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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(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, 1998
Commission file number - 33-23617
MATERIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4622822
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 707, 11661 San Vicente Boulevard, Los Angeles, California 90049
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 208-5589
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock None
Securities Registered pursuant to section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of regis-trant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
1
State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)
The aggregate market value of the voting stock and non-voting common equity
held by non-affiliates computed by reference to the price at which such common
equity was sold on March 19, 1999 (i.e. $.40625 per share) is $2,200,030.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the last practicable date.
Class of Common Stock No. of Shares Outstanding
(As of March 19, 1998)
Common Stock 10,221,897
Class B Common Stock 60,000 Shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
S-1 Registration Statement for Material Technologies, Inc., effective July 31,
1997.
PART I
MATERIAL TECHNOLOGIES, INC.
ITEM 1. BUSINESS
Material Technologies, Inc. ("Matech"), a development stage company, which
became the suc-cessor on July 31, 1997, to Material Technology, Inc.'s ("Matech
1") business, owns a certain technology referred to as the Fatigue Fuse. The
Company believes the Fatigue Fuse, in its pres-ent state, is ready for
commercialization in certain specified markets, but requires significant
ad-ditional research and development for commercialization in other markets.
Matech is also the exclusive licensee of the Electrochemical Fatigue Sensor
("EFS"), which like the Fatigue Fuse is ready for commercialization in certain
specified markets, but requires significant additional re-search and development
for commercialization in other markets. The Fatigue Fuse and the
Elec-trochemical Fatigue Sensor are intended to measure the progression of
fatigue and the status of fatigue respectively in metal structures.
DESCRIPTION OF TECHNOLOGIES
2
The Fatigue Fuse
- ------------------
The Fatigue Fuse, a relatively low cost device, is a monolithically constructed
array of thin metal fingers attached to a common base. Each finger incorporates
a design specific notch near the base. The notch and size and shape of the
notch act as an energy concentrator for each finger. The Fuse is intimately
attached to the structural member of interest. Therefore, the Fuse
experi-ences the same loading and wear history as the structural member. The
notches on each finger accelerate the fatigue process for a given finger
according to the respective design characteristics of the notch. If the notch
is shaped in such a way as to concentrate large amounts of energy at a sharp
point, fatigue for that finger will accelerate causing a rupture in the finger
at an early in the finger's fatigue life. The rupture in the finger is directly
correlated to a certain point in the pro-gression of the fatigue age of the
structural member. If the notch is so shaped that energy is spread over a
relatively large area of a given finger, fatigue rupture will be delayed. Its
eventual rupture will take place late in the progression of fatigue age. The
different rates of fatigue accel-eration can be calibrated for different metal
compounds and different strain spectra. Thus, by designing specific steps for
an array of Fatigue Fuse fingers, it is possible to monitor the progres-sion of
fatigue age in a structural member, provided the fatigue condition of that
member is known. In a brand new structure we can generally assume there is no
fatigue and can thus design our Fuse for 100% of fatigue life potential. But,
in the case of an existing structure, one that has experienced loading and wear,
we must determine the fatigue age of that structural member so that we can
design the Fatigue Fuse to monitor the remaining fatigue life potential. The
Electro-chemical Fatigue Sensor is dedicated to that purpose.
Electrochemical Fatigue Sensor ("EFS")
- -----------------------------------------
The EFS technology consists of passing a current through the structural member
at a stress point and analyzing certain electronic information. Depending on
the characteristics of the informa-tion, a fatigue age determination is made.
The technique involves cleaning and then delivery of an easily ionized gel at
the appropriate surface of the structural member. At the same time elec-trodes
are inserted in the gel and an electronic signal is passed through the area of
interest as it cycles through normal stress excursions. Usually associated with
such inspections is difficulty with access. Stress points are very often
located in difficult-to-get-at places for humans. There-fore, it has become
desirable to miniaturize the process and develop a means for delivery in very
inaccessible areas. The answer is borescope technology, which the Company is
researching. This technology is currently in an unproven developmental state.
DEVELOPMENT OF TECHNOLOGIES
Status of the Fatigue Fuse
The development and application sequence for the Fatigue Fuse and EFS is (a)
Basic Research, (b) Exploratory Development, (c) Advanced Development, (d)
Prototype Evaluation, (e) Appli-cation Demonstration, and (f) Commercial Sales
and Service.
3
The Fatigue Fuse came first. The inventor, Professor Maurice Brull, conducted
the Basic Re-search at the University of Pennsylvania. Matech conducted the
Advanced Development, in-cluding variations of the adhesive bonding process and
fabrication of a laboratory grade recorder for the separation events which
constitute proper functioning of the Fatigue Fuse. The next step is Prototype
Evaluation encompassing empirical tailoring of Fuse parameters to fit the actual
spectrum loading expected in specific applications. The associated tests
include both coupon specimens and full scale structural tests with attached
Fuses. A prototype of a flight qualifiable operational separation event
recorder was designed, fabricated, and successfully demonstrated. The next
tasks will be to prepare a mathematical analysis for more efficient selection of
Fuse parameters and to conduct a comprehensive test program to prove the ability
of the Fuse to accurately indicate fatigue damage when subjected to
realistically large variations in spectrum loading. The final tasks prior to
marketing will be an even larger group of demonstration tests.
The Fatigue Fuse is at its final stages of testing and development. To begin
marketing the Fuse, will take from 6 to 12 months and cost approximately
$600,000, including technical and beta testing and final development. If
testing, development, and marketing are successful, manage-ment estimates Matech
should begin receiving revenue from the sale of the Fatigue Fuse within a year
of receiving the $600,000. Management cannot estimate the amount of revenue
that may be realized from sales of the Fuse.
To date, certain organizations have included Matech's Fatigue Fuse in test
programs. Already completed are tests for welded steel civil bridge members
conducted at the University of Rhode Island. In 1996, Westland Helicopter, a
British firm, tested the Fatigue Fuse on Helicopters. That test was successful
with the legs of the Fuses failing in sequence as predicted.
Status of the EFS
Electronic and data acquisition methodologies have been developed that are now
considered practical for initial commercialization. The EFS currently has
limitations. To obtain meaningful measurements, the process requires that at
least 50% of the fatigue life has occurred. Also, the process has only been
perfected for commercial use with mild and soft steels. This limits the use of
EFS presently to such applications as bridges, ships, cranes, etc. Use in more
exotic struc-tures such as aircraft and turbine engines is currently precluded.
Although there is a vast body of testing supporting successful use of this
methodology, to date, there has not been any confirmed success in aircraft and
turbine engines. No one can assure that the method will work in the field.
GOVERNMENT FUNDING
In August 1996 the Company entered into a teaming agreement with Southwest
Research Insti-tute (SWRI) and the University of Pennsylvania (the Team) for
research and development ef-forts. On February 25, 1997, the team was awarded a
$2.5 million Phase I contract to "determine the feasibility of the EFS to
improve the United States Air Force capability to perform durability assessments
of military aircraft, including both air frames and engines through the
application of the EFS to specific military aircraft alloys." Matech's share of
this award was approximately $550,000. On June 18, 1998 the team was awarded a
$2,061,642 Phase II contract to "determine the applicability of the EFS to
4
improve the United States Air Force capability to perform dura-bility
assessments of military aircraft, including both air frames and engines through
the applica-tion of the EFS to specific military aircraft alloys. Matech's
share of this award is approximately $350,000. In addition, on February 5,
1999, the Team of Matech, the U. of Pa, and Optim, Inc., a Connecticut Co. which
specializes in borescope technology, with Matech as the 1st tier prime
contractor, was awarded a contract of approximately $2,000,000 to develop an EFS
system to detect fatigue damage in both retired for time engine components and
installed military aircraft turbine engines. Matech's share is approximately
$250,000.
The Company continues in its efforts to raise funds from numerous sources,
including various state and federal governmental agencies and/or private or
public offerings of securities. At this time, however, the Company has no firm
agreements.
COMMERCIAL APPLICATIONS OF THE COMPANY'S TECHNOLOGIES
No commercial application of Matech's products has been arranged to date, but
the technology has matured to a point where it can, in the opinion of
management, be applied to certain markets. Some of those that are under
consideration are ships, storage tanks, cranes, and infrastructure bridges.
Foremost, in the opinion of management, are infrastructure bridges. Management
be-lieves the technology is ready but there can be no assurance until the
technology is successfully installed in the field and passed required testing
and validation.
The Company is currently pursuing a commercialization program for the
infrastructure bridge market through the amalgamation of the Company's
technology with a third party's technology, which together, in the opinion of
management, create a holistic bridge monitoring system. The third party
technology consists of an optically driven linear motion detector for a spectrum
of measured motion on bridges and a low cost technique for determining the
tightness of fasteners in real time all the time. Together, in the opinion of
management, the combination of all the technologies form a suite of capabilities
that provide the necessary analysis for satisfying bridge management
requirements.
Specifically, the Company has entered into a strategic alliance with Structural
Integrity Moni-toring Systems ('SIMS') of Willimantic, Connecticut. The Company
and SIMS are in the final stages of planning to obtain government funding to
develop and demonstrate a bridge monitoring system. The Company and SIMS will
each own 50% of new company to be formed and will each license its technology to
that Company. The arrangement also will require the new Com-pany to acquire
certain liabilities from each company. As this plan is in its early stages, the
Company can give no assurances that the new Company will be successful in its
financing ef-forts, nor is there any assurance that the bridge monitoring system
that will result from the amal-gamation will be successful in the field.
Certain manufacturers are capable of producing the fatigue fuse and EFS at a
reasonable cost. No assurance can be given, however, that these devices will be
successfully manufactured, that they can be commercially produced, that they
will perform to Management's expectations, or that they will be successfully
marketed. Moreover, significant competition may develop.
5
PATENTS
Matech is the assignee of four patents originally issued to Tensiodyne
Corporation. The first was issued on May 27, 1986, and expires on May 27, 2003.
It is entitled "Device for Monitoring Fa-tigue Life" and bears United States
Patent Office Numbers 4,590,804. The second patent, enti-tled "Method of
Making a Device for Monitoring Fatigue Life" was issued on February 3, 1987 and
expires February 3, 2004, United States Patent Office Number 4,639,997. The
third patent, entitled "Metal Fatigue Detector" was issued on August 24, 1993
and expires on August 24, 2010, United States Patent Number 5,237,875. The
fourth patent, entitled "Device for Monitor-ing the Fatigue Life of a Structural
Member and a Method of Making Same," was issued on June 14, 1994 and expires on
June 14, 2011, United States Patent Number 5,319,982.
PRODUCT DISTRIBUTION METHODS
Provided there are funds to support such activities, as to which no assurance
can be given, Matech intends to exhibit the Fatigue Fuse and the Electrochemical
Fatigue Sensor at various aerospace trade shows and will also market its
products directly to end users, including aircraft manufacturing and aircraft
maintenance companies, crane manufactures and operators, certain state
regulatory agencies charged with overseeing bridge maintenance, companies
engaged in manufacturing and maintaining large ships and tankers, and the
military. Although management intends to undertake marketing, dependent on the
availability of funds, within and with out the United States, no assurance can
be given that any such marketing activities will be implemented.
COMPETITION
Other technologies exist which indicate fatigue damage. Single cracks larger
than a minimum size can be found by nondestructive inspection methods such as
dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics.
Tracking of load and strain history, to subsequently estimate fatigue damage by
computer processing, is possible with recording instruments such as strain
gauges and counting accelerometers. These methods have been used for 40 years
and also offer the advantage of having been accepted in the market, whereas
Matech's products remain largely unproven for some currently indeterminable
period. Companies marketing these alternate technologies include Magnaflux
Corporation, Kraut-Kermer-Branson, Dunegan-Endevco, and MicroMeasurements.
These companies have more substantial assets, greater experience, and more
resources than Matech, including but not limited to established distribution
channels and an established computer base. The familiarity and loyalty to these
technologies may be difficult to dislodge. Because Matech is still in its
development stage, it is unable to predict whether its technologies will be
successfully developed and commercially attractive in potential markets.
ITEM 2. PROPERTIES
The Company leases an office at 11661 San Vicente Boulevard, Suite 707, Los
Angeles, Califor-nia, 90049. The lease has a term of 24 months beginning June
1, 1997. The space consists of 830 square feet and will be adequate for the
Company's current and foreseeable needs. The total rent is $40,464.00 payable
at $1,868.00 per month.
6
Matech owns a remote monitoring system and certain manufacturing equipment which
is pres-ently being used by the University of Pennsylvania for instructional and
testing purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings which in
management's opinion might have a material effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Bulletin Board. Its symbol
is MTEY.
From October 1997 through December 31, 1998, Matech's Common Stock was quoted
between a low bid of $.13 per share and a high bid of $2.821 per share on the
NASDAQ Bulletin Board. Such over-the-counter quotations reflect inter-dealer
prices, without retail markup, markdown, or commission and may not necessarily
represent actual transactions. The following chart shows the high and low bid
prices per share per calendar quarter from October 1997 to December 1998.
High Bid Price(1) Low Bid Price(1)
------------------ -----------------
Fourth Quarter 1997 $ 2.50 $ .13
------------------ -----------------
First Quarter 1998 $ 2.75 $ .25
------------------ -----------------
Second Quarter 1998 $ 2.812 $ .50
------------------ -----------------
Third Quarter 1998 $ 1.375 $ .593
------------------ -----------------
Fourth Quarter 1998 $ $1.50 $ .312
- ------------------- ------------------ -----------------
1).All bid prices were supplied to the Company by Smith Barney.
On March 19, 1999, there were 441 holders of record of the Company's common
stock and one holder of its Class B Common Stock.
No dividends on any of the Company's shares were declared or paid during 1998
nor are any dividends contemplated in the foreseeable future.
In August, 1993, Tensiodyne, a predecessor of the Company, entered into two
agreements, a li-cense agreement and a development agreement, with the
University of Pennsylvania regarding a new invention designed to measure
electrochemically the status of fatigue of a structure without knowing the
structure's past loading history. Under the license agreement, 12,500 shares of
Ten-siodyne's common stock were issued, a 5% royalty on sales of this product
was granted, and un-der the development agreement Tensiodyne agreed to pay
$11,112 per month for 18 months, for a total payment of $200,000. As of this
date, no payments have been made on this obligation. On December 17, 1997, the
7
company and the University modified the terms of the licensing agreement and
related obligation. The terms of the modified agreements include an increase in
the University's royalty to 7% of the sale of related products, additional
shares of the Common Stock to equal 5% of the Company's outstanding stock as of
December 17, 1997, and to pay to the University 30% of any amounts the Company
raises in excess of $150,000 (excluding amounts received on government grants or
contracts) up to $200,000 plus interest at 1.5% per month from June 30, 1997.
At various times during 1998 the Company issued Common Stock to various persons
relying on Section 4(2) of the Securities Act of 1933. Each and every such
person has been associated with the Company in some way, is sophisticated, and
is familiar with the Company, its business, and its financial position.
By Unanimous Consent in lieu of the first meeting of the Board of Directors, on
March 9, 1997, the Corporation authorized the issuance of the following shares:
1. On March 9, 1997, 5,560,000 shares of Common Stock to Matech 1 which later
became Se-curFone America, Inc. As of July 31, 1997, 5,000,000 of these shares
were then distributed to the shareholders of Matech 1, including 707,911 shares
under a registration statement filed with the Securities and Exchange Commission
that became effective on that date. On that date Matech 1 became SecurFone
America, Inc. SecurFone retained 560,000 that secured a $50,000 note to the
Company. Subsequently, SecurFone defaulted on a $50,000 promissory note to the
Company and forfeited its 560,000 shares which were canceled.
2. 60,000 shares of Class B Common Stock to Robert M. Bernstein in
consideration for Mr. Bernstein taking on the duties of Chief Executive Officer,
President, and Chief Financial Officer of the Corporation.
3. 350,000 shares of convertible preferred stock to the Baker Group in
accordance with an agreement with that Group to exchange its Class A Preferred
Stock in Matech 1 for Class A Preferred Stock in the Company.
4. 15 shares of Class B preferred stock to Tensiodyne Corporation in accordance
with an agree-ment with Tensiodyne to exchange its Class B Preferred Stock in
Matech 1 for Class B Preferred Stock in the Company. Subsequently, the Company
purchased these shares and canceled them. Accordingly, no Class B preferred
shares are outstanding.
On September 26, 1997, the Board authorized the Corporation to issue 27,000
shares of Common Stock to Corporate Counsel, for services rendered to the
Corporation.
On November 3, 1997, the Board authorized the Corporation to issue 100,000
shares of Common Stock to a consultant for services rendered to the Corporation.
On November 21, 1997, the Board authorized the Corporation to issue 100,000
shares of Com-mon Stock to a consultant for services rendered to the
Corporation.
8
On March 26, 1998, the Board authorized the Corporation to issue 2,430,000
shares of Common Stock to its president, Robert M. Bernstein, in exchange for
canceling $170,000 the Company owed Mr. Bernstein.
On May 10, 1998, the Board authorized the Corporation to issue 733,280 shares of
Common Stock to Variety Investments for reducing its Fatigue Fuse royalty
interest from 20% to 5%.
On May 10, 1998, the Board authorized the Corporation to issue 244,427 shares
of its Common Stock to a third party individual for consulting services. (See,
---
Financial Statements, Note 10f.)
On May 10, 1998, the Board authorized the Corporation to issue 15,000 shares of
its Common Stock to another individual for consulting services.
On May 10, 1998, the Board authorized the Corporation to issue 302,190 shares of
its Common Stock to Mr. Joel Freedman, a Director, for consulting services.
On June 25, 1998, the Board authorized the Corporation to issue two warrants to
purchase a total of 2,000,000 shares of Common Stock at $.50 per share with an
expiration date of June 30, 2002, one to Robert M. Bernstein, Chairman and Chief
Executive Officer, for 1,800,000 shares of Common Stock and one to Joel
Freedman, a director, for 200,000 shares of Common Stock.
On October 30, 1998, the Board authorized the Corporation to issue 50,000 shares
of its Com-mon Stock to Tensiodyne Corporation in exchange for canceling its 15
shares of Class B Pre-ferred Stock.
On November 3, 1998, SecurFone, Inc. forfeited the 560,000 shares of the
Company's Common Stock which it pledged against a $50,000 obligation it owed to
the Company. The Company subsequently canceled the shares.
On November 6, 1998, the Board authorized a decrease in the purchase price of
the warrants to purchase 2,000,000 shares of common stock issued to Mr.
Bernstein and Mr. Friedman from $.50 per share to $.10 per share.
On November 24, 1998, the Board authorized the Corporation to issue 60,000
shares of its Common Stock, an option to purchase 50,000 shares of Common Stock
at $1.00 per share, and an option to purchase an additional 100,000 shares of
Common Stock at $2.00 per share until November 30, 2001 to an unrelated
corporation for consulting services.
On November 24, 1998, the Board authorized the Corporation to issue 200,000
shares of its Common Stock to a consultant for consulting services.
On January 14, 1999, the Board authorized the issuance of a warrant to purchase
2,500 shares of the Corporation's Common Stock for $1.00 per share to a long
time investor in the Company in exchange for exchanging a promissory note due to
be paid for a new note.
9
On February 4, 1999, the Board authorized the Corporation to issue to a
consultant whom the Corporation owed $66,666, 175,000 shares of Common Stock and
a Warrant to purchase an ad-ditional 175,000 shares of Common Stock at $2.50 per
share with an expiration date of February 1, 2002 in exchange for canceling the
debt.
On March 5, 1999, the Board authorized the Corporation to issue 50,000 shares of
Common Stock to John Goodman, a director for services rendered to the
Corporation.
On March 5, 1999, the Board authorized the Corporation to issue 50,000 shares of
Common Stock to a consultant for services rendered to the Corporation.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Corporation are derived from the
Corporation's financial statements. The selected financial data should be read
in conjunction with the Corporation's financial statements attached hereto.
Fiscal Year Ending December 31,
Inception to
December 31,
1994 1995 1996 1997 1998 1998
---------- ---------- ----------- ---------- ---------- --------------
Net Sales $ -- $ -- $ -- $ -- $ -- $ --
---------- ---------- ----------- ---------- ---------- --------------
Income from Research
Development Contract $ -- $ -- $ -- $ 336,410 $ 374,324 $ 1,423,314
---------- ---------- ----------- ---------- ---------- --------------
Income (Loss) from
Continued
Operations $(377,063) $(203,849) $ (483,186) $(177,221) $(684,946) $ (3,534,266)
---------- ---------- ----------- ---------- ---------- --------------
Income (Loss) from
Continued Operations Per
Common Share $ (.35)
--------------
Common Shares
Outstanding 10,061,897
--------------
Total Assets $ 184,579 $ 150,692 $ 208,299 $ 287,257 $ 233,746
---------- ---------- ----------- ---------- ----------
Total Liabilities $ 620,375 $ 783,882 $1,046,517 $ 618,582 $ 719,178
---------- ---------- ----------- ---------- ----------
Redeemable Preferred Stock $ -- $ 150,000 $ 150,000 $ 150,000 $ --
---------- ---------- ----------- ---------- ----------
Total Stockholders' Equity
(Deficit) $(619,166) $(585,796) $ (988,218) $(481,325) $(485,432)
---------- ---------- ----------- ---------- ----------
Dividends $ -- $ -- $ -- $ -- $ --
- --------------------------- ---------- ---------- ----------- ---------- ----------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations, capital resources, and
liquidity pertains to the consolidated activities of Material Technology, Inc.,
("Matech 1") for 1996 and of the Company for the years ended December 31, 1997
and 1998. Since July 31, 1997, the Company has been successor to all of the
assets and operations of Matech 1.
10
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998.
- --------------------------------------------------------------------------------
In 1998, the Company received $374,324 under its contracts with Southwest
Research Institute ("SWRI") and the U. S. Air Force. In 1997, the Company
generated $336,410 under its contract with SWRI. The Company generated no
significant revenue in 1996.
Costs and Expenses
General and Administrative costs were $807,013 for 1998, $435,222 for 1997, and
$472,486 for 1996. The major costs in 1998 were consulting fees of $225,953,
interest expense of $53,680, officer's salary of $100,000, legal fees of
$179,951, bad debts of $50,000, and asset impairment of $92,919.
The major costs in 1997 were legal costs of $166,102 incurred in contracting for
government funds for research and development of the EFS technology and
effecting the SecurFone transac-tion, officers' salaries of $ 90,417, consulting
fees of $111,013, filing and public relations costs of $31,917 primarily for the
Company's filings with the SEC relating to the SecurFone transac-tion, employee
expenses of $27,286, travel expenses of $20,744, and rent of $28,136.88.
The major costs in 1996 were officers' salaries of $ 200,000, professional fees
of $111,080, of-fice related expenses of $45,136, travel expenses of $21,902,
rent of $16,742 and consulting fees to-taling $34,631. The primary increase in
these expenses from 1995 resulted from the Board ap-proving compensation of
$200,000 to Robert M. Bernstein for his successful negotiation of the teaming
agreement with SWRI and the University of Pennsylvania which resulted in the U.
S. Air Force awarding SWRI a $2,500,000 contract in February 1997 to conduct
research on the Company's EFS technology.
Liquidity and Capital Resources
The Company's accountant has opined that the Company's financial condition
raises substantial doubt concerning the Company's ability to continue as a going
concern. As a result of the Com-pany's contracts with the U.S. Air Force which
is providing money for research on the EFS tech-nology, including certain
overhead expenses, it appears that the Company will have sufficient funds to
continue operating at least through 1999.
As reflected in the numbers below, over the past three years, to continue
seeking capital and to maintain its patents, the Company was totally dependent
on the willingness of the Company's President, Mr. Bernstein, and long time
investors in the Company to loan the Company money or purchase additional
securities from the Company. Over the next year, the Company expects to receive
additional funds from U. S. Air Force. These funds, however, are not
guaranteed. These funds, however, are only a beginning, the Company estimates
substantial additional funds will have to be raised to complete research and
development and bring its products to market. Al-though, Mr. Bernstein intends
to continue to loan the Company funds as required while it seeks additional
financing, he is under no obligation to do so. The Company does not expect to
receive any additional material financing from its other long time investors.
11
Any prediction of the likelihood or timing of obtaining the required funding
would be highly speculative. The Company's ability to obtain such financing may
depend on the results of the research contract with the U.S. Air Force which
will not be evident for a year or more.
Cash and cash equivalents at December 31,1998 were $20. During 1998, the
Company received $125,000 from the sale of its common stock under the Company's
1998 Stock Option Plan. The Company's president advanced $150,500, and $34,611
was repaid towards his loan account. The Company also received $261,450 from
the sale of securities it held for sale. From the proceeds received in 1998,
the Company used $411,466 in its operations.
Cash and cash equivalents at December 31,1997 were $2,451. During 1997, the
Company re-ceived $100,000 from the sale of its common stock under the Company's
1996 Stock Option Plan. The Company's president advanced $119,000, including
direct loans to the Company and payment of Company expenses, and $79,659 was
repaid towards his loan account. From the proceeds received in 1997, the
Company used $178,918 in its operations.
As of December 31, 1996, cash and cash equivalents were 0. During 1996, the
Company re-ceived $242,290 including $170,040 for the issuance of common stock
under the Company's 1996 Stock Option Plan, a $43,250 loan from the President,
and a $25,000 loan from an unre-lated third party. Of the $242,290 received,
$64,676 repaid loans from the President, $5,000 paid legal fees in connection
with the S-1 Registration Statement, and the remaining $172,614 was used in
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as at December 31, 1998 prepared in accordance with
Regulation S-X (17 CFR 210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, office, and principal occupation of the executive officers and
directors of Matech and certain information relating to their business
experiences are set forth below:
NAME AGE POSITION
Robert M. Bernstein 64 President/Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 39 Secretary/Director
Dr. John Goodman 65 Chief Engineer/Director
The Term of the directors and officers of Matech is until the next annual
meeting or until their successors are elected.
ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.
Robert M. Bernstein is 64 years of age. He received a Bachelor of Science
de-gree from the Wharton School of the University of Pennsylvania in 1956. From
August 1959 until his certification expired in August 1972, he was a Certified
Public Accountant licensed in Pennsylvania. From 1961 to 1981, he was a
consultant specializing in mergers, acquisitions, and financing. From 1981 to
1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay
Enterprises, Inc. of Philadelphia, PA, an oil and gas exploration company. In
December 198 5, he formed a research and development partnership for Tensiodyne,
funding approximately $750,000 for research on the Fatigue Fuse. In October
1988 he became Chairman of the Board, President, Chief Financial Officer, and
CEO of Matech 1 and retained these positions with the Company after the spin off
from Matech 1 on July 31, 1997.
JOEL R. FREEDMAN, SECRETARY/DIRECTOR. Joel R. Freedman is 39 years of age. From
October 1989 until February 1994, Mr. Freedmen was Secretary and a Director of
Tensiodyne and Matech 1, retaining these positions with the Company after the
spin-off from Matech 1 on July 31, 1997. Mr. Freedman attends board meetings
and provides advice to the Company as needed. Since 1983, he has been president
of Genesis Advisors, Inc., an investment advisory firm in Bala Cynwyd,
Pennsylvania. His duties there are a full-time commitment. Accordingly, he
does not take part in Matech's day to day activities. He is not a director of
any other company.
DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR. Dr. John W. Goodman is 65 years
of age. He is presently Senior Staff Engineer, Materials Engineering Department
of TRW Space and Electronics and was formerly Chairmen of the Aerospace
Division of the American Society of Mechanical Engineers. He holds a Doctorate
of Philosophy in Materials Science which was awarded with distinction by the
University of California at Los Angeles in 1970. In 1957, he received a Masters
of Science degree in Applied Mechanics from Penn State University and in 1955 he
received a Bachelor of Science degree in Mechanical Engineering from Rutgers
University. From 1972 to 1987, Dr. Goodman was with the U. S. Air Force as lead
Structural Engineer for the B-1 aircraft; Chief of the Fracture and Durability
13
Branch and Materials Group Leader, Structures Department, Aeronautical Systems
Center, Wright-Patterson Air Force Base. From 1987 to December 1993, he was on
the Senior Staff, Materials Engineering Department of TRW Space and Electronics.
He has been Chief Engineer for Development of Matech's products since May 1993.
He worked full time for Matech 1 from August 1993 to December 1994, when he
returned to TRW. Since then he has consulted with the Company periodically.
ADVISORY BOARD
Since 1987, the Company and its predecessors have had an Advisory Board
presently consisting of Alexander M. Adelson, William F. Ballhaus, Robert P.
Coogan, Dr. Malcolm H. Hodge, Campbell Laird, Ronald Landgraf, Robert Madden,
Samuel I. Schwartz and Miles Wilson. These individuals consult with the Company
on an as needed basis. Members of the Advisory Board serve at will. The
Advisory Board advises Matech's Management on technical, financial, and business
matters and may in the future be additionally compensated for these services. A
brief biographical description of the members of the advisory board is as
follows:
ALEXANDER M. ADELSON. Alexander M. Adelson, age 64 has thirty years as an
applied physicist and businessman specializing in technical marketing matters.
Since 1974, Mr. Adelson has led the Technology Resource Group of RTS Research
Lab, Inc. ("RTS). This group provides management, product development, and
related marketing services to various clients with spe-cialization in technical
marketing matters. For example, RTS helped conceive and develop the first
portable bar code scanner and acted as program manager for 12 years while
developing two generations of portable bar code laser scanners for Symbol
Technologies, Inc. Mr. Adelson holds 64 patents in the fields of optical
electronics, bar code technology, automatic inspection, and medical software.
Mr. Adelson serves on the board of directors of Base 10, Inc. Nocopi
Technologies, Inc., and PatComm Corporation.
WILLIAM F. BALLHAUS. William F. Ballhaus, age 80, now retired, was an
Aerodynamacist with Douglas Aircraft Company, a Vice President and General
Manager, Nortonics Division of Northrop Aircraft, Inc., Executive Vice President
of Northrop Corporation, and was President of Beckman Instruments, Inc. from
1965-1983. He is director of Republic Automotive Parts, Mi-crobics Corp., and
Nucio Industries.
ROBERT P. COOGAN. Robert P. Coogan, age 74, retired from a distinguished naval
career spanning 40 years during which he held numerous posts including:
Commander U.S. Third Fleet, Commander Naval Air Force - U.S. Pacific Fleet,
Commandant of Midshipmen - U.S. Naval Academy, and Chief of Staff - Commander
Naval Air Force - U.S. Atlantic Fleet. From 1980 to 1991 he was with Aerojet
General Company and served as Executive Vice President of Aerojet Electrosystems
Co. from 1982-1991. He has his BS in Engineering from the US Naval Acad-emy and
MA in International Affairs from George Washington University.
DR. MALCOLM H. HODGE. Dr. Hodge, age 56, received his Ph.D. in Ceramic Science
from Penn State. He is currently the President and CEO of Structural Integrity
Monitoring Systems, Inc. (SIMS). From 1994 to 1996, he was Chairman and
President of Applied Fiberoptics, Inc. Previous to that he spent ten years with
Ensign-Bickford Industries, Inc. as Corporate Vice Presi-dent of Technology.
14
CAMPBELL LAIRD. Campbell Laird, age 62, received his Ph.D. in 1963 from the
University of Cambridge. His Ph.D. thesis title was "Studies of High Strain
Fatigue." He is presently Pro-fessor and graduate group Chairman in the
Department of Materials, Science & Engineering at the University of
Pennsylvania. His research has focused on the strength, structure, and fatigue
of materials, in which areas he published in excess of 250 papers. He is
co-inventor of the EFS.
RONALD W. LANDGRAF. Ronald W. Landgraf, age 59, spent 20 years in the
industrial sec-tor, first as a Material Engineer in the Micro Switch Division of
Honeywell, Inc. in Freeport, Illi-nois, and later as a Research Scientist,
Metallugy Dept., Engineering & Research Staff of Ford Motor Company in Dearborn,
Michigan. In 1988, he became a Visiting Professor at Virginia Tech and in 1990,
a Professor.
ROBERT MADDEN. Robert Madden, age 79, is presently retired. He received his BS
from Purdue University in 1942 and Doctor of Engineering from Yale University in
1948. From 1957 to 1972, he was director and later chairman of the Department
of Metallurgy, University of Pennsylvania; from 1973 to 1983 was Professor of
Metallurgy at the University of Pennsylvania, from 1984 to 1987 was a visiting
professor of Anthropology at Harvard University and from February 1987 until
recently has been an honorary curator of archaeological sciences, Peabody Museum
of Archaeology and Ethnology, Harvard University.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 49, is presently President of Sam
Schwartz Co., consulting engineers, primarily in the bridge industry. Mr.
Schwartz received his BS in Physics from Brooklyn College in 1969, and his
Masters in Civil Engineering from the Univer-sity of Pennsylvania in 1970. From
February, 1986 to March, 1990, was the Chief Engineer/First Deputy Commissioner,
New York City Department of Transportation and from April 1990 to the present
has acted as a director of the Infrastructure Institute at the Cooper Union
College, New York City, New York. From April 1990 to 1994 he was a Senior Vice
President of Hayden Wegman Consulting Engineers, and is a columnist for the New
York Daily News.
MYLES WILSON. Myles Wilson, age 63, is Chief Executive Officer of Specialized
Executives Unlimited, a consulting and interim management firm. He received his
MBA in Industrial Man-agement and his BS in Economics and Accounting from The
Wharton School of the University of Pennsylvania. From 1983 to 1986, he was
Vice President of Alexander's depart-ment store chain responsible for managing
information systems and Chief Information Officer. From 1986 to 1989, he was a
Senior Vice President of the Gimbel/Saks Fifth Avenue Corp.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Robert M. Bernstein, Chief Executive Officer of the Company filed one Form 3 in
September 1998 covering transactions that occurred in April, May, and June 1998.
Accordingly, three (3) of Mr. Bernstein's Form 3s were late covering a total of
four (4) transactions. The Company is un-aware of any other late filings or any
failures to file any Form 3, 4, or 5.
15
ITEM 11. EXECUTIVE COMPENSATION
Other
Name and Annual Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) (SARs (#) Payout ($) sation ($)
- ------------- ------- ------------ ----------- ----------- ----------- ---------- ----------- -----------
Robert M. 1996 $ 200,000 $ -- $ -- $ 620 (1) -- $ -- $ --
Bernstein CEO 1997 $ 90,417 $ -- $ -- $ 1,500 (2) -- $ -- $ --
1998 $ 100,000 $ -- $ -- 1,800,000 $ -- $ -- $ --
John W. 1996 $ 5,200 $ -- $ -- $ -- -- $ -- $ --
Goodman 1997 $ 24,885 $ -- $ -- $ -- -- $ -- $ --
Director and 1998 $ 20,462 $ -- $ -- $ -- -- $ -- $ --
Engineer
In 1996, Matech 1 issued 62,000 shares of Common Stock par value $.001, to Mr.
Bernstein.
On July 31, 1997, Matech 1 issued 1,049,454 of Common Stock to Mr. Bernstein in
exchange for $372,000 in accrued salary owed to him. In addition, the Company
authorized issuing Mr. Bern-stein an additional 450,000 shares of its common
stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
1998
Security Ownership of Certain Beneficial Owners
Class of Name and Address of Amount and Nature Percent
Stock Beneficial Owner of Beneficial of Class
Ownership
-----------------
Common Sherman Baker 1,077,920 Shares 10.4%
Stock 555 Turnpike St.
Canton, MA 02021
-----------------------------
Security Ownership of Management
Class of Stock Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial of Class
Ownership
-----------------
Common Robert M. Bernstein, CEO 3,232,044 Shares1 31.3%1
Stock Suite 707
11661 San Vicente Blvd.,
Los Angeles, CA 90049
-----------------------------
Joel R. Freedman, Director 396,471 Shares2 3.8%
1 Bala Plaza
Bala Cynwyd, PA 19004
-----------------------------
John Goodman, Director 100,000 Shares 1.0%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
-----------------------------
Directors and executive of- 3,728,515 Shares 36.1%
ficers as a group (3 persons)
-----------------------------
16
Class B Robert M. Bernstein 60,000 Shares 100.00%3
Common Suite 707
Stock 11661 San Vicente Blvd.
Los Angeles, CA 90049
-----------------------------
1 In addition, Mr. Bernstein has an option to purchase an additional 1,800,000 shares of
Com-mon Stock at $.10 per share.
2 In addition, Mr. Friedman has an option to purchase an additional 200,000 shares of common
stock at $.10 per share.
3 Each of Mr. Bernstein's Class B Common Shares has 500 votes on any matter on which the
common stockholders vote. Accordingly, these shares give Mr. Bernstein 20 million votes
which gives Mr. Bernstein voting control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Robert M. Bernstein advanced funds to the Company and at
December 31, 1998, the Company owed him $73,177. The Board has approved paying
Mr. Bernstein interest at the rate of 10% per year on his advances. Robert M.
Bernstein is under no obligation to make further advances to the Company but may
continue to so do at his sole discretion.
In August, 1997, the Company's board of directors signed a resolution
recognizing the Com-pany's extreme dependence on the experience, contacts, and
efforts of Mr. Bernstein and author-ized to pay him a salary of $150,000 a year
since 1991. Mr. Bernstein will receive the compen-sation at such time as the
board has determined that the Company has profited from. Mr. Bern-stein's
efforts in regards to the Company receiving substantial funding, the licensing
of its tech-nology, the selling of its technology, the Company's merger with
another company, or otherwise profiting in a substantial manner. The amount
which would be due to Mr. Bernstein as of De-cember 31, 1998, had the board so
declared, is approximately $557,583. This amount represents the difference
between the $150,000 a year and the compensation actually accrued during the
year 1991 through 1997.
In March 1998, the Board authorized the Corporation to issue a total of
2,430,000 shares of Common Stock and to exchange those shares at $.07 per share
with Robert M. Bernstein for can-celing $170,000 that he had lent to the
Corporation. Mr. Bernstein sold part of these shares at $.07 per share to a
group of preferred shareholders known as the Baker Group in accordance with a
1994 agreement between the Company, Mr. Bernstein, and that Group. The sale of
the stock provided needed working capital.
17
On June 25, 1998, the Board authorized the Corporation to issue two warrants to
purchase a total of 2,000,000 shares of Common Stock at $.50 per share with an
expiration date of June 30, 2002, one to Robert M. Bernstein, Chairman and Chief
Executive Officer, for 1,800,000 shares of Common Stock and one to Joel
Freedman, a director, for 200,000 shares of Common Stock. On November 6, 1998,
the Board authorized a decrease in the purchase price of the warrants from $.50
per share to $.10 per share.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS IN FORM 8-K
a. Exhibits.
Exhibit No. Description Page No.
- ------------ ------------------------------------------------------------ ------------------------
3(i) Certificate of Incorporation of Material Technologies, Inc. Previously filed with
S-1 Registration
Statement effective on
July 31, 1997.
------------------------
3(ii) Bylaws of Material Technologies, Inc. Previously filed with
July 31, 1997 S-1
------------------------
4.1 Class A Convertible Preferred Stock Certificate of Previously filed with
Designations July 31, 1997 S-1
------------------------------------------------------------ ------------------------
4.2 Class B Convertible Preferred Stock Certificate of Previously filed with
Designations July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.1 License Agreement Between Tensiodyne Corporation and Previously filed with
the Trustees of the University of Pennsylvania July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.2 Sponsored Research Agreement between Tensiodyne Previously filed with
Corporation and the Trustees of the University July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.3 Amendment 1 to License Agreement Between Tensiodyne Previously filed with
Scientific Corporation and the Trustees of the University July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.4 Repayment Agreement Between Tensiodyne Scientific Previously filed with
Corporation and the Trustees of the University July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.5 Teaming Agreement Between Tensiodyne Scientific Previously filed with
Corporation and Southwest Research Institute July 31, 1997 S-1
------------------------------------------------------------ ------------------------
10.6 Letter Agreement between Tensiodyne Scientific Previously filed with
Corporation, Robert M. Bernstein, and Stephen Forrest Beck July 31, 1997 S-1
and Handwritten modification.
------------------------------------------------------------
10.7 Agreement Between Tensiodyne Corporation and Previously filed with
Tensiodyne 1985-1 R&D Partnership is incorporated by July 31, 1997 S-1
reference from Exhibit 10.3 of Material Technology, Inc.'s
------------------------------------------------------------
10.8 Amendment to Agreement Between Material Technology, Previously filed with
Inc. and Tensiodyne 1985-1 R&D Partnership is July 31, 1997 S-1
incorporated by reference from Exhibit 10.6 of Material
Technology, Inc.'s S-1 Registration Statement, File No. 33-
83526 which became effective on January 19, 1996.
18
------------------------------------------------------------
10.9 Agreement Between Advanced Technology Center of Previously filed with
Southeastern Pennsylvania and Material Technology, Inc. is July 31, 1997 S-1
incorporated by reference from Exhibit 10.4 of Material
Technology, Inc.'s S-1 Registration Statement, File No. 33-
83526 which became effective on January 19, 1996.
------------------------------------------------------------
10.10 Addendum to Agreement Between Advanced Technology Previously filed with
Center of Southeastern Pennsylvania and Material July 31, 1997 S-1
Technology, Inc. is incorporated by reference from Exhibit
10.5 of Material Technology, Inc.'s S-1 Registration
Statement, File No. 33-83526.
------------------------------------------------------------
10.11 Shareholder Agreement Between Tensiodyne Corporation, Previously filed with
Variety Investments, Ltd. and Countryman Investments, Ltd. July 31, 1997 S-1
is incorporated by reference from Exhibit 10.7 of Material
Technology, Inc.'s S-1 Registration Statement, File No. 33-
83526 which became effective on January 19, 1996.
------------------------------------------------------------
10.12 Agreement and Plan of Reorganization By and Between Previously filed with
Tensiodyne Corporation, Pegasus Technologies, Inc. and July 31, 1997 S-1
Lloyd and E. Anne Eisenhower and Doug Froom is
incorporated by reference from Exhibit 2.1 of Material
Technology, Inc.'s S-1 Registration Statement, File No. 33-
83526 which became effective on January 19, 1996.
------------------------------------------------------------
10.13 Settlement Agreement and Modification to Agreement and Previously filed with
Plan of Reorganization is incorporated by reference from July 31, 1997 S-1
Exhibit 2.3 of Material Technology, Inc.'s S-1 Registration
Statement, File No. 33-83526 which became effective on
January 19, 1996.
------------------------------------------------------------
10.14 Equipment Loan Agreement between Tensiodyne and the Previously filed with
University of Pennsylvania is incorporated by reference from July 31, 1997 S-1
Exhibit 10.8 of Material Technology, Inc.'s S-1 Registration
Statement, File No. 33-83526 which became effective on
January 19, 1996.
------------------------------------------------------------
27 Financial Data Schedule F-28
- ------------ ------------------------------------------------------------ ------------------------
b. Reports on From 8-K - none.
c. Financial Statements - attached.
19
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) 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.
MATERIAL TECHNOLOGY, INC.
By: /s/ Robert M. Bernstein
------------------------
Robert M. Bernstein, President
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchanges 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.
By: /s/ Robert M. Bernstein
------------------------------
Robert M. Bernstein,
President, Director, Chief Executive Officer, and Chief
Financial Officer (Principal Executive Officer, Principal
Financial Officer, and Principal Accounting Officer)
Date: March 26, 1999
By: /s/ Joel Freedman
------------------------------
Joel Freedman, Secretary and Director
Date: March 26, 1999
By: /s/ John Goodman
------------------------------
John Goodman, Director
Date: March 26, 1999
20
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
Contents
--------
Page
----
Independent Auditors' Report F-1
Balance Sheets F-3
Statements of Operations F-5
Statements of Comprehensive Loss F-6
Statement of Stockholders' Equity (Deficit) F-7
Statements of Cash Flows F-12
Notes to Financial Statements F-14
21
Independent Auditors' Report
Board of Directors
Material Technologies, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 1997 and 1998, and the related
statements of operations, com-prehensive income (loss), stockholders' equity
(deficit), and cash flows, for the years ended December 31, 1996, 1997, and 1998
and for the period from January 1, 1991 through December 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. State-ments of operations and cash flows for the period from
October 21, 1983 (inception) through Decem-ber 31, 1990, (with the exception of
1989 which was unaudited) were audited by other auditors whose reports dated on
various dates, expressed unqualified opinions including an explanatory
paragraph, as discussed in Note 4, regarding the Company's ability to continue
as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
F-1
In our opinion, the financial statements referred to above present fairly, in
all material respects, the fi-nancial position of Material Technologies, Inc. as
of December 31, 1997 and 1998, and the results of its operations, its
comprehensive loss, and its cash flows for the years ended December 31, 1996,
1997, and 1998 and for the period from January 1, 1991 through December 31,
1998, in conformity with generally accepted accounting principles.
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
February 25, 1999
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1997 1998
-------- --------
CURRENT ASSETS
Cash and Cash Equivalents $ 2,451 $ 20
Accounts Receivable 62,332 202,737
Reimbursement Receivable 50,000 -
Employee Advance 1,500 1,500
-------- --------
TOTAL CURRENT ASSETS 116,283 204,257
-------- --------
FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciation 95,227 2,712
-------- --------
OTHER ASSETS
Investments 55,200 8,219
Intangible Assets, Net of
Accumulated Amortization 18,679 16,690
Refundable Deposit 1,868 1,868
-------- --------
TOTAL OTHER ASSETS 75,747 26,777
-------- --------
TOTAL ASSETS 287,257 233,746
======== ========
See accompanying notes and independent accountants' report.
F-3
MATERIAL TECHNOLOGIES, INC.
See accompanying notes and independent accountants' report.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
December 31,
1997 1998
------------ ------------
CURRENT LIABILITIES
Legal Fees Payable $ 103,757 $ 149,453
Consulting Fees Payable 67,778 101,669
Accounting Fees Payable 11,825 23,308
Other Accounts Payable 5,283 17,334
Accrued Payroll Taxes 24,269 25,197
Loan Payable - Officer 118,863 73,177
Loans Payable-Others 68,807 46,273
------------ ------------
TOTAL CURRENT LIABILITIES 400,582 436,411
Payable on Research and Development
Sponsorship 218,000 257,240
Notes Payable - Other -- 25,527
------------ ------------
TOTAL LIABILITIES 618,582 719,178
------------ ------------
REDEEMABLE PREFERRED STOCK
Class B Preferred Stock, $.001 Par Value Authorized 510
Shares, Outstanding 15 Shares at December 31, 1997;
Redeemable at $10,000 Per Share After January 31, 2002 150,000 -
------------ ------------
STOCKHOLDERS' (DEFICIT)
Common Stock, $.001 Par Value, Authorized 30,000,000
Shares, Outstanding 5,787,000 Shares at December 31,
1997, 10,061,897 Shares at December 31, 1998 5,787 10,062
Class B Common Stock, $.001 Par Value, Authorized
100,000 Shares, Outstanding 60,000 Shares 60 60
Class A Preferred, $.001 Par Value, Authorized 900,000
Shares Outstanding 350,000 Shares 350 350
Additional Paid in Capital 2,436,445 2,996,664
Less Notes and Subscriptions Receivable - Common Stock (14,720) (14,720)
Deficit Accumulated During the Development Stage (2,964,447) (3,486,067)
Unrealized Holding Gain on Investment Securities 55,200 8,219
------------ ------------
TOTAL STOCKHOLDERS' (DEFICIT) (481,325) (485,432)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) 287,257 233,746
============ ============
See accompanying notes and independent accountants' report.
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
From Inception
(October 21, 1983)
Through
1996 1997 1998 December 31, 1998
---------- ---------- ------------ -------------------
REVENUES
Sale of Fatigue Fuses $ _ $ _ $ _ $ 64,505
Sale of Royalty Interests _ _ _ 198,750
Income from Research and Development Contracts _ 336,410 374,324 1,423,314
Test Services _ _ _ 10,870
---------- ---------- ------------ -------------------
TOTAL REVENUES _ 336,410 374,324 1,697,439
---------- ---------- ------------ -------------------
COSTS AND EXPENSES
Research and Development 10,700 78,409 252,257 1,838,962
General and Administrative 472,486 435,222 807,013 3,392,743
---------- ---------- ------------ -------------------
TOTAL COSTS AND EXPENSES 483,186 513,631 1,059,270 5,231,705
---------- ---------- ------------ -------------------
INCOME (LOSS) FROM OPERATIONS (483,186) (177,221) (684,946) (3,534,266)
---------- ---------- ------------ -------------------
OTHER INCOME (EXPENSE)
Expense Reimbursed 12,275 11,037 _ 4,510
Interest Income 2,427 8 8 39,503
Miscellaneous Income _ _ _ 25,145
Loss on Sale of Equipment _ _ _ (12,780)
Settlement of Teaming Agreement _ _ _ 50,000
Litigation Settlement _ _ _ 18,095
Modification of Royalty Agreement _ _ (7,332) (7,332
Gain on Foreclosure _ 18,697 _ 18,697
Gain on Sale of Stock 17,750 13,901 171,450 203,101
---------- ---------- ------------ -------------------
TOTAL OTHER INCOME 32,452 43,643 164,126 338,939
---------- ---------- ------------ -------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY (450,734) (133,578) (520,820) (3,195,327)
ITEMS AND PROVISIONS FOR INCOME TAXES
PROVISION FOR INCOME TAXES _ _ (800) (7,800)
---------- ---------- ------------ -------------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (450,734) (133,578) (521,620) (3,203,127)
EXTRAORDINARY ITEMS
Forgiveness of Debt _ _ _ (289,940)
Utilization of Operating Loss Carry Forward _ _ _ 7,000
---------- ---------- ------------ -------------------
NET INCOME (LOSS) (450,734) (133,578) (521,620) (3,486,067)
========== ========== ============ ===================
NET SHARE DATA
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ (0.05)
Extraordinary Items _
------------
NET (LOSS) PER SHARE $ (0.05)
============
COMMON SHARES OUTSTANDING 10,061,897
============
See accompanying notes and independent accountants' report.
F-5
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF COMPREHENSIVE LOSS
From Inception
(October 21, 1983)
Through
1996 1997 1998 December 31, 1998
------------ ------------- ---------- ------------------------
NET LOSS $ (450,734) $ (133,578) $(521,620) $ (3,486,067)
Other Comprehensive Income (Loss) Net of Tax
Unrealized Gains on Securities 55,200 55,200 8,219 8219
------------ ------------- ---------- ------------------------
Comprehensive Loss $ (395,534) $ (78,378) $(513,401) (3,477,848)
============ ============= ========== ========================
See accompanying notes and independent accountants' report.
F-6
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
CLASS A CLASS B
COMMON STOCK CLASS B COMMON PREFERRED STOCK PREFERRED STOCK
---------------------- ---------------------- -------------------- ------------
SHARES SHARES SHARES SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------------ -------- ------------ -------- ----------- ------- ------------
Initial Issuance of Common Stock
October 21, 1983 2,408 $ 2 - $ - - $ - -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2,202) (2) - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
206 - - - - - -
Balance - October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
with Pooling of Interests 42,334 14 - - - - -
Net (Loss), Year Ended
December 31, 1983 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1984 42,540 14 - - - - -
Capital Contribution - 28 - - - - -
Issuance of Common Stock 4,815 5 - - - - -
Costs Incurred in Connection
with Issuance of Stock - - - - - - -
Net (Loss), Year Ended
December 31, 1984 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1985 47,355 47 - - - - -
Shares Contributed Back
to Company (315) (0) - - - - -
Capital Contribution - - - - - - -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - - - -
Shares Canceled (8,758) (9) - - - - -
Net (Loss), Year Ended
December 31, 1985 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
F-7
Balance, January 1, 1986 38,282 38 - - - - -
Net (Loss), Year Ended
December 31, 1986 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1987 38,282 38 - - - - -
Issuance of Common Stock upon
Exercise of Warrants 216 - - - - - -
Net (Loss), Year Ended
December 31, 1987 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1988 38,498 38 - - - - -
Issuance of Common Stock
Sale of Stock (Unaudited) 2,544 3 - - - - -
Services Rendered (Unaudited) 3,179 3 - - - - -
Net (Loss), Year Ended
December 31, 1988 (Unaudited) - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1989 (Unaudited) 44,221 44 - - - - -
Issuance of Common Stock
Sale of Stock 4,000 4 - - - - -
Services Rendered 36,000 36 - - - - -
Net (Loss), Year Ended
December 31, 1989 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance, January 1, 1990 84,221 84 - - - - -
Issuance of Common Stock
Sale of Stock 2,370 2 - - - - -
Services Rendered 6,480 7 - - - - -
Net Income, Year Ended
December 31, 1990 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance January 1, 1991 93,071 93 - - - - -
Issuance of Common Stock
Sale of Stock 647 1 - - 350,000 350 -
Services Rendered 4,371 4 - - - - -
Conversion of Warrants 30 -
Conversion of Stock (6,000) (6) 60,000 60 - - -
Net (Loss), Year Ended
December 31, 1991 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
F-8
Balance January 1, 1992 92,119 92 60,000 60 350,000 350 -
Issuance of Common Stock
Sale of Stock 20,000 20 - - - - -
Services Rendered 5,400 5 - - - - -
Conversion of Warrants 6,000 6 - - - - -
Sale of Class B Stock - - 60,000 60 - - -
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 - - - - -
Conversion of Stock 6,000 6 (60,000) (60) - - -
Cancellation of Shares (6,650) (7) - - - - -
Net (Loss), Year Ended
December 31, 1992 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance January 1, 1993 127,620 127 60,000 60 350,000 350 -
Issuance of Common Stock
Licensing Agreement 12,500 13 - - - - -
Services Rendered 67,030 67 - - - - -
Warrant Conversion 56,000 56 - - - - -
Cancellation of Shares (31,700) (32) - - - - -
Net (Loss) for Year Ended
December 31, 1993 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance January 1, 1994 231,449 231 60,000 60 350,000 350 -
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,818 31 - - - - -
Issuance of Shares for
Services Rendered 223,000 223 - - - - -
Sale of Stock 1,486,112 1,486 - - - - 15
Issuance of Shares for
the Modification of Agreements 34,000 34 - - - - -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
F-9
Balance January 1, 1995 2,005,380 2,005 60,000 60 350,000 350 15
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 153 - - - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance January 1, 1996 2,157,880 2,157 60,000 60 350,000 350 15
Issuance of Shares for
Services Rendered 164,666 165 - - - - -
Sale of Stock 70,000 70 - - - - -
Issuance of Shares for
the Modification of Agreements 250,000 250 - - - - -
Cancellation of Shares Held
in Treasury (62,000) (62) - - - - -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - - -
------------ -------- ------------ -------- ----------- ------- ------------
Balance January 1, 1997 2,580,546 2,580 60,000 60 350,000 350 15
Sale of Stock 100,000 100 - - - - -
Conversion of Indebtedness 800,000 800 - - - - -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 - - - - -
Issuance of Shares for
Services Rendered 247,000 247 - - - - -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 560,000 560 - - - - -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - - -
F-10
5,787,000 5,787 60,000 60 350,000 350 15
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 - - - - -
Conversion of Options 500,000 500 - - - - -
Issuance of Shares for
Services Rendered 1,121,617 1,122 - - - - -
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 - - - - (15)
Shares Returned to Treasury
and Canceled (560,000) (560) - - - - -
Modification of Royalty Agreement 733,280 733 - - - - -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - - -
10,061,897 $10,062 60,000 $ 60 350,000 $ 350 -
============ ======== ============ ======== =========== ======= ============
CLASS B
PREFERRED STOCK
CAPITAL IN DEFICIT ACCUMU-
EXCESS OF PAR LATED DURING THE
AMOUNT VALUE DEVELOPMENT STAGE
---------- --------------- -------------------
Initial Issuance of Common Stock
October 21, 1983 $ - $ 2,498 $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares - (2) -
---------- --------------- -------------------
- 2,496 -
Balance - October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
with Pooling of Interests - 4,328 -
Net (Loss), Year Ended
December 31, 1983 - - (4,317)
---------- --------------- -------------------
Balance, January 1, 1984 - 6,824 (4,317)
Capital Contribution - 21,727 -
Issuance of Common Stock - 10,695 -
Costs Incurred in Connection
with Issuance of Stock - (2,849) -
Net (Loss), Year Ended
December 31, 1984 - - (21,797)
---------- --------------- -------------------
Balance, January 1, 1985 - 36,397 (26,114)
Shares Contributed Back
to Company - - -
Capital Contribution - 200,555 -
Sale of 12,166 Warrants at
$1.50 Per Warrant - 18,250 -
Shares Canceled - 9 -
Net (Loss), Year Ended
December 31, 1985 - - (252,070)
---------- --------------- -------------------
Balance, January 1, 1986 - 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 - - (10,365)
---------- --------------- -------------------
Balance, January 1, 1987 - 255,211 (288,549)
Issuance of Common Stock upon
Exercise of Warrants - 27,082 -
Net (Loss), Year Ended
December 31, 1987 - - (45,389)
---------- --------------- -------------------
Balance, January 1, 1988 - 282,293 (333,938)
Issuance of Common Stock
Sale of Stock (Unaudited) - 101,749 -
Services Rendered (Unaudited) - 70,597 -
Net (Loss), Year Ended
December 31, 1988 (Unaudited) - - (142,335)
---------- --------------- -------------------
Balance, January 1, 1989 (Unaudited) - 454,639 (476,273)
Issuance of Common Stock
Sale of Stock - 1,996 -
Services Rendered - 17,964 -
Net (Loss), Year Ended
December 31, 1989 - - (31,945)
---------- --------------- -------------------
Balance, January 1, 1990 - 474,599 (508,218)
Issuance of Common Stock
Sale of Stock - 59,248 -
Services Rendered - 32,393 -
Net Income, Year Ended
December 31, 1990 - - 133,894
---------- --------------- -------------------
Balance January 1, 1991 - 566,240 (374,324)
Issuance of Common Stock
Sale of Stock - 273,335 -
Services Rendered - 64,880 -
Conversion of Warrants -
Conversion of Stock - - -
Net (Loss), Year Ended
December 31, 1991 - - (346,316)
---------- --------------- -------------------
Balance January 1, 1992 - 904,455 (720,640)
Issuance of Common Stock
Sale of Stock - 15,980 -
Services Rendered - 15,515 -
Conversion of Warrants - 14,994 -
Sale of Class B Stock - 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary - 71,659 -
Conversion of Stock - - -
Cancellation of Shares - 7 -
Net (Loss), Year Ended
December 31, 1992 - - (154,986)
---------- --------------- -------------------
Balance January 1, 1993 - 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement - 6,237 -
Services Rendered - 13,846 -
Warrant Conversion - 304,943 -
Cancellation of Shares - (7,537) -
Net (Loss) for Year Ended
December 31, 1993 - - (929,900)
---------- --------------- -------------------
Balance January 1, 1994 - 1,355,039 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 - 385,393 -
Issuance of Shares for
Services Rendered - - -
Sale of Stock 150,000 23,300 -
Issuance of Shares for
the Modification of Agreements - (34) -
Net (Loss) for the Year
Ended December 31, 1994 - - (377,063)
---------- --------------- -------------------
Balance January 1, 1995 150,000 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - (197,546)
---------- --------------- -------------------
Balance January 1, 1996 150,000 1,763,698 (2,380,135)
Issuance of Shares for
Services Rendered - 16,301 -
Sale of Stock - 173,970 -
Issuance of Shares for
the Modification of Agreements - (250) -
Cancellation of Shares Held
in Treasury - (154,538) -
Net (Loss) for the Year
Ended December 31, 1996 - - (450,734)
---------- --------------- -------------------
Balance January 1, 1997 150,000 1,799,181 (2,830,869)
Sale of Stock - 99,900 -
Conversion of Indebtedness - 165,200 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer - 370,500 -
Issuance of Shares for
Services Rendered - 2,224 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 - (560) -
Net (Loss) for the Year
Ended December 31, 1997 - - (133,578)
150,000 2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness - 167,570 -
Conversion of Options - 124,500 -
Issuance of Shares for
Services Rendered - 111,040 -
Shares Issued in Cancellation
of Redeemable Preferred Stock (150,000) 149,950 -
Shares Returned to Treasury
and Canceled - 560 -
Modification of Royalty Agreement 6,599 -
Net (Loss) for the Year
Ended December 31, 1998 - - (521,620)
$ - $ 2,996,664 $ (3,486,067)
========== =============== ===================
F-11
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
From Inception
(October 21, 1983)
Through December
1996 1997 1998 31, 1998
---------- ---------- ---------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(450,734) $(133,578) $(521,620) $ (3,486,067)
---------- ---------- ---------- -------------------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization 4,931 4,779 4,889 169,383
Bad Debts - - 50,000 50,000
Gain on Sale of Securities (17,750) - (171,450) (189,200)
Charge off of Deferred Offering Costs - 5,000 - 36,480
Charge off Long-lived Assets due to Impairment - - 92,919 92,919
Gain on Foreclosure (18,697) - (18,697)
Modification of Royalty Agreement - - 7,332 7,332
(Increase) Decrease in Receivables - (113,832) (140,405) (254,237)
(Increase) Decrease in Prepaid Expenses (1,472) 1,793 - 321
Loss on Sale of Equipment - - - 12,780
Issuance of Common Stock for Services 16,467 2,470 112,162 410,597
Issuance of Common Stock for Agreement - - - 152
Modifications
Forgiveness of Indebtedness - - - 165,000
Increase (Decrease) in Accounts
Payable and Accrued Expenses 238,957 32,376 104,049 688,960
Interest Accrued on Notes Payable 17,681 11,266 50,658 90,475
Increase in Research and Development
Sponsorship Payable - 29,505 - 218,000
(Increase) in Note for Litigation Settlement (2,092) - - (25,753)
(Increase) in Deposits - - - (2,189)
---------- ---------- ---------- -------------------
TOTAL ADJUSTMENTS 256,722 (45,340) 110,154 1,452,323
---------- ---------- ---------- -------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (194,012) (178,918) (411,466) (2,033,744)
---------- ---------- ---------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of Equipment - - - 10,250
Purchase of Property and Equipment - - (3,304) (229,413)
Proceeds from Sale of Securities 17,750 - 261,450 279,200
Purchase of Securities - - (90,000) (90,000)
Proceeds from Foreclosure 44,450 - 44,450
(Increase) in Other Assets - - - (69,069)
Payment for License Agreement - - - (6,250)
---------- ---------- ---------- -------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 17,750 44,450 168,146 (60,832)
---------- ---------- ---------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock Net of Offering Costs 174,040 100,000 125,000 957,319
Costs incurred in Offering - - - (31,480)
Sale of Common Stock Warrants - - - 18,250
Sale of Preferred Stock - - - 258,500
Sale of Redeemable Preferred Stock - - - 150,000
Capital Contributions - - - 301,068
Payment on Proposed Reorganization (5,000) - - (5,000)
Loans From Officers 43,250 119,000 150,500 625,807
Repayments to Officer (64,676) (79,659) (34,611) (344,532)
Increase in Loan Payable-Others 25,000 - - 164,664
---------- ---------- ---------- -------------------
See accompanying notes and independent accountants' report.
F-12
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
From Inception
(October 21, 1983)
Through
1996 1997 1998 December 31, 1998
--------- --------- --------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $172,614 $139,341 $240,889 $ 2,094,596
--------- --------- --------- -------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,648) 4,873 (2,431) 20
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS $ 1,226 (2,422) 2,451 -
--------- --------- --------- -------------------
ENDING BALANCE - CASH AND CASH
EQUIVALENTS (2,422) 2,451 20 20
========= ========= ========= ===================
SUPPLEMENTAL INFORMATION:
A. Definition of Cash and Cash Equivalents
For the purpose of the statements of cash flows, all
highly liquid investments with a maturity of three
Months or less are considered to be cash equivalents.
B. Interest and Income Taxes Paid
Interest Paid During Period 2,000 2,500 2,500
========= ========= =========
Income Taxes Paid - - -
========= ========= =========
C. Non Cash Investing and Financing Activities
During 1996, the Company issued 250,000 shares of its Class A Common stock in consideration for cancellation of a
2.5% royalty interest in the Company's Fatigue Fuse.
During 1996, a unrelated third party assigned his interest in a $55,000 loan owed him by the Company to the
Company's President.
During 1997, the Company issued 1,499,454 shares of Common Stock to its President in exchange for the cancellation
of accrued salary due him in the amount of $372,000.
During 1997, the Company issued 520,000 shares of Common Stock to the Company's President when he converted a
convertible note.
During 1997, the Company issued 280,000 shares of Common Stock to a third party through the conversion of a
convertible note.
During 1998, the Company issued 2,430,000 shares of Common Stock to its President in exchange for the cancellation
of $170,000 of indebtedness.
During 1998, the Company issued 733,280 shares of Common Stock in exchange for the reduction of a royalty on the
fatigue fuse from 20% to 5%. The Company valued the shares issued at $7,332 which was charged to operations.
During 1998, the Company issued 50,000 shares of Common Stock in exchange for the cancellation of the $150,000
redeemable preferred stock.
See accompanying notes and independent accountants' report.
F-13
NOTE 1 - ORGANIZATION
Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.
On March 9, 1997, the Company's Board of Directors authorized the issuance of
5,560,000 of its Common Stock to Material Technology, Inc. ("Matech 1") in
exchange for all of Matech 1's op-erations including all of its assets and the
assumption of all of Matech 1's liabilities.
The formation of this subsidiary and related to transfer of assets and
liabilities is in connection with a February 17, 1997 Stock Purchase Agreement
among Matech 1, Montpilier Holdings, Inc., SecurFone America, Inc. and the
Company's President. Under this agreement, the parties effected a reverse
merger of SecurFone into Matech 1 immediately after the distribution of this
Company's stock to the shareholders of Matech 1. A schedule of the assets and
liabilities ac-quired is as follows:
ASSETS
Prepaid Expenses $ 6,472
Property & Equipment - Net 98,016
Licensing Agreement and
Patents 20,669
Notes Receivable 25,753
Other Assets 57,389
--------
$ 208,299
=======
Liabilities
Bank Overdraft $ 2,422
Payables and Other
Accrued Expenses 180,536
Accrued Salaries
- Officer 372,000
Loans Payable - Officer 56,846
Loans Payable - Other 57,627
Note Payable on
Licensing Agreement 188,495
-------
857,926
Redeemable Preferred
Stock 150,000
-------
Liabilities in Excess
of Assets Transferred $(799,627)
==========
NOTE 1 - ORGANIZATION (CONTINUED)
F-14
The amounts reflected above are the balances reflected in Matech 1's audited
balance sheet as of December 31, 1996, adjusted to take into effect the
conversion of certain loans due a share-holder and the Company's President as
discussed further in Notes 8 and 13. Management has determined that the activity
between this balance sheet date and the actual date of transfer is immaterial.
For financial reporting purposes, the above transaction was treated as a
recapitalization. There-fore, the assets and liabilities transferred have been
recorded at historical cost.
The Company is in the development stage, as defined in FASB Statement 7, with
its principal activity being research and development in the area of metal
fatigue technology with the intent of future commercial application. The
Company has not paid any dividends and dividends which may be paid in the future
will depend on the financial requirements of the Company and other relevant
factors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Property and Equipment
The cost of property and equipment is depreciated over the estimated useful
lives of the re-lated assets. Depreciation is computed on the straight-line
method for financial reporting purposes and for income tax reporting purposes.
b. Intangible Assets
Intangibles are amortized on the straight-line method over periods ranging from
5 to 20 years (see Note 5).
c. Net Loss Per Share
Net loss per share is computed pursuant to SAB Topic 1.B.2.
d. Persuasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
F-15
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e) Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at their
current carrying amounts.
f) Concentration of Credit Risk
Currently, the Company's only source of income comes from its sub-contracts for
EFS re-search with United States Air Force contractors. The Company believes
these contracts will continue throughout 1999.
NOTE 3 - RECEIVABLE FROM MONTPILIER HOLDINGS, INCA
Under the original terms of the merger agreement with Montpilier Holding, Inc.
as discussed in Note 1, the Company was owed $50,000 which was secured by
560,000 shares of the Com-pany's common stock. The receivable was due in
October 1998. Montpelier gave notice that it could not pay the $50,000 and
surrendered the 560,000 shares back to the Company. These shares were returned
to the Company's treasury and subsequently canceled.
NOTE 4 - INTANGIBLES
Period of December 31,
Amortization 1997 1998
------------ -------------- ---------
Patent Costs 17 Years $ 28,494 $ 28,494
Organization Costs 5 Years 9,076 9,076
License Agreement 20 Years 6,250 6,250
(See Note 7)
43,820 43,820
Less Accumulated Amortization (25,141) (27,130)
-------------- ---------
$ 18,679 $ 16,690
============== =========
Amortization charged to operations for 1996, 1997, and 1998, were $1,989, $1,990
and $1,989, respectively.
F-16
NOTE 5 - LITIGATION SETTLEMENT
On October 26, 1992, the Company agreed to an out-of-court settlement resulting
from impro-prieties by its chief technical consultant, who was also an officer
and director. The settlement resulted in a return from the individual of 5,650
shares of the Company's common stock, a re-turn of 600 warrants to purchase 600
shares of common stock, and a promissory note for $50,000 secured by a mortgage
interest on the individual's residence.
As of December 31, 1996, the note was in default due to the failure by the
individual to maintain insurance on the property and to pay property taxes.
During 1997, the Company foreclosed on the property and then sold it. The
proceeds received from the sale net of related costs and attor-ney's fees
amounted to approximately $44,450. The company realized a net gain from the
fore-closure of approximately $18,697.
NOTE 6 - LICENSE AGREEMENT
The Company has entered into a license agreement with the University of
Pennsylvania regard-ing the development and marketing of the Electrochemical
Fatigue Sensor. The Sensor is de-signed to measure electrochemically the status
of a structure without knowing the structure's past loading history. The
Company is in the initial stage of developing the Sensor.
Under the terms of the agreement the Company issued to the University 12,500
shares of its common stock, and a 5% royalty on sales of the product. The
Company valued the licensing agreement at $6,250. Under the terms of the
agreement, the license terminates upon the expira-tion of the underlying
patents, unless sooner terminated as provided in the agreement. The Company is
amortizing the license over 20 years.
In addition to entering into the licensing agreement, the Company also agreed to
sponsor the de-velopment of the Sensor. Under the Sponsorship agreement, the
Company agreed to reimburse the University development costs totaling
approximately $200,000 which was to be paid in 18 monthly installments of
$11,112. Pursuant to the terms of the agreement, the Company reim-bursed the
University $10,000 in 1996 for the cost it incurred in the prosecution and
mainte-nance of its patents relating to the Electrochemical Fatigue Sensor.
The Company and the University have agreed to modify the terms of the licensing
agreement and related obligation. The terms of the modified agreements include
an increase in the Univer-sity's royalty to 7% of the sale of related products,
the issuance of additional shares of the Com-pany's Common Stock to equal 5% of
the outstanding stock of the Company as of the effective date of the modified
agreements, and to pay to the University 30% of any amounts raised by the
Company in excess of $150,000 (excluding amounts received on government grants
or con-tracts) up to the amount owed to the University.
F-17
NOTE 6 - LICENSE AGREEMENT (CONTINUED)
The parties agreed that the balance owed on the Sponsorship Agreement is
$200,000 and com-mencing June 30, 1997, the balance due will accrue interest at
a rate of 1.5% per month until the loan matures on December 16, 2001, when the
loan balance and accrued interest becomes fully due and payable. In addition,
under the agreement, Mr. Bernstein agreed to limit his compensa-tion from the
Company to $150,000 per year until the loan and accrued interest is fully paid.
In-terest charged to operations for 1997 and 1998, relating to this obligation
was $18,000 and $39,240, respectively. The balance of the note at December 31,
1997, and 1998, was $218,000 and $257.240, respectively,
NOTE 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
December 31,
1997 1998
---------- -----------
Office Equipment $ 14,345 $ 21,890
Remote Monitoring system 97,160 --
Manufacturing Equipment 100,067 100,067
---------- -----------
211,572 121,957
Less: Accumulated
Depreciation (116,345) (119,245)
---------- -----------
$ 95,227 $ 2,712
========== ===========
Depreciation charged to operations was $2,942, and $2,789, and $2,900, in 1996,
1997, and 1998, respectively. The useful lives of office equipment for the
purpose of computing deprecia-tion is five years. Management will commence
depreciating its manufacturing equipment upon the commencement of the
manufacturing of its products.
The Company's equipment has been pledged as collateral on the agreement with
Advanced Technology Center (See Note 11(b)).
The Company has entered into an agreement dated April 1, 1993, with the
University of Penn-sylvania acting through the Laboratory for Research on the
Structure of Matter ("LRSM") to loan certain manufacturing equipment to the LRSM
for instructional and research related pur-poses for a period of 5 years,
beginning December 1, 1992, and ending December 1, 1997.
In 1998, the Company had determined that based upon its current research and
development program, the cost basis of the Remote Monitoring system was severely
impaired. The Company determined that the system had no value and charged its
full cost of $97,160 to operations.
F-18
NOTE 8 - NOTES PAYABLE
On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a current
share-holder. The loan is evidenced by a promissory note which is assessed
interest at major bank prime rate. The Company has pledged its patents as
collateral against this loan.
As additional consideration for the loan, the Company granted to Mr. Baker, a 1%
royalty inter-est in the Fatigue Fuse and a 0.5.% royalty interest in the
Electrochemical Fatigue Sensor. The Company has not placed a value on the
royalty interest granted. The balance due on this loan as of December 31, 1997,
and 1998, was $35,218, and $38,211, respectively. Interest charged to
operations for 1996, 1997, and 1998 was $3,189, and $2,759, and $2,993,
respectively.
The Company did not pay any amounts due on this note when it matured on May 26,
1996, and the note is in default.
In October 1996, the Company borrowed $25,000 from an unrelated third party.
Under the terms of the promissory note, the loan was assessed interest at an
annual rate of 10% and ma-tured on October 15, 1998. The Company renegotiated
the terms of the loan. Under the revised terms, the note is assessed interest at
a rate of 11% per annum commencing January 1, 1999, and matures on October 15,
2000. In addition the Company issued warrants to the lender for the purchase of
2,500 shares of the Company's common stock at a price of $1.00 per share.
Interest charged to operations on this loan in 1996, 1997, and 1998, was $527,
and $2,500, and $2,500, respectively.
NOTE 9 - INCOME TAXES
Income taxes are provided based on earnings reported for financial statement
purposes pursuant to the provisions of Statement of Financial Accounting
Standards No. 109 ("FASB 109").
FASB 109 uses the asset and liability method to account for income taxes which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax basis and financial
reporting basis of assets and liabilities.
An allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses to zero, as it cannot be
determined when, or if, the tax benefits derived from these operating losses
will materialize.
As of December 31, 1998, the Company has unused operating loss carryforwards,
which may provide future tax benefits in the amount of approximately $1,792,000
which expire in various years throughout 2018.
F-19
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, in order to provide funding for research and
development related to the Fatigue Fuse, the Company entered into various
agreements with the Tensiodyne 1985-I R & D Partnership. These agreements were
amended on October 9, 1989, and under the re-vised terms, obligated the Company
to pay the Partnership a royalty of 10% of future gross sales. The Company's
obligation to the Partnership is limited to the capital contributed to it by its
partners in the amount of approximately $912,500 and accrued interest.
b. On August 30, 1986, the Company entered into a funding agreement with the
Advanced Technology Center ("ATC"), whereby ATC paid $45,000 to the Company for
the purchase of a royalty of 3% of future gross sales and 6% of sublicensing
revenue. The royalty is lim-ited to the $45,000 plus an 11% annual rate of
return. At December 31, 1997, and 1998, the future royalty commitment was
limited to $149,630 and $166,089, respectively.
The payment of future royalties is secured by equipment used by the Company in
the devel-opment of technology as specified in the funding agreement.
c. On May 4, 1987, the Company entered into a funding agreement with ATC,
whereby ATC provided $63,775 to the Company for the purchase of a royalty of 3%
of future gross sales and 6% of sublicensing revenues. The agreement was
amended August 28, 1987, and as amended, the royalty cannot exceed the lesser of
(1) the amount of the advance plus a 26% annual rate of return or, (2) total
royalties earned for a term of 17 years.
At December 31, 1997, and 1998, the total future royalty commitments, including
the accu-mulated 26% annual rate of return, was limited to approximately
$684,488, and $862,454, respectively. The future royalties are secured by the
Company's patents, products, and ac-counts receivable, which may be related to
technology developed with the funding.
d. In 1994, the Company issued to Variety Investments, Ltd. of Vancouver,
Canada ("Variety"), a 22.5% royalty interest on the Fatigue Fuse in
consideration for the cash advances made to the Company by Variety.
In December 1996, in exchange for the issuance by the Company of 250,000 shares
of its Common Stock, Variety reduced its royalty interest to 20%.
In 1998, in exchange for the issuance by the Company of 733,280 shares of its
Common Stock, Variety reduced its royalty interest to 5%.
e. Under an agreement which was effective February 2, 1994, Tensiodyne
Corporation, the Company's former parent, was obligated to provide $5,100,000 in
financing to the Company.
F-20
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1994, the Company received $150,000 under this agreement in exchange for
the is-suance of 7,560 shares of its common stock and 15 shares of its
Redeemable Class B Pre-ferred Stock. The $150,000 has been classified for
financial purposes as Redeemable Pre-ferred Stock.
In 1998, the Company issued 50,000 shares of its Common Stock in exchange for
the can-cellation of the redeemable preferred stock.
Tensiodyne was not able to fund the full amount of its obligation to the Company
and on November 22, 1994, the Company filed suit against Tensiodyne for breach
of contract. On March 28, 1995, a settlement agreement was entered into whereby
Tensiodyne issued to the Company 6,375,000 shares of its Common Stock. The
proceeds received from the sale of these shares will be used to reduce
Tensiodyne's obligation to pay the remaining balance owing of $4,950,000 and
accrued interest which is assessed under the settlement agreement at 7% per
annum.
The Company also received upon the signing of the settlement agreement 250,000
shares of Tensiodyne common stock.
Management believes that Tensiodyne has insufficient capital to meet its
obligation to pay any of the amounts owed and the Company will have to rely on
the proceeds it receives through the sale of the Tensiodyne shares to reduce the
amount due.
The shares received were subject to restrictions imposed under SEC Rule 144. As
of De-cember 31, 1997, the restrictions imposed by SEC Rule 144 are lifted, but
due to the limited market in which to sell the Tensiodyne stock, it is
impractical to estimate the full value of the obligation owed the Company by
Tensiodyne.
f. The Company entered into an agreement with an unrelated third party for
providing the idea of pursuing government contracts for to fund development of
the Company's technologies, under which he would receive Common Stock equal to
2.5% of the number of shares out-standing as of the date a government contracts
are signed, 15% of the amount of the respective government contracts, and an
appointment to the Company's Board of Directors. Funds due him are to be paid
only when such funds become available to the Company.
The Company's obligation is created on the date the government contract are
signed. Under the agreement with this individual, the amounts due will be
evidenced by a promissory note bearing interest at major bank prime.
F-21
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Agreement contains anti-dilution provisions relating to the shares to be
issued which expire once $50,000 is paid. The Company's obligation to have this
person as a Director ex-pires once all amounts due are paid. The contingent
amount due has been personally guar-anteed by the Company's President and is
secured by the Company's patents. The personal guarantee expires upon the
individual receiving $100,000.
In 1998, in accordance with the agreement, the Company issued 244,427 shares of
its com-mon stock to the individual.
g. As discussed in Note 9, the Company granted a 1% royalty interest in the
Company's Fa-tigue Fuse and a .5% royalty interest in its Electrochemical
Fatigue Sensor to Mr. Sherman Baker as part consideration on a $25,000 loan made
by Mr. Baker to the Company.
A summary of royalty interests which the Company has granted and are outstanding
as of December 31, 1998, follows:
Fatigue Fatigue
Fuse Sensor
------- -------
Tensiodyne 1985-1 R&D Partnership --* --
Advanced Technology Center
Future Gross Sales 6.00%* --
Sublicensing Fees -- ** --
Variety Investments, LTD 5.00% --
University of Pennsylvania
Net Sales of Licensed Products -- 7.00%
Net Sales of Services -- 2.50%
Sherman Baker 1.00% 0.50%
------- -------
12.00% 10.00%
======= =======
* Royalties limited to specific rates of return as discussed in Notes 11(a)
and (b) above.
** The Company granted 12% royalties on sales from sublicensing. These
royalties are also limited to specific rates of return as discussed in Note
11(b) and (c) above.
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
h) Operating Leases
The Company leases its existing office under a noncancelable lease, which
expires on May 31, 1999.
F-22
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rental expense charged to operations for the years ended December 31, 1996,
1997, and 1998 was approximately $29,017, $28,137, and $22,632, which consisted
solely of mini-mum rental payments.
In addition to rent, the Company is obligated to pay property taxes, insurance,
and other re-lated costs associated with the leased office.
NOTE 11 - INVESTMENTS
As discussed in Note 10, the Company acquired 6,625,000 of Class A Common Stock
of Ten-siodyne Corporation. During 1996, the Company received approximately
$17,750 through the sale of 50,000 shares of Tensiodyne Corporation stock.
Due to the share's limited market, the Company believed that the actual proceeds
it would de-rive from their sale at December 31, 1997, would be far lower then
its computed value. The Company believed that the decline in value is other
than temporary, Therefore, it has valued these shares at $55,200.
In 1998, the Board of Shareholders' of Tensiodyne authorized two reverse stock
splits which re-duced the total shares owned by the Company to 65,750. These
shares were valued at December 31, 1998, at their market value of $8,219.
NOTE 12 - STOCKHOLDERS' EQUITY
a. Warrants
On August 10, 1994, the Company granted 994,500 Warrants to Mr. Robert
Bernstein, 170,000 Warrants to Mr. Joel Freedman, and 535,500 Warrants to
certain preferred share-holders. Each Warrant entitled the registered holder
to purchase one share of Common Stock of the Company for $.50. On December 15,
1995, the Company's Board of Directors extended the expiration date of the
Warrants from August 22, 1996 to August 22, 1999.
At the dates of the original grant and subsequent extension, the exercise price
was greater than market value, therefore, no compensation costs were recognized.
On July 31, 1997, all warrants were canceled.
On June 25, 1998, the Company granted 1,800,000 Warrants to Robert A.
Bernstein and 200,000 Warrants to Joel Freedman. Each warrant
purchases 1 share of the Company's common stock at a price of $.50 per share.
The warrants expire on June 30, 2002. On November 6, 1998, the Company's Board
reduced the purchase price to $.10 a share.
F-23
NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)
b. Common Stock
The holders of the Company's Common Stock are entitled to one vote per share of
common stock held.
c. Class B Common Stock
The holders of the Company's Class B Common Stock are not entitled to dividends,
nor are they entitled to participate in any proceeds in the event of a
liquidation of the Company. However the holders are entitled to 500 votes for
each share of Class B Common held.
d. Class A Preferred Stock
During 1991, the Company sold to a group of 15 individuals 2,585 shares of $100
par value preferred stock and warrants to purchase 2,000 shares of common stock
for a total consid-eration of $258,500.
In the Company's 1994 spin off, these shares were exchanged for 350,000 shares
of the Company's Class A Convertible Preferred Stock and 300,000 shares of its
Common Stock. The holders of these shares have a liquidation preference to
receive out of assets of the Company, an amount equal to $.72 per one share of
Class A Preferred Stock. Such amounts shall be paid upon all outstanding shares
before any payment shall be made or any assets distributed to the holders of the
common stock or any other stock of any other series or class ranking junior to
the Shares as to dividends or assets.
These shares are convertible to shares of the Company's common stock at a
conversion price of $.72 ("initial conversion price") per share of Class A
Preferred Stock which will be ad-justed depending upon the occurrence of certain
events. The holders of these preferred shares shall have the right to vote and
cast that number of votes which the holder would have been entitled to cast had
such holder converted the shares immediately prior to the record date for such
vote.
The holders of these shares shall participate in all dividends declared and paid
with respect to the Common Stock to the same extent had such holder converted
the shares immediately prior to the record date for such dividend.
e. Issuances Involving Non-cash Consideration
All issuances of the Company's stock for non-cash consideration have been
assigned a dollar amount equaling either the market value of the shares issued
or the value of consideration received whichever is more readily determinable.
The majority of the non-cash considera-tion received pertains to services
rendered by consultants and others.
F-24
NOTE 13 - TRANSACTIONS WITH MANAGEMENT
a. On December 10, 1992, the Company issued to Mr. Robert M. Bernstein, the
President of the Company, 60,000 shares of the Company's Class B common stock.
In exchange for the stock, Mr. Bernstein executed a five-year
non-interest-bearing note for $15,000. The Note is non-recourse as the only
security pledged for the obligation was the stock purchased.
b. During 1993, Mr. Bernstein exercised warrants to purchase 56,000 shares
of the Company's common stock. Pursuant to the resolution on April 12, 1993,
adjusting the per share amount from $10.00 to $2.50, Mr. Bernstein paid $560 and
executed two five year non-interest bearing notes to the Company for $124,500
and $14,940. The Note is non-recourse as the only security pledged for the
obligation was the stock purchased.
c. On February 28, 1994, the Company authorized the issuance of 10,000
shares of Common Stock to Mr. Bernstein for past services.
d. In March 1994, Mr. Bernstein advanced the Company $48,750 of which
$12,000 was can-celed in exchange for the issuance of 1,200,000 shares of the
Company's Common Stock. Of these shares purchased, Mr. Bernstein sold 420,000
shares for $4,200 to Joel Freedman and certain preferred shareholders.
e. In 1994, the president and a director of the Company purchased 278,550
shares of the Com-pany's common stock for $2,786.
f. In 1995, the Company's Board of Directors amended the Company's By-laws
increasing the number of Directors from 2 to 3, and establishing an advisory
board consisting of 7 people.
The Company authorized the issuance of 58,000 shares of its Common Stock to the
new board member and authorized the issuance of 20,000 shares of its Common
Stock to each member of the advisory board. Each member must serve on the
advisory board for at least 2 years or will have to return the issued shares
back to the Company.
g. On June 12, 1995, $108,000 of the total advances made by the Company's
President to the Company was converted into an interest-bearing loan.
The loan is assessed interest at Mellon Bank, N.A. prime lending rate and is
convertible into 520,000 shares of the Company's Common Stock on a pro rata
basis. The loan matures in five years and the conversion of the $108,000 or any
portion thereof can occur any time prior to maturity.
In March 1997, the President converted the balance owed him into 520,000 shares
of Com-mon Stock.
F-25
NOTE 13 - TRANSACTIONS WITH MANAGEMENT (CONTINUED)
h. In 1995, the Company forgave $154,600 on an obligation due from the
Company's President in consideration for the President returning 62,000 shares
of the Company's Common Stock to the Company's Treasury.
i. During 1996, the Company's President advanced the Company approximately
$43,250. During 1996, the Company paid back to the President approximately
$64,676.
j. In 1996, the Company issued the President 62,000 shares of its Common
Stock for services.
k. During 1997, the President advanced $119,000 of which $79,659 was repaid.
In the past, the Company only paid the President interest on his convertible
note. All other loans were made interest free. In 1998, the Company's board of
directors authorized the Company to pay the President interest on all amounts
due him as of January 1, 1997, and on any future loan activity at an annual rate
of 10%.
The total amounts owed the president of the Company as of December 31, 1997
and 1998 amounted to $118,863 and $73,177, respectively. The amount of accrued
interest charged to operations on the President's loans in 1996, 1997, 1998, was
$9,430, and $7,978, and $8,425, respectively.
l. During 1997, the Company canceled the approximately $372,000 of accrued
salary owed the Company's President in exchange for issuing to him 1,499,454
shares of the Company's Common Stock.
m. In August, 1997, the Company's board of directors signed a resolution
recognizing the Company's extreme dependence on the experience, contacts, and
efforts of Mr. Bernstein and authorized to pay him a salary of $150,000 a year
since 1991. Mr. Bernstein will receive the compensation at such time as the
board has determined that the Company has profited from. Mr. Bernstein's efforts
in regards to the Company receiving substantial funding, the licensing of its
technology, the selling of its technology, the Company's merger with another
company, or otherwise profiting in a substantial manner. The amount which would
be due to Mr. Bernstein as of December 31, 1998, had the board so declared, is
approximately $557,583. This amount represents the difference between the
$150,000 a year and the com-pensation actually accrued during the year 1991
through 1997.
n In 1998, the Company issued 2,430,000 shares of its common stock to Mr.
Bernstein in ex-change for the cancellation of $170,000 of indebtedness.
o. In 1998, the Company issued to a Director 302,190 shares of its common
stock for consult-ing services valued at $30,219
F-26
NOTE 14 - STOCK OPTION PLAN
In 1998, the Company formed the 1998 stock option plan where 1,700,000 shares
were reserved under the plan. Under the plan, the Company in 1998 issued
500,000 shares of common stock in consideration for receiving $125,000 and
issued an additional 575,000 for consulting services.
NOTE 15 - SUBSEQUENT EVENTS
In February 1999, the Company entered into an agreement whereby it converted
$66,666 of in-debtedness owed to a consultant in exchange for the issuance of
175,000 shares of restricted common stock and a warrant to purchase up to an
additional 175,000 shares of common stock at a price of $2.50 a share. The
warrant expires on February 1, 2002.
F-27