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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number - 33-23617
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MATERIAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4622822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 707, 11661 San Vicente Boulevard,
Los Angeles, California 90049
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 208-5589
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Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None n/a
Securities Registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
None n/a
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 (Sec.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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 16, 2004, was $63,907,721 based on the average of the bid
and asked prices of $3.10 as reported by the Over The Counter Electronic
Bulletin Board on such date.
As of March 16, 2004, there were 67,551,934 shares of common stock, $.001 par
value issued and outstanding.
As of March 16, 2004, there were 600,000 shares of Class B Common Stock, $.001
par value issued and outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
List hereunder the following documents incorporated by reference and the part
ofthe 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).
There is no annual report, proxy statement, or prospectus to incorporate by
reference.
The S-1 Registration Statement for Material Technologies, Inc., effective July
31, 1997 with exhibits is incorporated by reference. The SB-2 Registration
Statement and related amendment filed on February 7, 2002, for Material
Technologies, Inc., with exhibits is also incorporated by reference
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
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Securities Litigation Reform Act of 1995
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The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere herein. Statements in this Form 10-K that reflect projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations,
including those contained in "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Quantitative and
Qualitative Disclosure about Market Risk," or relating to the Company's outlook
for fiscal year 2004, overall volume and pricing trends or strategies and their
anticipated results, are "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as "expects,"
"anticipates," "approximates," "believes," "estimates," "intends," and "hopes"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. No assurance can be given that actual results
or events will not differ materially from those projected, estimated, assumed or
anticipated in any such forward-looking statements. Important factors that could
result in such differences, in addition to the other factors noted with such
forward-looking statements, include (but are not limited to): general economic
conditions in the Company's market, including inflation, recession, interest
rates and other economic factors; casualty to or other disruption of the
Company's facilities and equipment; and other factors that generally affect the
transportation and infrastructure industries.
PART I
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MATERIAL TECHNOLOGIES, INC.
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ITEM 1. BUSINESS
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We are engaged in research and development of metal fatigue detection,
measurement, and monitoring technologies. As such, we are developing several
monitoring devices for metal fatigue detection and measurement. We are a
development stage company doing business as Tensiodyne Scientific Corporation.
2
Our efforts are dedicated to developing devices and systems that indicate the
true fatigue status of a metal component. We have developed two products, with a
third product now in the last stages of its development. The first is a small,
extremely simple device that continuously integrates the effect of fatigue
loading in a structural member, called a Fatigue Fuse. The second is an
instrument that detects very small cracks in metals, The Electrochemical Fatigue
Sensor. It has demonstrated that it can detect cracks, in the laboratory, as
small as 10 microns (0.0004 inches), which is smaller than any other practical
crack detection technology, as acknowledged by the United States Air Force and
confirmed by Rockwell Scientific Corporation.
These two devices are pioneering technology in the fatigue field that we believe
provide cutting-edge solutions in materials technology. We hold the patents on
the Fatigue Fuse and license the technology on the Electrochemical Fatigue
Sensor from the University of Pennsylvania
Another product currently under development is the Company's "Matech NDT
Probe(TM) ("Videoscope"), which provides visual access and simultaneously,
certain non-destructive test sensors to remote locations. It comprises a video
detecting element and light source together with a working channel, through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures such as the interior of jet turbine engines.
The detecting element provides very clear video resolution; images are displayed
on a monitor, and can be recorded. The Videoscope is derived from similar
devices in wide use in medicine.
Its uniqueness is its small diameter and its capability for applying multiple
sensors. Developed to inspect internal components of fully assembled jet turbine
engines using the existing inspection holes in assembled engine outer surfaces,
it can be used to access remote areas of bridges and other structures to monitor
fatigue and other cracks, permitting good visual access to otherwise
inaccessible areas.
We were 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. Material Technology, Inc. was the
successor to the business of Tensiodyne Corporation that began developing the
fatigue fuse in 1983. Our two predecessors, Tensiodyne Corporation and Material
Technology, Inc. were engaged in developing and testing the Fatigue Fuse and,
beginning in 1993, developing the Electrochemical Fatigue Sensor.
As of December 31, 2003, our investments in our subsidiary companies represented
less than 10% of our total assets. We have controlling interests in each of our
subsidiary companies and members of our management also serve as officers and
directors of each subsidiary. The following is a list of our subsidiary
companies as of December 31, 2003, with a brief description of their business:
Integrated Metal Technologies
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On January 1, 2003 the Company formed Integrated Metal Technologies, Inc., a
Delaware corporation "IMT". The Company owns 51% of the outstanding shares of
IMT and the remaining 49% of the outstanding shares are owned by Austin Tech,
LLC, a Texas limited liability company. IMT was initially capitalized with two
separate technology license agreements. The first technology license agreement
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is by and between the Company and IMT. That license provides for the use by IMT
of certain proprietary technology for measuring microscopic fractures in metal
structures and monitoring metal fatigue using miniature low-cost,
state-of-the-art devices. The license is further restricted to only those
applications in which the technology can be used in combination with,
simultaneously or as an integral part of certain technologies developed or
provided by Austin Tech, LLC, a Texas limited liability company. Additionally,
the license further restricts use of the technology in only the following
markets: a) bridges, b) tunnels, c) tank farms, and d) railroads. The Company
granted IMT an exclusive, royalty free license to use this technology in the
countries of Mexico, Brazil, United States of America, Lebanon, Saudi Arabia,
Argentina, United Arab Emirates, Jordan, Qatar, Kuwait, Egypt, Canada, Norway,
Sweden, Finland, Denmark and Iceland. The license expires on January 1, 2005
("Term"), unless earlier terminated in accordance with its terms.
The second technology license agreement is by and between IMT and Austin Tech,
LLC, a Texas limited liability company. That license provides for the use by IMT
of certain proprietary technology for wireless data acquisitions and delivery.
At the present time there is no activity in IMT and the Company does not
anticipate nor reasonably foresee any business activity in IMT in the near
future.
Matech International, Inc.
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On January 22, 2003 the Company formed Matech International, Inc., a Nevada
corporation "International". International was formed as a wholly owned
subsidiary of the Company to advertise, market and sell the Company's videoscope
technology which is presently utilized in the inspection of stress and crack
points in turbine engines on the wings of airplanes. The Company granted
International an exclusive, royalty free license to use the Company's
technologies in the countries of Mexico, Brazil, United States of America,
Lebanon, Saudi Arabia, Argentina, United Arab Emirates, Jordan, Qatar, Kuwait,
Egypt, Canada, Norway, Sweden, Finland, Denmark and Iceland. The license expires
on January 1, 2005 ("Term"), unless earlier terminated in accordance with its
terms.
The license is further restricted to only those applications in which the
technology can be used in combination with, simultaneously or as an integral
part of certain technologies developed or provided by Austin Tech, LLC, a Texas
limited liability company. Additionally, the license further restricts use of
the technology in only the following markets: a) bridges, b) tunnels, c) tank
farms, and d) railroads.
At the present time there is no activity in International and the Company does
not anticipate nor reasonably foresee any business activity in International in
the near future.
Matech Aerospace, Inc.
- ----------------------
On March 13, 2003 the Company formed Matech Aerospace, Inc., a Nevada
corporation "Aerospace" with a capital contribution of $5,000. Aerospace was
formed as a wholly owned subsidiary of the Company to advertise, market and sell
all manufacturing and marketing rights to the Company's products and
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technologies in all commercial markets within the United States. The Company
granted Aerospace an exclusive license to advertise, market and sell all
manufacturing and marketing rights to the Company's products and technologies in
all commercial markets within the United States in exchange for a seven percent
(7%) royalty on all gross sales generated by Aerospace.
The purposes of forming these subsidiaries is to 1) segregate the different
technologies into distinct entities and 2) to award equity based compensation to
employees and consultants in the further development of the related
technologies.
THE COMPANY'S TECHNOLOGIES
- --------------------------
THE FATIGUE FUSE
- ----------------
The Fatigue Fuse is designed to be affixed to a structure to give warnings as
pre-selected 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 an application-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
(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
(strain cycles) 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 strain and wear history as the member.
Methods are available for remote indication of Fuse fracturing.
We believe that the Fatigue Fuse is of value in monitoring aircraft, ships,
bridges, conveyor systems, mining equipment, cranes, etc. No special training is
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 our successful marketing of the Fatigue Fuse, and
no assurance can be given that we will be able to overcome the obstacles
relating to introducing a new product to the market. To implement our ability to
produce and market the Fatigue Fuse, we need substantial additional capital and
no assurance can be given that this needed capital will be available.
5
In a new structure, we 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 has experienced loading and wear, we must determine the fatigue status
of that structural member so we can design the Fatigue Fuse to monitor the
remaining fatigue life potential.
THE ELECTROCHEMICAL FATIGUE SENSOR ("EFS")
- ------------------------------------------
The EFS is a device that employs the principle of electrochemical/mechanical
interaction to find cracks. It is an instrument that detects very small cracks
and has the potential to determine crack growth rates. The Electrochemical
Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as
small as 10 microns (0.0004 inches), which is smaller than any other practical
technology, as acknowledged by the United States Air Force and Rockwell
Scientific Corporation. We believe that nothing comparable to this instrument
currently exists in materials technology.
The EFS functions by treating the location of interest (the target) associated
with the structural member as an electrode of an electrochemical cell. 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
required, e.g. to measure a bridge structural member it is necessary that cyclic
loads be imposed, as normal traffic on the bridge would do. The results are a
specific set of current waveforms and amplitudes that characterize and indicate
fatigue damage i.e., fatigue cracks.
MATECH NDT PROBE(TM) (VIDEOSCOPE)
- ---------------------------------
Critical stress points are very often located in difficult-to-get-at places.
Therefore it has become desirable to miniaturize the process and develop a means
for delivery of test sensors to inaccessible areas. The Videoscope comprises a
video detecting element and light source together with a working channel through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures. The device as presently implemented has a maximum
diameter of 12 mm (0.472 inches) and length of 1.5m (60 inches.). Contained
within this diameter is a working channel of 2.8 mm (0.11 inches) diameter,
through which proprietary eddy current or ultrasonic sensors may be passed and
used to examine areas of interest.
The Videoscope's uniqueness is its small diameter and its capability for
applying multiple non-destructive test sensors. Developed to inspect internal
components of fully assembled jet turbine engines using the existing inspection
holes in assembled engine outer surfaces, it can be used to access remote areas
of bridges and other structures to monitor fatigue and other cracks, permitting
good visual access to otherwise inaccessible areas.
DEVELOPMENT OF OUR TECHNOLOGIES
- -------------------------------
Currently, the Company's primary focus is on the development and
commercialization of the EFS and Videoscope. Due to the Company's limited
resources, efforts in the development and testing of the Fatigue Fuse have been
delayed.
6
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. We conducted the
advanced development, including variations of the adhesive bonding process, and
fabricating a laboratory-grade remote recorder for finger separation events that
constitute proper functioning of the Fatigue Fuse. The next step, prototype
evaluation, encompasses empirical tailoring of Fatigue Fuse parameters to fit
the actual spectrum loading expected in specific applications, and needs to be
done. The tests associated with further development of the Fatigue Fuse include
full-scale structural tests with attached Fatigue Fuses. A prototype of the
Fatigue Fuse has been designed, fabricated, and successfully demonstrated. The
next tasks will be to prepare an analysis for more efficient selection of
Fatigue 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 measuring stresses and strains in fatiguing
metal. 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 Fatigue Fuse, it is the Company's belief that it will take from
six to 12 months and cost approximately $600,000, including technical and beta
testing and final development. If testing, development, and marketing are
successful, we estimate we should begin receiving revenue from the sale of the
Fatigue Fuse within a year of completing development of the Fatigue Fuse.
However, we cannot estimate the amount of revenue that may be realized from
sales of the Fuse, if any.
To date, certain organizations have included our Fatigue Fuse in test programs.
We have already completed the 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 Fatigue Fuses failing in sequence as predicted.
The Fatigue Fuse has been at this stage for the past several years as the
Company has not had the necessary financial resources to finalize its
development and commence marketing. At the present time the Company has elected
to defer future development of the Fatigue Fuse and apply its resources to
pursue the EFS technology and the videoscope.
Status of the EFS
- -----------------
The existence of very small cracks can be determined by EFS, and in this regard
it appears superior in resolution to other current non-destructive testing
techniques. It has succeeded in regularly detecting cracks as small as 40
microns in a titanium alloy, in a laboratory environment, as verified by a
scanning electronic microscope, and has proven to be capable of detecting cracks
down to 10 microns, as acknowledged by the Materials Laboratory at Wright
Patterson Air Force and confirmed by evaluations at Rockwell Scientific
Corporation. This is much smaller than the capability of any other practical
non-destructive testing method for structural components. There is also a vast
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body of testing supporting successful use of this technology with selected
aluminum alloys. Additional testing is required to verify EFS' crack detection
capabilities under various industrial environments which are representative of
actual structures in the field, like a highway bridge or aircraft fuselage. The
Company continues to seek out real world test sites to complete this part of the
development process.
In October 2003 we were awarded a $215,000 contract from Northrop/Grumman
Corporation to apply EFS in an experimental program to evaluate long term
sensing of fatigue damage in military vehicles and aircraft.
Status of the Matech NDT Probe(TM) (Videoscope)
- -----------------------------------------------
The Company had a working prototype model of its Videoscope manufactured and is
in the process of demonstrating it to potential customers. At the present time,
there can be no assurance that the technology represented by the Videoscope will
be accepted in the market place.
COMMERCIAL MARKETS FOR OUR PRODUCTS AND TECHNOLOGIES
- ----------------------------------------------------
No commercial application of our products has been arranged to date, but we
believe it can be applied to certain markets. Our 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.
Application Of Our Technologies For Bridges
- -------------------------------------------
Our EFS and fatigue fuse products primarily address the detection of fatigue in
structures such as bridges. In the United States alone there are more than
610,000 bridges of which over 260,000 are rated by the Federal Highway
Administration as requiring major repair, rehabilitation, or replacement. Our
EFS and Fatigue Fuse products can be effectively used as fatigue detection
devices for all metal bridges located within the United States. Our detection
devices also address maintenance problems associated with bridge structures.
Although there are normal business imperatives, the bridge market is essentially
macro-economically and government policy driven. In our opinion, only technology
can provide the solution. The need for increased spending accelerates
significantly each year as infrastructure ages. The Federal government has
recently mandated bridge repair and detection through the passage of the
Intermodal Surface Transportation and Efficiency Act in 1991 and again recently
in the $200 billion, 1998 Transportation Equity Act. We do not currently have
contracts in place to install our fatigue detection products on bridge
structures within the United States.
8
OUR PATENT PROTECTIONS
- ----------------------
We are the assignee of four patents originally issued to Tensiodyne Corporation.
The first was issued on May 27, 1986, and expired 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 "Metal Fatigue Detector" was issued
on August 24, 1993 and expires on August 24, 2010, United States Patent Number
5,237,875. The third 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, we
own a fourth patent, titled "Device for Monitoring the Fatigue Life of a
Structural Member and a Method of Making Same," which was issued June 20, 1995,
United States Patent Number 5,425,274, and expires June 20, 2012. Effective as
of December 31, 2003 the Company was assigned all rights under the patent
application relating to the Videoscope.
OUR PATENTS ARE ENCUMBERED
- --------------------------
The patents described in the preceding section are pledged as collateral to
secure the repayment of loans extended to us or indebtedness that we currently
owe. On August 30, 1986, we entered into a funding agreement with the Advanced
Technology Center, whereby ATC paid $45,000 to us 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, 2002,
and 2003 , the future royalty commitment was limited to $252,136 and $279,871,
respectively. The payment of future royalties is secured by equipment we use in
the development of technology as specified in the funding agreement, however, no
lien against our equipment or our patents in favor of ATC vests until we
generate royalties from product sales.
On May 4, 1987, we entered into a funding agreement with ATC whereby ATC
provided $63,775 to us for the purchase of a royalty of 3% of future gross sales
and 6% of sublicensing revenue. 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. As with our first agreement with ATC, no lien or encumbrance
against our assets, including our patents, vests in favor of ATC until we
generate royalties from product sales. If we were to default on these payments
to ATC, our obligations relating to these agreements then become secured by our
patents, products and accounts receivable. At December 31, 2002, and 2003, , the
total future royalty commitments, including the accumulated 26% annual rate of
return, were limited to approximately $3,070,680 and $3,869,057, respectively.
On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our
shareholders. We gave Mr. Baker a promissory note due May 31, 2002 and we
pledged our patents as collateral to secure the repayment of this note. As of
the date of this prospectus, there is a first priority security interest in our
patents as collateral for the repayment of the amounts we owe to Mr. Baker. As
additional consideration for this loan, we granted to Mr. Baker, a 1% royalty
interest in the fatigue fuse and a 0.5% royalty interest in the Electrochemical
Fatigue Sensor. We are in default of the repayment terms of the note held by Mr.
Baker, and at December 31, 2003, we owe Mr. Baker approximately $50,000 in
principal and accrued interest. Mr. Baker has not taken any action to foreclose
his interest in the collateral and we are in discussions with Mr. Baker, with
the expectation that we will cure any default in the note he holds and avoid any
foreclosure of his security interest held in our patents. We believe, that
although we have not yet cured our defaults on the loans to Mr. Baker, our
9
current communications with him suggest that Mr. Baker does not have the present
intention of foreclosing on the patents as collateral or the pursuit of legal
action against us to collect the balance due under our note.
DISTRIBUTION OF OUR PRODUCTS
- ----------------------------
Subject to available financing, we intend to exhibit the Fatigue Fuse and the
Electrochemical Fatigue Sensor at various aerospace trade shows and intend to
also market our 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 we intend to undertake marketing, dependent on the
availability of funds, within and without the United States, no assurance can be
given that any such marketing activities will be implemented.
COMPETITION
- -----------
Other technologies exist which measure and indicate fatigue damage. Single
cracks larger than a minimum size can be found by nondestructive inspection
methods such as dye penetrate, 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 our products remain largely unproven. Companies marketing these
alternate technologies include Magnaflux Corporation, Kraut-Kermer-Branson,
Dunegan-Endevco, and Micro Measurements. These companies have more substantial
assets, greater experience, and more resources than ours, including, but not
limited to, established distribution channels and an established customer base.
The familiarity and loyalty to these technologies may be difficult to dislodge.
Because we are still in the development stage, we are unable to predict whether
our technologies will be successfully developed and commercially attractive in
potential markets.
EMPLOYEES
- ---------
The Company has four employees, Robert M. Bernstein, President and Chief
Executive Officer, a Secretary, and two part time engineers. In addition, the
Company retains consultants for specialized work.
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
$2,348 per month on a month to month basis. Either party may cancel the lease on
30 days notice.
Matech owns a remote monitoring system and certain equipment that is being used
by the University of Pennsylvania for instructional and testing purposes. The
10
Company determined that the system has no future use and probably cannot be
sold. Therefore, the Company charged its full costs of $97,160 to operations in
1998.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
NONE.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's common stock is traded on the Over-the-Counter Electronic Bulletin
Board maintained by the NASD ("Bulletin Board"). Its symbol is MTNA.
From January 2002 through December 31, 2003 Matech's Common Stock was quoted
between a low bid of $.003 per share and a high bid of $2.70 per share on the
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 major reason for the severe difference between the low
and high bid prices during the year was the Company's 1,000:1 reverse stock
split which came into effect on September 23, 2003. The following chart shows
the high and low bid prices per share per calendar quarter from January 2002 to
December 2003.
High Bid Price Low Bid Price
First Quarter 2002 $.27 * $.10 *
Second Quarter 2002 $.10 * $.07 *
Third Quarter 2002 $.02 * $.02 *
Fourth Quarter 2002 $.015 * $.015 *
First Quarter 2003 $.024 * $.006 *
Second Quarter 2003 $.016 * $.008 *
Third Quarter 2003 $1.90 ** $.003 *
Fourth Quarter 2003 $2.70 ** $1.80 *
* Price prior to September 23, 2003 1000:1 reverse stock split.
** Price after September 23, 2003 1000:1 reverse stock split.
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On March 16, 2004, there were 987 holders of record of the Company's common
stock and one holder of its Class B common stock. Our Class B common stock is
not quoted on the Bulletin Board.
No dividends on any of the Company's shares were declared or paid during the
years 2002 or 2003, nor are any dividends contemplated in the foreseeable
future.
At various times during the years 2002 and 2003, the Company issued common stock
to various persons which issuances we believe to be exempt from registration
under Section 4(2) of the Securities Act of 1933 or under Regulation D
promulgated under the Securities Act of 1933, and comparable state law
exemptions. Each and every such person that received shares of our common stock
had a pre-existing relationship with Matech and has been associated with the
Company in some way, is sophisticated in investment and financial matters, and
is familiar with the Company, its business, and its financial position.
COMMON STOCK ISSUANCES
- ----------------------
The number of shares issued by the Company as discussed below have been restated
to reflect the Company's September 23, 2003, 1,000:1 reverse stock split as if
the stock split took place at the beginning of each period presented.
2004
- ----
On January 7, 2004, the Company issued 25,000 Class A common shares to the
Company's executive secretary. The shares are subject to a three-year lock up
agreement.
On February 11, 2004, the Company issued 250,000 Class A common shares of its
common stock through the conversion of 250,000 shares of Class C Preferred
stock.
On February 12, 2004, the Company issued 500,000 Class A common shares to a
consultant for services rendered in connection with Matech Aerospace and for the
overseeing the design, utilization, and marketing of the Videoscope. The shares
are subject to a three-year lock up agreement.
On February 12, 2004, the Company issued 50,000 Class A common shares to a
consultant for services rendered in connection with Matech Aerospace and the
design and utilization of the Videoscope. The shares are subject to a three-year
lock up agreement.
On February 12, 2004, the Company issued 25,000 Class A common shares to its
outside accountant as payment towards last years' accounting fees. The shares
are subject to a three-year lock up agreement.
On March 16, 2004, the Company issued 25, 000 shares of its Class A common stock
to a consultant for services rendered in the connection with the development of
the Electrochemical Fatigue Sensor for use on bridges.
12
2003
- ----
On January 6, 2003, the Company issued 500 shares of its Class A common stock
for financial consulting services including searching on behalf of the Company
for additional equity capital.
On January 8, 2003, the Company issued 3,000 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
On January 24, 2003, the Company issued 313 shares of its Class A common stock
for consulting services in connection with Company public relations.
On February 4, 2003, the Company issued 787 shares of its Class A common stock
through its Regulation S offering.
On February 12, 2003, the Company issued 2,550 shares of its Class A common
stock for services rendered in connection with its Regulation S offering.
On March 4, 2003, the Company issued 1,500 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
On March 10, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On March 11, 2003, the Company issued 260 shares of its Class A common stock to
Mr. Stephen Beck pursuant to the anti-dilution provisions of his settlement
agreement.
On March 11, 2003, the Company issued 1,500 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
On March 11, 2003, the Company issued 300 shares of its Class A common stock for
financial consulting services in connection with seeking potential funding for
the Company.
On March 26, 2003, the Company issued 250 shares of its Class A common stock for
consulting services in connection with the Company's research and development
efforts.
On March 28, 2003, the Company issued 8,261 shares of its Class A common stock
through its Regulation S offering.
On April 11, 2003, the Company issued 4,242 shares if its Class A common stock
to the University of Pennsylvania pursuant to the anti-dilution provision in its
license agreement.
On April 15, 2003, the Company issued 250 shares of its Class A common stock for
marketing services relating to the EFS.
13
On April 15, 2003, the Company issued 1,000 shares of its Class A common stock
each to Messrs. Goodman and Berks for consulting services in connection with the
Company's research and development efforts.
On April 21, 2003, the Company issued 500 shares of its Class A common stock to
one of its advisory board members for services rendered in connection with
proposed marketing of the Videoscope in overseas markets.
On April 21, 2003, the Company issued 171 shares of its Class A common stock for
consulting services rendered in connection with its research and development
efforts.
On April 21, 2003, the Company issued 1,180 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
On April 29, 2003, the Company issued 3,000 shares of its Class A common stock
through its Regulation S offering.
On May 8, 2003, the Company issued 250 shares of its Class A common stock
through its Regulation S offering.
On May 20, 2003, the Company issued 150 shares of its Class A common stock for
advising the Company as to potential sources of government research and
development contracts and/or grants in regards to Company's technologies.
On May 27, 2003, the Company issued 2,000 shares of its Class A common stock for
consulting services relating to research and development on the EFS.
On May 30, 2003, the Company issued 500 shares of its Class A common stock to an
advisory member for consulting services in connection with seeking potential
bridge projects.
On June 10, 2003, the Company issued 1,650 shares of its Class A common stock
for legal services in connection with general corporate matters.
On June 12, 2003, the Company issued 1,000 shares of its Class A common stock to
an attorney firm for amounts due them.
On June 20, 2003, the Company issued 2,000 shares of its Class A common stock to
Mr. William Berks for consulting services in connection with the Company's
research and development efforts.
On July 11, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On July 31, 2003, the Company issued 1,250 shares of its Class A common stock
through its Regulation S offering.
14
On August 18, 2003, the Company issued 31 shares of its Class A common stock and
12,500 shares of Matech Aerospace common stock through its for Regulation S
offering.
On August 18, 2003, the Company issued 625 shares of its Class A common stock
through its Regulation S offering.
On August 20, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On August 27, 2003, the Company issued 2,257 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
On September 4, 2003, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On September 16, 2003, the Company issued 62 shares of its Class A common stock
and 25,000 shares of Matech Aerospace common stock through its for Regulation S
offering.
On September 22, 2003, the Company issued 492 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
On September 23, 2003, the Company issued 22,000,000 shares of Class A common
stock in consideration for the assumption of the obligation due by the Company
to two attorneys in the amount of $1,583,128.
On September 23, 2003, the Company issued its President 32,000,000 shares of its
Class A Common Stock and 300,000 shares of Class B Common Stock for past
services rendered pursuant to an Accord, Satisfaction and Mutual Release in
which Mr. Bernstein released all claims he had against the Company that arose
prior to September 24, 2003, including past services rendered in excess of
compensation paid
On September 23, 2003, the Company issued 5,000,000 shares of its Class A common
stock to its President in consideration for a promissory note totaling $50,000.
On September 23, 2003, the Company issued 7,000,000 shares of its Class A common
stock for services rendered in connection with its Regulation S offering.
On September 26, 2003, the Company issued 16,000 shares of its Class A common
stock and 6,250 shares of Matech Aerospace common stock through its Regulation S
offering.
On September 26, 2003, the Company issued 2,000,000 shares of its Class A common
stock for services rendered in connection with seeking funding for the Company.
On September 29, 2003, the Company issued 5,760,000 shares of its Class A common
stock for services rendered pursuant to a consulting agreement.
15
On November 12, 2003, the Company issued 30 shares of its Class A common stock
and 12,000 shares of Matech Aerospace common stock through its Regulation S
offering.
On December 11, 2003, the Company issued 80 shares of its Class A common stock
and 32,000 shares of Matech Aerospace common stock through its Regulation S
offering.
On December 17, 2003, the Company issued 3,750 shares of its Class A common
stock for services rendered in connection with the development of the
Electrochemical Fatigue Sensor.
On September 24, 2003, the Company adopted the 2003 Stock Option, SAR and Stock
Bonus Consultant Plan and reserved 10,000,000 shares of its common stock for
distribution under the plan. Eligible Plan participants include independent
consultants. The option price per share is determined by Committee and will be
no less than 85% of the fair market value of a share of common stock at date of
grant. Options granted under the plan are not exercisable within 6 months from
date of grant and expire five years from date of grant. The plan terminates on
September 24, 2006. During 2003, there were no options issued under the plan.
2002
- ----
On January 11, 2002, the Company issued 14 shares through its Regulation S
offering.
On January 11, 2002, the Company issued a consultant 20 shares of its Class A
common stock for services rendered in connection with the development of the
Company's business plan.
On January 22, 2002, the Company issued 40,000 Class A shares of its common
stock to Allied Boston pursuant to the terms of the Straight Documentary Credit
as discussed in Note 9(g) to the financial statements. These shares were
subsequently returned to the Company on June 25, 2003 and cancelled.
On January 25, 2002, the Company issued 239 shares of its Class A common stock
through its Regulation S offering.
On January 29, 2002, the Company issued 200 shares of its Class A common stock
through its Regulation S offering.
On January 30, 2002, the Company issued a consultant 15 shares of its Class A
common stock for services rendered in connection with the Company's attempt to
seek equity capital.
On February 4, 2002, the Company issued 71 of its Class A common stock shares
through is Regulation S offering.
On February 14, 2002, the Company issued 300 shares of its Class A common stock
through its Regulation S offering.
16
On February 13, 2002, the Company issued 4 shares its Class A common stock for
assistance in legal research in connection with the Company's technologies.
On February 14, 2002, the Company issued a consultant 400 shares of its Class A
common stock for services rendered in connection with Company `s search for
funding.
On February 14, 2002, the Company issued 606 shares of its Class A common stock
through its Regulation S offering.
On February 19, 2002, the Company issued 40 shares of its Class A common stock
through its Regulation S offering.
On February 21, 2002, the Company issued 195 shares of its Class A common stock
through its Regulation S offering.
On February 25, 2002, the Company issued 113 shares of its Class A common stock
through its Regulation S offering.
On February 26, 2002, the Company issued 20 of its Class A common stock shares
through its Regulation S offering.
On February 27, 2002, the Company issued 198 shares of its Class A common stock
through its Regulation S offering.
On March 1, 2002, the Company issued 150 shares of its Class A common stock
through its Regulation S offering.
March 4, 2002, the Company issued its executive assistant 25 shares of its Class
A common stock for services rendered.
March 4, 2002, the Company issued 200 shares of its Class A common stock for
consulting services rendered in connection with the development of the Company's
business plan.
March 4, 2002, the Company issued to 50 shares of its Class A common stock for
consulting services rendered in connection with the Company's attempt at finding
sources of capital.
March 4, 2002, the Company issued to 50 shares of its Class A common stock for
cost accounting services in connection with the Company's government contracts.
March 4, 2002, the Company issued to 100 shares of its Class A common stock for
services rendered in connection with Company's public relations.
March 4, 2002, the Company issued to 250 shares of its Class A common stock to
an advisory board member for services rendered relating to the adoption of the
Company's technology for utilization on bridges and other infrastructure.
17
On March 5, 2002, the Company issued 190 shares of its Class A common stock
through its Regulation S offering.
On March 6, 2002, the Company issued 631 shares of its Class A common stock
through its Regulation S offering.
On March 8, 2002, the Company issued 16 shares of its Class A common stock
through its Regulation S offering.
On March 13, 2002, the Company issued 54 shares of its Class A common stock
through its Regulation S offering.
On March 15, 2002, the Company issued 150 shares of its Class A common stock for
consulting services rendered in connection with the Company's investigation into
obtaining government grants or contracts utilizing its technologies..
On March 15, 2002, the Company issued 78 shares of its Class A common stock
through its Regulation S offering.
On March 18, 2002, the Company issued 150 shares of its Class A common stock for
consulting services rendered. in connection with the Company's attempt at
finding sources of capital
On March 18, 2002, the Company issued 5 shares of its Class A common stock for
services rendered in connection with its Regulation S offering.
On March 19, 2002, the Company issued to 125 shares of its Class A common stock
for legal services rendered in connection with general corporate matters.
On March 19 2002, the Company issued 597 shares of its Class A common stock
through its Regulation S offering.
On March 20 2002, the Company issued 49 shares its Class A common stock through
its Regulation S offering.
On March 21 2002, the Company issued 150 shares its Class A common stock through
its Regulation S offering.
On March 25 2002, the Company issued 24 shares its Class A common stock through
its Regulation S offering.
On March 27 2002, the Company issued 426 shares its Class A common stock through
its Regulation S offering.
18
On April 2, 2002, the Company issued 1,096 shares of its Class A common stock to
the University of Pennsylvania pursuant to the anti-dilution provision in its
licensing agreement.
On April 2, 2002, the Company issued to two members of its advisory board a
total of 470 shares of its Class A common stock for consulting services rendered
in connection with the development of the Company's EFS..
On April 2, 2002, the Company issued its executive assistant 25 shares of its
Class A common stock.
On April 4, 2002, the Company issued to 120 shares of its Class A common stock
for legal services rendered with general corporate matters.
On April 4, 2002, the Company issued 4 shares its Class A common stock for
clerical services rendered.
On April 5, 2002, the Company issued 50 shares of its Class A common stock
through its Regulation S offering.
On April 8, 2002, the Company issued 54 shares of its Class A common stock
through its Regulation S offering.
On April 9, 2002, the Company issued 30 shares of its Class A common stock
through its Regulation S offering.
On April 10, 2002, the Company issued 62 shares of its Class A common stock
through its Regulation S offering.
On April 10, 2002, the Company issued to 42 shares of its Class A common stock
for legal services rendered in connection with general corporate matters
On April 12, 2002, the Company issued to 100 shares of its Class A common stock
for legal services rendered in connection with general corporate matters.
On April 25, 2002, the Company issued 100 shares of its Class A common stock for
consulting services rendered in connection with the Company's investigation into
obtaining government grants or contracts utilizing its technology.
On April 25, 2002, the Company issued 250 shares of its Class A common stock to
an advisory board member for consulting services rendered in connection with the
adaptation of the Company's technologies as it relates to bridges and other
infrastructures.
19
On April 25, 2002, the Company issued 200 shares of its Class A common stock for
cost accounting services rendered in connection with the Company's government
contracts.
On April 25, 2002, the Company issued 30 shares of its Class A common stock
through its Regulation S offering.
On May 8, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On May 9, 2002, the Company issued 674 shares of its Class A common stock for
services rendered in connection with its Regulation S offering.
On May 10, 2002, the Company issued 330 shares of its Class A common stock for
legal services rendered in connection with general corporate matters.
On May 10, 2002, the Company issued 415 shares of its Class A common stock
through its Regulation S offering.
On May 21, 2002, the Company issued 400 shares of its Class A common stock for
consulting services rendered in connection with the Company's search for
additional funding.
On May 22, 2002, the Company issued 1,000 shares of its Class A common stock for
legal services rendered. in connection with the Company aborted SB-2
registration statement.
On May 28, 2002, the Company issued 533 shares of its Class A common stock
through its Regulation S offering.
On May 31, 2002, the Company issued 50 of its Class A common stock shares
through its Regulation S offering.
On June 5, 2002, the Company issued 150 shares of its Class A common stock for
consulting services rendered connection with the Company's search for additional
funding.
On June 5, 2002, the Company issued 50 shares of its Class A common stock for
legal services rendered in connection with general corporate matters.
On June 5, 2002, the Company issued 23 shares of its Class A common stock
through its Regulation S offering.
On June 6, 2002, the Company issued 50 shares of its Class A common stock for
consulting services rendered for cost accounting services rendered in connection
with the Company's government contracts.
On June 20, 2002, the Company issued 1,760 shares of its Class A common stock
through its Regulation S offering.
20
On June 21, 2002, the Company issued 660 shares of its Class A common stock
through its Regulation S offering.
On June 28, 2002, the Company issued 110 shares of its Class A common stock
through its Regulation S offering.
On July 1, 2002, the Company issued 220 shares of its Class A common stock
through its Regulation S offering.
On July 2, 2002, the Company issued 93 shares of its Class A common stock
through its Regulation S offering.
On July 3, 2002, the Company issued 1,000 shares of its Class A common stock for
legal services rendered in connection with the Company aborted SB-2 registration
statement.
On July 3, 2002, the Company issued 250 shares of its Class A common stock to an
advisory board member for consulting services rendered in connection with
developing a marketing program for the Company's technologies for overseas
markets.
On July 5, 2002, the Company issued 148 shares of its Class A common stock
through its Regulation S offering.
On July 8, 2002, the Company issued 200 shares of its Class A common stock for
legal services rendered in connection with general corporate matters.
On July 8, 2002, the Company issued 200 shares of its Class A common stock for
consulting services rendered in connection with the development of the Company's
technologies.
On July 8, 2002, the Company issued 175 shares of its Class A common stock
through its Regulation S offering.
On July 12, 2002, the Company issued 125 shares of its Class A common stock
through its Regulation S offering.
On July 15, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On July 16, 2002, the Company issued 149 shares of its Class A common stock
through its Regulation S offering.
On July 26, 2002, the Company issued 1,000 shares of its Class A common stock to
Stephen Beck as settlement of the lawsuit he filed against the Company for
alleged compensation due him.
On August 5, 2002, the Company issued 1,000 shares of its Class A common stock
each to Mssrs. Goodman and Berks for services rendered in connection for the
development of the fatigue fuse.
21
On August 5, 2002, the Company issued 1,230 shares of its Class A common stock
for legal services on general corporate matters.
On August 14, 2002, the Company issued 1,000 shares of its Class A common stock
for legal services in connection with the Company's aborted SB-2 registration
statement.
On August 15, 2002, the Company issued 600 shares of its Class A common stock
through its Regulation S offering.
On August 23, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On August 29, 2002, the Company issued 1,000 Class A shares of its common stock
for legal services connection with the Company's aborted SB-2 registration
statement.
On August 30, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On September 4, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On September 5, 2002, the Company issued 2,000 shares of its Class A Common
Stock that were escrowed and held in reserve pursuant to the term of the
settlement agreement with Mr. Beck. These shares will be withdrawn and issued to
him in order that his interest in the Company will remain constant for
eighteen-months commencing on the date of settlement. Upon expiration of the
eighteen month, the remaining shares held in escrow will be returned to the
Company's treasury.
On September 5, 2002, the Company issued 400 shares of its Class A common stock
through its Regulation S offering.
On September 5, 2002, the Company issued 300 shares of its Class A common stock
for consulting services rendered in connection with developing a plan for
protecting Company assets through insurance or other means. Planning relates to
protection needed by the Company when it commences commercial production and
marketing of its products.
On September 5, 2002, the Company issued 75 shares of its Class A common stock
for legal services in connection with general corporate matters.
On September 6, 2002, the Company issued 1,542 shares of its Class A common
stock for services rendered in connection with its Regulation S offering.
On September 10, 2002, the Company issued 2,000 shares of its Class A common
stock for consulting services in connection with the future marketing of the
Company's products.
22
On September 10, 2002, the Company issued 300 shares of its Class A common stock
through its Regulation S offering.
On September 11, 2002, the Company issued 1,000 shares of its Class A common
stock for legal services connection with general corporate matters.
On September 11, 2002, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On September 12, 2002, the Company issued 2,500 shares of its Class A common
stock for legal services in connection with the Company's aborted SB-2
registration statement.
On September 12, 2002, the Company issued 125 shares of its Class A common stock
through its Regulation S offering.
On September 13, 2002, the Company issued 410 shares of its Class A common stock
through its Regulation S offering.
On September 18, 2002, the Company issued 20 shares of its Class A common stock
through its Regulation S offering.
On September 20, 2002, the Company issued 270 shares of its Class A common stock
through its Regulation S offering.
On September 23, 2002, the Company issued 295 of its Class A common stock shares
through its Regulation S offering.
On October 1, 2002, the Company issued 200 of its Class A common stock shares
through its Regulation S offering.
On October 7, 2002, the Company issued 1,756 of its Class A common stock shares
through its Regulation S offering.
On October 7, 2002, the Company issued 2,500 shares of its Class A common stock
for consulting services in connection with the Company attempt at seeking
additional equity capital.
On October 9, 2002, the Company issued its executive assistant 50 shares of its
Class A common stock
On October 9, 2002, the Company issued 2,485 shares of its Class A common stock
through its Regulation S offering.
On October 10, 2002, the Company issued 685 Class A shares through its
Regulation S offering.
On October 11, 2002, the Company issued 500 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
23
On October 11, 2002, the Company issued 3,313 shares of its Class A common stock
through its Regulation S offering.
On October 15, 2002, the Company issued 200 shares of its Class A common stock
through its Regulation S offering.
On October 16, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On October 18, 2002, the Company issued 228 shares of its Class A common stock
through its Regulation S offering.
On October 21, 2002, the Company issued 400 shares of its Class A common stock
through its Regulation S offering.
On October 23, 2002, the Company issued 150 shares of its Class A common stock
through its Regulation S offering.
On October 25, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On October 29, 2002, the Company issued 250 shares of its Class A common stock
to an advisory board member for consulting services in connection with
developing a marketing plan for overseas sales of future Company products.
On November 1, 2002, the Company issued 50 shares of its Class A common stock
through its Regulation S offering.
On November 4, 2002, the Company issued 150 shares of its Class A common stock
through its Regulation S offering.
On November 13, 2002, the Company issued 250 shares of its Class A common stock
through its Regulation S offering.
On November 19, 2002, the Company issued 300 shares of its Class A common stock
through its Regulation S offering.
On November 25, 2002, the Company issued 250 shares of its Class A common stock
through its Regulation S offering.
On December 2, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On December 4, 2002, the Company issued 140 shares of its Class A common stock
through its Regulation S offering.
24
On December 6, 2002, the Company issued 650 shares of its Class A common stock
for consulting services in connection with the Company's search for additional
funding.
On December 6, 2002, the Company issued 250 shares of its Class A common stock
for legal services in connection with the Company's aborted SB-2 registration
statement.
On December 6, 2002, the Company issued 300 shares of its Class A common stock
through its Regulation S offering.
On December 9, 2002, the Company issued Stephen Beck 397 shares of its Class A
common stock pursuant to the anti-dilution provision of his settlement
agreement.
On December 10, 2002, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On December 11, 2002, the Company issued 400 shares of its Class A common stock
through its Regulation S offering.
On December 12, 2002, the Company issued 1,400 shares of its Class A common
stock through its Regulation S offering.
On December 13, 2002, the Company issued 1,210 shares of its Class A common
stock through its Regulation S offering.
On December 16, 2002, the Company issued 1,000 shares of its Class A common
stock to a member of the Company's advisory board in connection with the
adaptation of the Company's technologies for utilization on bridges and other
infrastructures.
On December 16, 2002, the Company issued 459 shares of its Class A common stock
through its Regulation S offering.
On December 17, 2002, the Company issued 1,000 shares of its Class A common
stock for legal services in connection with the Company's aborted SB-2
registration statement.
On December 17, 2002, the Company issued 200 shares of its Class A common stock
through its Regulation S offering.
On December 18, 2002, the Company issued 13,000 shares of its Class A common
stock to its president for past compensation due him.
On December 27, 2002, the Company issued 150 shares of its Class A common stock
through its Regulation S offering.
On December 31, 2002, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
25
In February 2002, the Company adopted the 2002 Stock Issuance/Stock Plan, and
reserved 20,000,000 shares of its common stock for distribution under the Plan.
Eligible Plan participants include employees, advisors, consultants, and
officers who provide services to the Company. The option price shall be 100% of
the fair market value of a share of common stock at either, a) date of grant or
such other day as the as the Board of Directors may determine. Options issued
under this plan expire five years from date of grant. As of December 31, 2003,
there were no options outstanding under this plan.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The selected financial data for the Company is derived from the Company's
financial statements. The selected financial data should be read in conjunction
with the Company's financial statements and the notes to the financial
statements that are attached hereto.
Inception
Fiscal Year Ending December 31, to
---------------------------------------------------------------------------------- December 31,
1999 2000 2001 2002 2003 2003
-------------- -------------- -------------- -------------- -------------- --------------
Net Sales $ -- $ -- $ -- $ -- $ -- $ --
Income from Research
Development Contract $ 924,484 $ 635,868 $ 1,579,823 $ 461,323 $ 41,549 $ 5,066,361
Income (Loss) from
Continued
Operations $ (539,283) $ (1,199,695) $ (3,548,559) $ (3,852,296) $ (1,885,728) $ (14,539,195)
Income (Loss) from
Continued Operations Per
Common Share $ (44.05) $ (63.48) $ (105.49) $ (61.08) $ (.09)
Basic Weighted
Average - Common
Shares Outstanding 12,242 18,900 33,640 63,074 20,042,583
Total Assets $ 250,041 $ 108,776 $ 516,282 $ 372,620 $ 198,276
Total Liabilities $ 719,178 $ 870,586 $ 819,236 $ 2,466.936 $ 1,590,637
Minority Interest in
Consolidated Subsidiary $ -- $ -- $ -- $ -- $ 38,422
Total
Stockholders'
Equity (Deficit) $ (620,545) $ (710,459) $ (680,414) $ (2,094,316) $ (1,430,783)
Dividends $ -- $ -- $ -- $ -- $ --
26
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, 2001, 2002, and 2003.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
- ----------------------------------------------------------------------
In 2003, we entered into a research contract with Northrop Grumann in connection
with the application of the Company's Electrochemical Fatigue Sensor in
detecting metal fatigue stress on military vehicles. Revenue generated on this
contract in 2003 amounted to $28,004. Also during 2003, the Company invoiced and
received its final payments under its contracts with the United States Air Force
totaling $13,545. From these two contracts the Company generated total revenue
from research contracts in 2003 amounting to $41,549. In 2002 and 2001, we
earned $461,323 and $1,579,823 from our contracts with the United States Air
Force.
In 2003, interest income totaled $41,641 of which $2,203 was earned from
investments. Of the remaining $39,438, $7,831 was accrued on loans due the
Company's President , and $31,607 accrued on stock subscriptions due from the
Company's President, Secretary and third party.
In 2002, interest income totaled $52,782 of which $729 was earned from
investments and the remaining $52,053 was accrued on loans due the Company from
its President, and from stock subscriptions due from the President, a Director,
and third party. In 2001, interest income totaled $102,283, of which $657 was
from investments and the remaining $101,626 was accrued on loans due the Company
from its President, and from stock subscriptions due from the President, a
Director, and third party.
In 2003, subscription receivables and related accrued interest amounting
$770,033 due from the Company's officers were cancelled in exchange for the
officers returning the associated 5,006 shares of common stock back to the
Company, which were subsequently cancelled. The $35,000 subscription receivable
due the Company from a third party was cancelled in exchange for services
rendered by the party.
27
COSTS AND EXPENSES
- ------------------
Research and development costs were $229,317, $665,435, $1,493,628, for 2003,
2002, and 2001, respectively. Of the R&D costs incurred,$15,000, $400,201, and
$1,069,671 related to subcontractor costs associated with the research contracts
for the years 2003, 2002, and 2001, respectively. General and administrative
costs were $1,532,025, $3,581,706, and $3,632,769, for 2003, 2002, and 2001,
respectively.
In 2003, cash compensation paid to our president, Mr. Bernstein, totaled
$71,000. We also accrued an additional $66,963 in additional compensation
pursuant to Mr. Bernstein's employment agreement. In addition, the Company
issued Mr. Bernstein 32,000,000 shares of its common stock for past services
valued at $320,000 and charged him with additional compensation of $19,617 as
consideration for the release of the remaining 1,962 shares of common stock held
in escrow when it was cancelled (See Item 11. Executive Compensation). Legal
fees in 2003 amounted to $271,186 of which $111,500 was paid through the
issuance of 7,650 shares of our common stock. Other expenses in 2003 included
consulting services of $498,871 of which $317,836 was paid through the issuance
of 7,768,434 shares of our common stock, public and shareholder relations costs
of $22,427, office expense of $29,757, office salaries of $44,002, telephone
expense of $13,410, travel expenses of $23,529, accounting and auditing fees of
$51,906, and rent of $28,176.
In 2002, cash compensation paid to our president, Mr. Bernstein, totaled
$110,018. We also accrued an additional $9,982 in additional compensation. In
addition, the Company issued Mr. Bernstein 13,000 shares of its common stock for
past services valued at $260,000. Legal fees in 2002 amounted to $1,922,861 of
which $1,599,200 relates to the settlement of the Beck matter. Of the
$1,599,200, $1,481,895 is evidenced by a promissory note, $112,193 was paid
through the issuance of 2,028, shares of our common stock, and $5,112 paid in
cash. We also incurred $314,729 in the filing of our registration statement on
SB-2 of which $297,500 was paid through the issuance of 7,750 shares and $17,229
was paid in cash. Other expenses in 2002 included consulting services of
$940,160 of which $662,098 was paid through the issuance of 10,881 shares of our
common stock, office salaries of $36,968, telephone expense of $23,284, travel
expenses of $57,797, accounting and auditing fees of $71,317, and rent of
$28,176.
In 2001, cash compensation paid to our president totaled $90,000. We also
accrued $30,000 in additional compensation due to Mr. Bernstein. We charged to
operations $1,500,000 due to a reduction in the balance of the non-recourse
promissory note due to us by Mr. Bernstein and another director, Joel Freedman,
in connection with their purchases of our common stock. Initially, we agreed to
issue 4,650 and 350 shares of our class "A" common stock to Messrs. Bernstein
and Freedman, respectively, in exchange for their issuance to us of non-recourse
promissory notes in the amount of $1,855,350 by Mr. Bernstein and $139,650 by
Mr. Freedman. At the time of their purchase of our shares, the market price of
our common stock was approximately $.60 (pre-split) per share. Both promissory
notes mature on May 25, 2005 and accrued interest at 8% per annum. On June 18,
2001, we authorized the $1,500,000 reduction of the combined principal amount of
these notes since the market value of our common stock declined to approximately
$.10 per share. This reduction and charge to operations was deemed to be fair
and reasonable under the circumstances.
We issued 6,000 shares of restricted common stock to Mr. Bernstein during 2001,
valued at $1,128,000, for past compensation due to him. Previously, the
28
financial statements have reflected the value of the shares at $420,000, the
fair market value of the services rendered. The change in the value of shares
issued to Mr. Bernstein relates to a comment received by the Company from the
Securities and Exchange Commission indicating that all shares issued in the
exchange for services will be valued at the quoted market price of the shares
issued on the date of issuance. These 6,000 shares have been issued subject to
certain restrictions limiting the President's ability to sell or transfer the
shares.
Other expenses in 2001 included consulting fees of $477,671, of which $281,635
was paid through the issuance of 2,275 shares of our common stock, legal fees of
256,736 of which $138,750 was paid through the issuance of 915 shares of our
common stock, accounting fees of $51,120, travel expenses of $42,092, office
salaries of $36,225, office expense of $34,880, rent of $29,468, telephone
expense of $13,838, and a write off of our $33,000 investment in Antaeus
Research, LLC.
Interest charged to operations for 2003, 2002, and 2001 , amounted to $206,776,
$118,460 and $70,468, respectively. Of the $206,776 incurred in 2003, $139,272
was accrued on the note due to the University of Pennsylvania and $63,964 was
accrued on the note due for legal fees on the Beck matter. Of the $118,460
incurred in 2002, $76,078 was accrued on the note due to the University of
Pennsylvania and $37,271 was accrued on the note due for legal fees on the Beck
mater. Of the $70,468 incurred in 2001, $64,472 was accrued on the note due to
the University of Pennsylvania.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In 2003, we raised $191,645 net of offering costs through the issuance of 34,030
shares of our common stock through Regulation S offerings, 4,074 shares of our
preferred stock and 87,750 shares of common stock in our subsidiary, Matech
Aerospace, Inc. We also received $13,545 during 2003 from our contracts with the
Air Force, $2,203 in interest income, $340,000 from advances on our Class A
Senior Convertible Debenture, and $10,000 on a loan from a third party . We used
$737,079 in our operations and paid $24,432 for the purchase of 1,296 shares of
our common stock from various shareholders for cancellation.
In 2002, we raised $892,261 net of offering costs through the issuance of
28,046,766 shares of our common stock through a Regulation S offering, and
143,250 shares of our preferred stock. We also received $175,646 during 2002
from our subcontracts with the Air Force. Of the $1,067,907 we received, we used
$927,439 in our operations, we advanced $33,547 to our president and paid
$29,608 for equipment.
In 2001, we raised a net $286,567 through the issuance of 4,932,358 shares of
its common stock through its Regulation S Offering.
As of December 31, 2003, the Company's liquid assets totaled $47,664. The
Company has entered into a Senior Class A Convertible debenture for a total
amount of $1,500,000 of which $340,000 was advanced to the Company in 2003. In
2004, an additional $375,000 has been advanced through March 25, 2004 (See note
2 to table of Item12.The Company's research contract for $215,000 with Northrop
Grumann is for a two year period which expires in September 2005. These are the
only known sources of revenue that the Company has for 2004. At the Company's
current level of operating overhead, the funds derived from these sources and
current liquid assets should allow the Company to continue operating through the
29
remainder of 2004. Although the Company hopes to have revenue from the
utilization of its products in late 2004 or early 2005, and will continue in its
attempt to raise capital, no assurance can be made that funds will be raised or
sales will develop in order to finance future period's operations. The Company's
independent auditors' issued a going concern opinion on its report relating to
the Company's financial statements for the year ended December 31, 2003.
CRITICAL ACCOUNTING ISSUES
- --------------------------
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. In consultation with its Board of
Directors, the Company has identified three accounting policies that it believes
are key to an understanding of its financial statements. These are important
accounting policies that require management's most difficult, subjective
judgments.
The first critical accounting policy relates to revenue recognition. Income from
the Company's research is recognized at the time services are rendered and
billed for.
The second critical accounting policy relates to research and development
expense. Costs incurred in the development of the Company's Electrochemical
Fatigue Sensor and Videoscope are expensed as incurred.
The third critical accounting policy relates to the valuation of non-monetary
consideration issued for services rendered. The Company values all services
rendered in exchange for its common stock at the quoted price of the shares
issued at date of issuance or at the fair value of the services rendered,
whichever is more readily determinable. In certain issuances, the Company may
discount the value assigned to issued shares for illiquidity and restrictions on
resale All other services provided in exchange for other non-monetary
consideration are valued at either the fair value of the services received or
the fair value of the consideration relinquished, whichever is more readily
determinable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS
- -----------------------------
Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as of December 31, 2003, 2002, and 2001, prepared
in accordance with Regulation S-X (17 CFR Sec.210)
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
- ----------
ITEM 9A. Controls and Procedures.
- ----------------------------------
Material Technologies, Inc. management, including the Principal Executive
Officer has conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14(c) and 15d-14(c). This
evaluation was conducted within 90 days prior to the filing of this report.
Based on that evaluation, the Principal Executive Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
him in a timely fashion. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Principal Executive Officer completed his evaluation.
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 69 President/Chief Executive and Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 44 Secretary/Director
Dr. John Goodman 69 Chief Engineer/Director
William I. Berks 73 Vice President/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 69 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 1985, he
formed a research and development partnership for Tensiodyne, funding
approximately $750,000 for research on the Fatigue Fuse. In October 1988 he
31
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 44 years of age. From October 1989 until the present, Mr.
Freedmen holds the position of Secretary and a Director of the company. 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. Since January 1, 2000, he has been a
Senior Vice President of PMG Capital Corp., a securities brokerage and
investment advisory firm in West Conshohocken, 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 69 years of age. He is retired from TRW Space and
Electronics and was formerly Chairman 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 Engineering
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.
Over the last four years he has consulted part time for the Company.
William Berks- Vice-President/Director. He managed the previous Matech contracts
for the development of EFS at the University of Pennsylvania, Southwest Research
Institute, and Optim, Inc. Mr. Berks has a B. Aero. E and MS in Applied
Mechanics from Polytechnic Institute of New York and MS in Industrial Eng.,
Stevens Institute of Technology . With Matech since 1997. He has over 30 years `
experience in spacecraft mechanical systems engineering. He retired from TRW in
November 1992 where he was employed for 26 years in a variety of management
positions: Manager of the Mechanical Design Laboratory, the engineering design
skill center for the design and development of spacecraft mechanical systems,
which had as many as 350 individuals: Manager of the Advanced Systems Design
Department, which was responsible for mechanical systems design for all
spacecraft project: Assistant Project Manager for Mechanical Subsystems for a
major spacecraft program, which included preparation of plans, specifications
and drawings, supervision of two major subcontracts, and responsibility for
flight hardware fabrication and testing. He holds six patents.
32
ADVISORY BOARD
Since 1987, the Company and its predecessors have had an Advisory Board
consisting of very senior experienced businessmen and technologists, most of
whom are nationally prominent. 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:
ROBERT F. CUSHMAN, ESQ. Mr. Cushman is 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.
In 2003, the Company cancelled a promissory note due from Mr. Cushman for
$35,000 issued to the Company in 1999 in exchange for the issuance of 100 shares
of the Company's common stock.. The note was cancelled in exchange for services
rendered to the Company by Mr. Cushman.
Also in 2003, the Company issued Mr. Cushman 250 shares of its common stock for
services rendered in connection with the marketing services relating to the EFS.
The shares were valued at $2,500.
CAMPBELL LAIRD. Campbell Laird, age 64, 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.
During 2001, we issued Dr. Laird 100 shares of our common stock that were valued
at $18,800 for services rendered in connection with the development of our EFS.
During 2002, we issued Dr. Laird 235 shares of our common stock that were valued
at $32,894 for services rendered in connection with the development of our EFS.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 50, 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.
33
During 2001, we issued Mr. Schwartz 125 shares of our common stock which were
valued at $16,250 for consulting services rendered in connection with our
technology for bridges.
During 2002, we issued Mr. Schwartz 1,000 shares of our common stock which were
valued at $30,000 for consulting services rendered in connection with our
technology for bridges.
NICK SIMIONESCU. Mr. Simionescu joined HNTB in 1974, one of the largest
consulting engineering companies in the world, and is currently Vice President,
Director of Business Development in the New York City Office. He has over 37
years of management, construction, design, inspection and detailing experience.
Mr. Simionescu is very familiar with the New York City infrastructure. For
nearly 28 years he has been working in New York City, primarily on projects with
the New York City Department of Transportation and New York State Department of
Transportation Regions 10 and 11. His projects have included management of the
inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro
bridges. Additionally, he has been the Project Manager of Bridge Inspection for
many other arterial and local bridges throughout New York. Mr. Simionescu's
responsibilities with HNTB have involved a variety of National and International
projects. He has been the Senior Structural Designer and Manager of bridges in
South Carolina (800 Ft. span), Rhode Island (366 ft. span), Malaysia (740 ft.),
and Florida (1300 ft.).
During 2003, the Company issued Mr. Simionescu 500 shares of its common stock
services in connection with seeking potential bridge projects. The shares were
valued at $5,000.
During 2002, we issued Mr.Simionescu 250 shares of our common stock which were
valued at $67,500 for consulting services rendered in connection with our
technology for bridges
LIEUTENANT GENERAL JOE N. BALLARD. General Ballard is retired from the United
States Army and has served as President and Chief Executive Officer of The
Ravens Group, Inc., a business development, consulting, and executive level
leadership service company, since March 2001. He received his MS in Engineering
Management from the University of Missouri, BS in Electrical Engineering from
Southern University, and he is a registered professional engineer. He served as
Commanding General, US Army Corps of Engineers from 1996 until 2000, Chief of
Staff US Army Training and Doctrine Command from 1995 until 1996, Commander of
the US Army Engineer Center in Missouri from 1993 until 1995, Director of the
Total Army Basing Study at the Pentagon from 1991 until 1993, and he was
Commander of the 18th Engineering Brigade in Germany from 1988 until 1990. He
has received many honors including the Deans of Historical Black Colleges and
Minority Institutions Black Engineer of the Year in 1998, Honorary Doctorate of
Engineering from the University of Missouri in 1999, Honorary Doctorate of Law
L.L.D. from Lincoln University in 1998, Honorary Doctorate of Engineering from
Southern University in 1999, and Fellow of the Society of American Military
Engineers in 1999.
34
HENRYKA MANES. Ms. Manes is the Founder and President of H. Manes & Associates,
a consulting firm that enables environmental and high technology companies to
export their products worldwide. She has a wide-range of experience with
projects in more than 20 countries in Asia, Africa, Eastern Europe and South
America. Prior to founding HMA, Ms. Manes was Director of Operations for the
American Jewish Joint Distribution Committee's International Development Program
and has worked with the World Bank, United States Agency for International
Development, and the United Nations Development Program. Ms. Manes received her
B.A. from Macalester College in St. Paul, MN, and did her graduate work at the
University of Minnesota, Minneapolis, MN.
During 2003, we issued Ms. Manes 500 shares of our common stock, which were
valued at $5,000 for consulting services rendered in connection with the
development of foreign markets for our products, when developed for commercial
application.
During 2002, we issued Ms. Manes 500 shares of our common stock which were
valued at $17,500 for consulting services rendered in connection with the
development of foreign markets for our products, when developed for commercial
application.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
The Company is unaware of any other late filings or any other failures to file
any Form 3, 4, or 5 for the calendar year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
=======================================================================================================================
Other
Name and Annual Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) (SARs (#) Payout($) sation ($)
- -----------------------------------------------------------------------------------------------------------------------
Robert M. Bernstein
CEO 2001 $ 120,000 $ -- $ -- $ 1,128,000 (1) -- $ -- $ --
$ 1,395,000 (2) -- $ -- $ --
2002 $ 120,000 $ -- $ -- $ 200 (3) -- $ -- $ --
$ 260,000 (4)
2003 $ 138,000 $ -- $ 19,617(5) $ 320,000 (6) -- $ -- $ --
John W. Goodman
Director and 2001 $ 23,076 $ -- $ -- $ 147,600 (7) -- $ -- $ --
Engineer 2002 $ 17,945 $ -- $ -- $ 40,000 (8) -- $ -- $ --
2003 $ 18,943 $ -- $ -- $ 10,000 (9) -- $ -- $ --
William Berks
Vice-President
of Government 2001 $ 55,388 $ -- $ -- $ 147,600 (7) -- $ -- $ --
Projects and 2002 $ 70,301 $ -- $ -- $ 40,000 (8) -- $ -- $ --
Director 2003 $ 71,374 $ -- $ -- $ 30,000 (10) -- $ -- $ --
=======================================================================================================================
35
(1) In 2001, the Corporation issued Mr. Bernstein 6,000 shares for past
compensation (see item 5). The Company valued these shares at
$1,128,000.
(2) In 2001, the Company reduced the obligation from Mr. Bernstein to the
Company on a non-recourse promissory note relating to the issuance of
4,650 shares of its common stock from $1,855,350 to $460,350.
(3) In 2002, the Company issued 200,000 shares of its Class B Common stock
to its president in relinquishment of his interest in the Company's
patents. The shares were valued at par.
(4) In 2002, the Company issued 13,000 shares of its common stock to Mr.
Bernstein for past compensation. The shares were valued at $260,000.
(5) In 2003, the restrictions placed on Mr. Bernstein as escrow holder
were lifted and Mr. Bernstein received immediate vesting in the
remaining 1,962 shares of common stock held in escrow. Mr. Bernstein
recognized $19,617 in additional compensation for this transaction.
Compensation was valued on the fair value of the shares on the date
the restrictions lifted.
(6) In 2003, as part of the agreement in obtaining the Class A Senior
Secured Convertible Debenture, Mr. Bernstein received 32,000,000
shares of Class A common stock and 300,000 shares of Class B of common
stock in consideration for past services. The Class A shares were
valued at the agreed upon amount of $320,000. The Class A shares are
subject to a three-year lock up agreement.
(7) In 2001, the Corporation issued each to Mr. Goodman and Mr. Berks 900
shares of restricted common stock. These shares were valued at
$147,500.
(8) In 2002, the Corporation issued each to Mr. Goodman and to Mr. Berks
1,000 shares of restricted common stock. Each issuance was valued at
$40,000.
(9) In 2003, the Corporation issued to Mr. Goodman 1,000 shares of
restricted common stock. The shares were valued at $10,000, the fair
value of the shares on date of issuance.
(10) In 2003, the Corporation issued Mr. Berks 3,000 shares of restricted
common stock. The shares were valued at $30,000, the fair of value of
the shares on date of issuance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
- --------------------------------------------------------------------------------
2003
- ----
36
Securities authorized for issuance under equity compensation plans.
- -------------------------------------------------------------------
Plan category Number of securities Weighted-average Number of securities
To be issued upon exercise price remaining for
exercise of of outstanding available for future
outstanding options, options, warrants issuance under
warrants and rights and rights equity compensation
plans (excluding
securities reflected
in column a))
(a) (b) (c)
Equity
Compensation plans
approved by
shareholders n/a n/a n/a
Equity
Compensation plans
not approved by
shareholders n/a n/a n/a
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
The Company does not know of any non-affiliated person or "group" as that term
is used in section 13(d)(3) of the Exchange Act that owns more than five percent
of any class of the Company's voting securities.
Security Ownership of Management
- --------------------------------
CLASS OF STOCK NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- -------------- ------------------- -------------------- ----------
Common Stock Robert M. Bernstein, CEO 28,127,537 Shares 41.64%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Joel R. Freedman, Director 628 Shares .00%
1 Bala Plaza
Bala Cynwyd, PA 19004
John Goodman, Director 903,000 Shares 1.33%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
William Berks, Vice President 1,505,000 Shares 2.23%
Government Projects
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Directors and executive 30,536,165 Shares 45.20%
officers as a group
(4 persons)
37
Class B Robert M. Bernstein 600,000 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 1,000 votes per
share on any matter on which the common stockholders vote.
Accordingly, the Class B common stock held by Mr. Bernstein equal 600
million shares of voting control. These votes give Mr. Bernstein
voting control of the Company.
(2) Following the Reverse Split the Company also entered into a Class A
Senior Secured Convertible Debenture (the "Debenture") with Palisades
Capital, LLC or its registered assigns ("Palisades"), pursuant to
which Palisades has agreed to loan to the Company up to $1,500,000,
which is expected to be funded in full within twelve months. Under the
Debenture Palisades has the option, after March 30, 2004, to convert
the principal amount of all moneys loaned under the Debenture,
together with accrued interest, into Common Stock of the Company at
the lesser of (i) 50% of the averaged ten closing prices for the
Company's Common Stock for the ten (10) trading days immediately
preceding the Conversion Date or (ii) $0.10 (the lesser of the two
being referred to as the "Conversion Price"). In the event Palisades
loans the full $1,500,000 face amount of the Debenture to the Company
and subsequently elects to exercise its right to convert the Debenture
into Company Common Stock at a time when the Conversion Price is less
than four cents per share Palisades would receive at least fifty
million (50,000,000) shares of Common Stock resulting in a change in
control of the Common Stock of the Company, however, Mr. Bernstein
would still retain voting control as a result of his holding of one
hundred percent (100%) of the Class B Common Stock.
In addition to the shares issued to Mr. Bernstein under the Release as
described above, following the Reverse Split, the Company also
liquidated approximately $1,500,000 of its currently outstanding debt.
In full payment and settlement of such debt, the Company issued
22,000,000 shares of common stock and warrants (the "Warrants") to
acquire an additional 30,000,000 shares of common stock for $0.10 per
share to seven investors who were the holders of such debt (the "Debt
Holders"). Palisades required, as a condition to its agreement to
enter in to the Debenture described above, that the Company first
enter into the settlement with the Debt Holders and thereby reduce the
amount of debt on the Company's balance sheet by approximately
$1,500,000. The Warrants contain a provision limiting the exercise of
the warrants to a number of shares that do not exceed an amount that
would cause the holder of each such Warrant to beneficially own 4.99%
of the outstanding common stock of the Company, and, in addition, the
Warrants vest only in proportion to the amount ultimately funded under
the Debenture as a percentage of the $1,500,000 face value.
Finally, Mr. Bernstein entered into a voting agreement and irrevocable
proxy, which provides that until September 23, 2006, if an Event of
Default, as defined in the Debenture in favor of Palisades continues
for a period of not less than 30 days, all Class B Common Stock which
Mr. Bernstein owns of record, or becomes the owner of record in the
future will be voted in accordance with the directions of Mr. Monty
Freedman, or his designated successor. This loss of voting rights
would affect a change in the voting control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (SEE NOTE 11 TO
- ------------------------------------------------------------------------
FINANCIAL STATEMENTS.)
- ----------------------
On May 25, 2000, the Company issued its President 4,650 shares its common stock
in exchange for $4,650 and a $1,855,350 non-recourse promissory note bearing
interest at an annual rate of 8%. On the same day, the Company issued 350,000
shares its common stock to a Director Joel Freedman, in exchange for $350 and a
$139,650 non-recourse promissory note bearing interest at an annual rate of 8%..
In June 2001, the Company's Board of Directors authorized the reduction in the
amount owed by the President and a Director on these non-recourse promissory
notes to $460,350 and $34,650, respectively. .In 2003, the 5,000 shares were
returned to the Company in exchange for the cancellation of the non-recourse
promissory note and related accrued interest totaling $755,093. The returned
shares were subsequently cancelled by the Company.
38
On October 27, 2000, the Company issued 4,184 shares to its President for future
compensation pursuant to a Stock Escrow/Grant Agreement. Under the terms of the
agreement, the President was required to hold these shares in escrow. While in
escrow, the President could not vote the shares but had full rights as to cash
and non-cash dividends, stock splits or other change in shares. Upon the
exercise by certain holders of Company options or warrants or upon the need by
the Company, in the sole discretion of the Board, to issue common stock to
certain individuals or entities, the number of shares required for issuance to
these holders was returned from escrow by the President thereby reducing the
number of shares he held. The shares held in escrow were non-transferable and
will be granted to the Company's President only upon the exercise or expiration
of all of the options and warrants, the direction of the Board, in its sole
discretion, or the mutual agreement by the President and the Board of Directors
to terminate the agreement. Due to the restrictions imposed on these shares, the
Company valued these shares at par and charged the $4,183 to operations in 2000.
The escrow terminated in 2003, and the President became immediately vested in
the remaining 1,962 shares held in escrow. In consideration for full vesting in
these shares, the President recognized additional compensation of $19,617 in
2003.
On January 9, 2001, the Company's Board of Directors authorizes the issuance of
100 shares of its common stock to William Berks, a part-time employee, for
engineering and other services rendered to the Company.
On January 8, 2001, the Company's Board of Directors authorized the issuance of
100 shares of its common stock to Dr. Campbell Laird, an advisory board member,
for services to the Company.
On January 9, 2001, the Company's Board of Directors authorized the issuance of
100 shares of its common stock to John Goodman, a director and part-time
employee, for engineering and other services rendered to the Company.
On January 9, 2001, the Company's Board of Directors authorized the issuance of
100shares of its common stock to William Berks, a part-time employee, for
engineering and other services rendered to the Company.
On February 19, 2001, the Company's Board of Directors authorized the issuance
of 6,000shares of its common stock to the Company's President for past
compensation due as discussed above.
On May 3, 2001, the Company's Board of Directors authorized the issuance of 100
shares of its common stock to Mr. William Berks for services rendered to the
Company.
On June 12, 2001, the Company's Board of Directors authorized the issuance of
25, shares of its common stock to the company's executive assistant, for
services rendered to the Company.
On October 8, 2001, the Company's Board of Directors authorized the issuance of
300shares of its common stock each to Mr. William Berks and Mr. John Goodman for
services rendered to the Company.
39
On October 18, 2001, the Company's Board of Directors authorized the issuance of
20 shares of its common stock to the company's executive assistant, for services
rendered to the Company.
On November 21, 2001, the Company's Board of Directors authorized the issuance
of 400 shares of its common stock each to Mr. William Berks and Mr. John Goodman
for services rendered to the Company.
Also on February 28, 2002, the Company issued its Executive Assistant 25 shares
of its common stock for services rendered.
On March 20, 2002, the Company issued 25 shares of its common stock to the
Company's executive assistant.
On August 5, 2002, the Company's Board of Directors authorized the issuance of
1,000 shares of its common stock each to Mr. John Goodman and Mr. William Berks
for services rendered to the Company.
On October 7, 2002, the Company issued its executive assistant 50shares of its
common stock.
On December 6, 2002, the Company issued 200 shares of its Class B common stock
to its president in consideration for the relinquishment of his interest in the
Company's patents.
On December 18, 2002, the Company issued 13,000 shares of its common stock to
its president in consideration for past services. The shares were issued under a
1997 Board resolution in which Mr. Bernstein's compensation was increased to
$150,000 a year with $120,000 being paid presently with the remaining $30,000 a
year being paid only when the Company was financially able to make such
payments. As the Company's financial position has not improved, Mr. Bernstein
agreed to take the accrued compensation in stock. The 13 million shares issued
have been valued at $260,000. The sale and transferability of the shares are
restricted for a three-year period in which Mr. Bernstein must remain working
for the Company. If he terminates his employment during this three-year period,
then the 13 million shares will be returned to the Company.
On April 15, 2003 the Company issued 1,000 shares of its common stock each to
Mr. John Goodman and Mr. William Berks for services rendered to the Company.
On June 20, 2003, the Company issued 2,000 shares of its common stock to Mr.
William Berks for services rendered to the Company.
On September 23, 2003, the Company issued 32,000,000 shares of its Class A
Common Stock and 300,000 shares of Class B Common Stock to its President
pursuant to an Accord, Satisfaction and Mutual Release in which Mr. Bernstein
released all claims he had against the Company that arose prior to September 24,
2003, including past services rendered in excess of compensation paid. The
shares are subject to a three-year lock up agreement and value assigned to these
shares was discounted for illiquidity and restrictions on resale at $320,000.
The Class A Common Shares were issued pursuant to a three-year lock up
agreement.
40
Also on September 23, 2003, the Company issued 5,000,000 shares of its Class A
common stock to its President in consideration for a promissory note totaling
$50,000 that is assessed interest at an annual rate of 6%. The note matures on
September 26, 2006, when the $50,000 and accrued interest becomes s fully due.
The shares were issued pursuant to a three-year lock up agreement and the value
assigned to the shares and related note was discounted for illiquidity and
restrictions on resale.
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 Material Previously Filed
Technologies, Inc. in connection with
S-1 Registration
Statement that
became effective
on July 31, 1997.
Amended and Restated Certificate of
Incorporation, September 12, 2003 Filed herewith
3(ii) Bylaws of Material Technologies, Inc. Previously filed
with July 31, 1997
S-1
4.1 Class A Convertible Preferred Stock Previously filed
Certificate of Designations with July 31, 1997
S-1
4.2 Class B Convertible Preferred Stock Previously filed
Certificate of Designations with July 31, 1997
S-1
10.1 License Agreement Between Tensiodyne Previously filed
Corporation and the Trustees of the with July 31, 1997
University of Pennsylvania S-1
10.2 Sponsored Research Agreement between Previously filed
Tensiodyne Corporation and the Trustees with July 31, 1997
of the University of Pennsylvania S-1
41
10.3 Amendment 1 to License Agreement Between Previously filed
Tensiodyne Scientific Corporation and the with July 31, 1997
Trustees of the University of Pennsylvania S-1
10.4 Repayment Agreement Between Tensiodyne Previously filed
Scientific Corporation and the Trustees with July 31, 1997
of the University of Pennsylvania S-1
10.5 Teaming Agreement Between Tensiodyne Previously filed
Scientific Corporation and Southwest with July 31, 1997
Research Institute S-1
10.6 Letter Agreement between Tensiodyne Previously filed
Scientific Corporation, Robert M. with July 31, 1997
Bernstein, and Stephen Forrest Beck S-1
and Handwritten modification.
10.7 Agreement Between Tensiodyne Corporation Previously filed
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.
10.8 Amendment to Agreement Between Material Previously filed
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 Technology Center Previously filed
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 Advanced Previously filed
Technology Center of Southeastern
Pennsylvania and Material Technology, Inc.
is incorporated by reference from Exhibit 10.5
of Material Technology, Inc.'s S-1
Registration Statement, File No. 33-83526.
10.11 Class A senior preferred convertible Filed herewith
debenture between Materials Technologies,
Inc. and Palisades Capital, LLC
42
10.12 Voting agreements and irrevocable proxy Filed herewith
between Robert M. Bernstein, Monty Freedman,
Material Technologies Inc. and Palisades
Capital, LLC.
10.13 Purchase Order No. 472249 between Material Filed herewith
Technologies, Inc. (Supplier) and Northrop
Grumman (Buyer) dated 10/27/2003
b. Reports on Form 8-K - September 24, 2003.
c. Financial Statements - attached.
SIGNATURES
----------
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MATERIAL TECHNOLOGY, INC.
- -------------------------
By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein, President
Date: March 23, 2004
Pursuant to the requirements of the Securities Exchanges Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein,
President, Director, Chief Executive Officer, and Chief
Financial Officer (Principal Executive Officer, Principal
Financial Officer, and Principal Accounting Officer)
Date: March 23, 2004
By: /s/ Joel Freedman
-------------------------------
Joel Freedman, Secretary and Director
Date: March 23, 2004
By: /s/ John Goodman
-------------------------------
John Goodman, Director
Date: March 23, 2004
43
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
Contents
--------
Page
--------
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Statement of Stockholders' (Deficit) F-7
Notes to Consolidated Financial Statements F-13
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Material Technologies, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Material
Technologies, Inc., (A Development Stage Company) as of December 31, 2003, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows, for the year then ended. We have also compiled the amounts for the
year ended December 31, 2003, included in the column from inception (October 21,
1983) through December 31, 2003, in the statements of operations and cash flows
to arrive at the balances for the period from inception (October 21, 1983)
through December 31, 2003 and found the totals to be correct. We did not audit
any amount prior to January 1, 2003. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Material
Technologies, Inc. (A Development Stage Company) as of December 31, 2003, and
the results of its operations, and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
GUMBINER, SAVETT, FINKEL, FINGLESON & ROSE, INC.
SANTA MONICA, CA
March 16, 2004
Independent Auditor's Report
----------------------------
Board of Directors
Material Technologies, Inc.
Los Angeles, California
I have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 2001 and 2002, and the related
statements of operations, stockholders' equity (deficit), and cash flows, for
the years ended December 31, 2000, 2001, 2002, and for the period from the
Company's inception (October 21, 1983) through December 31, 2002. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with auditing standards generally accepted
in the United States. These standards require that I 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. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Material Technologies, Inc. as of
December 31, 2001 and 2002, and the results of its operations, and its cash
flows for the years ended December 31, 2000, 2001, 2002, and for the period from
the Company's inception (October 21, 1983) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
s/s Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
March 7, 2003
F-1
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
December 31, December 31,
2002 2003
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 251,782 $ 47,664
Receivable due on research contract - 28,004
Receivable from officer 76,109 83,940
Employee receivable 1,433 1,350
Receivable from taxing authorities - 161
Prepaid expenses 1,179 4,179
---------------- ----------------
TOTAL CURRENT ASSETS 330,503 165,298
---------------- ----------------
FIXED ASSETS
Property and equipment, net
of accumulated depreciation 27,649 20,626
---------------- ----------------
OTHER ASSETS
Intangible assets:
Patents and other, subject to amortization 12,120 10,004
Refundable deposit 2,348 2,348
---------------- ----------------
TOTAL OTHER ASSETS 14,468 12,352
---------------- ----------------
TOTAL ASSETS $ 372,620 $ 198,276
================ ================
See accompanying notes and independent accountants' report
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
December 31, December 31,
2002 2003
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Legal fees payable $ 216,782 $ 219,154
Fees payable to R&D subcontractor - 25,000
Accounting fees payable 22,443 37,984
Other accounts payable 15,736 78,671
Accrued expenses 33,880 17,920
Accrued officer compensation 75,482 142,446
Notes payable - current portion 25,688 25,688
Payable on research and
development sponsorship 498,731 638,003
Loans payable - others 59,028 60,438
---------------- ----------------
TOTAL CURRENT LIABILITIES 947,770 1,245,304
LONG-TERM DEBT 1,519,166 345,333
---------------- ----------------
TOTAL LIABILITIES 2,466,936 1,590,637
---------------- ----------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY - 38,422
---------------- ----------------
STOCKHOLDERS' (DEFICIT)
Class A preferred stock, $.001 par value, authorized 350,000 Shares,
issued and outstanding 337 shares at December 31, 2002 and
and December 31, 2003 - -
Class B preferred stock, $.001 par value, authorized 200,000 Shares,
issued and outstanding 143 shares at December 31, 2002 and
167 shares at December 31, 2003 - -
Class C preferred stock, $.001 par value, authorized
25,000,000 shares, issued and outstanding 0 at December 31, 2002
and 4,050 shares at December 31, 2003 - 4
Class D preferred stock, $.001 par value, authorized 20,000,000 Shares,
issued and outstanding 0 shares at December 31, 2002 and - 5,440
5,440,000 shares at December 31, 2003
Class A Common Stock, $.001 par value, authorized 549,400,000 shares,
issued and outstanding 109,228 at December 31, 2002 and 66,488,975
shares at December 31, 2003, Shares held in reserve 101,603 at
December 31, 2002 and 843 shares at December 31, 2003 109 66,488
Class B Common Stock, $.001 par value, authorized 600,000
Shares, issued and outstanding 300,000 shares at
December 31, 2002, and 600,000 at December 31, 2003 300 600
Additional paid in capital 11,333,053 13,086,976
Less notes receivable - common stock (774,311) (51,096)
Deficit accumulated during the development stage (12,653,467) (14,539,195)
---------------- ----------------
TOTAL STOCKHOLDERS' (DEFICIT) (2,094,316) (1,430,783)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 372,620 $ 198,276
================ ================
See accompanying notes and independent accountants' report
F-3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
===================================================================================================================================
From Inception
(October 21, 1983)
For the Year Ended December 31, Through
2001 2002 2003 December 31, 2003
---------------- ---------------- ---------------- ----------------
REVENUES
Sale of fatigue fuses $ - $ - $ - $ 64,505
Sale of royalty interests - - - 198,750
Research and development revenue 1,579,823 461,323 41,549 5,066,361
Test services - - - 10,870
---------------- ---------------- ---------------- ----------------
TOTAL REVENUES 1,579,823 461,323 41,549 5,340,486
---------------- ---------------- ---------------- ----------------
COSTS AND EXPENSES
Research and development 1,493,628 665,435 229,317 5,260,080
General and administrative 3,632,769 3,581,706 1,532,025 13,985,879
---------------- ---------------- ---------------- ----------------
TOTAL COSTS AND EXPENSES 5,126,397 4,247,141 1,761,342 19,245,959
---------------- ---------------- ---------------- ----------------
LOSS FROM OPERATIONS (3,546,574) (3,785,818) (1,719,793) (13,905,473)
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 102,283 52,782 41,641 342,241
Interest expense (70,468) (118,460) (206,776) (641,223)
Forgiveness of indebtedness (289,940)
Loss on abandonment of interest in joint venture (33,000) - - (33,000)
---------------- ---------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (1,185) (65,678) (165,135) (621,922)
---------------- ---------------- ---------------- ----------------
NET LOSS BEFORE PROVISION FOR
INCOME TAXES (3,547,759) (3,851,496) (1,884,928) (14,527,395)
PROVISION FOR INCOME TAXES (800) (800) (800) (11,800)
---------------- ---------------- ---------------- ----------------
NET LOSS $ (3,548,559) $ (3,852,296) $ (1,885,728) $ (14,539,195)
================ ================ ================ ================
PER SHARE DATA
BASIC NET LOSS PER SHARE $ (105.49) $ (61.08) $ (0.09)
================ ================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 33,640 63,074 20,042,583
================ ================ ================
See accompanying notes and independent accountants' report
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
From Inception
For the Year Ended December 31, (October 21, 1983)
-------------------------------------------------------- Through
2001 2002 2003 December 31, 2003
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,548,559) $ (3,852,296) $ (1,885,728) $ (14,539,195)
---------------- ---------------- ---------------- ----------------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 3,755 7,747 9,139 194,751
Accrued interest income (98,298) (49,444) (39,438) (287,169)
Gain on sale of securities - - - (196,596)
Charge off of investment in joint venture 33,000 - - 33,000
Officers' and directors compensation on stock
subscription modification 1,500,000 - - 1,500,000
Issuance of common stock to officer for services
rendered 1,128,000 260,000 339,617 1,727,617
Charge-off of deferred offering costs - - - 36,480
Charge-off of long-lived assets due to impairment - - - 92,919
Modification of royalty agreement - - - 7,332
Gain on foreclosure - - - (18,697)
(Increase) decrease in accounts receivable (255,073) 285,677 (28,004) (78,332)
(Increase) in employee advances and other
receivables - (1,433) (78) (1,511)
(Increase) decrease in prepaid expense (212) (1,179) (3,000) (4,338)
Loss on sale of equipment - - - 12,780
Issuance of common stock for services 804,336 1,286,894 519,336 3,972,992
Issuance of stock for agreement modification - - - 152
Forgiveness of Indebtedness - - - 215,000
Increase (decrease) in accounts
payable and accrued expenses 267,742 (284,625) 166,848 1,069,837
Increase in legal fees secured by note payable - 1,481,895 - 1,481,895
Interest accrued on note payables 67,718 114,971 199,977 587,703
Increase in research and development
sponsorship payable - - - 218,000
(Increase) in note for litigation settlement - - - (25,753)
(Increase) in deposits - - - (2,189)
---------------- ---------------- ---------------- ----------------
TOTAL ADJUSTMENTS 3,450,968 3,100,503 1,164,397 10,535,873
---------------- ---------------- ---------------- ----------------
NET CASH USED IN
OPERATING ACTIVITIES (97,591) (751,793) (721,331) (4,003,322)
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From sale of equipment - - - 10,250
Purchase of property and equipment (5,961) (29,608) - (266,472)
Proceeds from sale of securities - - - 283,596
Purchase of securities - - - (90,000)
Proceeds from foreclosure - - - 44,450
Investment in joint ventures - - - (102,069)
Payment for license agreement - - - (6,250)
---------------- ---------------- ---------------- ----------------
NET CASH USED IN
INVESTING ACTIVITIES (5,961) (29,608) - (126,495)
---------------- ---------------- ---------------- ----------------
See accompanying notes and independent accountants' report
F-5
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
From Inception
For the Year Ended December 31, (October 21, 1983)
-------------------------------------------------------- Through
2001 2002 2003 December 31, 2003
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received through the issuance of
common stock and preferred stock 366,126 1,153,735 235,198 3,110,583
Costs incurred in offerings (79,559) (261,474) (81,975) (454,488)
Purchase of Company's common stock for cancellation - - (24,432) (24,432)
Sale of common stock warrants - - - 18,250
Sale of stock in subsidiary - - 38,422 323,005
Sale of redeemable preferred stock - - - 150,000
Capital contributions - - - 301,068
Payment on proposed reorganization - - - (5,000)
Loans From officer 42,800 - - 778,805
Officer advances and repayments (53,300) (33,547) - (542,379)
Increase in notes and loan payable-others - - 350,000 522,069
---------------- ---------------- ---------------- ----------------
NET CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES 276,067 858,714 517,213 4,177,481
---------------- ---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 172,515 77,313 (204,118) 47,664
BEGINNING BALANCE CASH AND
CASH EQUIVALENTS 1,954 174,469 251,782 -
---------------- ---------------- ---------------- ----------------
ENDING BALANCE CASH AND CASH
EQUIVALENTS $ 174,469 $ 251,782 $ 47,664 $ 47,664
================ ================ ================ ================
SUPPLEMENTAL INFORMATION:
Non-cash investing and financing activities:
2001
The Company issued 60,000 shares which was held in reserve in
connection with connection with its Straight Documentary Credit.
The Company issued 698 shares of its common stock in connection with
its Regulation S offering.
2002
The Company issued an additional 40,000 shares which was held in
reserve in connection with its Straight Documentary Credit.
The Company issued 1,096 shares to the University of Pennsylvania
pursuant to the anti-dilutive provision in its licensing agreement
with the University.
The Company's president cancelled 1,322 shares of common stock which
he held in escrow pursuant to the escrow agreement that he has with
the Company.
The Company issued 2,741 shares of its common stock in connection with
its Regulation S offering.
The Company issued 397 shares of its common stock as additional
consideration pursuant to its anti-dilution provision in its
settlement agreement with Mr. Stephen Beck.
2003
The Company abandoned its search of funding through its Straight
Documentary Credit and cancelled the 100,000 shares that were held in
reserve.
The Company issued 4,242 shares to the University of Pennsylvania
pursuant to the anti-dilutive provision in its licensing agreement
with the University.
The Company issued 22,000,000 shares of its common stock in
consideration for the assumption by certain third parties of the legal
obligation due by the Company to two attorneys amounting to
$1,583,127.
The Company issued 5,000,000 shares of its common stock to its
President in consideration for a $50,000 non-recourse promissory note.
The Company issued 260 shares of its common stock as additional
consideration pursuant to its anti-dilution provision in its
settlement agreement with Mr. Stephen Beck.
The President and its Secretary returned 5,001 shares of common stock
in consideration for the cancellation of notes due the Company by them
for past purchases of the common stock totaling $769,823.
The Company issued 7,006,479 shares of its common stock in connection
with its Regulation S offering.
Of the 22,000,000 shares of common shares issued in consideration of
the assumption of the above-indicated indebtedness 7,440,000 shares
were canceled in consideration for the issuance of 2,500,000 shares of
Class D Preferred Shares.
The Company paid the full amount due an attorney firm through the
issuance of 1,000 shares of common stock.
Interest and Taxes Paid:
Taxes Interest
--------- ------------
2001 $ 800 $ 2,750
========= ============
2002 $ 800 $ 2,750
========= ============
2003 $ 800 $ 2,750
========= ============
See accompanying notes and independent accountants' report
F-6
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Initial Issuance of Common
Stock October 21, 1983 2 $ - - $ - - $ - - $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2) - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
- - - - - - - -
Balance - October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
with Pooling of Interests 42 - - - - - - -
Net (Loss), Year Ended
December 31, 1983 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1983 42 - - - - - - -
Capital Contribution - - - - - - - -
Issuance of Common Stock 5 - - - - - - -
Costs Incurred in Connection
with Issuance of Stock - - - - - - - -
Net (Loss), Year Ended
December 31, 1984 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1984 47 - - - - - - -
Capital Contribution - - - - - - - -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - - - - -
Shares Cancelled (9) - - - - - - -
Net (Loss), Year Ended
December 31, 1985 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1985 38 - - - - - - -
Net (Loss), Year Ended
December 31, 1986 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1986 38 - - - - - - -
Issuance of Common Stock
upon Exercise of Warrants - - - - - - - -
Net (Loss), Year Ended
December 31, 1987 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1987 38 - - - - - - -
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Initial Issuance of Common
Stock October 21, 1983 - $ - - $ - $ 2,500 $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares - - - - (4) -
----------- ---------- ----------- ---------- ------------- --------------
- - - - 2,496 -
Balance - October 21, 1983
Shares Issued By Tensiodyne - -
Corporation in Connection - -
with Pooling of Interests - - - - 4,342 -
Net (Loss), Year Ended
December 31, 1983 - - - - - (4,317)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1983 - - - - 6,838 (4,317)
Capital Contribution - - - - 21,755 -
Issuance of Common Stock - - - - 10,700 -
Costs Incurred in Connection
with Issuance of Stock - - - - (2,849) -
Net (Loss), Year Ended
December 31, 1984 - - - - - (21,797)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1984 - - - - 36,444 (26,114)
Capital Contribution - - - - 200,555 -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - 18,250 -
Shares Cancelled - - - - - -
Net (Loss), Year Ended
December 31, 1985 - - - - - (252,070)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1985 - - - - 255,249 (278,184)
Net (Loss), Year Ended
December 31, 1986 - - - - - (10,365)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1986 - - - - 255,249 (288,549)
Issuance of Common Stock
upon Exercise of Warrants - - - - 27,082 -
Net (Loss), Year Ended
December 31, 1987 - - - - - (45,389)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1987 - - - - 282,331 (333,938)
See accompanying notes and independent accountants' report.
F-7
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Issuance of Common Stock
Sale of Stock 3 - - - - - - -
Services Rendered 3 - - - - - - -
Net (Loss), Year Ended
December 31, 1988 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1988 44 - - - - - - -
Issuance of Common Stock
Sale of Stock 4 - - - - - - -
Services Rendered 36 - - - - - - -
Net (Loss), Year Ended
December 31, 1989 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1989 84 - - - - - - -
Sale of Stock 2 - - - - - - -
Services Rendered 6 - - - - - - -
Net Income, Year Ended
December 31, 1990 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1990 92 - - - - - - -
Issuance of Common Stock
Sale of Stock 1 - - - 350 - - -
Services Rendered 4 - - - - - - -
Conversion of Warrants - - - - - - - -
Conversion of Stock (6) - 60,000 60 - - - -
Net (Loss), Year Ended
December 31, 1991 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1991 91 - 60,000 60 350 - - -
Issuance of Common Stock
Sale of Stock 20 - - - - - - -
Services Rendered 5 - - - - - - -
Conversion of Warrants 6 - - - - - - -
Sale of Class B Stock - - 60,000 60 - - - -
Issuance of Stock to
Unconsolidated Subsidiary 5 - - - - - - -
Conversion of Stock 6 - (60,000) (60) - - - -
Cancellation of Shares (7) - - - - - - -
Net (Loss), Year Ended
December 31, 1992 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1992 126 - 60,000 60 350 - - -
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Issuance of Common Stock
Sale of Stock - - - - 101,752 -
Services Rendered - - - - 70,600 -
Net (Loss), Year Ended
December 31, 1988 - - - - - (142,335)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1988 - - - - 454,683 (476,273)
Issuance of Common Stock
Sale of Stock - - - - 2,000 -
Services Rendered - - - - 18,000 -
Net (Loss), Year Ended
December 31, 1989 - - - - - (31,945)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1989 - - - - 474,683 (508,218)
Sale of Stock - - - - 59,250 -
Services Rendered - - - - 32,400 -
Net Income, Year Ended
December 31, 1990 - - - - - 133,894
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1990 - - - - 566,333 (374,324)
Issuance of Common Stock
Sale of Stock - - - - 273,686 -
Services Rendered - - - - 64,884 -
Conversion of Warrants - - - - - -
Conversion of Stock - - - - (6) -
Net (Loss), Year Ended
December 31, 1991 - - - - - (346,316)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1991 - - - - 904,897 (720,640)
Issuance of Common Stock
Sale of Stock - - - - 16,000 -
Services Rendered - - - - 15,520 -
Conversion of Warrants - - - - 15,000 -
Sale of Class B Stock - - - - 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary - - - - 71,664 -
Conversion of Stock - - - - 6 -
Cancellation of Shares - - - - - -
Net (Loss), Year Ended
December 31, 1992 - - - - - (154,986)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1992 - - - - 1,038,027 (875,626)
See accompanying notes and independent accountants' report.
F-8
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Issuance of Common Stock
Licensing Agreement 13 - - - - - - -
Services Rendered 67 - - - - - - -
Warrant Conversion 56 - - - - - - -
Cancellation of Shares (32) - - - - - - -
Net (Loss) for Year Ended
December 31, 1993 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1993 230 - 60,000 60 350 - - -
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 31 - - - - - - -
Issuance of Shares for
Services Rendered 223 - - - - - - -
Sale of Stock 1,486 2 - - - - - -
Issuance of Shares for
the Modification of
Agreements 34 - - - - - - -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1994 2,004 2 60,000 60 350 - - -
Issuance of Common Stock
in Consideration for
Modification of Agreement 153 - - - - - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1995 2,157 2 60,000 60 350 - - -
Issuance of Shares for
Services Rendered 165 - - - - - - -
Sale of Stock 70 - - - - - - -
Issuance of Shares for
the Modification of
Agreements 250 - - - - - - -
Cancellation of Shares Held
in Treasury (62) - - - - - - -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1996 2,580 2 60,000 60 350 - - -
Sale of Stock 100 - - - - - - -
Conversion of Indebtedness 800 1 - - - - - -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,500 2 - - - - - -
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Issuance of Common Stock
Licensing Agreement - - - - 6,250 -
Services Rendered - - - - 13,913 -
Warrant Conversion - - - - 304,999 -
Cancellation of Shares - - - - (7,569) -
Net (Loss) for Year Ended
December 31, 1993 - - - - - (929,900)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1993 - - - - 1,355,620 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 - - - - 385,424 -
Issuance of Shares for
Services Rendered - - - - 223 -
Sale of Stock - - - - 24,784 -
Issuance of Shares for
the Modification of
Agreements - - - - - -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - (377,063)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1994 - - - - 1,766,051 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement - - - - 153 -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - (197,546)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1995 - - - - 1,766,204 (2,380,135)
Issuance of Shares for
Services Rendered - - - - 16,466 -
Sale of Stock - - - - 174,040 -
Issuance of Shares for
the Modification of
Agreements - - - - - -
Cancellation of Shares Held
in Treasury - - - - (154,600) -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - (450,734)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1996 - - - - 1,802,110 (2,830,869)
Sale of Stock - - - - 100,000 -
Conversion of Indebtedness - - - - 165,999 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer - - - - 371,998 -
See accompanying notes and independent accountants' report.
F-9
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Issuance of Shares for
Services Rendered 247 - - - - - - -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 560 1 - - - - - -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1997 5,787 6 60,000 60 350 - - -
Shares Issued in Cancellation
of Indebtedness 2,430 2 - - - - - -
Conversion of Options 500 1 - - - - - -
Issuance of Shares for
Services Rendered 1,122 1 - - - - - -
Shares Issued in Cancellation
of Redeemable Preferred
Stock 50 - - - - - - -
Shares Returned to Treasury
and Cancelled (560) (1) - - - - - -
Modification of Royalty
Agreement 733 1 - - - - - -
Issuance of Warrants to
Officer - - - - - - - -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1998 10,062 10 60,000 60 350 - - -
Shares Issued in Cancellation
of Indebtedness 2,175 2 - - - - - -
Issuance of Shares for
Services Rendered 1,255 1 - - - - - -
Shares Issued in Modification
of Licensing Agreement 672 1 - - - - - -
Sale of Stock 433 - - - - - - -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 1999 14,597 14 60,000 60 350 - - -
Issuance of Shares for
Services Rendered - as
restated 700 1 - - - - - -
Shares Issued to Investors
Pursuant to Settlement
Agreement 65 1 - - - - - -
Shares Issued for Cash
and Non-Recourse Promissory
Note 5,000 5 - - - - - -
Shares Issued for Cash 400 - - - - - - -
Shares Issued in Cancellation
of Indebtedness 100 - - - - - - -
Shares Issued as Compensation
Pursuant to Escrow
Agreement 4,184 4 - - - - - -
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Issuance of Shares for
Services Rendered - - - - 2,471 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 - - - - (1) -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - (133,578)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1997 - - - - 2,442,577 (2,964,447)
Shares Issued in Cancellation
of Indebtedness - - - - 169,998 -
Conversion of Options - - - - 124,999 -
Issuance of Shares for
Services Rendered - - - - 112,161 -
Shares Issued in Cancellation
of Redeemable Preferred
Stock - - - - 150,000 -
Shares Returned to Treasury
and Cancelled - - - - 1 -
Modification of Royalty
Agreement - - - - 7,331 -
Issuance of Warrants to
Officer - - - - 27,567 -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - (549,187)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1998 - - - - 3,034,634 (3,513,634)
Shares Issued in Cancellation
of Indebtedness - - - - 166,665 -
Issuance of Shares for
Services Rendered - - - - 95,098 -
Shares Issued in Modification
of Licensing Agreement - - - - (1) -
Sale of Stock - - - - 173,540 -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - (539,283)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 1999 - - - - 3,469,936 (4,052,917)
Issuance of Shares for
Services Rendered - as
restated - - - - 824,515 -
Shares Issued to Investors
Pursuant to Settlement
Agreement - - - - (1) -
Shares Issued for Cash
and Non-Recourse Promissory
Note - - - - 1,994,995 -
Shares Issued for Cash - - - - 281,694 -
Shares Issued in Cancellation
of Indebtedness - - - - 100,000 -
Shares Issued as Compensation
Pursuant to Escrow
Agreement - - - - 4,180 -
See accompanying notes and independent accountants' report.
F-10
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Shares Returned from Escrow (400) - - - - - - -
Common Shares Converted into
Class B Common (40) - 40,000 40 - - - -
Preferred Shares Converted
into Common 12 - - - (13) - - -
Net (Loss) for the Year
Ended December 31, 2000 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 2000 24,618 25 100,000 100 337 - - -
Issuance of Shares for
Services Rendered 6,185 6 - - - - - -
Shares Issued for Cash 4,932 5 - - - - - -
Shares Issued in Connection
with Private Offering 698 - - - - - - -
Shares Issued to Officer 6,000 6 - - - - - -
Net (Loss) for the Year
Ended December 31, 2001 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 2001 42,433 42 100,000 100 337 - - -
Issuance of Shares for
Services Rendered 21,835 22 - - - - - -
Issuance of Shares to
University of Pennsylvania 1,096 1 - - - - - -
Shares issued in settlement
of lawsuit 1,397 1 - - - - - -
Shares Issued for Cash 28,048 28 - - - - 143 -
Offering costs - - - - - - - -
Shares issued in cancellation
of President's interest in
patents - - 200,000 200 - - - -
Cancellation of shares in
stock (1,322) (1) - - - - - -
Shares issued to Company's
president for past
compensation 13,000 13 - - - - - -
Shares Issued in Connection
with Private Offering 2,741 3 - - - - - -
Net (Loss) for the Year
Ended December 31, 2002 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 2002 109,228 109 300,000 300 337 - 143 -
Issuance of Shares for
Services Rendered 7,780,333 7,780 - - - - - -
Issuance of Shares to
University of Pennsylvania 4,242 4 - - - - - -
Shares purchased for
cancellation (1,296) (1) - - - - - -
Shares issued in settlement
of lawsuit 260 - - - - - - -
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Shares Returned from Escrow - - - - - -
Common Shares Converted into
Class B Common - - - - (40) -
Preferred Shares Converted
into Common - - - - - -
Net (Loss) for the Year
Ended December 31, 2000 - - - - - (1,199,695)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 2000 - - - - 6,675,279 (5,252,612)
Issuance of Shares for
Services Rendered - - - - 804,330 -
Shares Issued for Cash - - - - 286,562 -
Shares Issued in Connection
with Private Offering - - - - - -
Shares Issued to Officer - - - - 1,127,994 -
Net (Loss) for the Year
Ended December 31, 2001 - - - - - (3,548,559)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 2001 - - - - 8,894,165 (8,801,171)
Issuance of Shares for
Services Rendered - - - - 1,185,609 -
Issuance of Shares to
University of Pennsylvania - - - - (1) -
Shares issued in settlement
of lawsuit - - - - 39,999 -
Shares Issued for Cash - - - - 1,153,708 -
Offering costs - - (200,412) - (200,412) -
Shares issued in cancellation
of President's interest in
patents - - - - - -
Cancellation of shares in
stock - - - - 1 -
Shares issued to Company's
president for past
compensation - - - - 259,987 -
Shares Issued in Connection
with Private Offering - - - - (3) -
Net (Loss) for the Year
Ended December 31, 2002 - - - - - (3,852,296)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 2002 - - - - 11,333,053 (12,653,467)
Issuance of Shares for
Services Rendered - - - - 476,554 -
Issuance of Shares to
University of Pennsylvania - - - - (4) -
Shares purchased for
cancellation - - - - (24,431) -
Shares issued in settlement
of lawsuit - - - - - -
See accompanying notes and independent accountants' report.
F-11
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT))
Class A Common Class B Common Class A Preferred Stock Class B Preferred Stock
----------------------- ----------------------- ----------------------- -----------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Shares Issued for Cash 34,030 33 - - - - 24 -
Offering costs - - - - - - - -
Shares issued in cancellation
of legal fee note payable 22,000,000 22,000 - - - - - -
Shares issued to Company's
president for past
compensation 32,000,000 32,000 - - - - - -
Shares issued to Company's
president in consideration
for note payable 5,000,000 5,000 - - - - - -
Officer's compensation
relating to cancelation of
Oct. 27, 2000 escrow
agreement - - - - - - - -
Shares issued in cancellation
of indebtedness due on legal
fees 1,000 1 - - - - - -
Shares returned to treasury
by Company officers in
consideration for the
cancellation of notes due
the Company by them on past
stock purchases (5,001) (5) - - - - - -
Exchange of Class A Common
stock for Class B Common (300) - 300,000 300 - - - -
Exchange of Class A Common
stock for Class D Preferred (7,440,000) (7,440) - - - - - -
Shares Issued in Connection
with Private Offering 7,006,479 7,007 - - - - - -
Net (Loss) for the Year
Ended December 31, 2003 - - - - - - - -
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Balance December 31, 2003 66,488,975 $ 66,488 600,000 $ 600 337 $ - 167 $ -
=========== ========== =========== ========== =========== ========== =========== ==========
Deficit
Class C Preferred Stock Class D Preferred Stock Accumulated
----------------------- ----------------------- Additional During the
Shares Shares Paid-in Development
Outstanding Amount Outstanding Amount Capital Stage
----------- ---------- ----------- ---------- ------------- --------------
Shares Issued for Cash 4,050 4 - - 235,161 -
Offering costs - - - - (81,975) -
Shares issued in cancellation
of legal fee note payable - - - - 1,561,127 -
Shares issued to Company's
president for past
compensation - - - - 288,000 -
Shares issued to Company's
president in consideration
for note payable - - - - 45,000 -
Officer's compensation
relating to cancelation of
Oct. 27, 2000 escrow
agreement - - - - 19,617 -
Shares issued in cancellation
of indebtedness due on legal
fees - - - - 9,999 -
Shares returned to treasury
by Company officers in
consideration for the
cancellation of notes due
the Company by them on past
stock purchases - - - - (769,818) -
Exchange of Class A Common
stock for Class B Common - - - - (300) -
Exchange of Class A Common
stock for Class D Preferred - - 5,440,000 5,440 2,000 -
Shares Issued in Connection
with Private Offering - - - - (7,007) -
Net (Loss) for the Year
Ended December 31, 2003 - - - - - (1,866,111)
----------- ---------- ----------- ---------- ------------- --------------
Balance December 31, 2003 4,050 $ 4 5,440,000 $ 5,440 $ 13,086,976 $ (14,519,578)
=========== ========== =========== ========== ============= ==============
See accompanying notes and independent accountants' report.
F-12
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization
- ---------------------
Material Technologies, Inc. (the "Company") was organized on October 21,
1983, 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.
On January 22, 2003 the Company formed Matech International, Inc., a Nevada
corporation ("International"). International was formed as a wholly owned
subsidiary of the Company to advertise, market and sell the Company's
videoscope technology which is presently utilized in the inspection of
stress and crack points in turbine engines on the wings of airplanes.
At the present time there is no activity in International and the Company
does not anticipate nor reasonably foresee any business activity in
International in the near future.
On March 13, 2003 the Company formed Matech Aerospace, Inc., a Nevada
corporation ("Aerospace"). Aerospace was formed as a wholly owned
subsidiary of the Company to advertise, market and sell all manufacturing
and marketing rights to the Company's products and technologies in all
commercial markets within the United States. During 2003, Aerospace sold
shares of its common stock to investors. As of December 31, 2003, the
Company holds a 99% interest in Aerospace.
On September 23, 2003, the Company's Board of Directors affected a 1,000
for 1 reverse stock split of its Class A Common Stock and all classes of
its Preferred Stock. The financial statements presented herein have been
restated as if the reverse stock split occurred at the beginning of each
period presented.
The Company maintains significantly all of its cash deposits at one bank.
The Company's average cash balance with this bank from time-to-time exceeds
the insured limits of $100,000 as provided by the FDIC.
F-13
Note 2 - Summary of Significant Accounting Policies
- ---------------------------------------------------
a. Principles of consolidation
The accompanying financial statements include the accounts and
transactions of Material Technologies, Inc.and its wholly owned
subsidiaries, Matech International, Inc and Matech Aerospace, Inc.
Intercompany transactions and balances have been eliminated in
consolidation.
b. Accounts Receivable
Accounts receivable are reported at the customers' outstanding
balances less any allowance for doubtful accounts. Interest is not
accrued on overdue accounts receivable.
c. Allowance for Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged
to income in amounts sufficient to maintain the allowance for
uncollectible accounts at a level management believes is adequate to
cover any probable losses. Management determines the adequacy of the
allowance based on historical write-off percentages and information
collected from individual customers.
d. Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while replacements,
maintenance and repairs, which do not improve or extend the lives of
the respective assets, are expensed. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or
charged to income.
Material Technologies, Inc. depreciates its property and equipment as
follows:
Financial statement reporting - straight line method as follows:
Machinery 5 years
Computer equipment 3-5 years
Office equipment 5 years
Long-Lived Assets
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost-carrying value of an
F-14
asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of an asset by estimating the
future net cash flows expected to result from the asset, including
eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to
the difference between the asset's carrying value and fair value or
disposable value..
e. Net Loss Per Share
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS")
that established standards for the computation, presentation and
disclosure of earnings per share, replacing the presentation of
Primary EPS with a presentation of Basic and diluted EPS. Basic and
diluted EPS is calculated by dividing net loss by the weighted average
shares number of shares outstanding during the year.
f. Accounting 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.
g. Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at
their current carrying amounts since the assets and liabilities
approximate their respective fair values.
h. 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.
i. Revenue Recognition
Significantly all of the Company's revenue is derived from the
Company's contracts relating to the further development of the
Electrochemical Fatigue Sensor (EFS). Revenue on the contracts is
recognized at the time services are rendered. . The Company bills
monthly for services pursuant to these contracts at which time revenue
is recognized for the period that the respective invoice relates. The
Company's contracts relating to work performed for the United States
Air Force expired in 2002. In October 2003, the Company entered into a
contract to provide research services to Northrop Grumman in
connection with the application of the Company's Electrochemical
F-15
Fatigue Sensor to detect stress on military vehicles. The Contract
expires in September 2005 and has an approved budget of $215,281. This
gross amount includes out-of pocket expenses relating to third party
engineering and other related costs.
All other revenue is reported in the period that the income was
earned.
j. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
cash and cash equivalents to include all stable, highly liquid
investments with maturities of three months or less.
k. Income Taxes
The Company accounts for its income taxes under the provisions of
Statement of Financial Accounting Standards 109 ("SFAS 109"). The
method of accounting for income taxes under SFAS 109 is an asset and
liability method. The asset and liability method requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
l. Recent Accounting Pronouncements
The FASB recently issued the following statements:
Statement No. 149
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities
This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities.
Statement No. 150
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were
previously classified as equity
F-16
These FASB statements did not have, or are not expected to have, a
material impact on the Company's financial position and results of
operations.
Note 3 - Accounts Receivable
- ----------------------------
Accounts receivable consists entirely of amounts due under the Company's
research and development contracts and consists of the following:
December 31,
2002 2003
------- -------
Accounts receivable $ 8,362 $ 28,004
Less allowance for doubtful accounts (8,362) --
---------- ----------
$ -- $ 28,004
========== ==========
Note 4 - Intangibles
- --------------------
Intangible assets consist of the following:
Period of December 31,
Amortization 2002 2003
------------ ------- ------
Patent Costs 17 Years $ 28,494 $ 28,494
License Agreement 17 Years 6,250 6,250
(See Note 5)
Website 5 Years 5,200 5,200
---------- ---------
39,944 39,944
Less Accumulated Amortization (27,824) (29,940)
---------- ---------
$ 12,120 $ 10,004
========== =========
Amortization charged to operations for 2001, 2002, and 2003 were $2,249,
and $3,080, and $2,116 respectively.
Estimated amortization expense for the next five years is as follows:
2004 $2,116
2005 $2,116
2006 $1,856
2007 $1,076
2008 $1,076
F-17
In December 2003, the Company's President and Vice-President filed on
behalf of the Company an application with the United States Patent and
Trademark Office for a patent on the Company's Vidioscope.
Note 5 - 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 state of fatigue damage in a
metal structural member. The Company is in the final stage of developing
the EFS.
Under the terms of the agreement the Company issued to the University 13
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 17
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.
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 owing to the University.
The parties agreed that the balance owed on the Sponsorship Agreement was
$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, the Company's President 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 2001,
2002, and 2003, relating to this obligation was $64,472, $76,078, and
$139,272 respectively. The balance of the note at December 31, 2002, and
2003, was $498.731 and $638,003, respectively.
F-18
In addition, pursuant to the anti-dilution provision of the Sponsorship
Agreement, the Company was required to issue an additional 5,338 shares to
the University through December 31, 2003 pursuant to the revised agreement.
As indicated, the Note matured on December 16, 2001 and the Company has not
made any payments and under the terms of the agreement, it is in default.
The Company is currently in discussions with the University regarding the
default and other related matters.
Note 6 - Property and Equipment
- -------------------------------
The following is a summary of property and equipment:
December 31,
2002 2003
------ ------
Office and computer equipment $ 24,142 $ 24,142
Manufacturing equipment 129,675 129,675
--------- ---------
153,817 153,817
Less: Accumulated
Depreciation (126,168) (133,191)
--------- ---------
$ 27,649 $ 20,626
========= =========
Depreciation charged to operations was $1,044, $4,667, and $7,023 for 2001,
2002, and 2003, respectively. The Company's equipment has been pledged as
collateral on the agreement with Advanced Technology Center (See Note
9(b)).
Note 7 - Notes and Loans Payable
- --------------------------------
a. 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 note matured on May
31, 2002, when principal and accrued interest became fully due and
payable. The Company has pledged its patents as collateral against
this loan. The loan has not been paid and is now in default.
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, 2002, and 2003, was $58,859, and $50,269,
respectively. Interest charged to operations for 2001 2002, and 2003
was $3,246, $1,622, and $1,622, respectively. At the end of 2003, it
was discovered that the Company had over accrued interest on the loan
by $10,213, which was credited against interest in that year.
F-19
b. In October 1996, the Company borrowed $25,000 from an unrelated third
party. The loan was assessed interest at an annual rate of 11% and
matured on October 15, 2000. In addition the Company issued warrants
to the lender for the purchase of 25 shares of the Company's common
stock at a price of $1.00 per share. The loan balance as of December
31, 2002 and 2003 was $25,688 and $25,688, respectively. Interest
charged to operations on this loan in 2001, 2002, and 2003, was
$2,750, $2,750, and $2,750, respectively.
The Company did not pay any principal amounts due on this note when it
matured on October 15, 2000, and the note is in default.
c. On April 28, 2003, the Company borrowed $10,000 from a third party.
The loan is unsecured, non-interest bearing, and due on demand.
d. On September 23, 2003, the Company entered into a Class A Senior
Secured Convertible Debenture (the "Debenture") with Palisades
Capital, LLC or its registered assigns ("Palisades"), pursuant to
which Palisades has agreed to loan to the Company up to $1,500,000,
which is expected to be funded in full within twelve months. Under the
Debenture, Palisades has the option, after March 30, 2004, to convert
the principal amount of all moneys loaned under the Debenture,
together with accrued interest, into Common Stock of the Company at
the lesser of (i) 50% of the average ten closing prices for the
Company's Common Stock for the ten (10) trading days immediately
preceding the Conversion Date or (ii) $0.10 (the lesser of the two
being referred to as the "Conversion Price"). In the event Palisades
loans the full $1,500,000 face amount of the Debenture to the Company
and subsequently elects to exercise its right to convert the Debenture
into the Company's Common Stock at a time when the Conversion Price is
less than four cents per share Palisades would receive at least fifty
million (50,000,000) shares of Common Stock resulting in a change in
control of the Common Stock of the Company. However, Mr. Bernstein
would still retain voting control as a result of his holding of one
hundred percent (100%) of the Class B Common Stock.
In addition, Palisades assumed the Company's $1,583,128 obligation to
two attorneys in exchange for the Company issuing Palisades 22,000,000
shares of common stock and warrants to acquire 30,000,000 shares of
common stock for $0.10 per share to seven investors who were the
holders of such debt (the "Debt Holders"). Palisades required, as a
condition to its agreement to enter into the Debenture described
above, that the Company first enter into the settlement with the Debt
Holders and thereby reduce the amount of debt on the Company's balance
sheet by approximately $1,500,000. The Warrants contain a provision
limiting the exercise of the warrants to a number of shares that do
F-20
not exceed an amount that would cause the holder of each such Warrant
to beneficially own 4.99% of the outstanding common stock of the
Company, and, in addition, the Warrants vest only in proportion to the
amount ultimately funded under the Debenture as a percentage of the
$1,500,000 face value.
Finally, the Company's President entered into a voting agreement and
irrevocable proxy, which provides that until September 23, 2006, if an
Event of Default, as defined in the Debenture in favor of Palisades
continues for a period of not less than 30 days, all Class B Common
Stock which Mr. Bernstein owns of record, or becomes the owner of
record in the future will be voted in accordance with the directions
of Mr. Monty Freedman, or his designated successor. This loss of
voting rights would affect a change in the voting control of the
Company.
The debenture bears interest at an annual rate of 10% and matures on
December 31, 2006 when the principal and accrued interest becomes
fully due. During 2003, the Company was advanced $340,000 from
Palisades The balance of the debenture at December 31, 2003 was
$345,333 including $5,333 of accrued interest which was charged to
operations.
From January 1, 2004 through March 25, 2004, the Company received
further advances on the debenture amounting to $265,000.
Note 8 - 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. The allowance for federal income tax
benefits for 2001, 2002 and 2003 were $2,689,324, $3,887,003 and
$4,467,177, respectively. The allowance for state income tax benefits for
2001, 2002, and 2003 were $776,431, $1,116,903 and $1,283,529,
respectively. As of December 31, 2003, the Company has unused operating
loss carryforwards of $14,539,195, which expire in various years through
2022, and future state benefits which will expire in various years through
2013.
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.
F-21
Note 9 - 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.
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, 2002, and 2003, the
future royalty commitment was limited to $252,136 and $ 279,871,
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, 2002, and 2003, the total future royalty commitments,
including the accumulated 26% annual rate of return, were limited to
approximately $ 3,070,380, and $3,869,057, respectively. If the
Company defaults on the agreement, then the obligation relating to
this agreement becomes 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 shares of its
Common Stock to Variety, Variety reduced its royalty interest to 5%.
F-22
e. As discussed in Note 5, 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, 2003, 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 9(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 9(b) and (c) above.
f. Operating Leases
The Company leases its existing office on a month-to-month basis.
Rental expense charged to operations for the years ended December 31,
2001, 2002, and 2003 was $29,468, $28,176, and $28,176, which
consisted solely of minimum rental payments.
F-23
g. Straight Documentary Credit
On October 10, 2001, the Company entered into an arrangement to obtain
a Straight Documentary Credit for $12,500,000. Under the terms of the
commitment, the Company issued 100,000 shares of its common stock as
collateral. The Company reflected the 100,000 shares as held in
reserve. In 2003, the Company abandoned its efforts to find financing
using the Straight Documentary Credit and the 100,000 shares were
returned to the Company and subsequently cancelled.
h. Litigation
In July 2002, the Company settled its pending lawsuit with Mr. Beck.
Under the terms of the settlement, Mr. Beck received 1,000 shares of
the Company's common stock. The shares to be issued are subject to
anti-dilution provisions for a period of five years. The Company
valued the shares issued to Mr. Beck at $40,000, the quoted price of
the shares on date of issuance was charged to operations, accordingly.
During 2002 and 2003, the Company issued Mr. Beck an additional 657
shares of common stock pursuant to the anti-dilutive provision of the
settlement agreement.
In addition, pursuant to the agreement that the Company had with the
attorneys who represented it in this matter, a contingent fee of
$1,481,895 became due them upon the settlement of the case. The
balance of this obligation at September 23, 2003 including accrued
interest of $1,583,128 was assumed by Palisades Capital LLC in
exchange for receiving 22,000,000 shares of the Company's common stock
(See Note 7). Interest charged to operations for 2002 and 2003
amounted to $37,271, and $63,962, respectively.
Note 10 - Investments
- ---------------------
The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
Corporation. At December 31, 2003, there was no market for these shares and
the Company valued its interest at $0.
On January 1, 2003 the Company formed Integrated Metal Technologies, Inc.,
a Delaware corporation ("IMT"). The Company owns 51% of the outstanding
shares of IMT and the remaining 49% of the outstanding shares are owned by
Austin Tech, LLC, a Texas limited liability company. IMT was initially
capitalized with two separate technology license agreements. The first
technology license agreement is by and between the Company and IMT. That
license provides for the use by IMT of certain proprietary technology for
measuring microscopic fractures in metal structures and monitoring metal
fatigue using miniature low-cost, state-of-the-art devices. The license is
further restricted to only those applications in which the technology can
be used in combination with, simultaneously or as an integral part of
certain technologies developed or provided by Austin Tech, LLC, a Texas
F-24
limited liability company. Additionally, the license further restricts use
of the technology in only the following markets: a) bridges, b) tunnels, c)
tank farms, and d) railroads. The Company granted IMT an exclusive, royalty
free license to use this technology in the countries of Mexico, Brazil,
United States of America, Lebanon, Saudi Arabia, Argentina, United Arab
Emirates, Jordan, Qatar, Kuwait, Egypt, Canada, Norway, Sweden, Finland,
Denmark and Iceland. The license expires on January 1, 2005 ("Term"),
unless earlier terminated in accordance with its terms.
The second technology license agreement is by and between IMT and Austin
Tech, LLC, a Texas limited liability company. That license provides for the
use by IMT of certain proprietary technology for wireless data acquisitions
and delivery.
At the present time there is no activity in IMT and the Company does not
anticipate nor reasonably foresee any business activity in IMT in the near
future.
Note 11 - Stockholders' Equity
- ------------------------------
a. Common Stock
The holders of the Company's Common Stock are entitled to one vote per
share of common stock held.
b. 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 1,000 votes for each share of Class B Common Stock held.
c. 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
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
F-25
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.
In 2000, a holder of 13 shares of preferred stock exchanged these
shares for 12,259 shares of the Company's common stock. The 13 shares
of preferred were subsequently cancelled.
d. Class B Preferred Stock
During 2002 and 2003, the Company sold to its legal counsel 167,
shares of its Class B Preferred Stock for $165,350. These shares are
convertible to shares of the Company's common stock at a conversion
price of $.50 per share. The shares accrue interest at 8% payable out
of earnings before income tax, depreciation, and amortization. The
accrued interest is cumulative.
e. Class C Preferred Stock
In May 2003, the Company sold 4,050 units. Each unit consisted of one
share of the Company's Class C Preferred Stock and warrants to
purchase one share of the Company's Class A Common Stock and one share
of the Company's Class B common stock. The total amount that the
Company received from selling the 4.050 units was $40,405. Class A
Warrants expire one year after issuance and entitles the warrant
holder the right to purchase one share of the Company's Class A common
stock at a price set forth in the respective Warrant which is
dependent on the phase wherein the Warrant was offered. Class B
Warrants expire two years after issuance and entitles the warrant
holder the right to purchase one share of the Company's Class B common
stock at a price set forth in the respective Warrant which is
dependent on the phase wherein the Warrant was offered.
Conversion prices for the Class A Common Stock Warrants range from
$.05 per share in Phase A to the greater of $.30 or 1.5 times the
average bid price at the date of the commencement of the Phase D.
Conversion prices for the Class B Common Stock Warrants range from
$.10 per share in Phase A to the greater of $.35 or 1.5 times the
average bid price at the date of the commencement of the Phase D
offering.
Each shareholder of Class C preferred is entitled to receive a
F-26
cumulative dividend of 8% simple interest per annum for a period of
two years. Dividends do not accrue or are payable except out of
earnings generated by the Company net of interest, taxes,
depreciation, and amortization ("EBITDA"). Holders of the Class C
Preferred Stock are junior to holders of the Company's Class A and B
Preferred Stock but hold a higher position than common shareholders in
terms of liquidation rights. Holders of Class C Preferred have no
voting rights, Each holder of Class C Preferred stock have the right
to convert their shares to Class A Common Stock on a one-to-one basis.
The Company requires an approval of at least two-thirds of the holders
of Class C Preferred in order to alter or change their rights or
privileges by way of a reverse stock split, reclassification, merger,
consolidation or otherwise, so as to adversely affect the manner by
which the shares of Class C Preferred Stock are converted into common
shares.
f. Class D Preferred Stock
On December 29, 2003, certain shareholders exchanged 7,440,000 shares
of common stock in exchange for the issuance of 5,440,000 shares of
Class D Preferred Stock. Holders of Preferred D stock have no voting
rights and are junior to holders of all classes of Preferred stock and
senior to common shareholders in terms of liquidation rights. Class D
Preferred Stockholders are entitled to dividends as declared by the
Company's board. Each share of Class D Preferred is convertible at the
holder's option into one share of the Company's common stock.
g. Issuances Involving Non-cash Consideration
All issuances of the Company's stock for non-cash consideration have
been assigned a dollar amount equaling the quoted market price of the
shares at date of issuance or the fair market value of the non-cash
consideration received, whichever is more readily determinable. In
certain issuances, the Company may discount the value assigned to the
issued shares for illiquidity and restrictions on resale.
On January 9, 2001, the Company issued 100 shares of its common stock
to a member of the Company's advisory board for consulting services.
These shares were valued at their quoted market price at date of
issuance amounting to $18,800. Also on January 9, 2001, the Company
issued 50 shares of its common stock to a consultant for services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $9,400. On January 10, 2001, the Company
issued 100 shares each to two employees pertaining to services
rendered on the Company's research project. These shares were valued
at their quoted market price at date of issuance amounting $31,200. On
January 11, 2001, the Company issued 100 shares of its common stock to
an attorney for legal services. These shares were valued at their
quoted market price at date of issuance amounting to $12,500. On March
6, 2001, the Company issued its President 6,000 shares of common stock
for services rendered. These shares were valued at their quoted market
price at date of issuance amounting $1,128,000. On April 6, 2001, the
F-27
Company issued a consultant 200 shares of its common stock for
services rendered. These shares were valued at their quoted market
price at date of issuance amounting $21,800. On April 17, 2001, the
Company issued a consultant 250 shares of its common stock for
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $22,500. On April 20, 2001, the
Company issued to two consultant 50 shares each of its common stock
for marketing services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $9,000. On May 3,
2001, the Company issued to one of its employee's 100 shares of its
common stock for services rendered on the Company's research project.
These shares were valued at their quoted market price at date of
issuance amounting to $9,000. Also on May 3, 2001, the Company issued
a consultant 100 shares of its common stock for services rendered.
These shares were valued at their quoted market price at date of
issuance amounting to $9,000. On June 8, 2001, the Company issued a
consultant 1,000 shares of its common stock for past marketing
services rendered. These shares were valued at $50,000, the balance
due for the services rendered. On June 12, 2001, the Company issued
its executive assistant 25 shares of its common stock for services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $2,750. On July 5, 2001, the Company
issued an attorney 50 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $5,000. On July 26, 2001, the Company
issued a consultant 200 shares of its common stock for services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $26,000. On August 6, 2001, the Company
issued a consultant 125 shares of its common stock for services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $16,250. On August 9, 2001, the Company
issued an attorney 265 shares of its common stock for services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $39,750. On August 29, 2001, the Company
issued 50 shares of its common stock to one consultant and 300 shares
of its common stock to another consultant for services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $42,000. On September 6, 2001, the Company issued a
consultant 38 shares of its common stock for services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $3,750. On September 14, 2001, the Company issued a
consultant 50 shares of its common stock for services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $5,000. On September 19, 2001, the Company issued a
consultant 125 shares of its common stock for services rendered. These
shares were valued at their quoted market price at date of issuance
amounting $11,250. On October 8, 2001, the Company issued to two of
its employees 300 shares of its common stock each for services
rendered in connection with the Company research project. These shares
were valued at their quoted market price at date of issuance amounting
to $102,000. On October 16, 2001, the Company issued a consultant 50
shares of its common stock for services rendered. These shares were
valued at their quoted market price at date of issuance amounting to
$4,560. On October 18, 2001, the Company issued its executive
assistant 20 shares of its common stock for services rendered. These
F-28
shares were valued at their quoted market price at date of issuance
amounting to $4,000. On October 23, 2001, the Company issued an
attorney 150 shares of its common stock for services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $33,000. On October 25, 2001, the Company issued 698 of
its common stock as additional fees pertaining to its Regulation S
offering.. These shares were valued at their quoted market price at
date of issuance amounting to $118,635. On November 6, 2001, the
Company issued an attorney 350 shares of its common stock for legal
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $56,000. On November 14, 2001,
the Company issued a consultant 150 shares of its common stock for
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $33,000. On November 17, 2001,
the Company issued to the same consultant 108 shares of its common
stock for services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $16,125. On December 20,
2001, the Company issued to three consultants a total of 530 shares of
its common stock for services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $90,325.
The value assigned to shares issued for services were charged to
operations. Additional shares issued to the University of Pennsylvania
were issued pursuant to a non-dilution provision of the agreement
between the Company and the University and were valued at par and
charged against paid-in capital. Shares issued in cancellation of
indebtedness were charged against the balance of the debt owed, and
shares issued relating to the Regulation S offerings were charged
against the related proceeds received.
On January 11, 2002, the Company issued a consultant 20 shares of its
common stock for services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $3,200. On
January 30, 2002, the Company issued a consultant 15 shares of its
common stock for services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $2,850. On
February 13, 2002, the Company issued 4 shares its common stock for
clerical services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $760. On February 14,
2002, the Company issued a consultant 400 shares of its common stock
for services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $72,000. On March 4, 2002, the
Company issued its executive assistant 25 shares of its common stock.
These shares were valued at their quoted market price at date of
issuance amounting to $6,750. Also on March 4, 2002, the Company
issued to six individuals a total of 650 shares of its common stock
for consulting services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $175,500. On
March 15, 2002, the Company issued 150 shares of its common stock for
consulting services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $37,500. On March 18,
2002, the Company issued 150 shares of its common stock for consulting
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $22,500. On March 19, 2002, the
Company issued to 125 shares of its common stock for legal services
F-29
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $20,000. On April 2, 2002, the Company
issued to two members of its advisory board a total of 470 shares of
its common stock for consulting services rendered. These shares were
valued at their quoted market price at date of issuance amounting
$65,789. On April 2, 2002, the Company issued its executive assistant
25 shares of its common stock. These shares were valued at their
quoted market price at date of issuance amounting to $3,500. On April
4, 2002, the Company issued 120 shares of its common stock for legal
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $16,800. On April 4, 2002, the
Company issued 4 shares its common stock for clerical services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $560. On April 10, 2002, the Company
issued to 42 shares of its common stock for legal services rendered.
These shares were valued at their quoted market price at date of
issuance amounting to $5,473. On April 12, 2002, the Company issued to
105 shares of its common stock for legal services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $14,000. On April 25, 2002, the Company issued 550 shares
of its common stock for consulting services rendered. These shares
were valued at their quoted market price at date of issuance amounting
to $49,500. On May 10, 2002, the Company issued 215 shares of its
common stock for legal services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $32,250. On
May 10, 2002, the Company issued 115 shares of its common stock for
legal services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $17,250. On May 21,
2002, the Company issued 400 shares of its common stock for consulting
services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $36,000. On May 22, 2002, the
Company issued 1,000 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $90,000. On June 5, 2002, the Company
issued 150 shares of its common stock for consulting services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to were $9,000. On June 5, 2002, the
Company issued 50 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at
date of issuance amounting to $3,000. On June 6, 2002, the Company
issued 50 shares of its common stock for consulting services rendered.
These shares were valued at their quoted market price at date of
issuance amounting to $3,000. On July 3, 2002, the Company issued
1,000 shares of its common stock for legal services rendered. These
shares were valued at their quoted market price at date of issuance
amounting to $50,000. On July 3, 2002, the Company issued 250 shares
of its common stock for consulting services rendered. These shares
were valued at their quoted market price at date of issuance amounting
to $12,500. On July 8, 2002, the Company issued 200 shares of its
common stock for legal services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $8,000. On
July 8, 2002, the Company issued 200 shares of its common stock for
consulting services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $8,000. On July 26,
2002, the Company issued 1,000 shares of its common stock to Stephen
F-30
Beck in settlement of the lawsuit he filed against the Company for
alleged compensation due him. These shares were valued at their quoted
market price at date of issuance amounting to $40,000. On August 5,
2002, the Company issued 1,000 shares of its common stock to an
employee for services rendered in connection for the development of
the fatigue fuse. These shares were valued at their quoted market
price at date of issuance amounting to $40,000. On August 5, 2002, the
Company issued 1,230 shares of its common stock for legal services.
These shares were valued at their quoted market price at date of
issuance amounting to $49,200. On August 14, 2002, the Company issued
1,000 shares of its common stock for legal services. These shares were
valued at their quoted market price at date of issuance amounting to
$40,000. On August 29, 2002, the Company issued 1,000 shares of its
common stock for legal services. These shares were valued at their
quoted market price at date of issuance amounting to $30,000. On
September 5, 2002, the Company issued 300 shares of its common stock
for consulting services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $6,000. On
September 5, 2002, the Company issued 75 shares of its common stock
for legal services. These shares were valued at their quoted market
price at date of issuance amounting to $1,500. On September 10, 2002,
the Company issued 2,000 shares of its common stock for consulting
services. These shares were valued at their quoted market price at
date of issuance amounting to $60,000. On September 11, 2002, the
Company issued 1,000 shares of its common stock for legal services.
These shares were valued at their quoted market price at date of
issuance amounting to $20,000. On September 12, 2002, the Company
issued 2,500 shares of its common stock for legal services. These
shares were valued at their quoted market price at date of issuance
amounting to $50,000. On October 7, 2002, the Company issued 2,500
shares of its common stock for consulting services. These shares were
valued at their quoted market price at date of issuance amounting to
$75,000. On October 9, 2002, the Company issued its executive
assistant 50 shares of its common stock. These shares were valued at
their quoted market price at date of issuance amounting to $1,500. On
October 29, 2002, the Company issued 250 shares of its common stock
for consulting services. These shares were valued at their quoted
market price at date of issuance amounting to $5,000. On December 6,
2002, the Company issued 50 shares of its common stock for consulting
services. These shares were valued at their quoted market price at
date of issuance amounting to $19,500. On December 6, 2002, the
Company issued 250 shares of its common stock for legal services.
These shares were valued at their quoted market price at date of
issuance amounting to $7,500. On December 16, 2002, the Company issued
1,000 shares of its common stock to a member of the Company's advisory
board. These shares were valued at their quoted market price at date
of issuance amounting to $30,000. On December 17, 2002, the Company
issued 1,000 shares of its common stock for legal services. These
shares were valued at their quoted market price at date of issuance
amounting to $30,000. On December 18, 2002, the Company issued 13,000
shares of its common stock to its president for past compensation due
him. These shares were valued at their quoted market price at date of
issuance amounting to $260,000.
F-31
The value assigned to shares issued for services were charged to
operations. Shares issued for legal services included services
rendered in connection with the Beck matter as discussed and
preparation of the Company's registration statement. During 2002, the
Company issued 2,042 shares of Class A Common Stock as additional
consideration in connection with the Company's Regulation S offering.
In addition, the Company issued 200 shares of the Company's Class B
common shares to its President in consideration for the relinquishment
of his total interest in the Company's patents. In addition, during
2002, the Company cancelled 450 shares of its common stock previously
issued to consultants. The value assigned to these cancelled shares
was $48,250 was credited against operations. The Company also issued
1,398 shares of its Class A Common Stock to Mr. Stephen Beck pursuant
to the anti-dilution provisions of the settlement agreement (see note
9(h)). During 2002, the Company cancelled 1,322 shares of originally
issued to Mr. Bernstein pursuant to the Stock Escrow/Grant Agreement.
On January 6, 2003, the Company issued 500 shares of its common stock
for consulting services. The shares were valued at their quoted market
price at date of issuance amounting to $10,000. On January 8, 2003,
the Company issued 3,000 shares of its common stock for legal services
in connection with its aborted S-B registration statement. The shares
were valued at their quoted market price at date of issuance amounting
to $60,000. On January 24, 2003, the Company issued 313 shares of its
common stock for consulting services. The shares were valued at their
quoted market price at date of issuance amounting to $6,250. On March
4, 2003, the Company issued 1,500 shares of its common stock for legal
services in connection with its aborted S-B registration statement.
The shares were valued at their quoted market price at date of
issuance amounting to $15,000. On March 11, 2003, the Company issued
1,500 shares of its common stock for legal services in connection with
its aborted S-B registration statement. The shares were valued at
their quoted market price at date of issuance amounting to $30,000. On
March 11, 2003, the Company issued 300 shares of its common stock for
consulting services. The shares were valued at their quoted market
price at date of issuance amounting to $6,000. On March 26, 2003, the
Company issued 250 shares of its common stock for consulting services
in connection with the Company's research and development efforts. The
shares were valued at their quoted market price at date of issuance
amounting to $5,000. On April 15, 2003, the Company issued 250 shares
of its common stock for consulting services. The shares were valued at
their quoted market price at date of issuance amounting to $2,500. On
April 15, 2003, the Company issued 1,000 shares of its common stock
each to Messrs. Goodman and Berks for consulting services in
connection with the Company's research and development efforts. The
shares were valued at their quoted market price at date of issuance
amounting to $20,000. On April 21, 2003, the Company issued 500 shares
of its common stock to one of its advisory board members for services
rendered. The shares were valued their quoted market price at date of
issuance amounting to $5,000. On April 21, 2003, the Company issued
171 shares of its common stock for consulting services. The shares
were valued at their quoted market price at date of issuance amounting
to $1,711. On May 20, 2003, the Company issued 150 shares of its
F-32
common stock for consulting services. The shares were valued at their
quoted market price at date of issuance amounting to $1,500. On May
27, 2003, the Company issued 2,000 shares of its common stock for
consulting services. The shares were valued at their quoted market
price at date of issuance amounting to $20,000. On May 30, 2003, the
Company issued 500 shares of its common stock for consulting services.
The shares were valued at their quoted market price at date of
issuance amounting to $5,000. On June 10, 2003, the Company issued
1,650 shares for legal services. The shares were valued at their
quoted market price at date of issuance amounting to $16,500. On June
12, 2003, the Company issued 1,000 shares to an attorney firm as
settlement for all amounts due them. The shares were valued at their
quoted market price at date of issuance amounting to $10,000. On June
20, 2003, the Company issued 2,000 shares of its common stock to Mr.
William Berks for consulting services in connection with the Company's
research and development efforts. The shares were valued at their
quoted market price at date of issuance amounting to $20,000. On
September 23, 2003, the Company issued to its President 32,000,000
shares of its Class A common stock pursuant to an Accord, Satisfaction
and Mutual Release in which Mr. Bernstein released all claims he had
against the Company that arose prior to September 24, 2003, including
past services rendered in excess of compensation paid. The shares are
subject to a three-year lock up agreement and were valued at $320,000,
the value indicated in the agreement. In addition, the Company issued
its President 5,000,000 shares of common stock in exchange for a
$50,000 promissory note. The shares are subject to a three-year lock
up agreement and were valued at in accordance with price determined in
the Accord, Satisfaction and Mutual Release. On September 26, 2003,
the Company issued 2,000,000 shares of its common stock for services
rendered. The shares were discounted for illiquidity and restrictions
on resale, subject to a three-year lock up agreement, and were valued
at the amount invoiced for the services rendered amounting to $10,500.
On September 23, 2003, the Company issued 22,000,000 shares of common
stock in consideration for the assumption of the obligation due by the
Company to two attorneys in the amount of $1,583,128. The shares were
discounted for illiquidity and restrictions on resale and were valued
at $1,583,128. On September 29, 2003, the Company issued 5,760,000
shares of its common stock for services rendered. The shares were
discounted for illiquidity and restrictions on resale, are subject to
a three-year lock-up agreement, and were valued at the amount invoiced
for the services rendered amounting to $240,000. On December 17, 2003,
the Company issued 3,750 shares of its common stock for services
rendered. The shares were valued at their quoted market price at date
of issuance amounting to $9,375.
Also during 2003, the Company issued 7,006,479 in connection with the
Company's regulation S offering. The shares were discounted for
illiquidity and restrictions on resale and valued at $131,695, which
was netted against the proceeds received from the related offerings.
Also during the year, the Company issued 260 shares of its common
stock to Mr. Beck and 4,242 shares to the University of Pennsylvania.
On December 29, 2003, certain shareholders cancelled 7,440,000 shares
of common tock in exchange for receiving 5440,000 shares of Class D
Preferred Stock.
F-33
The value assigned to shares issued for services were charged to
operations. Additional shares issued to the University of Pennsylvania
were issued pursuant to a non-dilution provision of the agreement
between the Company and the University and were valued atpar and
charged against paid-in capital. Shares issued relating to the
Regulation S offering were charged against the related proceeds
received.
Note 12 - Transactions with Management
- --------------------------------------
a. During 1993, Mr. Bernstein, the Company's president, exercised
warrants to purchase 6 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.
In December 2003, Mr. Bernstein returned the 6 shares to the Company
in exchange for the cancellation of the note.
b. On May 25, 2000, the Company issued its President 4,650 shares its
common stock in exchange for $4,650 and a $1,855,350 non-recourse
promissory note bearing interest at an annual rate of 8%. On the same
day, the Company issued 350 shares its common stock to its Secretary
in exchange for $350 and a $139,650 non-recourse promissory note
bearing interest at an annual rate of 8%. Both notes mature on May 25,
2005, when the principal and accrued interest becomes fully due and
payable. At the date of issuance, the shares were valued by the
Company at $.40 per share.
In June 2001, the Company's Board of Directors authorized the
reduction in the amount owed by the President and a Director on
non-recourse promissory notes referred to in footnote (d) above to
$460,350 and $34,650, respectively. The reduction was due to the
substantial reduction in the market value of the Company's stock. The
$1,500,000 reduction was charged to general and administrative
expenses as compensation to the President.
In December 2003, the President and Secretary returned the 5,000
shares of common stock to the Company in exchange for the cancellation
of the notes and accrued interest due totaling $755,093.
c. On October 27, 2000, the Company issued 4,184 shares to its President
for future compensation pursuant to a Stock Escrow/Grant Agreement.
Under the terms of the agreement, the President is required to hold
these shares in escrow. While in escrow, the President cannot vote the
shares but has full rights as to cash and non-cash dividends, stock
splits or other change in shares. Any additional shares issued to the
President by reason of the ownership of the 4,184 shares will also be
escrowed under the same terms of the agreement.
F-34
Upon the exercise by certain holders of Company options or warrants or
upon the need by the Company, in the sole discretion of the Board, to
issue common stock to certain individuals or entities, the number of
shares required for issuance to these holders will be returned from
escrow by the President thereby reducing the number of shares he holds.
The shares held in escrow are non-transferable and will be granted to
the Company's President only upon the exercise or expiration of all of
the options and warrants, the direction of the Board, in its sole
discretion, or the mutual agreement by the President and the Board of
Directors to terminate the agreement. The Company valued these shares
at par. Upon the actual grant of the remaining shares to the President,
the shares issued will be valued at their market value when issued and
charged to operations as compensation. As of August 31, 2003, 2,222 of
these shares were issued to an unrelated third party at which time the
Company's Board of Directors eliminated the escrow that granted full
rights and interest to the Company's President of the remaining 1,962
shares. Company treated the vesting of the shares as additional
compensation to Mr. Bernstein and valued the shares released from
escrow at the market value of the shares on the date the escrow
terminated of $19,617.
d. On February 19, 2001, the Company issued its President 6,000 shares of
common stock for services rendered. These shares were valued their
quoted market price at date of issuance amounting to $1,128,000.
e. During 2001, the President advanced the Company $42,000 and received
$53,300 from the Company. The outstanding amount due from the
President as of December 31, 2001 was $35,880. The amount of interest
credited to operations for 2001 totaled $3,327.
f. For 2001, the Company accrued $30,000 of unpaid compensation owed its
President.
g. During 2002, the Company issued 200,000 shares of its Class B common
stock in exchange for the Company's President relinquishing all of the
interest that he had in the Company's patents.
h. On December 18, 2002, the Company issued 13,000 shares of its common
stock to its president for past compensation due him. These shares
were valued their quoted market price at date of issuance amounting to
$260,000.
i. During 2002, the Company cancelled 1,322 shares of originally issued
to Mr. Bernstein pursuant to the Stock Escrow/Grant Agreement.
j. During 2002, the Company made advances to its President amounting to
$34,826. The outstanding amount due from the President as of December
31, 2002, is $76,109. The amount of interest credited to operations in
2002 was $6,682.
F-35
k. During 2003, the Company issued 32,000,000 shares of its Class A
Common Stock and 300,000 shares of Class B Common Stock to its
President for past services rendered and full release of all claims
due him by the Company. The Class A Common Shares issued are subject
to a three year lock up agreement and the value assigned to the shares
issued were discounted for illiquidity and restrictions on resale at
date of issuance amounting to $320,000, the amount agreed to in the
Accord, Satisfaction and Mutual Release.
l. During 2003, the Company issued 5,000,000 shares of its common stock
in consideration for a promissory note. The value assigned toshares
and related promissory note were discounted for illiquidity and
restrictions on resale amounting to totaling $50,000. The Note is
assessed interest at an annual rate of 6% and matures on September 26,
2006, when the $50,000 and accrued interest becomes s fully due. The
balance of the note as of December 31 2003 amounted to $51, 096.
Interest of $1,096 was credited to operations during 2003.
m. The outstanding amount due from the President as of December 31, 2003
was $83,940. The amount of interest credited to operations for 2003
totaled $7,831.
Note 13 - Stock-Based Compensation Plans
- ----------------------------------------
a. In February 2002, the Company adopted the 2002 Stock Issuance/Stock
Plan, and reserved 20,000,000 shares of its common stock for
distribution under the plan. Eligible Plan participants include
employees, advisors, consultants, and officers who provide services to
the Company. The option price shall be 100% of the fair market value
of a share of common stock at either, a) date of grant or such other
day as the as the Board may determine. During 2002, the Company issued
options to acquire 13,475,000 shares of the Company's common stock of
which expired in 2003. There were no options issued under this plan in
2003.
b. In September 2003, the Company adopted the 2003 Stock Option, SAR and
Stock Bonus Consultant Plan and reserved 10,000,000 shares of its
common stock for distribution under the plan. Eligible Plan
participants include independent consultants. The option price shall
be no less than 85% of the fair market value of a share of common
stock at date of grant. During 2003, there were no option issued under
the plan.
The following is a summary of the various plans' activities :
F-36
1998 Stock Plan 2002 Stock Plan 2003 Stock Plan
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
-------------- ------------ -------------- ------------ -------------- ------------
Outstanding Dec 31, 2000 275,000 $ 0.60 - $ - - $ -
Granted - $ - - $ - - $ -
Exercised - $ - - $ - - $ -
Forfieted - $ - - $ - - $ -
Cancelled - $ - - $ - - $ -
-------------- ------------ -------------- ------------ -------------- ------------
Outstanding Dec 31, 2001 275,000 $ 0.60
Granted - $ - 13,475,000 $ 0.06 - $ -
Exercised - $ - - $ - - $ -
Forfieted (275,000) $ (0.60) - $ - - $ -
Cancelled - - - $ - - $ -
-------------- ------------ -------------- ------------ -------------- ------------
Outstanding Dec 31, 2002 - $ - 13,475,000 $ 0.06 - $ -
Granted - $ - - $ 0.06 - $ -
Exercised - $ - - $ - - $ -
Forfieted - $ - (13,475,000) $ - - $ -
Cancelled - - - $ - - $ -
-------------- ------------ -------------- ------------ -------------- ------------
Outstanding Dec 31, 2003 - $ - - $ 0.06 - $ -
============== ============ ============== ============ ============== ============
Weighted Average Fair Value of Options Granted
During 2001 n/a
==============
Weighted Average Fair Value of Options Granted
During 2002 $0.01
==============
Weighted Average Fair Value of Options Granted
During 2003 n/a
==============
In determining the fair value of the options granted during the
respective years, the Black-Scholes Option Pricing Model was used with
the following assumptions determined:
2001 2002 2003
---- ---- ----
Risk free interest rate n/a 4% n/a
Expected life n/a 1.5 years n/a
Expected volatility n/a 34% n/a
F-37
Note 14 - Basis of Presentation and Going Concern
- -------------------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. However, the
Company has sustained operating losses since its inception (October 21,
1983). In addition, the Company has used substantial amounts of working
capital in its operations. Further, at December 31, 2003, current
liabilities exceed current assets by approximately $1,080,000 and the
deficit accumulated during the development stage amounted to approximately
$14,539,000.
In view of these matters, realization of a major portion of the assets in
the accompanying consolidated balance sheet is dependent upon the Company's
ability to meet its financing requirements, and the success of its future
operations. Management has secured a debenture for up to $1,500,000
($340,000 outstanding at December 31, 2003) to be used for its operations.
In addition, the Company has entered into a $215,000 contract to provide
research services over a two year period. Management believes that these
sources of funds and current liquid assets will allow the Company to
continue as a going concern. Management of the Company will also attempt to
raise additional capital. However, no assurances can be made that current
or anticipated sources of funds will enable the Company to finance future
periods' operations.
Note 15 - Subsequent Events
- ---------------------------
In 2004, the Company had the following stock issuances:
On January 7, 2004, the Company issued 25,000 shares to the Company's
executive secretary. The shares are subject to a three-year lock up
agreement.
On February 11, 2004, the Company issued 250,000 shares of its common
stock through the conversion of 250,000 shares of Class C Preferred
stock.
On February 12, 2004, the Company issued 500,000 shares to a
consultant for services rendered in connection with Matech Aerospace
and for the overseeing the design, utilization, and marketing of the
Videoscope. The shares are subject to a three-year lock up agreement.
On February 12, 2004, the Company issued 50,000 shares to a consultant
for services rendered in connection with Matech Aerospace and the
design and utilization of the Videoscope. The shares are subject to a
three-year lock up agreement.
On February 12, 2004, the Company issued 25,000 shares to its outside
accountant as payment towards last years' accounting fees. The shares
are subject to a three-year lock up agreement.
On March 16, 2004, the Company issued 25, 000 shares of its common
stock to a consultant for services rendered in the connection with the
development of the Electrochemical Fatigue Sensor for use on bridges.
F-38