated Comprehensive
Shares Amount Capital Income (Loss) Deficit Loss
---------- -------- ----------- ------------- ------------- --------------
Balance - January 1, 2000 33,817,332 $338,200 $10,434,600 ($39,500) ($10,335,100)
Net loss (382,700) ($382,700)
Translation adjustment 39,500 39,500
----------- -------- ----------- -------- ------------ ----------
Balance - December 31, 2000 33,817,332 338,200 10,434,600 - (10,717,800) ($343,200)
==========
Sales of common stock, net of
expenses 5,304,909 53,000 364,000
Net loss (828,600) ($828,600)
----------- -------- ----------- -------- ------------ ----------
Balance - December 31, 2001 39,122,241 $391,200 $10,798,600 $ - ($11,546,400) ($828,600)
=========== ======== =========== ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
Nocopi Technologies, Inc.
Statements of Cash Flows
Years ended December 31
2001 2000
---- ----
Operating Activities
Net loss ($828,600) ($382,700)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation 23,500 36,400
Allowance for doubtful accounts, net (1,300) (25,000)
Equity in net income of unconsolidated affiliate (35,000)
Impairment of investment in unconsolidated affiliate 178,600
-------- --------
(806,400) (227,700)
Decrease in assets
Accounts receivable 33,700 61,600
Prepaid and other 16,400 74,800
Increase (decrease) in liabilities
Accounts payable and accrued expenses 133,600 (275,400)
Deferred revenue 18,900 (137,800)
-------- --------
202,600 (276,800)
-------- --------
Cash used in operating activities (603,800) (504,500)
Investing Activities
Additions to fixed assets (14,700)
Advances from affiliate, net 81,100
-------- --------
Cash provided by investing activities 66,400
Financing Activities
Issuance of common stock, net 417,000
Repayment of notes (125,000)
-------- --------
Cash provided by (used in) financing activities 417,000 (125,000)
-------- --------
Decrease in cash and cash equivalents (186,800) (563,100)
Cash and cash equivalents
Beginning of year 186,900 750,000
-------- --------
End of year $100 $186,900
======== ========
Supplemental cash flow data
Interest paid $5,600
The accompanying notes are an integral part of these financial statements.
F-6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000
1. Organization of the Company
Nocopi Technologies, Inc. (the Company) is organized under the laws of the
State of Maryland. Its main business activities are the development and
distribution of document security products and the licensing of its
patented authentication technologies in the United States and foreign
countries. The Company operates in one principal industry segment.
2. Significant Accounting Policies
Estimates - The preparation of the financial statements in conformity with
Accounting Principles Generally Accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities
at the dates of financial statements and the reported amounts of revenues
and expenses during the reported periods. Actual results could differ from
those estimates.
Cash and cash equivalents - Cash equivalents consist principally of time
deposits and highly liquid investments with an original maturity of three
months or less placed with major banks and financial institutions. Cash
equivalents are carried at the lower of cost, plus accrued interest, or
market value and are held in money market accounts at a local bank. At
December 31, 2001, Nocopi's investments in money market accounts amounted
to $51,600. As a result of a book overdraft of $55,100 in the Company's
operating account maintained at the same bank, the net overdraft of $3,500
is included in Accounts Payable.
Fixed assets are carried at cost less accumulated depreciation and
amortization. Furniture, fixtures and equipment are generally depreciated
on the straight-line method over their estimated service lives. Leasehold
improvements are amortized on a straight-line basis over the shorter of
five years or the term of the lease. Major renovations and betterments are
capitalized. Maintenance, repairs and minor items are expensed as
incurred. Upon disposal, assets and related depreciation are removed from
the accounts and the net amount, less proceeds from disposal, is charged
or credited to income.
Investment in Affiliate - The Company's investment, approximately 18%, in
Euro-Nocopi, S.A. (Euro) was accounted for under the equity method through
September 30, 2000 due to the technical dependence of Euro on the Company.
The Company changed its method of accounting for its investment in Euro to
the cost method effective October 1, 2000 and recorded the carrying value
at that date as the cost of its investment. During the fourth quarter of
2000, the Company wrote down its investment in Euro by $110,000 due to the
uncertainty of its recoverability. (See note 8).
Patent costs are charged to expense as incurred due to the uncertainty of
their recoverability as a result of the Company's adverse liquidity
situation.
F-7
Revenues, consisting primarily of license fees and royalties, are recorded
as earned over the license term. Product sales are recognized upon
shipment of products.
Income taxes - Deferred income taxes are provided for all temporary
differences and net operating loss and tax credit carryforwards. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Fair value - The carrying amounts reflected in the balance sheets for cash,
cash equivalents, accounts receivable, and accounts payable approximate
fair value due to the short maturities of these instruments. The fair
values represent estimates of possible value that may not be realized in
the future.
Loss per share - the Company follows Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" resulting in the presentation of
basic and diluted earnings per share. Because the Company reported a net
loss in 2001 and 2000, common stock equivalents, including stock options,
warrants and convertible notes were anti-dilutive.
Comprehensive income (loss) - the Company follows Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", and,
accordingly, reports all components of comprehensive income (loss) in the
accompanying statements of stockholders' equity.
Recently Issued Accounting Standards
The following recently issued accounting pronouncements are currently not
applicable to the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("Statement 141"), effective for all business
combinations initiated after June 30, 2001. Statement 141 requires all
business combinations to be accounted for under the purchase method.
Statement 141 supersedes APB Opinion No. 16, "Business Combinations," and
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises."
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"), effective in
fiscal years beginning after December 15, 2001. Statement 142 addresses the
financial accounting and reporting for acquired goodwill and other
intangible assets. Under the new rules, the Company is no longer required
to amortize goodwill and other intangible assets with indefinite lives, but
will be subject to periodic testing for impairment. Statement 142
supersedes APB Opinion No. 17, "Intangible Assets."
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("Statement 143"), effective in fiscal years beginning
after June 15, 2002, with early adoption permitted. Statement 143
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets.
F-8
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"), effective in fiscal years beginning after December 15,
2001, with early adoption permitted, and in general are to be applied
prospectively. Statement 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued
operations. Statement 144 superseded Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
3. Stockholders' Equity
In March 2001, the Company received a $325,000 ($311,000 net of expenses)
investment from a licensee in return for 3,917,030 shares of its common
stock constituting approximately 10% of its then outstanding common stock.
During the second half of 2001, the Company sold 1,387,879 shares of its
common stock to investors, including affiliates of the Company for
$106,000. During January 2002, the Company sold 2,316,667 shares of its
common stock to investors, including affiliates of the Company, for
$139,000.
At December 31, 2001, the Company had 11,892,849 warrants, issued in 1997,
outstanding. Each warrant was exercisable for the purchase of one share of
the Company's common stock at a price of $.31. The warrants will expire
during the fourth quarter of 2002 unless extended by the Board of
Directors.
4. Income Taxes
At December 31, 2001, the Company had net operating loss carryforwards
("NOL's") approximating $11,100,000. These operating losses are available
to offset future taxable income through the year 2021. As a result of the
sale of the Company's common stock in an equity offering in late 1997 and
the issuance of additional shares, the amount of the NOL's carryforwards
may be limited. Additionally, the utilization of these NOL's if available,
to reduce the future income taxes will depend on the generation of
sufficient taxable income prior to their expiration. The Company has
established a 100% valuation allowance of approximately $4,500,000 at
December 31, 2001 for the deferred tax assets due to the uncertainty of
their realization.
5. Related Party Transactions
Expenses aggregating $42,500 and $43,800 in 2001 and 2000, respectively,
were incurred by the Company for consulting services provided by a firm
employing an officer of the Company.
6. Commitments and Contingencies
The Company conducts its operations in leased facilities and leases
equipment under non-cancelable operating leases expiring at various dates
to 2003.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 2001 are:
$112,000 - 2002; and $18,400 - 2003.
Total rental expense under operating leases was $103,600 and $102,600 in
2001 and 2000, respectively.
F-9
The Company has a consulting agreement with a former executive officer and
director, the term of which expires at December 31, 2002. Future minimum
compensation payments under this agreement at December 31, 2001 are
$62,500 in 2002. The Board of Directors of the Company in mid-2000
suspended cash payments to the consultant as a potential offset to certain
payments made to the consultant by a licensee of the Company. At December
31, 2001, all other provisions of the agreement remain in force.
From time to time, the Company may be subject to legal proceedings and
claims that arise in the ordinary course of its business. During late 2000
and early 2001, as described in Note 8, several legal and arbitration
proceedings were commenced by the Company's former European exclusive
licensee and certain of its shareholders against the Company, certain
former and present directors of the Company and against a licensee of the
Company. As the proceedings are in their discovery stage, management of
the Company is unable to assess the impact that the ultimate resolution,
and the related expense, of the litigation and arbitration, may have on
the Company's financial position or results of operations.
7. Stock Options and 401(k) Savings Plan
The 1996 and 1999 Stock Option Plans provide for the granting of up to
2,700,000 incentive and non-qualified stock options to employees,
non-employee directors, consultants and advisors to the Company. In the
case of options designated as incentive stock options, the exercise price
of the options granted must be not less than the fair market value of such
shares on the date of grant. Non-qualified stock options may be granted at
any amount established by the Stock Option Committee or, in the case of
Discounted Options issued to non-employee directors in lieu of any portion
of an Annual Retainer, in accordance with a formula designated in the
Plan.
F-10
A summary of stock options under the Company's stock option plans follows:
Exercise Weighted
Number of Price Range Average
Shares Per Share Exercise Price
--------- -------------- --------------
Outstanding at December 31, 1999 879,100 $.30 to $4.35 $ .96
Options canceled (232,100) .30 to 4.35 2.31
--------
Outstanding at December 31, 2000 647,000 .30 to 4.35 .45
Options canceled (122,000) .30 to 4.35 .83
--------
Outstanding at December 31, 2001 525,000 $.30 and $.45 $ .36
========
Exercise Weighted
Option Price Range Average
Shares Per Share Exercise Price
-------- ------------- --------------
Exercisable at year end:
2000 647,000 $.30 to $4.35 $ .45
2001 525,000 $.30 and $.45 $ .36
Options available for future grant under all plans:
2000 2,075,000
2001 2,175,000
The following table summarizes information about stock options outstanding at
December 31, 2001:
Range of exercise prices $.30 to $.45
------------
Number outstanding at
December 31, 2001 525,000
-------
Weighted average remaining contractual life
(years) 4.09
----
Weighted average exercise price $.36
----
Exercisable options:
Number outstanding at
December 31, 2001 525,000
-------
Weighted average remaining
Contractual life (years) 4.09
----
Weighted average exercise price $.36
----
No options were granted in 2001 or 2000.
F-11
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Compensation cost for
stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Compensation costs for shares
issued under performance share plans are recorded based upon the current
market value of the Company's stock at the end of each period. The Company
has adopted the disclosure-only provisions of Statement of Financial
accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation" for employees and employee-directors as defined in SFAS No.
123. Compensation costs for grants to employees and directors would be
determined based on the fair value at the date of grant in accordance with
SFAS No. 123 and would be amortized over the vesting period of the option,
which is generally two years. Had compensation cost for the Company's
stock option grants to employees and employee-directors been determined
based on the fair value at the date of grants in accordance with the
provisions of SFAS No. 123, the Company would have amortized the cost over
the vesting period of the option. There was no pro forma effect on the
Company's net loss or the net loss per share applicable to common shares
for 2001 and 2000.
At December 31, 2001, the Company has reserved 14,592,849 shares of common
stock for possible future issuance upon exercise of stock options and
warrants.
The Company sponsors a 401(k) savings plan, covering substantially all
employees, providing for employee and employer contributions. Employer
contributions are made at the discretion of the Company. There were no
contributions charged to expense during 2001 or 2000.
8. Affiliate
The Company organized Euro-Nocopi, S.A. (Euro) in 1994 to market the
Company's technologies in Europe under an exclusive license arrangement.
Euro was capitalized through a European private placement. The Company
holds an approximately 18% interest in Euro. During 2000, there arose
between Euro and the Company a number of areas of conflict and dispute,
leading each party to the licensing arrangement to assert informally that
the other was in breach of its obligations under that arrangement. The
parties initially sought to resolve their differences by negotiating a
transaction in which Euro would have purchased from the Company its entire
equity interest as well as the paid-up European rights to the Company's
technologies. These negotiations terminated without agreement early in
December 2000. Following the termination of the transaction negotiations,
the Company was informed by Euro that it had adopted resolutions to
liquidate and dissolve. In mid-December 2000, the Company terminated its
license agreement with Euro in accordance with its terms and discontinued
the provision of support (including the sale of proprietary inks) to Euro
and its customers. As a result of the license termination the
technological dependency of Euro on the Company ceased and the Company was
no longer permitted to account for its investment in Euro on the equity
method. Accordingly, the Company, effective October 1, 2000, changed its
method of accounting for its investment in Euro to the cost method and
recorded the carrying value at that date as the cost of its investment.
During the fourth quarter of 2000, the Company wrote down its investment
in Euro by $110,000 due to the uncertainty of its recoverability and
recorded a charge of $68,600 resulting from the transfer of foreign
currency translation adjustments to net income.
F-12
Euro responded to the license termination by denying that the Company's
action was permissible, or effective, and by asserting a claim that, as a
result of alleged breaches of the licensing agreement by the Company, it
was entitled to a royalty-free license to exploit the Company's
technologies in Europe.
Promptly thereafter, Euro commenced an action before a court in Paris,
France in which it sought the entry of an order, in the nature of a
preliminary injunction, to compel the Company to honor the license
agreement pending judicial or arbitral resolution of the dispute between
the parties under the license agreement. In the French litigation, Euro
did not seek an adjudication on the merits of the underlying dispute.
Certain shareholders of Euro subsequently joined in the proceedings
commenced by Euro. In March 2001, the Emergency Judge hearing the action
issued a decision denying the relief requested by Euro and the
shareholders. The decision, which does not purport to be a final
adjudication of the merits of the controversy but only of Euro's request
for preliminary relief, held that Euro was not entitled to the requested
order because the Company had validly terminated the licensing arrangement
in mid-December, and also ordered Euro to pay into escrow the
approximately $125,000 that the Company claimed was due and owing under
the licensing arrangement.
In March 2001, Euro commenced an arbitration proceeding before the
American Arbitration Association in New York, NY against the Company. In
this proceeding, Euro has not asserted a claim for damages but has
asserted a claim for an award in the nature of a declaratory judgment to
the effect that, because the Company has (allegedly) breached the license
agreement, Euro is entitled to a royalty-free license to exploit the
Company's technologies in Europe. The Company has filed a response denying
that Euro is entitled to the relief requested, asserting that it has
validly terminated Euro's license agreement, and seeking damages for
Euro's breaches of the licensing agreement. The arbitration currently is
scheduled to be heard by the arbitrators late in 2002.
In March 2001 certain shareholders of Euro filed suit in a court in Paris,
France against certain current and former officers and directors of the
Company and against a licensee of the Company. The Company is not named as
a defendant in the suit. The suit seeks damages in excess of $7 million
from the defendants for various alleged acts of oppression, self-dealing
and fraud in connection with the organization and capitalization of Euro,
the management of that company and the Company's management of its
relationship with that company. The defendants have denied any liability
to the plaintiffs and have sought indemnification from the Company in
connection with the lawsuit. The Company has advanced certain costs of
defense for the benefit of the named defendants.
In 2000, revenues totaling approximately $188,000 were derived from Euro.
There were no revenues derived from Euro in 2001.
9. Major Customer Information
The Company's largest non-affiliate customers accounted for approximately
16% and 18%, respectively, of 2001 and 2000 revenues and 16% of accounts
receivable at December 31, 2001. 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-13
10. Going Concern
Since its inception, the Company has incurred significant losses and, as of
December 31, 2001, had accumulated losses of $11,546,400. For the years
ended December 31, 2001 and 2000, the Company's net losses were $828,600
and $382,700, respectively. In addition, the Company had negative working
capital of $499,900 at December 31, 2001 and experienced negative cash flow
from operations of $603,800 and $504,500, respectively, for the years ended
December 31, 2001 and 2000. The Company may incur further operating losses
and experience negative cash flow in the future. Achieving profitability
and positive cash flow depends on the Company's ability to generate and
sustain significant increases in revenues and gross profits from its
traditional business. There can be no assurances that the Company will be
able to generate sufficient revenues and gross profits to achieve and
sustain profitability and positive cash flow in the future.
During January 2002, the Company sold 2,316,667 shares of its common stock
for $139,000. The funds invested have permitted the Company to continue in
operation. However, Management of the Company believes that, to survive, it
must obtain additional capital immediately both to fund continuing
operating deficits and to fund investments needed to increase its operating
revenues to levels that will sustain its operations. There can be no
assurances that the Company will be successful in obtaining sufficient
additional capital, or if it does, that the additional capital will enable
the Company to improve its business so as to have a material positive
effect on the Company's operations and cash flow. The Company believes that
without substantial immediate investment, it will be forced to cease
operations early in the second quarter of 2002. Further, the Company
requires investment to pay annuities, plus penalties, on certain patents,
which will lapse during 2002 if not paid and to fund the ongoing
arbitration with Euro-Nocopi, S.A. There are no assurances that, even if
funding, for which the Company has no commitments and only limited
prospects, is arranged, the Company will prevail in the arbitration.
The Company's independent certified public accountants have included "going
concern" explanatory paragraphs in their audit reports accompanying the
2001 and 2000 financial statements. These paragraphs state that the
Company's recurring losses from operations raise substantial doubt about
the Company's ability to continue as a going concern and cautions that the
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
F-14