Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 o (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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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 February 18, 2000 (i.e. $2.15625. per share) is $6,059,813.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the last practicable date.
1
No. of Shares Outstanding
CLASS OF COMMON STOCK (AS OF FEBRUARY 10, 2000)
- --------------------- -------------------------
Common Stock 14,706,769
Class B Common Stock 100,000 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"), is engaged in research and development
of metal fatigue detection, measurement, and monitoring technologies. As such,
the Company is developing a comprehensive system of monitoring devices for
detecting structural stress and metal fatigue measurement, and monitoring
technologies. Matech is a development stage company doing business as Tensiodyne
Scientific Corporation.
The Company's efforts are dedicated to developing devices and systems that
indicate the true fatigue status of a metal component. The Company has developed
two products. The first is a small, extremely simple device that continuously
monitors fatigue life in a structural member. It is called a Fatigue Fuse
(FFTM). The second is an instrument that can measure the amount of fatigue life
remaining in an existing structural member. Nothing like it currently exists in
material technology. Further it has the ability to determine the presence of
cracks. The crack detection modality has a resolution of a few microns,
exceeding the current state of the art by fifty times or more. It is called an
Electrochemical Fatigue Sensor (EFSTM). Both devices are pioneering technology
in the fatigue field that stands as cutting-edge solutions. They are both well
patented.
Future products under development are a smart Bridge Management System, a Clamp
Load Sensor for aerospace products, and a partnering relationship for
development of a Borescope for remote EFS delivery, and a combined Fatigue Fuse
and Electrochemical Fatigue Sensor.
The Company believes the Fatigue Fuse, in its present state, is ready for
commercialization in certain specified markets, but requires significant
additional 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 research and development
for commercialization in other markets. The Fatigue Fuse and the Electrochemical
Fatigue Sensor are intended to measure the progression of fatigue and the status
of fatigue respectively in metal structures.
2
The Company was formed as a Delaware corporation on March 4, 1997. It is the
successor to the business of Material Technology, Inc., a Delaware corporation,
also doing business as Tensiodyne Scientific, Inc., ("Matech 1") and Matech 1
was the successor to the business of Tensiodyne Corporation that began
developing the Fatigue Fuse in 1983. The Company's two predecessors, Tensiodyne
Corporation and Matech 1 were engaged in developing and testing the Fatigue Fuse
and, beginning in 1993, developing the EFS.
DESCRIPTION OF TECHNOLOGIES
THE FATIGUE FUSE
The Fatigue Fuse is designed to be affixed to a structure to give warnings as
preselected portions of the fatigue life have been used up (i.e., how far to
failure the structure has progressed). It warns against a condition of
widespread generalized cracking due to fatigue.
The Fatigue Fuse is a thin piece of metal similar to the material being
monitored. It consists of a series of parallel metal strips connected to a
common base, much as fingers are attached to a hand. Each "finger" has a
different geometric pattern called "notches" defining its boundaries. Each
finger incorporates a design specific notch near the base. By applying the laws
of physics to determine the geometric contour of each notch, the fatigue life of
each finger is finite and predictable. When the fatigue life of a finger (or
Fuse) is reached, the Fuse breaks.
By implementing different geometry for each finger in the array, different
increments of fatigue life are observable. Typically, notches will be designed
to facilitate observing increments of fatigue life of 10% to 20%. By
mechanically attaching or bonding these devices to different areas of the
structural member of concern, the Fuse undergoes the same fatigue history as the
structural member. Therefore, breakage of a Fuse indicates that an increment of
fatigue life has been reached for the structural member. The notch and the size
and shape of the notch concentrate energy on each finger. The Fuse is intimately
attached to the structural member of interest. Therefore, the Fuse experiences
the same load and wear history as the member.
The notches on each finger accelerate the fatigue process for a given finger
according to the design characteristics of the notch. If the notch is shaped to
concentrate large amounts of energy at a sharp point, fatigue for that finger
accelerates causing a rupture in the finger at an early state. The rupture is
directly correlated to a certain point in the progression 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 fatigue age. The different rates of
fatigue acceleration 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 progression of fatigue age
in a structural member, provided the fatigue condition of that member is known.
Fatigue is a consequence of a metal object undergoing repeated cyclic strain. In
a commercial context this strain and concomitant stress comes about as a result
of a large number of cycles of loading and unloading. Sudden fracture can
result. Fatigue damage and the resulting compromise of stability and integrity
of the member experiencing fatigue presents the potential for structural failure
and extreme danger. Objects such as bridges and airplane wings are subject to
fatigue, and it is obvious that sudden fracture of such structures would have
disastrous results. It is presently not possible, under any generally acceptable
theory of fatigue phenomena, to predict by analysis
3
alone when the limit is reached and when a fracture may occur. Further, in
normal usage, damage occurs cumulatively, at microscopic levels, and can only be
detected in the early stages at a time when dire results can be avoided by
examining the microscopic structure.
This difficulty has caused designers of structures subject to fatigue to be
extremely conservative by designing structures in a manner which maintains the
stresses presented in critical areas of a structure at a level well below the
known endurance limits of the material employed. In many instances this results
in extreme expense. In spite of this "over designing", catastrophic fatigue
failures still occur. Although tests of the Fatigue Fuse have been performed in
independent laboratories and the Fuse has been shown to perform as designed and
as expected, substantial additional testing is necessary to ensure that it will
be possible to calibrate various types of loading spectra, i.e., the range and
types of stresses which a metal object experiences during usage. Management
estimates that it will require an outlay of approximately $600,000 to accomplish
this additional testing and that such additional testing could be accomplished
in 6 to 12 months from the availability of the funds.
Management believes that the Fatigue Fuse will be of value in monitoring
aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc. No
special training will be needed to qualify individuals to report any broken
segments of the Fatigue Fuse to the appropriate engineering authority for
necessary action. The success of the device is contingent upon Matech's
successful development and marketing of the Fatigue Fuse, and no assurance can
be given that Matech will be able to overcome the obstacles relating to
introducing a new product to the market. To determine its ability to produce and
market the Fatigue Fuse, Matech needs substantial additional capital and no
assurance can be given that needed capital will be available. In a new structure
we can generally assume there is no fatigue and can thus design the fatigue fuse
for 100% of its life potential. But in an existing structure, one that
experienced loading and wear, we must determine the fatigue age of that
structural member so we can design the Fatigue Fuse to monitor the remaining
fatigue life potential. The EFS is dedicated to that purpose.
ELECTROCHEMICAL FATIGUE SENSOR ("EFS")
In August 1993, Tensiodyne, a predecessor of the Company, entered into two
agreements, a license 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 Tensiodyne's
common stock were issued, a 5% royalty on sales of this product was granted, and
under 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 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 until the Company receives
an additional $2,000,000 in paid in capital, 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.
4
The EFS is a device that employs the principle of electrochemical/mechanical
interaction to measure the state of fatigue damage in a metal structural member.
It provides a means for determining the fatigue age of that member so that
appropriate action (monitor, replacement, or repair) can be taken before
structural failure occurs.
The EFS passes a current through the structural member at a stress point and
analyzes certain electronic information. Depending on the electronic
characteristics, fatigue age is determined. The EFS functions by treating the
location of interest (the target) associated with the structural member as an
electrode of an electrochemical cell. To complete the electro-cellular reaction
an electrolyte, in the form of a low corrosion gel, is placed in contact with
the target. By imposing a constant voltage equivalent circuit as the control
mechanism for the electrochemical reaction - at the target surface - current
flows as a function of stress action. The EFS is always a dynamic process;
therefore stress action is a requirement, e.g.: to measure a bridge structural
member it is necessary that normal traffic be on the bridge. The results are a
specific set of waveforms and amplitudes that characterize and report fatigue
damage (age).
Stress points are very often located in difficult-to-get-at places for humans.
Therefore, it has become desirable to miniaturize the process and develop a
means for delivery in very inaccessible areas. The answer is borescope
technology that is currently unproven and being developed. The Company is highly
dependent on this technology for much of its potential market.
The EFS is a high precision instrument consisting of (a) a cell which can be
attached to a structure to measure electrical current, (b) a means of measuring
the small currents produced, and (c) software to interpret the current
measurements. The cell is an enclosure that contains a fluid or gel that
conducts electricity and two metal electrodes connected to external wires
leading to a battery and the current measuring instrument. The sensor is
temporarily attached to a structural member, and then the member is subjected to
repetitive loads while the instrument records the current. A computer analyzes
the current record to determine the degree of fatigue damage present at the
location of the sensor in the structure. Preliminary tests at the University of
Pennsylvania on different metals indicates that various stages of fatigue in
each metal produce a current specifically associated with that stage. For
example, if the specific metal has experienced 20% of its fatigue life, the
current produced with the EFS technology has certain characteristics, i.e. a
signature. If the metal has experienced 40% of its fatigue life, the current has
a different but distinct signature associated with that amount of fatigue.
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) Application Demonstration, and (f) Commercial Sales
and Service. The Fatigue Fuse came first. The inventor, Professor Maurice Brull,
conducted the Basic Research at the University of Pennsylvania. Matech conducted
the Advanced Development, including variations of the adhesive bonding process,
and fabricating a laboratory grade remote recorder for separation events that
constitute proper functioning of the Fatigue Fuse. The next step, Prototype
Evaluation encompassing empirical tailoring of Fuse parameters to fit the actual
spectrum loading expected in specific applications needs to be done. The
associated tests include both coupon specimens and full-scale structural tests
with attached Fuses. A prototype of
5
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 Fatigue 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, management 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. Since 1997, the U.S.
Government has awarded three contracts to research and develop the EFS
technology for specific purposes. As the results of the first contract were
encouraging, a phase II contract was awarded on June 18, 1998. On February 18,
1999, the government awarded a separate third contract to apply borescope and
EFS technology to turbine engines. (SEE, "Government Funding" below).
The EFS currently has certain 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 structures 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. Management cannot assure that
the method will work in the field.
GOVERNMENT FUNDING
In August 1996, the Company executed a teaming agreement with Southwest Research
Institute (SWRI) and the University of Pennsylvania (the Team) for research and
development efforts. 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 U. S.
Air Force capability to perform durability assessments of military aircraft,
including 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 improve the U. S. 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 is approximately
$350,000.
6
In addition, on February 5, 1999, the Team of Matech, the U. of Pa, and Optim,
Inc., a Connecticut Co. that 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 $400,000. Accordingly, over the last 3
years a total of approximately $6.5 million has been awarded to research and
develop the EFS. The results of this research are encouraging and provide a
basis for the Company and its research partners to obtain additional funding. No
assurance can be given, however, that such funding will be received.
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. Matech's technology is applicable to
many market sectors such as bridges and aerospace as well as ships, cranes,
power plants, nuclear facilities, chemical plants, mining equipment, piping
systems, and "heavy iron." Matech has chosen to begin commercialization, in an
alliance with a third party, in the bridge market. The second market sector that
will be pursued is aerospace. The aerospace industry is concerned with aluminum,
aluminum alloys and titanium. Only recently has the technology for monitoring
these materials been mastered. This market opportunity will follow a different
time line, budget, and market model. Management believes 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 BRIDGE MARKET
In the U.S. alone there are over 610,000 bridges of which over 260,000 are rated
by the Federal Highway Administration as requiring major repair, rehabilitation,
or replacement. Although there are normal business imperatives, the market is
essentially macro-economically and government policy driven. In the opinion of
management, "only technology can provide the solution". The need for increased
spending accelerates significantly each year as infrastructure ages. Analysis by
infrastructure economic experts, including the Federal Highway Administration,
confirms that $9 billion per year, for bridges alone, is the minimum required to
maintain the status quo. Since that amount has not been available, and a
backlogged repair bill of more than $358 billion has already accrued, greater
efficiencies in the management of current budgets are the only solution. In the
1991 ISTEA initiative (Intermodal Surface Transportation and Efficiency Act) and
recently in the $200 billion 1998 TEA-21 initiative (Transportation Equity Act)
Bridge Management Systems have been mandated as a matter of policy.
ANTAEUS AND THE PULSE SYSTEM
The Company has entered into a strategic alliance with Structural Integrity
Monitoring Systems ('SIMS') of Willimantic, Connecticut. The Company and SIMS
are seeking funding to develop and demonstrate a bridge monitoring system
through Antaeus Research, LLC, a Delaware limited liability company. The Company
and SIMS plan that each will own 45% of Antaeus and will contribute their
technology to Antaeus. The arrangement also will require Antaeus to acquire
certain liabilities from each company. The Company can give no
7
assurances that Antaeus will be successful in its financing efforts, nor is
there any assurance that the bridge monitoring system will be successful in the
field.
The technologies that form the suite of functionalities that make up the bridge
product consist of the Fatigue Fuse and Electrochemical Fatigue Sensor as well
as three more that come from Matech's strategic partner. The three are a light
driven linear motion detector, force driven corrosion monitor, and a very low
cost device for monitoring fastener loading. These technologies together form a
product called the Pulse Smart Bridge Management System (sBMS) that is
trademarked. It is to be produced and marketed by Antaeus Research, LLC of
Willimantic, CT. Matech currently owns only 5 percent of that company but
intends to increase its share to 45% when funding is in place and its technology
is contributed to Antaeus.
Antaeus was formed to serve an important emerging market: supplying "Smart "
Bridge Management Systems (sBM-TM). The purpose of these systems is to
constantly determine the physical state of a bridge. The system will ceaselessly
monitor the structural integrity and physical performance of a bridge, along
with concomitant machine analysis, generating reports containing highly relevant
detail. Having such complete and meaningful data will provide the means for
specifically scheduling, maintaining, and repairing only those items that are
necessary to meet the required performance and safety parameters. In
management's opinion, the result will be significant direct cost savings and
safety enhancement. Also, negative impact to surrounding economic zones will be
reduced by minimizing traffic interruption normally associated with bridge
maintenance.
The system's purpose is to constantly determine the physical state of a bridge.
There are two specific situations where sBMS-TM global monitoring can yield
beneficial outcomes. The first relates to deteriorated bridges slated for
significant repairs and for which cost estimates have been prepared.
Installation of sBMS-TM prior to upgrade will pinpoint aspects of the structure
that require immediate attention and, equally significant, will also highlight
maintenance that can be deferred or even ignored. This is the result of a wider
range of structural interrogation than normally available coupled with continued
`lifetime-real time' monitoring. Studies have shown that lack of accurate bridge
fatigue and bearing performance information, for example, often lead to
excessive repairs and thus greater costs, as well as traffic inconvenience or
paralysis. The second sBMS-TM application relates to new bridge construction
situations. The Antaeus sBMS-TM is configured to be installed concurrently with
bridge erection, assuring mechanical integrity in the still incomplete
structure. Further, the existence of a monitoring system which can track up to
twenty different bridge deterioration metrics simultaneously, substantially
reduces the risk of otherwise undetected problems. This is becoming more
important as the private-public DBOM (design-build-operate-maintain) paradigm
gains acceptance.
MANUFACTURING
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.
8
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 titled "Device for Monitoring Fatigue Life" and bears United States Patent
Office Numbers 4,590,804. The second patent, titled "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, titled
"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, titled "Device
for Monitoring 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. In addition, the Company owns a fifth patent titled
"Device for Monitoring the Fatigue Life of a Structural Member and a Method of
Making Same" with United States Patent Number 5,425,274.
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 Blvd., Suite 707, Los Angeles,
California, 90049. The space consists of 830 square feet and will be adequate
for the Company's current and foreseeable needs. The total rent is payable at
$2,011 per month. As of December 31, 1999, the lease had 5 months remaining for
a total rent of $10,055. SEE, Note 8(g) to Financial Statements.
9
Matech owns a remote monitoring system and certain equipment that was being used
by the University of Pennsylvania for instructional and testing purposes. The
Company determined that the system has no future use and probably cannot be
sold. Therefore, the Company charged its full cost of $97,160 to operations,
which is included in general and administrative expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings that in
management's opinion might have a material effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
PART II
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 January 1998 through December 31, 1999, Matech's Common Stock was quoted
between a low bid of $.25 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 January 1998 to December 1999.
High Bid Price(1) Low Bid Price(1)
First Quarter 1998 $2.75 $.25
Second Quarter 1998 $2.812 $.50
Third Quarter 1998 $1.375 $.593
Fourth Quarter 1998 $1.50 $.312
First Quarter 1999 $.625 $.218
Second Quarter 1999 $.625 $.37
Third Quarter 1999 $.625 $.32
Fourth Quarter 1999 $1.75 $.375
(1)All bid prices were supplied to the Company by Smith Barney.
On January 31,2000, there were 479 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 1999
nor are any dividends contemplated in the foreseeable future.
At various times during 1999 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.
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.
10
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 additional 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.
On May 27, 1999, the Board authorized the issuance of 200,000 shares of Common
Stock to Joel Freedman, a director, for services rendered to the Corporation.
On June 9, 1999, the Board authorized the issuance of 2,000,000 shares of Common
Stock to Robert M. Bernstein, Chairman of the Board, President, and controlling
shareholder, at $.05 per share in exchange for cancellation of $100,000 of cash
advances he made to the Corporation.
On June 12, 1999, the Board authorized the issuance of 200,000 shares of Common
Stock to C. Timothy Smoot, counsel to the Corporation, for services rendered.
On June 21, 1999, the Board authorized the issuance of 100,000 shares of Common
Stock to a Consultant for $.35 per share, payable by a non-recourse,
non-interest bearing promissory note payable on or before June 15, 2003 and
secured by the 100,000 shares.
On July 2, 1999, the Board authorized the issuance of 25,000 shares of Common
Stock to Alex Adelson, a consultant and advisory board member, or his designees,
and stock options for 675,000 shares of Common Stock with an exercise price of
$.25 per share.
On July 7, 1999, the Board authorized and the issuance of 672,205 shares of
Common Stock to the University of Pennsylvania in accordance with the
Corporation's Agreement with the University licensing the rights to the EFS.
On August 23, 1999, the Board authorized the issuance of 50,000 shares of Common
Stock to a consultant for services rendered to the Corporation.
On September 29, 1999, the Corporation issued 8,000 shares of Common Stock to a
consultant for public relations services.
On September 30, 1999, the Board authorized the grant of options to purchase
200,000 shares of Common Stock at $.60 per share to a consultant for services
rendered to the Corporation.
On October 11, 1999, the Board authorized the issuance of 333,333 shares of
Common Stock to a private investor for $.45 per share.
On October 27, 1999, the Corporation authorized the issuance of a total 300,000
shares of Common Stock to seven members of the Corporation's advisory Board. No
member received more than 50,000 shares.
On November 10, 1999, the Board authorized the issuance of 10,000 shares of
Common Stock to another member of the Corporation's advisory Board.
On November 15, 1999, the Board authorized the issuance of 4,500 shares of
Common Stock to a consultant for services rendered to the Corporation.
11
On November 22, 1999, the Board cancelled two warrants to purchase a total of
2,000,000 shares of Common Stock at $.10 per share with an expiration date of
June 30, 2002, that were originally authorized on June 25, 1998 at $.50 per
share. Robert M. Bernstein, Chairman and President held one warrant to purchase
1,800,000 shares and Joel Freedman, a director, held the other warrant to
purchase 200,000 shares.
On November 22, 1999, the Corporation authorized the issuance of 92,000 shares
of Common Stock to John Goodman, a director and engineer for the Corporation,
and 50,000 shares to a consultant, both for services rendered to the Corporation
On December 17, 1999, the Corporation authorized the issuance of 15,500 shares
of Common Stock to a consultant for services rendered to the Corporation.
On December 31, 1999, the Corporation authorized the issuance of 150,000 shares
of Common Stock to a consultant for services rendered to the Corporation.
On January 12, 2000, the Board authorized the issuance of up to 110,000 shares
of Common Stock to a group of approximately 22 investors who were defrauded by a
former consultant to the Corporation in exchange for an assignment of their
claims to the Corporation and a release of all claims against the Corporation.
On January 27, 2000, the Board authorized the Corporation to issue 40,000 shares
of Class B Common Stock to Robert M. Bernstein in exchange for 40,000 shares of
Common Stock. Mr. Bernstein, therefore, owns 100,000 shares of Class B Common
Stock that has 500 votes per share. Therefore, Mr. Bernstein's Class B Common
Stock has 50 million votes and gives him effective control of the Company.
On January 31, 1999, the Board authorized the issuance of 50,000 shares of
Common Stock to David Haberman, a new member of the Corporation's advisory
board.
On February 8, 1998, the Board authorized the issuance of 10,000 shares of
Common Stock to a consultant for services.
On February 14, 2000, the Board authorized an amendment to the Corporation's
Articles of Incorporation increasing the authorized shares of Common Stock from
30 million to 100 million shares. On that same day, by consent, Mr. Bernstein
and Mr. Freedman voted their shares to so amend the Articles.
On February 14, 2000, the Board authorized the Corporation to increase the
number of shares of Common Stock that may be issued under the Corporation's 1998
Stock Plan from 800,000 shares to 1,800,000 shares of Common Stock.
SEE, Notes 10 e, 11, 12, and 13 of the Financial Statements.
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.
12
Fiscal Year Ending December 31,
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
1995 1996 1997 1998 1999 Inception to
December 31,
1999
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Net Sales $ -- $ -- $ -- $ -- $ -- $ --
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Income from Research
Development Contract $ -- $ -- $ 336,410 $374,324 $924,484 $2,347,798
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Income (Loss) from
Continued Operations $(203,849) $(483,186) $(177,221) $(670,271) $(539,283) $(4,052,917)
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Income (Loss) from
Continued Operations Per
Common Share $(.0293) $(.0625) $(.0440)
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Common Shares
Outstanding 4,551,258 8,782,808 12,342,534
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total Assets $150,692 $208,299 $287,257 $233,746 $250,041
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total Liabilities $783,882 $1,046,517 $618,582 $719,178 $870,586
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Redeemable Preferred $ -- $150,000 $150,000 $150,000 $ --
Stock
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total Stockholders'
Equity (Deficit) $(585,796) $(988,218) $(481,325) $(485,432) $(620,545)
- -------------------------- -------------- -------------- -------------- -------------- --------------- --------------
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 activities of the Company for the years ended December
31, 1997, 1998 and 1999.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999.
In 1999, the Company received $924,484 under two contracts with the federal
government for research and development on the EFS. 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 received $336,410 under its
contract with SWRI.
Costs and Expenses
Research and development Costs were $536,237 for 1999, $252,257 for 1998, and
$78,409 for 1997. Of the $536,237 paid in 1999, $436,888 related to
subcontractor costs.
General and Administrative costs were $875,444 for 1999, $792,338 for 1998, and
$392,980 for 1997. The major costs in 1999 were officer's salary of $150,000,
legal fees of $88,791, travel expenses of $60,055, accounting fees of $32,814,
rent of $25,375, and office expense of $20,337.
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 transaction, 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 transaction, employee
expenses of $27,286, travel expenses of $20,744, and rent of $28,136.88.
13
Liquidity and Capital Resources
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. Although, 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.
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 contracts with the U.S. Air Force.
Cash and cash equivalents at December 31,1999 were $62,904. During 1999 the
Company received $150,000 from sale of its Common Stock. The Company's President
advanced $102,198 of which $71,500 was repaid towards his loan account. The
Company also received $7,405 as a deposit on the future sale of the Company's
Common Stock. From the proceeds received, the Company used $110,125 in its
operations.
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 cash 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 received $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.
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, 1999 prepared in accordance with
Regulation S-X (17 CFR Section 210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
14
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 65 President/Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 40 Secretary/Director
Dr. John Goodman 66 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 65 years of age. He received a Bachelor of Science degree
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 40 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 daily activities. He is not a director of any other
company.
DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR. Dr. John W. Goodman is 66 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 that 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 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.
15
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 specialization 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, Microbics Corp., and
Nucio Industries.
DR. LAWRENCE CHIMERINE. Dr. Chimerine is Managing Director and Chief Economist
for the Economic Strategy Institute (ESI) in Washington, D.C.; Senior Economic
Advisor for The WEFA Group in Eddystone, PA; and President of Radnor
International Consulting Inc. in Radnor, PA. He is the former Chairman, Chief
Executive, and Chief Economist of Chase Econometrics and The WEFA Group. For
more than 19 years, Dr. Chimerine has lent his advice and council to an
impressive resume of Fortune 500 companies, financial institutions, and
government agencies, providing private consultation on the state of the U.S. and
world economics, specific industries, and sectors, and the impact of economic
conditions on decision making, budgeting, and strategic planning. He has served
on numerous corporate boards, is a member of various professional associations,
and has held teaching positions at three universities. From 1965 to 1979, Dr.
Chimerine was Manager of the U.S. Economic Research and Forecasting for the IBM
Corporation. He left IBM to assume the chairmanship at Chase Economics and, in
1987, was appointed Chairman and CEO of the WEFA Group. Dr. Chimerine has served
on numerous governmental advisory boards including the House of Representatives
Task Force on International Competitiveness, the Census Advisory Committee, and
the Economic Policy Board of the Department of Commerce. He is frequently called
upon to testify on key economic issues before Congressional committees including
the House and Senate Budget Committee, Joint Economic Committee, Senate Finance
Committee, Senate Banking Committee, and the House Committee on Monetary Policy.
16
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 Academy and
MA in International Affairs from George Washington University.
ROBERT F. CUSHMAN, ESQ. Mr. Cushman is a partner in the Philadelphia office of
Pepper Hamilton LLP, is also the permanent chairman of the Andrews Conference
Group Construction Super Conference, and is the organizing chairman of the
Forbes Magazine Conferences on Worldwide Infrastructure Partnerships, Rebuilding
America's Infrastructure Conference, Alternative Dispute Resolution, the
Forbes/Council of the Americas Latin American Marketing Conference and the
Forbes Environmental Super Conference.
DAVID HABERMAN. Mr. Haberman is the chairman and co-founder of DCH Technology
Inc., a company that specializes in hydrogen technology development, safety,
process monitoring and hydrogen fuel cell power applications. William B.
Richardson, secretary of the Department of Energy (DOE), appointed Mr. Haberman
to represent the perspectives of commercial product developers and safety
engineers on the Hydrogen Technical Advisory Board (HTAP). This panel, created
by the Hydrogen Futures Act, reports directly to the Secretary of Energy and is
responsible to the U.S. Congress to monitor the DOE's implementation of the
National Hydrogen Program. As a director of the National Hydrogen Association
(NHA), Mr. Haberman chairs the Implementation Planning Committee. He is a
co-founder and president of the California Hydrogen Business Council, an
American delegate and member of the International Standards Organization (ISO)
Working Group on hydrogen system safety, and works to define the commercial
future of hydrogen energy. DCHT's hydrogen sensors contribute to the structural
integrity-monitoring mission of the Corporation.
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 President of Technology.
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 Professor 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
sector, first as a Material Engineer in the Micro Switch Division of Honeywell,
Inc. in Freeport, Illinois, and later as a Research Scientist, Metallurgy 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.
17
T.Y. LIN. Mr. Lin graduated from Tangshan College, Jiaotong University, and
received a M.S. degree in Civil Engineering from the University of California at
Berkeley. Since 1934, he taught and practiced civil engineering in China and the
U.S. and planned and designed highways, railways, and over 1,000 bridges and
buildings in Asia and the Americas. He is known as Mr. Prestressed Concrete in
the U.S., having pioneered both the technology and industry in the 1950s. He
authored and co-authored three textbooks in structural engineering and more than
100 technical papers. He was the founder of T.Y. Lin International that provides
design and analysis for all types of concrete and steel structures and pioneered
the design of long-span structures, prestressing technology, and new design and
construction methods over the past 40 years.
Y.C. YANG. Mr. Yang is a pioneer in "value engineering" which has optimized many
projects with economic te-designs. He is a recipient of the 1988 Jiaotong
University Outstanding Alumnus Award, a citation from Engineering News Record,
and the ACI Mason Award. With their partnership dating back to wartime China in
the early 1940s, Mr. Lin and Mr. Yang established their international stature in
the U.S. over the five decades that followed. In 1992, they formed the San
Francisco, CA headquartered firm, Lin Tung-Yen China, Inc., to continue their
tradition of excellence and innovation in structural and civil engineering and
to serve as a bridge between East and West. The firm serves its clients through
various tasks, ranging from planning and designs to construction management and
the introduction of financing.
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.
THOMAS V. ROOT. Mr. Root is President and CEO of Optim Incorporated, a company
that develops, manufactures, markets, sells, and services flexible endoscopic
products and solutions to medical and industrial markets. Optim Incorporated is
ISO 2001-certified and also manufactures and markets a complete line of
industrial fiberscopes to serve the remote inspection needs of aerospace,
transportation, energy generation, law enforcement, and school security markets.
Mr. Root has had 25 years of experience in all methods of nondestructive testing
and was an NDT, Level III, member of the American Society for Nondestructive
Testing (ASNT) Educational Council and Level III question committee. In
addition, he is past chairman of ASNT CT Yankee, and former member of SAE
Committee (k). His career began at General Dynamics in 1972 and after serving in
the nondestructive test engineering and education departments he joined
Technical Operations as manager of Technical Services in 1976. In 1978, Mr. Root
co-founded Northeast NDE Company, a private distribution and service company
committed to providing products and services for the development of
nondestructive testing applications. After completing a sale transaction to
Northeast NDE's treasurer, in 1990 Mr. Root founded Valtec Systems, a private
firm, for the development and distribution of specialty nondestructive testing
systems. In early 1996, he sold Valtec and became Vice President of Operations
and General Manager of the industrial products company of Applied Fiberoptics,
Inc., the predecessor of Optim Inc. In 1997 he became the CEO of Optim.
18
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 University 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
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 Management 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 department 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 unaware of any other late filings or any
failures to file any Form 3, 4, or 5.
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. 1997 $ 90,417 $ -- $ -- $ 1,500(1) -- $ -- $ --
Bernstein CEO 1998 $ 100,000 $ -- $ -- $ -- 1,800,000(2) $ -- $ --
1999 $ 150,000 $ -- $ -- $ -- $ --
- ------------------ ------- ------------ ----------- ------------ --------------- -------------- ------------ ------------
John W. 1997 $ 24,885 $ -- $ -- $ -- -- $ -- $ --
Goodman 1998 $ 20,462 $ -- $ -- $ -- -- $ -- $ --
Director and 1999 $ 23,384 $ -- $ -- $ 11,700(3) -- $ -- $ --
Engineer
- ------------------ ------- ------------ ----------- ------------ --------------- -------------- ------------ ------------
(1)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. Bernstein an additional 450,000 shares of its common
stock.
(2)In June 1998, the Corporation issued Mr. Bernstein a Warrant to purchase
1,800,000 shares of Common Stock for $.50 per share that was later reduced to
$.10 per share. In November 1999, the Board cancelled this Warrant with Mr.
Bernstein's approval.
(3)In 1999, the Corporation issued Mr. Goodman 142,000 shares of restricted
Common Stock. These shares were valued at $11,700.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
1999
Security Ownership of Certain Beneficial Owners
AMOUNT AND NATURE
CLASS OF STOCK NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS
Common Stock Sherman Baker 1,077,920 Shares 7.4%
555 Turnpike St.
Canton, MA 02021
Security Ownership of Management
AMOUNT AND NATURE
CLASS OF STOCK NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS
Common Stock Robert M. Bernstein, CEO 4,393,201 Shares 30.1%(1)
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Joel R. Freedman, Director 624,671 Shares 4.3%
1 Bala Plaza
Bala Cynwyd, PA 19004
John Goodman, Director 200,000 Shares 1.4%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Directors and executive 5,217,872 Shares 35.8%
officers as a group
(3 persons)
Class B Robert M. Bernstein 100,000 Shares 100.00%(1)
Common Stock Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
(1) 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
50 million votes. Those votes give Mr. Bernstein voting control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(SEE NOTE 11 TO FINANCIAL STATEMENTS.)
From time to time, Robert M. Bernstein advanced funds to the Company. At
December 31, 1999, the Company owed Mr. Bernstein $10,270 for such advances. In
June 1999, the Company issued Mr. Bernstein 2,000,000 shares of Common Stock in
exchange for cancellation of $100,000 of such advances. On December 31, 1999,
the Company owed him $10,270. 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. (SEE, Note 11r to Financial Statements.)
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 that would
be due to Mr. Bernstein as of December 31, 1999, had the Board so declared, is
approximately $607,583. This amount represents the difference
20
between the $150,000 a year and the compensation actually accrued during the
year 1991 through 1999.
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. On November 22, 1999, the Board cancelled these
warrants with the approval of Mr. Bernstein and Mr. Freedman.
In June 1999, the Company issued 2,000,000 shares of its Common Stock to Robert
M. Brenstein in exchange for the cancellation of $100,000 of indebtedness owed
Mr. Bernstein.
PART IV
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 Previously filed in connec-
Material Technologies, Inc. tionwith S-1 Registration
Statement that became effec-
tive on July 31, 1997.
3(ii) Bylaws of Material Technologies, Previously filed with July
Inc. 31, 1997 S-1
4.1 Class A Convertible Preferred Previously filed with July
Stock Certificate of Designations 31, 1997 S-1
4.2 Class B Convertible Preferred Previously filed with July
Stock Certificate of Designations 31, 1997 S-1
10.1 License Agreement Between Previously filed with July
Tensiodyne Corporation and the 31, 1997 S-1
Trustees of the University of
Pennsylvania
10.2 Sponsored Research Agreement Previously filed with July
between Tensiodyne Corporation 31, 1997 S-1
and the Trustees of the
University of Pennsylvania
10.3 Amendment 1 to License Agreement Previously filed with July
Between Tensiodyne Scientific 1997 S-1
Corporation and the Trustees of
the University of Pennsylvania
10.4 Repayment Agreement Between Previously filed with July
Tensiodyne Scientific Corporation 31, 1997 S-1
and the Trustees of the
University of Pennsylvania
10.5 Teaming Agreement Between Previously filed with July
Tensiodyne Scientific Corporation 31, 1997 S-1
and Southwest Research Institute
10.6 Letter Agreement between Previously filed with July
Tensiodyne Scientific Corporation, 31,1997 S-1
Robert M. Bernstein, and Stephen
Forrest Beck and Handwritten
modification.
10.7 Agreement Between Tensiodyne Previously filed
Corporation and Tensiodyne 1985-1
R&D Partnership is incorporated
by reference from Exhibit 10.3
of Material Technology, Inc.'s
S-1 Registration Statement,File
No. 33-83526 which became
effective on January 19, 1996.
21
EXHIBIT
NO. DESCRIPTION PAGE NO.
10.8 Amendment to Agreement Between Previously filed
Material Technology, Inc. and
Tensiodyne 1985-1 R&D Partnership
is 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.
10.9 Agreement Between Advanced Previously filed
Technology Center of Southeastern
Pennsylvania and Material
Technology, Inc. is 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 Previously filed
Advanced Technology Center of
Southeastern Pennsylvania and
Material Technology, Inc. is
incorporated by reference from
Exhibit 10.5 of Material
Technology, Inc.'s S-1 Registra-
tion Statement, File No. 33-83526.
10.11 Shareholder Agreement Between Previously filed
Tensiodyne Corporation, Variety
Investments, Ltd. and Countryman
Investments, Ltd. 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 Reorganiza- Previously filed
tion By and Between Tensiodyne
Corporation, Pegasus Technologies,
Inc. and 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 Modifi- Previously filed
cation to Agreement and Plan of
Reorganization is incorporated by
reference from 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 Previously filed
Tensiodyne and the University of
Pennsylvania is incorporated by
reference from 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
b. Reports on Form 8-K - none.
c. Financial Statements - attached.
22
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: February 25, 2000
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: February 25, 2000
By: /s/ Joel Freedman
------------------------
Joel Freedman, Secretary and Director
Date: February 25, 2000
By: /s/ John Goodman
------------------------
John Goodman, Director
Date: February 25, 2000
23
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
CONTENTS
PAGE
Independent Auditors' Report F-1
Balance Sheets F-2
Statements of Operations F-4
Statements of Comprehensive Loss F-5
Statement of Stockholders' Equity (Deficit) F-6
Statements of Cash Flows F-10
Notes to Financial Statements F-12
JONATHON P. REUBEN, CPA
An Accountancy Corporation
23440 Hawthorne Blvd. Suite 270 Torrance CA 90505
(310) 378-3609 o FAX (310) 378-3709
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, 1998 and 1999, and the related
statements of operations, comprehensive income (loss), stockholders' equity
(deficit), and cash flows, for the years ended December 31, 1997, 1998, and 1999
and for the period from the Company's inception (October 21, 1983) through
December 31, 1999. 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.
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial 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, 1997,
1998, and 1999, and for the period from Company's inception (October 21, 1983)
through December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Jonathon P. Reuben CPA
- --------------------------
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
February 22, 2000
F-1
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
------
December 31,
1998 1999
-------- --------
CURRENT ASSETS
Cash and Cash Equivalents .................... $ 20 $ 62,904
Accounts Receivable .......................... 202,737 144,796
Employee Advance ............................. 1,500 1,500
-------- --------
TOTAL CURRENT ASSETS ....................... 204,257 209,200
-------- --------
FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciation .............. 2,712 3,949
-------- --------
OTHER ASSETS
Investments .................................. 8,219 20,055
Intangible Assets, Net of
Accumulated Amortization ................... 16,690 14,701
Refundable Deposit ........................... 1,868 2,136
-------- --------
TOTAL OTHER ASSETS ......................... 26,777 36,892
-------- --------
TOTAL ASSETS ............................... $233,746 $250,041
======== ========
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
---------------------------------------
December 31,
1998 1999
----------- -----------
CURRENT LIABILITIES
Legal Fees Payable ............................. $ 149,453 $ 145,900
Fees Payable to R&D Subcontractor .............. -- 101,322
Consulting Fees Payable ........................ 101,669 159,000
Accounting Fees Payable ........................ 23,308 24,153
Other Accounts Payable ......................... 17,334 18,122
Accrued Expenses ............................... 25,197 24,269
Notes Payable - Current Portion ................ 46,273 84,007
Loan Payable - Officer ......................... 73,177 10,270
Loans Payable - Others ......................... -- --
----------- -----------
TOTAL CURRENT LIABILITIES .................... 436,411 567,043
Payable on Research and
Development Sponsorship ........................ 257,240 303,543
Notes Payable - Other ............................ 25,527 --
----------- -----------
TOTAL LIABILITIES ............................ 719,178 870,586
----------- -----------
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 . -- --
----------- -----------
STOCKHOLDERS' (DEFICIT)
Class A Common Stock, $.001 Par Value,
Authorized 30,000,000 Shares, Outstanding
10,061,897 Shares at December 31, 1998,
14,597,435 Shares at December 31, 1999 ..... 10,062 14,597
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 ..................... 3,024,231 3,455,004
Less Notes and Subscriptions Receivable -
Common Stock ................................ (14,720) (39,694)
Deficit Accumulated During the Development Stage (3,513,634) (4,052,917)
Unrealized Holding Gain on Investment Securities 8,219 2,055
----------- -----------
TOTAL STOCKHOLDERS' (DEFICIT) .................. (485,432) (620,545)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 233,746 $ 250,041
=========== ===========
See accompanying notes.
F-3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
From Incep-
tion (Octo-
ber 21, 1983)
Through
December 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
REVENUES
Sale of Fatigue Fuses ......... $ -- $ -- $ -- $ 64,505
Sale of Royalty Interests ..... -- -- -- 198,750
Income from Research and
Development Contract ........ 336,410 374,324 924,484 2,347,798
Test Services ................. -- -- -- 10,870
------------ ------------ ------------ ------------
TOTAL REVENUES .............. 336,410 374,324 924,484 2,621,923
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Research and Development ...... 78,409 252,257 536,237 2,375,199
General and Administrative .... 392,980 792,338 875,444 4,169,164
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES .... 471,389 1,044,595 1,411,681 6,544,363
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (134,979) (670,271) (487,197) (3,922,440)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Expense Reimbursed ............ 11,037 -- -- 4,510
Interest Income ............... 8 8 2,613 42,116
Miscellaneous Income .......... -- -- -- 25,145
Loss on Sale of Equipment ..... -- -- -- (12,780)
Settlement of Teaming Agreement -- -- -- 50,000
Litigation Settlement ......... -- -- -- 18,095
Interest Expense .............. (42,242) (42,242) (58,295) (184,885)
Modification of Royalty
Agreement ................... -- (7,332) -- (7,332)
Gain on Foreclosure ........... 18,697 -- -- 18,697
Gain on Sale of Stock ......... 13,901 171,450 4,396 207,497
------------ ------------ ------------ ------------
TOTAL OTHER INCOME .......... 1,401 121,884 (51,286) 161,063
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEMS AND PROVISION
FOR INCOME TAXES .... (133,578) (548,387) (538,483) (3,761,377)
PROVISION FOR INCOME TAXES ...... -- (800) (800) (8,600)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS ....... (133,578) (549,187) (539,283) (3,769,977)
EXTRAORDINARY ITEMS
Forgiveness of Debt ........... -- -- -- (289,940)
Utilization of Operating Loss
Carry forward ............... -- -- -- 7,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) ........... $ (133,578) $ (549,187) $ (539,283) $ (4,052,917)
============ ============ ============ ============
PER SHARE DATA
Income (Loss) Before Extra-
ordinary Item ............... $ (0.0293) $ (0.0625) $ (0.0440)
Extraordinary Item ............ -- -- --
------------ ------------ ------------
BASIC NET (LOSS) PER SHARE .. $ (0.0293) $ (0.0625) $ (0.0440)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ................... 4,551,258 8,782,808 12,242,534
============ ============ ============
See accompanying notes.
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF COMPREHENSIVE LOSS
From Incep-
tion (Octo-
ber 21, 1983)
Through
December 31,
1997 1998 1999 1999
----------- ----------- ----------- -----------
NET (LOSS) ............... $ (133,578) $ (549,187) $ (539,283) $(4,052,917)
Other Comprehensive income
(loss), net of tax
Unrealized gain (loss)
on securities ........ -- -- (6,164) 2,055
----------- ----------- ----------- -----------
Comprehensive Loss ..... $ (133,578) $ (549,187) $ (545,447) $(4,050,862)
=========== =========== =========== ===========
See accompanying notes and accountants' report.
F-5
MATERIALS TECHNOLOGY, INC
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Class A Common Class B Common Class A Preferred Accumulated
-------------- -------------- ----------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
----------- ------ ----------- ------ ----------- ------ --------- -----
Initial Issuance of Common Stock
October 21, 1983 ........... 2,408 $ 2 -- $ -- -- $ -- $ 2,498 $ --
Adjustment to Give Effect to
Recapitalization on December
15, 1986
Cancellation of Shares .......... (2,202) (2) -- -- -- -- (2) --
Balance - October 21, 1983 ...... 206 -- -- -- -- -- 2,496 --
Shares Issued by Tensiodyne
Corporation in Connection
With Pooling of Interests .. 42,334 14 -- -- -- -- 4,328 --
Net (Loss), Year Ended
December 31, 1983 .......... -- -- -- -- -- -- -- (4,317)
Balance - January 1, 1984 ....... 42,540 14 -- -- -- -- 6,824 (4,317)
Capital Contribution ............ -- 28 -- -- -- -- 21,727 --
Issuance of Common Stock ........ 4,815 5 -- -- -- -- 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 ....... 47,355 47 -- -- -- -- 36,397 (26,114)
Shares Contributed Back
to Company ................. (315) (0) -- -- -- -- -- --
Capital Contributions ........... -- -- -- -- -- -- 200,555 --
Sale of 12,166 Warrants at
$1.50 per Warrant .......... -- -- -- -- -- -- 18,250 --
Shares Cancelled ................ (8,758) (9) -- -- -- -- 9 --
Net (Loss), Year Ended
December 31, 1985 .......... -- -- -- -- -- -- -- (252,070)
Balance January 1, 1986 ......... 38,282 38 -- -- -- -- 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 .......... -- -- -- -- -- -- -- (10,365)
Balance January 1, 1987 ......... 38,282 38 -- -- -- -- 255,211 (288,549)
Issuance of Common Stock upon
Exercise of Warrants ....... 216 -- -- -- -- -- 27,082 --
Net (Loss), Year Ended
December 31, 1987 .......... -- -- -- -- -- -- -- (45,389)
F-6
MATERIALS TECHNOLOGY, INC
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Deficit
Class A Common Class B Common Class A Preferred Accumulated
-------------- -------------- ----------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
----------- ------ ----------- ------ ----------- ------ --------- -----
Balance - January 1, 1988 38,498 $ 38 -- $ -- -- $ -- $ 282,293 $ (333,938)
Sale of Stock 2,544 3 -- -- -- -- 101,749 --
Services Rendered 3,179 3 -- -- -- 70,597 --
Net (Loss), Year Ended
December 31, 1988 -- -- -- -- -- -- -- (142,335)
Balance - January 1, 1989 44,221 44 -- -- -- -- 454,639 (476,273)
Sale of Stock 4,000 4 -- -- -- -- 1,996 --
Services Rendered 36,000 36 -- -- -- 17,964 --
Net (Loss), Year Ended
December 31, 1989 -- -- -- -- -- -- -- (31,945)
Balance - January 1, 1990 84,221 84 -- -- -- -- 474,599 508,218)
Sale of Stock 2,370 2 -- -- -- -- 59,248 --
Services Rendered 6,480 7 -- -- -- -- 32,393 --
Net Income, Year Ended
December 31, 1990 -- -- -- -- -- -- -- 133,894
Balance - January 1, 1991 93,071 93 -- -- -- -- 566,240 (374,324)
Sale of Stock 647 1 -- -- 350,000 350 273,335 --
Services Rendered 4,371 4 -- -- -- -- 64,880 --
Conversion of Warrants 30 -- --
Conversion of Stock (6,000) (6) 60,000 60 -- -- -- --
Net (Loss), Year Ended
December 31, 1991 -- -- -- -- -- -- -- (346,316)
Balance - January 1, 1992 92,119 92 60,000 60 350,000 350 904,455 (720,640)
Sale of Stock 20,000 20 -- -- -- -- 15,980 --
Services Rendered 5,400 5 -- -- -- -- 15,515 --
Conversion of Warrants 6,000 6 -- -- -- -- 14,994 --
Sale of Class B Stock -- -- 60,000 60 -- -- 14,940 --
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 -- -- -- -- 71,659 --
Conversion of Stock 6,000 6 (60,000) (60) -- -- -- --
Cancellation of Shares (6,650) (7) -- -- -- -- 7 --
Net (Loss), Year Ended
December 31, 1992 -- -- -- -- -- -- -- (154,986)
F-7
MATERIALS TECHNOLOGY, INC
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Deficit
Class A Common Class B Common Class A Preferred Accumulated
-------------- -------------- ----------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
----------- ------ ----------- ------ ----------- ------ --------- -----
Balance - January 1, 1993 127,620 $ 127 60,000 $ 60 350,000 $ 350 $1,037,550 $ (875,626)
Licensing Agreement 12,500 13 -- -- -- -- 6,237 --
Services Rendered 67,029 67 -- -- -- -- 13,846 --
Warrant Conversion 56,000 56 -- -- -- -- 304,943 --
Cancellation of Shares (31,700) (32) -- -- -- -- (7,537) --
Net (Loss), Year Ended
December 31, 1993 -- -- -- -- -- -- -- (929,900)
Balance - January 1, 1994 231,449 231 60,000 60 350,000 350 1,355,039 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,819 31 -- -- -- -- 385,393 --
Issuance of Shares for
Services Rendered 223,000 223 -- -- -- -- -- --
Sale of Stock 1,486,112 1,486 -- -- -- -- 23,300 --
Issuance of Shares for the
Modification of Agreements 34,000 34 -- -- -- -- (34) --
Net (Loss), Year Ended
December 31, 1994 -- -- -- -- -- -- -- (377,063)
Balance - January 1, 1995 2,005,380 2,005 60,000 60 350,000 350 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 152 -- -- -- -- -- --
Net (Loss), Year Ended
December 31, 1995 -- -- -- -- -- -- -- (197,546)
Balance - January 1, 1996 2,157,880 2,157 60,000 60 350,000 350 1,763,698 (2,380,135)
Issuance of Shares for
Services Rendered 164,666 165 -- -- -- -- 16,301 --
Sale of Stock 70,000 70 -- -- -- -- 173,970 --
Issuance of Shares for the
Modification of Agreements 250,000 250 -- -- -- -- (250) --
Cancellation of Shares Held
in Treasury (62,000) (62) -- -- -- -- (154,538) --
Net (Loss), Year Ended
December 31, 1996 -- -- -- -- -- -- -- (450,734)
F-8
MATERIALS TECHNOLOGY, INC
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Deficit
Class A Common Class B Common Class A Preferred Accumulated
-------------- -------------- ----------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
----------- ------ ----------- ------ ----------- ------ --------- -----
Balance - January 1, 1997 2,580,546 $ 2,580 60,000 $ 60 350,000 $ 350 $1,799,181 $(2,830,869)
Sale of Stock 100,000 100 -- -- -- -- 99,900 --
Conversion of Indebtedness 800,000 800 -- -- -- -- 165,200 --
Class A Common Stock Issued in
Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 -- -- -- -- 370,500 --
Issuance of Shares for
Services Rendered 247,000 247 -- -- -- -- 2,224 --
Adjustment to Give Effect to
Recapitalization on
March 9, 1997 560,000 560 -- -- -- -- (560) --
Net (Loss), Year Ended
December 31, 1997 -- -- -- -- -- -- -- (133,578)
Balance - January 1, 1998 5,787,000 5,787 60,000 60 350,000 350 2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 -- -- -- -- 167,570 --
Conversion of Options 500,000 500 -- -- -- -- 124,500 --
Issuance of Shares for
Services Rendered 1,121,617 1,122 -- -- -- -- 111,040 --
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 -- -- -- -- 149,950 --
Shares Returned to Treasury
and Cancelled (560,000) (560) -- -- -- -- 560 --
Modification of Royalty Agreement 733,280 733 -- -- -- -- 6,599 --
Issuance of Warrants to Officer -- -- -- -- -- -- 27,567 --
Net (Loss), Year Ended
December 31, 1998 -- -- -- -- -- -- -- (549,187)
Balance - January 1, 1999 10,061,897 10,062 60,000 60 350,000 350 3,024,231 (3,513,634)
Shares Issued in Cancellation
of Indebtedness 2,175,000 2,175 -- -- -- -- 164,492 --
Issuance of Shares for
Services Rendered 1,255,000 1,255 -- -- -- -- 93,845 --
Shares Issued in Modification
of Licensing Agreement 672,205 672 -- -- -- -- (672) --
Sale of Stock 433,333 433 -- -- -- -- 173,108 --
Net (Loss), Year Ended
December 31, 1999 -- -- -- -- -- -- -- (539,283)
14,597,435 $14,597 60,000 $ 60 350,000 $ 350 $3,455,004 $(4,052,917)
========== ======= ====== ====== ======= ====== ========== ============
See accompanying notes and independent accountants' report.
F-9
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Incep-
tion (Octo-
ber 21,1983)
Through
December 31,
1997 1998 1999 1999
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) .......................... $ (133,578) $ (549,187) $ (539,283) $(4,052,917)
----------- ----------- ----------- -----------
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided (Used)
by Operating Activities
Depreciation and Amortization ........... 4,779 4,889 2,242 171,625
Interest Income Accrued on Stock
Subcription Receivable .................. -- -- (1,432) (1,432)
Bad Debts ............................... -- 50,000 -- 50,000
Gain on Sale of Securities .............. (13,901) (171,450) (4,396) (193,596)
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) 57,941 (196,296)
(Increase) Decrease in Prepaid Expenses . 1,793 -- (268) 53
Loss on Sale of Equipment ............... -- -- -- 12,780
Issuance of Common Stock for Services ... 2,470 139,729 95,100 533,264
Issuance of Common Stock for Agreement
Modifications ........................... -- -- -- 152
Forgiveness of Indebtedness ............. -- -- -- 165,000
Increase (Decrease) in Accounts Payable
and Accrued Expenses .................. 32,376 104,049 222,471 911,431
Interest Accrued on Notes Payable ....... 11,266 50,658 57,500 147,975
Increase in Research and Development
Sponsorship Payable ................... 29,505 -- -- 218,000
(Increase) in Note for Litigation Settlement -- -- -- (25,753)
(Increase) in Deposits .................. -- -- -- (2,189)
----------- ----------- ----------- -----------
TOTAL ADJUSTMENTS .......................... (59,241) 137,721 429,158 1,909,048
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES .............................. (192,819) (411,466) (110,125) (2,143,869)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of Equipment ............ -- -- -- 10,250
Purchase of Property and Equipment ......... -- (3,304) (1,490) (230,903)
Proceeds from Sale of Securities ........... -- 261,450 4,396 283,596
Purchase of Securities ..................... -- (90,000) -- (90,000)
Proceeds from Foreclosure .................. 44,450 -- -- 44,450
Investment in Joint Venture ................ -- -- (18,000) (87,069)
Payment for License Agreement .............. -- -- -- (6,250)
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES .............................. 44,450 168,146 (15,094) (75,926)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock Net of
Offering Costs ........................... 113,901 125,000 150,000 1,107,319
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)
Loans From Officers ...................... 119,000 150,500 102,198 728,005
Repayments to Officer ...................... (79,659) (34,611) (71,500) (416,032)
Increase in Loan Payable-Others ............ -- -- 7,405 172,069
----------- ----------- ----------- -----------
See accompanying notes.
F-10
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Incep-
tion (Octo-
ber 21, 1983)
Through
December 31,
1997 1998 1999 1999
---------- ---------- ---------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ......... $ 153,242 $ 240,889 $ 188,103 $2,282,699
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ....... 4,873 (2,431) 62,884 62,904
BEGINNING BALANCE - CASH
AND CASH EQUIVALENTS ............ (2,422) 2,451 20 -
---------- ---------- ---------- ----------
ENDING BALANCE - CASH AND
CASH EQUIVALENTS ................ $ 2,451 20 $ 62,904 $ 62,904
========== ========== ========== ==========
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 $ 2,565
========== ========== ==========
Income Taxes Paid $ - $ - $ 2,400
=========== ========== ==========
C. Non Cash Investing and Financing Activities
During 1997, the Company issued 1,499,454 shares of Class A 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 Class A Common Stock to
the Company's President through the conversion of a convertible note.
During 1997, the Company issued 280,000 shares of Class A Common Stock to
a third party through the conversion of a convertible note.
During 1998, the Company issued 2,430,000 shares of Class A Common Stock
to its President in exchange for the cancellation of $170,000 of
indebtedness.
During 1998, the Company issued 733,280 shares of Class A 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 Class A Common Stock in
exchange for the cancellation of the $150,000 redeemable preferred stock.
During 1999, the Company issued 175,000 shares of its Class A Common Stock
in exchange for the cancellation of the $66,667 of indebtedness due a
consultant.
During 1999, the Company issued 2,000,000 shares of its Class A Common
Stock to its President in exchange for the cancellation of $100,000 of
indebtedness due him.
During 1999, the Company issued 100,000 shares of its Class A Common Stock
to a consultant for $.35 a share, payable by a non-recourse, non-interest
bearing promissory note payable on or before June 15, 2003, and is secured
by the stock.
See accompanying notes.
F-11
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.
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 that 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 related 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 3).
c. Net Loss Per Share
Net loss per share is computed under FASB Statement 128. Under this
statement, when common shares are issued to acquire a business in a
transaction accounted for as a purchase business combination, the
computation of earnings (loss) per share shall recognize the existence
of the new shares only from the acquisition date. The Company was
formed in 1997 and through the issuance of its common stock, acquired
all of the assets and liabilities of Material Technology, Inc. The
Company accounted for this recapitalization as a purchase, therefore
loss per share is computed only for 1997 and subsequent periods.
d. Pervasiveness 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.
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 Electrochemical Fatigue Sensor ("EFS") research with
the United States Air Force contractors. The Company believes these
contracts will continue throughout 2000.
F-12
g. Stock Based Compensation
For 1998 and subsequent years, the Company has adopted FASB Statement
123 which establishes a fair value method of accounting for its
stock-based compensation plans. Prior to 1998, the Company used APB
Opinion 25.
h. Investments in companies in which the Company has less than a 20%
interest are carried at cost. The Company includes dividends received
from those companies in other income. The Company applies dividends
received in excess of the Company's proportionate share of accumulated
earnings as a reduction of the cost of the investment.
NOTE 3 - INTANGIBLES
Intangible assets consist of the following:
Period of December 31,
Amortization 1998 1999
------------------------
Patent Costs 17 Years $ 28,494 $ 28,494
License Agreement 20 Years 6,250 6,250
(See Note 5) -------- --------
34,744 34,744
Less Accumulated Amortization (18,054) (20,043)
-------- --------
$ 16,690 $ 14,701
======== ========
Amortization charged to operations for 1997, 1998, and 1999, were $1,989,
$1,990, and $1,989, respectively.
NOTE 4 - LICENSE AGREEMENT
The Company has entered into a license agreement with the University of
Pennsylvania regarding the development and marketing of the EFS. The EFS is
designed 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 EFS.
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. The license
terminates upon the expiration 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 development of the EFS. Under the Sponsorship
agreement, the Company agreed to reimburse the University development costs
totaling approximately $200,000 that was to be paid in 18 monthly
installments of $11,112.
Under the agreement, the Company reimbursed the University $10,000 in 1996
for the cost it incurred in the prosecution and maintenance of its patents
relating to the EFS.
F-13
The Company and the University agreed to modify the terms of the licensing
agreement and related obligation. The modified agreements increase the
University's royalty to 7% of the sale of related products, the issuance of
additional shares of the Company'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 contracts) up to the amount owed to the University.
The parties agreed that the balance owed on the Sponsorship Agreement is
$200,000 and commencing 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 become fully due and payable. In
addition, under the agreement, Mr. Bernstein agreed to limit his
compensation from the Company to $150,000 per year until the loan and
accrued interest is fully paid. Interest charged to operations for 1997,
1998, and 1999, relating to this obligation was $18,000, $39,240, and
$46,303, respectively. The balance of the note at December 31, 1998, and
1999, was $257,240 and $303,543, respectively,
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
December 31,
1998 1999
--------- ---------
Office Equipment ......................... $ 21,890 $ 23,380
Remote Monitoring System ................. -- --
Manufacturing Equipment .................. 100,067 100,067
--------- ---------
121,957 123,447
Less: Accumulated
Depreciation ...................... (119,245) (119,498)
--------- ---------
$ 2,712 $ 3,949
========= =========
Depreciation charged to operations was $2,789, $2,900, and $253, in 1997,
1998, and 1999, respectively. The useful lives of office equipment for the
purpose of computing depreciation are 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 8(b)).
In 1998, the Company had determined that based upon its current research
and development program, its current Remote Monitoring System has no future
use and probably cannot be sold. Therefore, the Company charged its full
cost of $97,160 to operations. The $97,160 is included in general and
administrative expenses. The Company determined the current value and
impairment loss of $97,160 based upon the present value of the expectant
future cash flows generated from the current system.
NOTE 6 - NOTES PAYABLE
On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a
current shareholder. The loan is evidenced by a promissory note that is
assessed interest at major bank prime rate. The Company has pledged its
patents as collateral against this loan.
F-14
As additional consideration for the loan, the Company granted to Mr. Baker,
a 1% royalty interest 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, 1998, and 1999, was $38,211, and $42,851, respectively. Interest
charged to operations for 1997, 1998 and 1999 was $2,759, $2,993, and
$4,640, 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 matured 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. The loan balance as of December
31, 1998 and 1999 was $25,527 and $25,688, respectively. Interest charged
to operations on this loan in 1997, 1998, and 1999, were $2,500, $2,500,
and $2,750, respectively.
NOTE 7 - 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.
That requires recognizing 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, 1999, the Company has
unused operating loss carryforwards, which may provide future tax benefits
in the amount of approximately $2,186,000 which expire in various years
through 2019.
The Company's use of its net operating losses may be restricted in future
years due to the limitations pursuant to IRC Section 382 on changes in
ownership.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, 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 revised
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.
F-15
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 limited to the $45,000 plus
an 11% annual rate of return. At December 31, 1998, and 1999, the
future royalty commitment was limited to $166,089 and $184,359,
respectively.
The payment of future royalties is secured by equipment used by the
Company in the development 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, 1998, and 1999, the total future royalty commitments,
including the accumulated 26% annual rate of return, were limited to
approximately $862,454, and $1,086,693, respectively. The future
royalties are secured by the Company's patents, products, and accounts
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 Company issuing 250,000 shares of
its Common Stock to Variety, Variety reduced its royalty interest to
20%. In 1998, in exchange for the Company issuing 733,280 shares of its
Common Stock to Variety, Variety reduced its royalty interest to 5%.
e. In 1995, the company entered into an agreement with an unrelated third
party for services rendered in connection with pursuing government
contracts for the funding of the development of the Company's
technologies, under which he would receive a number of the Company's
common stock equal to 2.5% of the number of shares outstanding as of
the date a government contract is signed, 15% of the amount of the
respective government contract, 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 and the third party
disagree as to the amount owed and the timing of payment under the
agreement and are attempting to settle the disagreements amicably.
F-16
f. In 1999, the Company was notified that a former consultant used
Company materials to sell Company stock to the public. The consultant
defrauded 25 investors out of $112,000. The Company had no knowledge
of his actions. But in order to avoid potential litigation and have
the ability to pursue the claims of these investors, the Company
authorized issuance of up to 110,000 shares of its restricted Common
Stock to these investors in exchange for the assignment of their
respective claims to the Company and a release of any claims against
the Company.
g. As discussed in Note 6, the Company granted a 1% royalty interest in
the Company's Fatigue 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 that the Company has granted and are
outstanding as of December 31, 1999, 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 8(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 8(b) and (c) above.
h. Operating Leases
The Company leases its existing office under a non-cancelable lease,
which expires on May 31, 2000.
Rental expense charged to operations for the years ended December 31,
1997, 1998, and 1999 was approximately $28,137, $22,632, and $25,375,
which consisted solely of minimum rental payments.
In addition to rent, the Company is obligated to pay property taxes,
insurance, and other related costs associated with the leased office.
NOTE 9 - INVESTMENTS
a. The Company acquired 6,625,000 of Class A Common Stock of Tensiodyne
Corporation. During 1996, the Company received approximately $17,750
through the sale of 50,000 shares of Tensiodyne Corporation stock. Of
the 6,575,000 shares of Tensiodyne shares held as of December 31, 1996,
only 690,000 shares were unrestricted and available for sale. The
Company valued these 690,000 shares at their quoted market price on
December 31, 1996 of $.08 per share totaling $55,200.
F-17
As of December 31, 1997, all of the 6,575,000 shares were unrestricted
and available for sale. The quoted market price of these shares as of
December 31, 1997, was $.10 per share. However, due to the share's
limited market, the Company could not sell any of these shares at that
price. Tensiodyne Corporation is a development stage company with no
sales history and little prospect of commencing operations in the near
future. The Company believed that its inability to sell the Tensiodyne
shares held at their quoted market price would continue indefinitely.
Therefore, as of December 31, 1997, the Company continued to value the
Tensiodyne shares at $55,200, the estimated net proceeds that the
Company believed it would receive if it sold the shares at that date in
bulk.
In 1998, the Board of Shareholders' of Tensiodyne authorized two
reverse stock splits that reduced the total shares owned by the Company
to 65,750. These shares were valued at December 31, 1998, at their
quoted market price of $.1250 per share totaling $8,219. As of December
31, 1999, the Company valued its interest in these shares at their
quoted market price of $.03125 per share totaling $2, 055.
b. In 1997, the Registrant issued 100,000 shares of its Common Stock to
Barry Peril in exchange for receiving 100,000 shares of Nevada
Manhattan Mining, Inc. ("Nevada"). The Company valued the shares
received in Nevada at $100,000. During 1997, the Company sold all of
the stock it held in Nevada in the open market netting approximately
$113,901. The Company reported a net gain of $13,901 from the sale.
c. In 1998, the Company acquired through a private stock offering, 115,000
shares of DCH Technology for $90,000. The Company sold these shares
throughout 1998 and 1999 for net proceeds totaling $265,846, thereby
reporting a net gain from these sales in 1998 of $171,450 and in 1999
of $4,396.
d. The Company owns a .5% interest in Antaeus Research, LLC. During 1999,
the Company invested $18,000. The Company accounts for this investment
under the Cost Method.
NOTE 10 - STOCKHOLDERS' EQUITY
a. Warrants
On June 25, 1998, the Company granted warrants to Mr. Robert M.
Bernstein and Mr. Joel Freedman to acquire 1,800,000, and 200,000
shares of the Company's Common Stock, respectively. Providing Mr.
Bernstein remains an officer or director of the Company 30 days prior
to any exercise of the Warrants, and at any time after December 1,
1998 (the "Grant Date"), Mr. Bernstein was entitled to purchase
900,000 shares. After December 1, 1999, Mr. Bernstein was entitled to
acquire the remaining 900,000 shares. While the warrants were
outstanding, if the Company issues any shares at a price less then the
exercise price, then the exercise price is reduced by a formula
indicated in the Warrant Agreement. Mr. Freedman was granted Warrants
under the same terms and conditions as Mr. Bernstein.
The exercise price at June 25, 1998, was initially $.50, but on
November 6, 1998, the Company's Board reduced the purchase price to
$.10 a share. The warrants expired on June 30, 2002.
F-18
The Company valued the warrants issued to Mr. Bernstein using the
Black-Sholes option pricing model using with the following assumptions:
risk-free interest rate of 5.5%, dividend yield of 0%, volatility
factor of the expected market price of the Company's common stock of
.12 and the expected life of the warrants of 42 months. For 1998, the
Company charged the fair value of the warrants totaling $27,567 to
operations.
These warrants were cancelled in 1999.
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 consideration 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 that will be adjusted 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 consideration
received pertains to services rendered by consultants and others.
F-19
During 1998, the Company issued a total of 1,121,617 shares of its
Common Stock in exchange for services. During 1999, the Company issued
a total of 4,202,205 shares of its Common Stock for services and other
non-cash consideration. A summary of each transaction follows:
On May 1, 1998, the Company issued 259,427 shares to two consultants.
These shares were valued at $25,943. Also on May 1, 1998, the Company
issued 302,190 to Joel Freedman, a Director of the Company, for
services rendered. These shares were valued at $30,219. On September 1,
1998, the Company issued to a consultant 200,000 shares of stock for
services relating to marketing efforts. These shares were valued at
$20,000. On October 9, 1998, Company issued 100,000 shares for
consulting services. These shares were valued at $10,000. In November
1998, the Company issued 60,000 shares to a company for public
relations and marketing services. These shares were valued at $6,000.
On November 24, 1998, the Company issued to a consultant 200,000 shares
of stock for consulting services. These shares were valued at $20,000.
On February 4, 1999, the Company issued 175,000 shares in exchange for
the cancellation of $66,667 of indebtedness due to a consultant. On
March 5, 1999, the Company issued 50,000 shares to Mr. John Goodman for
services rendered relating to the research and development projects.
These shares were valued at $2,500. Also on March 5, 1999, the Company
issued 50,000 shares to a consultant. These shares were valued at
$2,500. On April 15, 1999, the Company issued 50,000 shares to a
consultant. These shares were valued at $2,500. On June 9, 1999, the
Company issued 2,000,000 shares to its President in exchange for
canceling $100,000 of indebtedness due him. On May 27, 1999, the
Company issued its director, Joel Freedman, 200,000 shares of stock
from services. These shares were valued at $10,000. On June 21, 1999,
the Company issued 100,000 shares to a consultant for $.35 a share
payable by a non-recourse, non-interest bearing promissory note payable
on or before June 15, 2003 and is secured by the 100,000 shares. The
shares were valued at the present value of the note of $23,541. On June
12, 1999, the Company issued 200,000 shares to an attorney for
services. These shares were valued at $10,000. On July 7, 1999, the
Company issued 672,205 shares to the University of Pennsylvania
pursuant to the terms of the modified licensing agreement as discussed
in Note 4. These shares were valued at par. On August 23, 1999, the
Company issued 50,000 shares to a consultant. These shares were valued
at $2,500. On September 29, 1999, the Company issued 8,000 shares for
public relations services. These shares were valued at $400. On October
27, 1999, the Company issued 300,000 to its board of advisors. These
shares were valued at $30,000. On November 12, 1999, the Company issued
25,000 shares to a consultant. These shares were valued at $2,500. On
November 14, 1999, the Company issued 92,000 shares to Mr. John Goodman
for services rendered in connection with the development of the fatigue
fuse. These shares were valued at $9,200. On December 14, 1999, the
Company issued 50,000 shares to a consultant. These shares were valued
at $5,000. On December 21, 1999, the Company issued 20,000 shares to a
consultant for public relations services. These shares were valued at
$1,500. On December 21, 1999, the Company issued 10,000 shares to an
individual who is on the Company's advisory board. These shares were
valued at $1,000. On December 30, 1999, the Company issued 150,000
shares to a consultant. These shares were valued at $15,000.
F-20
NOTE 11 - TRANSACTIONS WITH MANAGEMENT
a. During 1993, Mr. Bernstein exercised warrants to purchase 6,000 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 $60 and executed a five year non-interest bearing note
to the Company for $14,940. The Note is non-recourse and the only
security pledged for the obligation is the stock purchased. The
promissory note was extended to the year 2003.
b. On February 28, 1994, the Company authorized the issuance of 10,000
shares of Common Stock to Mr. Bernstein for past services.
c. In March 1994, Mr. Bernstein advanced the Company $48,750 of which
$12,000 was canceled 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.
d. In 1994, the president and a director of the Company purchased 278,550
shares of the Company's common stock for $2,786.
e. 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.
f. 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 Common Stock.
g. 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. These
shares were subsequently canceled in 1996.
h. During 1996, the Company's President made advances to the Company
totaling approximately $43,250. During 1996, the Company paid back to
the President approximately $64,676.
F-21
i. In 1996, the Company issued the President 62,000 shares of its Common
Stock for services.
j. 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 amount owed the Company's president as of December 31, 1998
was $73,177.
k. During 1997, the Company canceled 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.
l. 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 that would
be due to Mr. Bernstein as of December 31, 1999, had the board so
declared, is approximately $607,583. This amount represents the
difference between the $150,000 a year and the compensation actually
accrued during the year 1991 through 1999.
m. In 1998, the Company issued 2,430,000 shares of its common stock to Mr.
Bernstein in exchange for the cancellation of $170,000 of indebtedness.
n. In 1998, the Company issued to a Director 302,190 shares of its common
stock for consulting services valued at $30,219
o. In 1998, the Company granted warrants to Mr. Bernstein and Mr. Joel
Freedman to acquire 1,800,000 and 200,000 shares of the Company's
Common Stock, respectively, at a price of $.10 a share. These warrants
were cancelled in 1999.
p. In 1999, the Company issued 2,000,000 shares of its Common Stock in
exchange for the cancellation of $100,000 of indebtedness owed its
President.
q. During 1999, the President advanced the Company $102,198 and of which
$71,500 was repaid. The outstanding loan balance as of December 31,
1999, was $10,270. The amount of accrued interest charged to operations
on the President's loans in 1997, 1998, 1999, were $7,978, and $8,425,
and $3,516, respectively.
F-22
NOTE 12 - STOCK-BASED COMPENSATION PLANS
a. In 1998, the Company adopted the 1998 Stock Option Plan and reserved
1,700,000 shares of Common Stock for distribution under the Plan.
Eligible Plan participants include employees, advisors, consultants,
and officers who provide services to the Company. A Committee appointed
by the Company's Board of Directors determines the option price and the
number of shares subject to each option granted. In the case of
Incentive Stock Options granted to an optionee who owns more than 10%
of the Company's outstanding stock, the option price shall be at least
110% of the fair market value of a share of common stock at date of
grant.
In 1998, the Company granted options to acquire 900,000 shares of which
500,000 shares were exercised for $125,000. In addition, under the
Plan, the Company issued additional 50,000 shares for consulting
services. The Company charged the fair value of the 50,000 shares of
$5,000 to operations.
In 1999, the Company granted options to acquire 775,000 shares of
Common Stock through the Plan. The Company did not issue any shares in
1999 under the Plan.
b. In 1998, the Company adopted the 1998 Stock Plan and reserved 800,000
shares of Common Stock for distribution under the plan. The Plan was
adopted to provide a means by which the Company could compensate key
employees, advisors, and consultants by issuing them stock in exchange
for services and thereby conserve the Company's cash resources. A
Committee of the Board of Directors determines the value of the
services rendered and the related number of shares to be issued through
the Plan for these services.
In 1998, the Company issued 310,000 shares of Common Stock through the
plan in exchange for consulting services. The Company valued these
shares at $31,000, the fair value of the services rendered.
F-23
The following is summary of the 1996 and 1998 Stock option plans:
1996 STOCK OPTION PLAN 1998 STOCK OPTION PLAN 1998 STOCK PLAN
---------------------- ---------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
OUTSTANDING
JAN 1, 1996 -- $ -- -- $ -- -- $ --
====== ========== ============= ========== =========== ========
GRANTED .... 70,000 $ 2.49 -- $ -- -- $ --
EXERCISED .. 70,000 $ 2.49 -- $ -- -- $ --
FORFEITED .. -- $ -- -- $ -- -- $ --
------ ---------- ------------- ---------- ----------- --------
OUTSTANDING
JAN 1, 1997 1) -- $ -- -- $ -- -- $ --
====== ========== ============= ========== =========== ========
GRANTED .... $ -- -- $ -- -- $ --
EXERCISED .. $ -- -- $ -- -- $ --
FORFEITED .. $ -- -- $ -- -- $ --
---------- ------------- ---------- ----------- --------
OUTSTANDING
JAN 1, 1998 -- $ -- -- $ -- -- $ --
====== ========== ============= ========== =========== ========
GRANTED .... -- $ -- 900,000 $ 0.64 310,000 $ 0.10
EXERCISED .. -- $ -- 550,000 $ 0.19 310,000 $ 0.10
FORFEITED .. -- $ -- -- $ -- -- $ --
------ ---------- ------------- ---------- ----------- --------
OUTSTANDING
DEC 31, 1998 -- $ -- 350,000 $ 1.29 -- $ --
====== ========== ============= ========== =========== ========
GRANTED .... -- $ -- 775,000 $ 0.25 -- $ --
EXERCISED .. -- $ -- -- $ -- -- $ --
FORFEITED .. -- -- -- -- $ --
------ ---------- ------------- ---------- ----------- --------
OUTSTANDING
DEC 31, 1999 -- $ -- 1,125,000 $ 0.58 -- $ --
====== ========== ============= ========== =========== ========
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 1998 $ 0.19
==========
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 1999 $ 0.00
==========
1) Plan transferred to SecureFone America in February 1997 reoganization
NOTE 13 - SUBSEQUENT EVENTS
In January 2000, the Company's Board of Directors authorized the
issuance of 50,000 shares of its Common Stock to an individual on its
advisory board.
In February 2000, the Company's Board of Directors authorized the
issuance of 40,000 shares of its Class B Common Stock to the Company's
President.
In February 2000, the Company's Board of Directors recommended an
increase in the Corporation's authorized number of shares of Common
Stock to 100,000,000 shares and a majority of the Corporation's
outstanding shares voted for the increase.
In February 2000, the Company's Board of Directors authorized the
issuance of 10,000 shares to a consultant for services.
F-24