UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K/A2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number - 33-23617
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:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (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
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The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 20, 2003, was $1,301,361 based on the average of the bid
and asked prices of $.015 as reported by the Over The Counter Electronic
Bulletin Board on such date.
1
As of March 20, 2003, there were 117,928,688 shares of common stock, $.001 par
value issued and outstanding. In addition, At March 20, 2003, the Company held
in reserve 101,342,800 of which 100,000,000 shares were held pursuant to the
terms of the Company's Straight Documentary Credit (See Note 9i to the
accompanying financial statements) and 1,342,800 shares were held in reserve
pursuant to the terms of the settlement with a consultant (see Note 9j of the
financial statements .
As of March 20, 2003, there were 300,000 shares of Class B Common Stock, $.001
par value issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
List hereunder the following documents incorporated by reference and the part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
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.
PART I
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MATERIAL TECHNOLOGIES, INC.
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ITEM 1. BUSINESS
-----------------
We are engaged in research and development of metal fatigue detection,
measurement, and monitoring technologies. As such, we are developing a
comprehensive system of monitoring devices for metal fatigue measurement. We are
a development stage company doing business as Tensiodyne Scientific Corporation.
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 under 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 an instrument that detects
very small cracks and is intended to determine crack growth rates, is 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
2
any other practical technologies, as acknowledged by the United States Air Force
and confirmed by Rockwell Scientific Corporation. We believe that nothing
comparable to this instrument currently exists in materials technology.
Both devices are pioneering technology in the fatigue field that we believe
provide cutting-edge solutions in materials technology. Both products are
protected by patents: we hold the patents on the Fatigue Fuse and license the
technology on the Electrochemical Fatigue Sensor (see "Our Patent Protections".)
Another product currently under development is a videoscope, which comprises a
fiber optic bundle 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 fiber optic bundle provides very clear video resolution, utilizing a video
camera integrated in the videoscope handle. Images are then 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, such as ultrasound and/or eddy current. 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.
On January 22, 2003, we formed Matech International, Inc., a wholly owned
subsidiary. On March 13, 2003, we formed another wholly owned subsidiary, Matech
Aerospace, Inc..We formed Matech International for the purpose of granting it a
comprehensive agreement that licenses all manufacturing and marketing rights to
our products and technologies in all commercial markets outside of the Untied
States in exchange for a royalty equal to 7 % of gross sales generated by the
subsidiary. We formed Matech Areospace, Inc. for the purpose of granting it the
same comprehensive license as we granted to International only Aerospace will be
granted manufacturing and marketing rights within the United States in exchange
for a7% royalty on all gross sales generated by it.
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 a design-specific notch near the base. By applying the laws
of physics to determine the geometric contour of each notch, the fatigue life of
each finger is finite and predictable. When the fatigue life of a finger (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
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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 load and wear history as the member.
Methods are available for remote indication of Fuse fracturing.
We believe that the Fatigue Fuse will be of value in monitoring aircraft, ships,
bridges, conveyor systems, mining equipment, cranes, etc. No special training
will be needed to qualify individuals to report any broken segments of the
Fatigue Fuse to the appropriate engineering authority for necessary action. The
success of the device is contingent upon our successful development and
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 determine its ability to produce and market the Fatigue Fuse, we need
substantial additional capital and no assurance can be given that needed capital
will be available.
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 is intended 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
technologies, 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 is expected to
characterize and report fatigue damage i.e., fatigue cracks.
THE VIDEOSCOPE
--------------
Stress points are very often located in difficult-to-get-at places for humans.
Therefore, it has become desirable to miniaturize the process and develop a
means for delivery to inaccessible areas. The videoscope comprises a fiber optic
bundle and light source together with a working channel through which certain
non-destructive test sensors such as ultrasound and/or eddy current devices can
4
be passed, to inspect visually or manually inaccessible regions of structures.
The device as presently implemented has a maximum diameter of 6 mm (0.236
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.
During the quarter ended December 31, 2002, we announced preliminary discussions
to launch a joint venture with Optim, Incorporated of Sturbridge, Massachusetts,
which is intended to commercially introduce a new borescope product known as the
OptiSpec Flaw Detection System. This new product combines remote visual
inspection with ultrasonic and eddy current non-destructive testing methods
which rapidly and accurately determine if the observed indication is, in fact, a
flaw that merits evaluation or repair. Optim, Incorporated designs,
manufactures, markets and sells flexible endoscopy products for both the medical
and industrial markets. Our discussions with Optim, Incorporated have resulted
in a preliminary arrangement whereby we may enter into a formal supply and
license agreement with Optim enabling us to access technology developed by Optim
for our planned marketing and distribution of the OptiSpec Flaw Detection
System. Our early planning for our borescope product includes our recent
formation of a wholly-owned subsidiary, Matech Aerospace, Inc., from which we
intend to further develop, market and distribute our borescope products. We are
uncertain at this juncture when a formal supply and license agreement will be
entered into with Optim and if entered into, the extent to which revenues may be
generated from the commercial development of the OptiSpec Flaw Detection System
and when product sales will begin. No assurances can be given by us at this time
that we will be in a position to develop and market the OptiSpec Flaw Detection
System.
DEVELOPMENT OF OUR TECHNOLOGIES
-------------------------------
Status of the Fatigue Fuse
The development and application sequence for the Fatigue Fuse and EFS is (a)
basic research, (b) exploratory development, (c) advanced development, (d)
prototype evaluation, (e) application demonstration, and (f) commercial sales
and service. The Fatigue Fuse came first. The inventor, Professor Maurice Brull,
conducted the basic research at the University of Pennsylvania. 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, that encompasses empirical tailoring of Fuse parameters to fit the
actual spectrum loading expected in specific applications, needs to be done. The
tests associated with further development of the Fatigue Fuse include full-scale
structural tests with attached Fuses. A prototype of the Fatigue Fuse has been
designed, fabricated, and successfully demonstrated. The next tasks will be to
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prepare an analysis for more efficient selection of Fuse parameters and to
conduct a comprehensive test program to prove the ability of the Fatigue Fuse to
accurately indicate fatigue damage when subjected to realistically large
variations in 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 Fuse 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 receiving
the $600,000. 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 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.
Status of the EFS
-----------------
The existence and size 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
body of testing supporting successful use of this technology with selected
aluminum alloys. However, additional testing is required to verify EFS' crack
detection capabilities under various industrial environments which are more
representative of actual structures in the field, like a highway bridge or
aircraft fuselage.
Joint Technology Venture with Integrated Technologies, Inc.
-----------------------------------------------------------
By agreement dated January 1, 2003, a new co joint venture subsidiary we formed,
Integrated Technologies, Inc. a Delaware corporation and Austin Tech, LLC, a
Texas limited liability company, entered into a license agreement. We own 51% of
the outstanding capital stock of Integrated Technologies, Inc. and Austin Tech,
LLC owns the remaining 49% of the outstanding capital stock. We jointly formed
Integrated Technologies, Inc. for the purpose of jointly developing, marketing
and licensing a new brand of remote transmittal monitoring products from our
combined technologies. Integrated Technologies, Inc. as the licensee of the
technologies owned by Austin Tech, LLC, has also entered into a form of license
agreement directly with us for the purpose of having access to our technologies
for joint development purposes. The license agreements granted to Integrated
6
Technologies, Inc. by Austin Tech, LLC and by us, expire on January 1, 2005
unless terminated earlier under the provisions of the agreements. The terms of
the licenses granted to Integrated Technologies, Inc. are exclusive, royalty
free and are geographically limited to certain territories described in the
license agreements, which include the United States, Canada, Middle Eastern
countries, several Northern European countries, Mexico and Brazil.
GOVERNMENT CONTRACT FUNDING
---------------------------
Historically, we have generated contract revenue by seeking research and
development contracts awarded by agencies of the United States government, such
as the U.S. Air Force. In developing our contract revenue, we have enlisted the
assistance of research and development partners that have used us as
subcontractors in the research and development effort. In August 1996, we
executed an agreement entitled, "Teaming Agreement," with the Southwest Research
Institute and the University of Pennsylvania for coordinated research and
development efforts.
We have also entered into similar relationships with Universal Technology
Corporation, which is a government contractor that acts as a pass-through or
monitor of our contracts. Universal Technology Corporation has acted as the
prime contractor with the Air Force, and we function as a first tier
subcontractor. Other than our association with these groups as research and
development partners, we have no other affiliation. Our contract revenue from
all sources of research and development agreements concluded in the third
quarter of fiscal year 2002, and we do not have any additional contract revenue
anticipated during the next 12 months.
On February 25, 1997, the Southwest Research Institute was awarded from the
United States Air Force, a $2,500,000 phase one contract to determine the
feasibility of the EFS to improve the U.S. Air Force capability to perform
durability assessments of military aircraft, including air frames and engines
through the application of the EFS to specific military aircraft alloys. Our
share of this award was approximately $550,000. On June 18, 1998 Universal
Technology Corporation, one of our contracting partners, was awarded a second
contract in the amount of $2,061,642 to determine the applicability of the EFS
to improve the U. S. Air Force capability to perform durability assessments of
military aircraft, including both air frames and engines through the application
of the EFS to specific military aircraft alloys. Our share of this award was
approximately $538,000. On February 5, 1999, a third contract in the amount of
$2,000,000 was awarded to Universal Technology Corporation to continue and
expand the efforts for turbine engines. Our directly subcontracted share was
approximately $382,000. A fourth contract was awarded to Universal Technology
Corporation on November 3, 2000 in the amount of approximately $2,000,000 to
continue the borescope and EFS technologies, as well as alternate means of
fatigue sensing. This fourth contract has been fully performed. Our directly
subcontracted share is approximately $700,000. Accordingly, over the last four
years we have been awarded approximately $8,500,000 in research and develop
services covering the EFS. The results of this research are encouraging and
provide a basis for us and our contract partners to obtain additional funding.
However, we cannot provide any assurance that additional contract revenue will
be generated by us or received in the future.
7
COMMERCIAL MARKETS FOR OUR PRODUCTS AND TECHNOLOGIES
----------------------------------------------------
No commercial application of our products has been arranged to date, but the
technology has matured to a point where 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. We anticipate that our
planned supply and licensing arrangement with Optim, Incorporated for the
commercial sale and distribution of the OptiSpec Flaw Detection System, will
begin to generate material product sales from the borescope, in the third
quarter of the current fiscal year. We cannot provide assurances that the
marketing and distribution of the OptiSpec Flaw Detection System will in fact
occur at any specific time in the future due to the possibility that we may not
enter into a formal agreements with Optim Incorporated or if we do, we may
experience delays or difficulties in the initial marketing, sales and
distribution of the product. Nor can we provide assurances that our results of
operations and our financial condition will materially improve from the planned
commercial distribution of the OptiSpec Flaw Detection System.
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
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.
OUR PATENT PROTECTIONS
----------------------
We are the assignee of four patents originally issued to Tensiodyne Corporation.
The first was issued on May 27, 1986, and expires on May 27, 2003. It is titled
"Device for Monitoring Fatigue Life" and bears United States Patent Office
Numbers 4,590,804. The second patent, titled "Method of Making a Device for
Monitoring Fatigue Life" was issued on February 3, 1987 and expires February 3,
2004, United States Patent Office Number 4,639,997. The third patent, titled
"Metal Fatigue Detector" was issued on August 24, 1993 and expires on August 24,
2010, United States Patent Number 5,237,875. The fourth patent, titled "Device
for Monitoring the Fatigue Life of a Structural Member and a Method of Making
Same," was issued on June 14, 1994 and expires on June 14, 2011, United States
Patent Number 5,319,982. In addition, we own a fifth patent, titled "Device for
Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,"
8
which was issued June 20, 1995, United States Patent Number 5,425,274, and
expires June 20, 2012.
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, 2001,
and 2002, the future royalty commitment was limited to $227,149 and $252,136,
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, 2001, and 2002, the
total future royalty commitments, including the accumulated 26% annual rate of
return, were limited to approximately $1,725,234, and $2,173,795, respectively.
On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our
shareholders. We gave Mr. Sherman 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 March 31, 2003, we owe Mr. Baker approximately $60,000 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
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
9
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 through June 30, 2003. The Company has an option to extend the
lease at the same rent through December 31, 2003.
Matech owns a remote monitoring system and certain equipment that is being used
by the University of Pennsylvania for instructional and testing purposes. The
Company determined that the system has no future use and probably cannot be
sold. Therefore, the Company charged its full costs of $97,160 to operations in
1998.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
None.
10
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 MTEY.
From January 2001 through December 31, 2002, Matech's Common Stock was quoted
between a low bid of $.08 per share and a high bid of $2.875 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 following chart shows the high and low bid prices per
share per calendar quarter from January 2001 to December 2002.
High Bid Price (1) Low Bid Price (1)
------------------ -----------------
First Quarter 2001 $ .23 $ .09
Second Quarter 2001 $ .12 $ .08
Third Quarter 2001 $ .22 $ .084
Fourth Quarter 2001 $ .25 $ .10
First Quarter 2002 $ .27 $ .10
Second Quarter 2002 $ .10 $ .07
Third Quarter 2002 $ .02 $ .02
Fourth Quarter 2002 $ .015 $ .015
On December 31, 2002, there were 733 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 2001 or 2002, nor are any dividends contemplated in the foreseeable
future.
At various times during the years 2001 and 2002, 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.
11
COMMON STOCK ISSUANCES IN 2003
------------------------------
On January 7, 2003, the Company issued 260,000 shares of its common stock to Mr.
Stephen Beck pursuant to the anti-dilution provisions of his settlement
agreement.
On January 22, 2003, the Company issued 2,000,000 shares of its common stock for
legal services.
On January 23, 2003, the Company issued 312,500 shares of its common stock for
consulting services.
On January 30, 2003, the Company issued 2,046,933 shares of its common stock
through its Regulation S offering.
On February 10, 2003, the Company issued 2,549,620 to various consultants
pertaining to its Regulation S offering.
On March 4, 2003, the Company issued 1,500,000 shares of its common stock for
legal services.
On March 11, 2003, the Company issued 300,000 shares of its common stock for
consulting services.
On March 11, 2003, the Company issued 1,500,000 shares of its common stock for
legal services.
On March 11, 2003, the Company cancelled 260,000 of its common stock that was
held in reserve for issuance to Mr. Beck pursuant to the anti-dilution
provisions of his settlement agreement.
COMMON STOCK ISSUANCES IN 2002
------------------------------
Since the end of our last fiscal year, the Company has had a series of
transactions resulting in the issuance of shares of our common stock, all of
which we believe were exempt from registration under the Securities Act of 1933.
Each of these transactions is described below:
On January 9, 2002, the Company issued 14,300 shares of its common stock through
its Regulation S offering.
On January 10, 2002, the Company issued 20,000 shares of its common stock to a
consultant for services rendered.
On January 17, 2002, the Company issued 213,500 shares of its common stock
through its Regulation S offering.
On January 22, 2002, the Company issued 40,000,000 shares of its common stock to
Allied Boston pursuant to the terms of the Straight Documentary Credit as
discussed in Note 9(i) to the financial statements.
12
On January 25, 2002, the Company issued 15,000 shares of its common stock to a
consultant for services rendered.
On January 30, 2002, the Company issued 296,500 shares of its common stock
through its Regulation S offering.
On February 11, 2002, the Company issued 4,000 shares of its common stock to a
consultant for services rendered.
Also on February 11, 2002, the Company issued 150,000 shares of its common stock
to a consultant for services rendered.
On February 13, 2002, the Company issued 400,000 shares of its common stock to a
consultant for services rendered.
On February 20, 2002, the Company issued 195,000 shares of its common stock
through its Regulation S offering.
On February 27, 2002, the Company issued 50,000 shares of its common stock to a
consultant for services rendered.
On February 28, 2002, the Company issued 250,000 shares of its common stock to a
consultant for services rendered.
Also on February 28, 2002, the Company issued 100,000 shares of its common stock
to a consultant for services rendered.
Also on February 28, 2002, the Company issued its Executive Assistant 25,000
shares of its common stock for services rendered.
Also on February 28, 2002 the Company issued 50,000 shares of its common stock
to a consultant for services rendered.
On March 1, 2002, the Company issued 100,000 shares of its common stock to a
consultant for services rendered.
Also on March 1, 2002, the Company issued 100,000 shares of its common stock to
a consultant for services rendered.
Also on March 1, 2002, the Company issued 580,824 shares of its common stock
through its Regulation S offering.
On March 12, 2002, the Company issued 5,000 shares of its common stock to a
consultant for services rendered.
13
Also on March 12, 2002, the Company issued 180,000 shares of its common stock to
a consultant for services rendered.
Also on March 12, 2002, the Company issued 180,000 shares of its common stock to
a consultant for services rendered.
On March 13, 2002, the Company issued 125,000 shares of its common stock for
legal services. Also on March 13, 2002, the Company issued 150,000 shares of its
common stock to a consultant for services rendered.
On March 19, 2002, the Company issued 150,000 shares of its common stock through
its Regulation S offering.
On March 20, 2002, the Company issued 25,000 shares of its common stock to The
Company's executive assistant.
On March 26, 2002, the Company issued to two members of its advisory board a
total of 469,918 shares of its common stock for consulting services rendered.
On March 26, 2002, the Company issued 1,096,476 shares of its common stock to
the University of Pennsylvania pursuant to the terms of its licensing agreement.
On March 27, 2002, the Company issued its executive assistant 25,000 shares of
its common stock.
On March 31, 2002, the Company issued 4,000 shares its common stock for clerical
services rendered.
On April 1, 2002, the Company issued to 120,000 shares of its common stock for
legal services rendered.
On April 5, 2002, the Company issued 2,046,580 shares of its common stock
through its Regulation S offering.
On April 10, 2002, the Company issued to 42,100 shares of its common stock for
legal services rendered.
On April 12, 2002, the Company issued to 105,000 shares of its common stock for
legal services rendered.
On April 22, 2002, the Company issued 154,100 shares of its common stock through
its Regulation S offering.
On April 23, 2002, the Company issued 550,000 shares of its common stock for
consulting services rendered.
14
On May 6, 2002, the Company issued 674,267 shares of its common stock to various
consultants.
On May 6, 2002, the Company issued 215,000 shares of its common stock for legal
services rendered.
On May 8, 2002, the Company issued 415,000 shares of its common stock through
its Regulation S offering.
On May 10, 2002, the Company issued 115,000 shares of its common stock for legal
services rendered.
On May 17, 2002, the Company issued 400,000 shares of its common stock for
consulting services rendered.
On May 21, 2002, the Company issued 1,000,000 shares of its common stock for
legal services rendered.
On May 27, 2002, the Company issued 562,704 shares of its common stock through
its Regulation S offering.
On May 29, 2002, the Company issued 50,000 shares of its common stock for
consulting services rendered.
On June 3, 2002, the Company issued 150,000 shares of its common stock for
consulting services rendered.
On June 3, 2002, the Company issued 50,000 shares of its common stock for legal
services rendered.
On July 3, 2002, the Company issued 1,000,000 shares of its common stock for
legal services rendered.
On July 3, 2002, the Company issued 250,000 shares of its common stock for
consulting services rendered.
On July 8, 2002, the Company issued 200,000 shares of its common stock for legal
services rendered.
On July 8, 2002, the Company issued 200,000 shares of its common stock for
consulting services rendered.
On July 26, 2002, the Company issued 1,000,000 shares of its common stock TO Mr.
Stephen Beck for services rendered pursuant to a settlement agreement.
15
On July 26, 2002, the Company issued 3,563,300 shares of its common stock
through its Regulation S offering.
On August 5, 2002, the Company issued 2,000,000 shares of its common stock to
two employees for services rendered in connection for the development of the
fatigue fuse.
On August 5, 2002, the Company issued 230,000 shares of its common stock for
legal services.
On August 14, 2002, the Company issued 1,000,000 shares of its common stock for
legal services.
On August 16, 2002, the Company issued 749,260 shares of its common stock
through its Regulation S offering.
On August 29, 2002, the Company issued 1,000,000 shares of its common stock for
legal services.
On September 5, 2002, the Company issued 300,000 shares of its common stock for
consulting services rendered.
On September 5, 2002, the Company placed in reserve 2,000,000 shares of its
common stock pursuant to the terms of the settlement agreement with Stephen
Beck.
On September 5, 2002, the Company issued 75,000 shares of its common stock for
legal services.
On September 5, 2002, the Company issued 771,040 shares of its common stock for
services rendered in connection with its Regulation S offering.
On September 10, 2002, the Company issued 2,000,000 shares of its common stock
for consulting services.
On September 11, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.
On September 11, 2002, the Company issued 2,500,000 shares of its common stock
for legal services.
On October 7, 2002, the Company issued 2,500,000 shares of its common stock for
consulting services.
On October 7, 2002, the Company issued its executive assistant 50,000 shares of
its common stock.
On October 10, 2002, the Company issued 500,000 shares of its common stock for
services rendered in connection with its Regulation S offering.
On October 18, 2002, the Company issued 11,445,872 shares of its common stock
through its Regulation S offering.
16
On October 29, 2002, the Company issued 250,000 shares of its common stock for
consulting services.
On November 6, 2002, the Company issued 1,077,500 shares of its common stock
through its Regulation S offering.
On November 25, 2002, the Company issued 912,000 shares of its common stock
through its Regulation S offering.
On December 5, 2002, the Company issued 650,000 shares of its common stock for
consulting services.
On December 5, 2002, the Company issued 250,000 shares of its common stock for
legal services.
On December 15, 2002, the Company issued 1,000,000 shares of its common stock to
a member of the Company's advisory board.
On December 16, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.
On December 17, 2002, the Company issued 3,950,000 shares of its common stock
through its Regulation S offering.
On December 18, 2002, the Company issued 13,000,000 shares of its common stock
to its president for past services.
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.
COMMON STOCK ISSUANCES IN 2001
------------------------------
During 2001, the Company has had a series of transactions resulting in the
issuance of shares of our common stock, all of which we believe were exempt from
registration under the Securities Act of 1933. Each of these transactions is
described below:
On January 8, 2001, the Company issued 100,000 shares of its common stock to Mr.
Campbell Laird, a member of the Company's advisory board, for consulting
services.
17
Also on January 8, 2001, the Company issued 50,000 shares of its common stock to
a consultant for services rendered.
On January 9, 2001, the Company issued 100,000 shares each to Mr. John Goodman
and Mr. William Berks, two employees, pertaining to services rendered on the
Company's research project. Mr. Goodman is also a member of the Company's Board
of Directors.
On January 11, 2001, the Company issued 100,000 shares of its common stock to
the attorney handling the Beck matter for legal services.
On February 19, 2001, the Company's Board of Directors authorized the issuance
of 6,000,000 shares of its common stock to the Company's President for past
compensation due.
On April 6, 2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered.
On April 17, 2001, the Company issued a consultant 250,000 shares of its common
stock for services rendered.
On April 20, 2001, the Company issued to two consultant 50,000 shares each of
its common stock for marketing services rendered.
On May 3, 2001, the Company issued 100,000 shares of its common stock to Mr.
Berks for services rendered on the Company's research project.
Also on May 3, 2001, the Company issued 100,000 shares of its common stock to
Mr. Thomas Root, a member of the Company's advisory board, for consulting
services.
On June 8, 2001, the Company issued a consultant 1,000,000 shares of its common
stock for past marketing services rendered.
On June 12, 2001, the Company issued its Executive Assistant 25,000 shares of
its common stock for services rendered.
On July 5, 2001, the Company issued to an attorney 50,000 shares of its common
stock for legal services rendered.
On July 26, 2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered.
18
On August 6, 2001, the Company issued to Mr. Samuel Schwartz, a member of the
Company's advisory board, 125,000 shares of its common stock for services
rendered.
On August 9, 2001, the Company issued 265,000 shares of its common stock to the
attorney handling the Beck matter for legal services rendered.
On August 29, 2001, the Company issued 50,000 shares of its common stock to one
consultant and 300,000 shares of its common stock to Mr. Samuel Schwartz, for
services rendered.
On September 6, 2001, the Company issued a consultant 37,500 shares of its
common stock for services rendered.
On September 14, 2001, the Company issued a consultant 50,000 shares of its
common stock for services rendered.
On September 19, 2001, the Company issued a consultant 125,000 shares of its
common stock for services rendered.
On October 8, 2001, the Company issued to Mr. Goodman and Mr. Berks, 300,000
shares of its common stock each for services rendered in connection with the
Company's research project.
On October 16, 2001, the Company issued a consultant 50,000 shares of its common
stock for services rendered.
On October 18, 2001, the Company issued its Executive Assistant 20,000 shares of
its common stock for services rendered.
On October 23, 2001, the Company issued to the attorney handling the Beck
matter, 150,000 shares of its common stock for services rendered.
On October 24, 2001, the Company issued 60,000,000 shares of its common stock to
Allied Boston pursuant to the terms of the Straight Documentary Credit as
discussed in Note 9(i) to the financial statements.
On October 25, 2001, the Company issued 697,853 as additional fees pertaining to
its Regulation S offering.
On October 30, 2001, the Company issued 4,538,458 shares of its common stock
pursuant to its Regulation S offering.
19
On November 5, 2001, the Company issued 84,500 shares of its common stock
pursuant to its Regulation S offering.
On November 6, 2001, the Company issued 350,000 shares of its common stock to an
attorney assisting in the Beck matter for legal services rendered.
On November 14, 2001, the Company issued a consultant 150,000 shares of its
common stock for services rendered.
On November 17, 2001, the Company issued to the same consultant 107,500 shares
of its common stock for services rendered.
On November 19, 2001, the Company issued 10,000 shares of its common stock
pursuant to its Regulation S offering.
On November 20, 2001, the Company issued 144,000 shares of its common stock
pursuant to its Regulation S offering.
On November 28, 2001, the Company issued 90,000 shares of its common stock
pursuant to its Regulation S offering.
On December 4, 2001, the Company issued 81,400 shares of its common stock
pursuant to its Regulation S offering.
On December 20, 2001, the Company issued to three consultants a total of 530,000
shares of its common stock for marketing services rendered.
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.
Fiscal Year Ending December 31, Inception
---------------------------------------------------------------------------------- to
1998 1999 2000 2001 2002 December 31,
(restated) (restated) 2002
-------------- -------------- -------------- -------------- -------------- --------------
Net Sales $ -- $ -- $ -- $ -- $ -- $ --
Income from Research
Development Contract $ 373,324 $ 924,484 $ 635,868 $ 1,579,823 $ 461,323 $ 5,024,812
20
Income (Loss) from
Continued
Operations $ (549,187) $ (539,283) $ (1,241,690) $ (3,546,574) $ (3,785,818) $ (12,185,680)
Income (Loss) from
Continued Operations Per
Common Share $ (.06) $ (.04) $ (.06) $ (.11) $ (.06)
Basic Weighted
Average - Common
Shares Outstanding 8,782,808 12,242,534 18,900,019 33,640,393 63,073,970
Total Assets $ 233,746 $ 250,041 $ 108,776 $ 516,282 $ 372,620
Total Liabilities $ 618,582 $ 719,178 $ 870,586 $ 819,236 $ 1,154,696
Redeemable Preferred
Stock $ -- $ -- $ -- $ -- $ --
Total Stockholders'
Equity (Deficit) $ (485,432) $ (620,545) $ (710,459) $ (680,414) $ (2,094,317)
Dividends $ -- $ -- $ -- $ -- $ --
Statements of operations for the years 2000 and 2001 have been restated to
reflect shares issued at the respective share's market value at date of
issuance.
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, 2000, 2001, and 2002.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
----------------------------------------------------------------------
In 2002, we completed our two subcontracts on programs with the United States
Air Force for application engineering and enhancement of the EFS and earned
$461,323. In 2001, and 2000, we earned $1,579,823, and $635,868, respectively,
from the same two subcontracts. 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
21
$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 2000,
interest income was $103,419, the majority of which pertains to interest
accruing on subscriptions due from the Company's president and a director. The
major difference in the amount of accrued interest in 2002 as compared to 2001
and 2000 pertains to the June 2001 modification of certain stock subscription
agreements that reduced the amounts due from the President and a Director from
$1,995,000 to $495,000. Our sole source of contract revenue from our research
and development contracts with the United States Air Force concluded in the
second quarter of 2002 and we have not replaced any contract revenue since that
contract concluded.
COSTS AND EXPENSES
------------------
Expenses for 2001 and 2000 have been restated to reflect the value of all
services which were compensated through the issuance of our common stock at the
quoted market price of the shares issued on the date of issuance.
Research and development costs were $665,435, $1,493,628, and $496,501, for
2002, 2001, and 2000, respectively. Of the R&D costs incurred, $400,201,
$1,069,671, and $409,823 related to subcontractor costs, for the years 2002,
2001, and 2000,respectively. General and administrative costs were $3,581,706,
$3,632,769, and $1,381,047 for 2002, 2001, and 2000, respectively.
In 2002, actual 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 13,000,000 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 2,027,639 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 7,750,000 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 10,881,118 shares of
our common stock, Other expenses in 2002 included consulting services of
$940,160 of which $662,098 was paid through the issuance of 10,881,118 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, actual 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 4,650,000 and 350,000 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 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
22
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 6,000,000 shares of restricted common stock to Mr. Bernstein during
2001, valued at $1,128,000, for past compensation due to him. Previously, the
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 6,000,000 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 2,275,000 shares of our common stock, legal
fees of 256,736 of which $138,750 was paid through the issuance of 915,000
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.
The major costs in 2000 were officer's salary of $127,183, consulting fees of
$856.202, legal fees of $206,198, accounting and auditing fees of $23,063, and
travel costs of $26,443.
Interest charged to operations for 2002, 2001 and 2000, amounted to $118,460 and
$70,468, and $60,634, respectively. 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. Of the $60,634 incurred in 2000, $54,638 was accrued on the note
due to the University of Pennsylvania.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
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. Also in 2001, the Company
entered into an agreement with Allied Boston International for a Straight
Documentary Credit for $12,500.000.The funding under this instrument is also not
guaranteed. If the $12,500,000 is raised, Management believes the amount should
be sufficient to fund the completion of its research projects and bring them to
market. Although Mr. Bernstein intends to continue to loan the Company funds as
23
required while it seeks additional financing, he is under no obligation to do
so. The Company does not expect to receive any additional material financing
from its other long time investors.
During 2000, the Company received $746,732 from its research and development
contract, $22,490 from the sale of its common stock, and $251,798 from the sale
of DCH Technologies, Inc., shares. The Company's president advanced $8,000 and
received $39,500 from the Company. In 2000, the Company spent $1,035,470 in its
operations, and $15,000 was invested in Antaeus Research, LLC.
As of December 31, 2002, the Company's liquid assets totaled $251,782. At the
Company's current level of spending in meeting its operating overhead, these
funds should allow the Company to continue operating through the second quarter
of 2003. Although the Company will continue to attempt to raise capital in order
to fund subsequent month's operations, no assurance can be made that these funds
will be raised.
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 two 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 subcontracts with the Air Force 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 fatigue fuse and
sensor 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. All other services provided in exchange for other
non-monetary consideration is valued at either the fair value of the services
received or the fair value of the consideration relinquished, whichever is more
readably determinable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Not Applicable.
24
ITEM 8. FINANCIAL STATEMENTS
-----------------------------
Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as of December 31, 2002, 2001, and 2000, prepared
in accordance with Regulation S-X (17 CFR Sec.210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
--------------------------------------------------------------------------------
DISCLOSURE
----------
None.
ITEM 9A. CONTROLS AND PROCEDURES.
----------------------------------
Material Technologies, Inc. management, including the Principal Executive
Officer and Principal Financial Officer, have 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 and Principal Financial 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 them 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 and Principal Financial Officer completed their
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 68 President/Chief Executive and Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 43 Secretary/Director
Dr. John Goodman 68 Chief Engineer/Director
William I. Berks 72 Vice President of Government Projects
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 68 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.
25
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
became Chairman of the Board, President, Chief Financial Officer, and CEO of
Material Technology, Inc., a predecessor of the company, and retained these
positions with the Company after the July 31, 1997 spin off.
JOEL R. FREEDMAN, SECRETARY/DIRECTOR. Joel R. Freedman is 43 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 68 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 OF GOVERNMENT PROJECTS. 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.
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
26
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:
ADM. ROBERT P. COOGAN, USN (Ret.). Robert P. Coogan, age 75, retired from a
distinguished naval career spanning 40 years during which he held numerous posts
including: Commander U.S. Third Fleet, Commander Naval Air Force - U.S. Pacific
Fleet, Commandant of Midshipmen - U.S. Naval Academy, and Chief of Staff -
Commander Naval Air Force - U.S. Atlantic Fleet. From 1980 to 1991 he was with
Aerojet General Company and served as Executive Vice President of Aerojet
Electrosystems Co. from 1982-1991. He has his BS in Engineering from the US
Naval Academy and MA in International Affairs from George Washington University.
ROBERT F. CUSHMAN, ESQ. Mr. Cushman is a partner in the Philadelphia office of
Pepper Hamilton LLP, is also the permanent chairman of the Andrews Conference
Group Construction Super Conference, and is the organizing chairman of the
Forbes Magazine Conferences on Worldwide Infrastructure Partnerships, Rebuilding
America's Infrastructure Conference, Alternative Dispute Resolution, the Forbes/
Council of the Americas Latin American Marketing Conference and the Forbes
Environmental Super Conference.
CAMPBELL LAIRD. Campbell Laird, age 63, 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 100,000 shares of our common stock which were
valued at $18,800 for services rendered in connection with the development of
our EFS.
During 2002, we issued Dr. Laird 234,959 shares of our common stock which were
valued at $32,894 for services rendered in connection with the development of
our EFS.
T.Y. LIN. Mr. Lin graduated from Tangshan College, Jiaotong University, and
received a M.S. degree in Civil Engineering from the University of California at
Berkeley. Since 1934, he taught and practiced civil engineering in China and the
U.S. and planned and designed highways, railways, and over 1,000 bridges and
buildings in Asia and the Americas. He is known as Mr. Prestressed Concrete in
the U.S., having pioneered both the technology and industry in the 1950s. He
authored and co-authored three textbooks in structural engineering and more than
100 technical papers. He was the founder of T.Y. Lin International that provides
design and analysis for all types of concrete and steel structures and pioneered
the design of long-span structures, prestressing technology, and new design and
construction methods over the past 40 years.
Y.C. YANG. Mr. Yang is a pioneer in "value engineering" which optimized many
projects with economic te-designs. He is a recipient of the 1988 Jiaotong
University Outstanding Alumnus Award, a citation from Engineering News Record,
and the ACI Mason Award. With their partnership dating back to wartime China in
the early 1940s, Mr. Lin and Mr. Yang established their international stature in
the U.S. over the five decades that followed. In 1992, they formed the San
27
Francisco, CA headquartered firm, Lin Tung-Yen China, Inc., to continue their
tradition of excellence and innovation in structural and civil engineering and
to serve as a bridge between East and West. The firm serves its clients through
various tasks, ranging from planning and designs to construction management and
the introduction of financing.
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.
During 2001, we issued Mr. Schwartz 125,000 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 1,000,000 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 2002, we issued Mr.Simionescu 250,000 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
28
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.
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 2002, we issued Ms. Manes 500,000 shares of our common stock which were
valued at $17,500 for consulting services rendered in connection with the
development of foreign markets for our products, when developed.for commercial
application.
DR. A. EMIN AKTAN. Dr. Aktan is the John Roebling Professor of Infrastructure
Studies at Drexel University Department of Civil Engineering and Architecture.
He is the director of Drexel Intelligent Infrastructure & Transportation Safety
Institute. His research interest is system identification and health monitoring
for management of civil infrastructure systems (CIS) while generating
fundamental knowledge regarding the actual behavior and loading environments of
constructed facilities. Dr. Aktan received a Ph.D. in Earthquake Structural
Engineering from the University of Illinois at Urbana-Champaign in 1973 and
served as a Post-Doctorate associate at University of California at Berkeley for
five years. Dr. Aktan has held faculty positions at Middle East Technical
University, Louisiana State University and University of Cincinnati before
joining Drexel University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
On March 27, 2001, Mr. Robert Bernstein, Chief Executive Officer and Chairman
filed a Form 5 relating to several transactions of stock issued to him in 2000
and a Form 4 for a January 2001 transaction. Mr. Bernstein was late in reporting
these transactions.
On March 27, 2001, Dr. John Goodman, Director filed a Form 4 for a transaction
in January 2001.
The Company is unaware of any other late filings or any other failures to file
any Form 3, 4, or 5.
29
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
===================================================================================================================================
Other
Name and Annual Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) (SARs (#) Payout($) sation ($)
----------------------- ---- ---------- --------- ---------- --------------- --------- --------- ----------
Robert M. Bernstein CEO 2000 $ 120,000 $ -- $ -- $ 4,183 (1) -- $ -- $ --
2001 $ 120,000 $ -- $ -- $ 1,128,000 (2) -- $ -- $ --
$ 1,395,000 (3) -- $ -- $ --
2002 $ 120,000 $ -- $ -- $ 200 (4) -- $ -- $ --
$ 260,000 (5)
John W. Goodman 2000 $ 26,614 $ -- $ -- $ -- -- $ -- $ --
Director and 2001 $ 23,076 $ -- $ -- $ 147,600 (6) -- $ -- $ --
Engineer 2002 $ 17,945 $ -- $ -- $ 40,000 (7) -- $ -- $ --
William Berks 2000 $ -- $ -- $ 39,235 $ -- -- $ -- $ --
Vice-President 2001 $ 55,388 $ -- $ -- $ 147,600 (6) -- $ -- $ --
of Government 2002 $ 70,301 $ -- $ -- $ 40,000 (7) -- $ -- $ --
Projects
===================================================================================================================================
(1) In 2000, the Corporation issued to Mr. Bernstein as escrow holder 4,183,675
shares of its common stock, in part, for future compensation and subject to
severe restrictions. The Company included the par value of the shares
issued in Mr. Bernstein's 2000 compensation amounting to $4,183.
(2) In 2001, the Corporation issued Mr. Bernstein 6,000,000 shares for past
compensation (see item 5). The Company valued these shares at $1,128,000.
(3) In 2001, the Company reduced the obligation from Mr. Bernstein to the
Company on a non-recourse promissory note relating to the issuance of
4,650,000 shares of its common stock from $1,855,350 to $460,350.
(4) 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.
(5) In 2002, the Company issued 13,000,000 shares of its common stock to Mr.
Bernstein for past compensation. The shares were valued at $260,000.
(6) In 2001, the Corporation issued each to Mr. Goodman and Mr. Berks 900,000
shares of restricted common stock. These shares were valued at $147,500.
(7) In 2002, the Corporation issued each to Mr. Goodman and to Mr. Berks
1,000,000 shares of restricted common stock. Each issuance was valued at
$40,000.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
--------------------------------------------------------------------------------
2002
----
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 27,800,966 Shares 25.45%(1)
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Joel R. Freedman, Director 626,471 Shares .57%
1 Bala Plaza
Bala Cynwyd, PA 19004
31
John Goodman, Director 2,000,000 Shares 1.83%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
William Berks, Vice President
Government Projects
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049 2,000,000 Shares 1.83%
Directors and executive 32,427,437 Shares 29.68%
officers as a group
(3 persons)
Class B Robert M. Bernstein 300,000 Shares 100.00%(2)
Common Stock Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
(1) Of these 27,800,966 shares, Mr. Bernstein has full rights to approximately
25,339,291 shares. The remaining 2,461,675 shares held are in escrow. On October
27, 2000, the Company issued 4,183,675 shares to Mr. Bernstein 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 4,183,675 shares will also be escrowed under
the same terms of the agreement. 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
Mr. Bernstein thereby reducing the number of shares he holds. The shares held in
escrow are non-transferable and will be granted to Mr. Bernstein 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 of Mr. Bernstein 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 Mr. Bernstein, the
shares issued will be valued at market value when issued and charged to
operations as compensation. As of the date of this filing, 1,722,000 of these
4,183,675 shares had been transferred to satisfy a stock agreement. Accordingly,
2,461,675 of these escrowed shares are included in the total of 26,544,847
shares beneficially owned by Mr. Bernstein. (See, Note 11 to Financial
Statements.)
(2) 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 100 million shares of voting control .
These votes give Mr. Bernstein voting control of the Company.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (SEE NOTE 11 TO
------------------------------------------------------------------------
FINANCIAL STATEMENTS.)
----------------------
In August, 1997, the Company's Board of Directors signed a resolution
recognizing the Company's extreme dependence on the experience, contacts, and
efforts of Mr. Bernstein and authorized to pay him a salary of $150,000 a year
since 1991. In February 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its Common Stock to the Company's President for
of past compensation due to Mr. Bernstein under this resolution. These shares
were originally valued at $360,000 which represents the difference between the
$150,000 a year and the compensation actually accrued during the years 1991
through 2000. However, the 6,000,000 shares have been revalued to $1,128,000
using the market price of the shares at date of issuance.
On May 25, 2000, the Company issued its President 4,650,000 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%. Approximately 1,500,000 of these
shares are subject to an option to purchase by a third party. 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%. Both notes mature on May 25, 2005, when the
principal and accrued interest becomes fully due and payable. 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. 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
operations as compensation.
On October 27, 2000, the Company issued 4,183,675 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
4,183,675 shares will also be escrowed under the same terms of the agreement.
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. Due to the restrictions imposed on these
shares, the Company valued these shares at par and charged the $4,183 to
operations..Upon the actual grant of the remaining shares to the President, the
shares issued will be valued its market value when issued and charged to
operations as compensation. (See, Exhibit 4.3.)
On January 9, 2001, the Company's Board of Directors authorizes the issuance of
100,000 shares of its common stock to William Berks, a part-time employee, for
engineering and other services rendered to the Company.
33
On January 8, 2001, the Company's Board of Directors authorized the issuance of
100,000 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
100,000 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
100,000 shares 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 6,000,000 shares 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
100,000 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
25,000 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
300,000 shares of its common stock each to Mr. William Berks and Mr. John
Goodman for services rendered to the Company.
On October 18, 2001, the Company's Board of Directors authorized the issuance of
20,000 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 400,000 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 25,000
shares of its common stock for services rendered.
On March 20, 2002, the Company issued 25,000 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
1,000,000 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 50,000 shares of
its common stock.
On December 6, 2002, the Company issued 200,000 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 13,000,000 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.
34
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 in connection with
Technologies, Inc. S-1 Registration Statement that became
effective on July 31, 1997.
Certificate of Amendment, February 16, 2000 1
Certificate of Amendment, July 12, 2000 3
Certificate of Amendment, July 31, 2000 4
3(ii) Bylaws of Material Technologies, Inc. Previously filed with July 31,
1997 S-1
4.1 Class A Convertible Preferred Stock Previously filed with July 31,
Certificate of Designations 1997 S-1
4.2 Class B Convertible Preferred Stock Previously filed with July 31,
Certificate of Designations 1997 S-1
4.3 Material Technologies, Inc. Stock Escrow/Grant 6
10.1 License Agreement Between Tensiodyne Previously filed with July 31,
Corporation and the Trustees of the 1997 S-1
University of Pennsylvania
10.2 Sponsored Research Agreement between Tensiodyne Previously filed with July 31,
Corporation and the Trustees of the University 1997 S-1
of Pennsylvania
10.3 Amendment 1 to License Agreement Between Previously filed with July 31,
Tensiodyne Scientific Corporation and the 1997 S-1
Trustees of the University of Pennsylvania
10.4 Repayment Agreement Between Tensiodyne Previously filed with July 31,
Scientific Corporation and the Trustees of the 1997 S-1
University of Pennsylvania
10.5 Teaming Agreement Between Tensiodyne Scientific Previously filed with July 31,
Corporation and Southwest Research Institute 1997 S-1
10.6 Letter Agreement between Tensiodyne Scientific Previously filed with July 31,
Corporation, Robert M. Bernstein, and Stephen 1997 S-1
Forrest Beck and Handwritten modification.
35
10.7 Agreement Between Tensiodyne Corporation and Previously filed
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.
b. Reports on Form 8-K - none.
c. Financial Statements - attached.
36
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, 2003
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, 2003
By: /s/ Joel Freedman
------------------------------
Joel Freedman, Secretary and Director
Date: March 23, 2003
By: /s/ John Goodman
------------------------------
John Goodman, Director
Date: March 23, 2003
37
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
Contents
--------
Page
------
Independent Auditors' Report F-1
Balance Sheets F-2
Statements of Operations F-4
Statement of Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-12
Notes to Financial Statements F-14
F-i
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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discuss in Note 15 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency, which raises substantial doubt about the its ability to
continue as a going concern. Management's plans regarding those matters also are
also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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)
BALANCE SHEETS
================================================================================================================
December 31, December 31,
2001 2002
---------------- ----------------
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 174,469 $ 251,782
Receivable due on research contract 285,677 -
Receivable from officer 35,880 76,109
Employee receivable - 1,433
Prepaid expense - 1,179
---------------- ----------------
TOTAL CURRENT ASSETS 496,026 330,503
---------------- ----------------
FIXED ASSETS
Property and equipment, net
of accumulated depreciation 2,708 27,649
---------------- ----------------
OTHER ASSETS
Intangible assets:
Patents and other, subject to amortization 15,200 12,120
Refundable deposit 2,348 2,348
---------------- ----------------
TOTAL OTHER ASSETS 17,548 14,468
---------------- ----------------
TOTAL ASSETS $ 516,282 $ 372,620
================ ================
See accompanying notes
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
================================================================================================================
December 31, December 31,
2001 2002
---------------- ----------------
(Restated)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Legal fees payable $ 282,950 $ 216,783
Fees payable to R&D subcontractor 196,043 -
Accounting fees payable 42,417 22,443
Other accounts payable 14,326 15,736
Accrued expenses 43,213 33,880
Accrued officer wages 70,000 75,482
Notes payable - current portion 25,688 25,688
Payable on research and
development sponsorship 422,653 498,731
Loans payable - others 57,406 59,028
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,154,696 947,771
LONG-TERM DEBT - 1,519,166
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Common Stock, $.001 par value, authorized 399,700,000
shares, issued and outstanding 42,433,378 at December
31, 2001 and 109,228,185 shares at December 31, 2002, Shares
held in reserve 60,000,000 at December 31, 2001 and 101,602,800
at December 31, 2002 42,433 109,228
Class B Common Stock, $.001 par value, authorized 300,000
Shares, issued and outstanding 100,000 shares at
December 31, 2001, and 300,000 at December 31, 2002 100 300
Preferred stock, $.001 par value, authorized 50,000,000 Shares,
issued and outstanding 337,471 shares at December 31, 2001,
and 480,721 shares issued and outstanding at December 31, 2002 337 480
Additional paid in capital 8,851,436 11,223,453
Less notes receivable - common stock (731,549) (774,311)
Deficit accumulated during the development stage (8,801,171) (12,653,467)
---------------- ----------------
TOTAL STOCKHOLDERS' (DEFICIT) (638,414) (2,094,317)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 516,282 $ 372,620
================ ================
See accompanying notes
F-3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
====================================================================================================================================
From Inception
(October 21, 1983)
For the Year Ended December 31, Through
2000 2001 2002 December 31, 2002
---------------- ---------------- ---------------- ------------------
(Restated) (Restated)
REVENUES
Sale of fatigue fuses $ - $ - $ - $ 64,505
Sale of royalty interests - - - 198,750
Research and development revenue 635,868 1,579,823 461,323 5,024,812
Test services - - - 10,870
---------------- ---------------- ---------------- ------------------
TOTAL REVENUES 635,868 1,579,823 461,323 5,298,937
---------------- ---------------- ---------------- ------------------
COSTS AND EXPENSES
Research and development 496,501 1,493,628 665,435 5,030,763
General and administrative 1,381,047 3,632,769 3,581,706 12,453,854
---------------- ---------------- ---------------- ------------------
TOTAL COSTS AND EXPENSES 1,877,548 5,126,397 4,247,141 17,484,617
---------------- ---------------- ---------------- ------------------
INCOME (LOSS) FROM OPERATIONS (1,241,680) (3,546,574) (3,785,818) (12,185,680)
---------------- ---------------- ---------------- ------------------
OTHER INCOME (EXPENSE)
Interest income 103,419 102,283 52,782 300,600
Interest expense (60,634) (70,468) (118,460) (434,447)
Loss on abandonment of interest in joint venture - (33,000) - (33,000)
---------------- ---------------- ---------------- ------------------
TOTAL OTHER INCOME 42,785 (1,185) (65,678) (166,847)
---------------- ---------------- ---------------- ------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (1,198,895) (3,547,759) (3,851,496) (12,352,527)
PROVISION FOR INCOME TAXES (800) (800) (800) (11,000)
---------------- ---------------- ---------------- ------------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (1,199,695) (3,548,559) (3,852,296) (12,363,527)
EXTRAORDINARY ITEMS
Forgiveness of indebtness - - - (289,940)
---------------- ---------------- ---------------- ------------------
NET INCOME (LOSS) $ (1,199,695) $ (3,548,559) $ (3,852,296) $ (12,653,467)
================ ================ ================ ==================
PER SHARE DATA
Basic income (loss) before extraordinary item $ (0.06) $ (0.11) $ (0.06)
Basic extraordinary items - - -
---------------- ---------------- ----------------
BASIC NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.11) $ (0.06)
================ ================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,900,019 33,640,393 63,073,970
================ ================ ================
See accompanying notes
F-4
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Initial Issuance of Common Stock
October 21, 1983 2,408 $ 2 - $ - - $ - 2,498 $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2,202) (2) - - - - (2) -
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
206 - - - - - 2,496 -
Balance - October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
with Pooling of Interests 42,334 14 - - - - 4,328 -
Net (Loss), Year Ended
December 31, 1983 - - - - - - - (4,317)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1984 42,540 14 - - - - 6,824 (4,317)
Capital Contribution - 28 - - - - 21,727 -
Issuance of Common Stock 4,815 5 - - - - 10,695 -
Costs Incurred in Connection
with Issuance of Stock - - - - - - (2,849) -
Net (Loss), Year Ended
December 31, 1984 - - - - - - - (21,797)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1985 47,355 47 - - - - 36,397 (26,114)
Shares Contributed Back
to Company (315) (0) - - - - - -
Capital Contribution - - - - - - 200,555 -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - - - 18,250 -
Shares Cancelled (8,758) (9) - - - - 9 -
See accompanying notes and independant accountants' report.
F-5
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Net (Loss), Year Ended
December 31, 1985 - - - - - - - (252,070)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1986 38,282 38 - - - - 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 - - - - - - - (10,365)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1987 38,282 38 - - - - 255,211 (288,549)
Issuance of Common Stock upon
Exercise of Warrants 216 - - - - - 27,082 -
Net (Loss), Year Ended
December 31, 1987 - - - - - - - (45,389)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1988 38,498 38 - - - - 282,293 (333,938)
Issuance of Common Stock
Sale of Stock 2,544 3 - - - - 101,749 -
Services Rendered 3,179 3 - - - - 70,597 -
Net (Loss), Year Ended
December 31, 1988 - - - - - - - (142,335)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1989 44,221 44 - - - - 454,639 (476,273)
Issuance of Common Stock
Sale of Stock 4,000 4 - - - - 1,996 -
Services Rendered 36,000 36 - - - - 17,964 -
Net (Loss), Year Ended
December 31, 1989 - - - - - - - (31,945)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance, January 1, 1990 84,221 84 - - - - 474,599 (508,218)
Issuance of Common Stock
Sale of Stock 2,370 2 - - - - 59,248 -
See accompanying notes and independant accountants' report.
F-6
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Services Rendered 6,480 7 - - - - 32,393 -
Net Income, Year Ended
December 31, 1990 - - - - - - - 133,894
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1991 93,071 93 - - - - 566,240 (374,324)
Issuance of Common Stock
Sale of Stock 647 1 - - 350,000 350 273,335 -
Services Rendered 4,371 4 - - - - 64,880 -
Conversion of Warrants 30 - -
Conversion of Stock (6,000) (6) 60,000 60 - - - -
Net (Loss), Year Ended
December 31, 1991 - - - - - - - (346,316)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1992 92,119 92 60,000 60 350,000 350 904,455 (720,640)
Issuance of Common Stock
Sale of Stock 20,000 20 - - - - 15,980 -
Services Rendered 5,400 5 - - - - 15,515 -
Conversion of Warrants 6,000 6 - - - - 14,994 -
Sale of Class B Stock - - 60,000 60 - - 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 - - - - 71,659 -
Conversion of Stock 6,000 6 (60,000) (60) - - - -
Cancellation of Shares (6,650) (7) - - - - 7 -
Net (Loss), Year Ended
December 31, 1992 - - - - - - - (154,986)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1993 127,620 127 60,000 60 350,000 350 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement 12,500 13 - - - - 6,237 -
Services Rendered 67,030 67 - - - - 13,846 -
See accompanying notes and independant accountants' report.
F-7
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Warrant Conversion 56,000 56 - - - - 304,943 -
Cancellation of Shares (31,700) (32) - - - - (7,537) -
Net (Loss) for Year Ended
December 31, 1993 - - - - - - - (929,900)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1994 231,449 231 60,000 60 350,000 350 1,355,039 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,818 31 - - - - 385,393 -
Issuance of Shares for
Services Rendered 223,000 223 - - - - - -
Sale of Stock 1,486,112 1,486 - - - - 23,300 -
Issuance of Shares for
the Modification of Agreements 34,000 34 - - - - (34) -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - - - (377,063)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1995 2,005,380 2,005 60,000 60 350,000 350 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 153 - - - - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - - - (197,546)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1996 2,157,880 2,157 60,000 60 350,000 350 1,763,698 (2,380,135)
Issuance of Shares for
Services Rendered 164,666 165 - - - - 16,301 -
See accompanying notes and independant accountants' report.
F-8
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Sale of Stock 70,000 70 - - - - 173,970 -
Issuance of Shares for
the Modification of Agreements 250,000 250 - - - - (250) -
Cancellation of Shares Held
in Treasury (62,000) (62) - - - - (154,538) -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - - - (450,734)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance January 1, 1997 2,580,546 2,580 60,000 60 350,000 350 1,799,181 (2,830,869)
Sale of Stock 100,000 100 - - - - 99,900 -
Conversion of Indebtedness 800,000 800 - - - - 165,200 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 - - - - 370,500 -
Issuance of Shares for
Services Rendered 247,000 247 - - - - 2,224 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 560,000 560 - - - - (560) -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - - - (133,578)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
5,787,000 5,787 60,000 60 350,000 350 2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 - - - - 167,570 -
Conversion of Options 500,000 500 - - - - 124,500 -
Issuance of Shares for
Services Rendered 1,121,617 1,122 - - - - 111,040 -
See accompanying notes and independant accountants' report.
F-9
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 - - - - 149,950 -
Shares Returned to Treasury
and Cancelled (560,000) (560) - - - - 560 -
Modification of Royalty
Agreement 733,280 733 - - - - 6,599 -
Issuance of Warrants to Officer - - - - - - 27,567 -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - - - (549,187)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
10,061,897 $ 10,062 60,000 $ 60 350,000 $ 350 3,024,231 $ (3,513,634)
Shares Issued in Cancellation
of Indebtedness 2,175,000 2,175 - - - - 164,492 -
Issuance of Shares for
Services Rendered 1,255,000 1,255 - - - - 93,844 -
Shares Issued in Modification
of Licensing Agreement 672,205 672 - - - - (672) -
Sale of Stock 433,333 433 - - - - 173,107 -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - - - (539,283)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
14,597,435 $ 14,597 60,000 $ 60 350,000 $ 350 3,455,002 $ (4,052,917)
Issuance of Shares for
Services Rendered - as
restated 699,500 699 - - - - 823,817 -
Shares Issued to Investors
Pursuant to Settlement
Agreement 65,028 65 - - - - (65) -
Shares Issued for Cash
and Non-Recourse Promissory
Notes 5,000,000 5,000 - - - - 1,990,000 -
Shares Issued for Cash 400,000 400 - - - - 281,294 -
Shares Issued in Cancellation
See accompanying notes and independant accountants' report.
F-10
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
of Indebtedness 100,000 100 - - - - 99,900 -
Shares Issued as Compensation
Pursuant to Escrow Agreement 4,183,675 4,184 - - - - - -
Shares Returned from Escrow (400,000) (400) - - - - 400 -
Common Shares Converted
into Class B Common (40,000) (40) 40,000 40 - - - -
Preferred Shares Converted
into Common 12,529 13 - - (12,529) (13)
Net (Loss) for the Year - -
Ended December 31, 2000 -
restated - - - - - - - (1,199,695)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance December 31, 2000 -
restated 24,618,167 $ 24,618 100,000 $ 100 337,471 $ 337 6,650,348 $ (5,252,612)
Issuance of Shares for
Services Rendered - restated 6,185,000 6,185 - - - - 798,151 -
Shares Issued for Cash 4,932,358 4,932 - - - - 281,635 -
Shares Issued in Connection
with Private Offering 697,853 698 - - - - (698) -
Shares Issued to Officer 6,000,000 6,000 - - - - 1,122,000 -
Net (Loss) for the Year
Ended December 31, 2001 -
restated - - - - - - - (3,548,559)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
42,433,378 $ 42,433 100,000 $ 100 337,471 $ 337 8,851,436 $ (8,801,171)
Issuance of Shares for
Services Rendered 21,835,018 21,835 - - - - 1,163,796 -
Issuance of Shares to
University of Pennsylvania 1,096,476 1,096 (1,096)
Shares issued in settlement
of lawsuit 1,397,200 1,398 - - - - 38,602
See accompanying notes and independant accountants' report.
F-11
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
Deficit
Class A Common Class B Common Preferred Stock Accumulated
------------------------ --------------------- -------------------- Capital During the
Shares Shares Shares in Excess of Development
Outstanding Amount Outstanding Amount Outstanding Amount Par Value Stage
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Shares Issued for Cash 28,046,766 28,047 - - 143,250 143 1,125,546 -
Offering costs - - - - (200,412)
Shares issued in canellation of
President's interest in patents - - 200,000 200 - - -
Cancellation of shares in stock
grant (1,322,000) (1,322) 1,322
Shares issued to Company's
president for past compensation 13,000,000 13,000 247,000
Shares Issued in Connection
with Private Offering 2,741,347 2,741 - - - - (2,741) -
Net (Loss) for the Year
Ended December 31, 2002 - - - - - - - (3,852,296)
------------ ---------- ----------- -------- ----------- -------- ------------ -------------
Balance - December 31, 2002 109,228,185 $ 109,228 300,000 $ 300 480,721 $ 480 11,223,453 $(12,653,467)
============ ========== =========== ======== =========== ======== ============ =============
See accompanying notes and independant accountants' report.
F-12
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
===================================================================================================================================
From Inception
For the Year Ended December 31, (October 21, 1983)
-------------------------------------------------------- Through
2000 2001 2002 December 31, 2002
---------------- ---------------- ---------------- ----------------
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,199,695) $ (3,548,559) $ (3,852,296) $ (12,653,467)
---------------- ---------------- ---------------- ----------------
Adjustments to reconcile net income
(loss) to net cash provided
(used) in operating activities
Depreciation and amortization 2,948 3,755 7,747 185,612
Accrued interest income (98,557) (98,298) (49,444) (247,731)
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 past
services 260,000 260,000
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 112,364 (255,073) 285,677 (50,328)
(Increase) decrease in employee advances - - (1,433) (1,433)
(Increase) decrease in prepaid expense - (212) (1,179) (1,338)
Loss on sale of equipment - - 12,780
Issuance of common stock for services 828,699 1,932,336 1,286,894 4,581,656
Issuance of stock for agreement modification - - - 152
Forgiveness of Indebtedness - - - 215,000
Increase (decrease) in accounts
payable and accrued expenses 8,441 267,742 (284,625) 902,989
Increase in legal fees secured by note payable - - 1,481,895 1,481,895
Interest accrued on note payables 57,062 67,718 114,971 387,726
Increase in research and development
sponsorship payable - - 218,000
(Increase) in note for litigation settlement - - (25,753)
(Increase) in Deposits - - (2,189)
---------------- ---------------- ---------------- ----------------
TOTAL ADJUSTMENTS 910,957 3,450,968 3,100,503 9,371,476
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (288,738) (97,591) (751,793) (3,281,991)
---------------- ---------------- ---------------- ----------------
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 (15,000) - - (102,069)
Payment for license agreement - - - (6,250)
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (15,000) (5,961) (29,608) (126,495)
---------------- ---------------- ---------------- ----------------
See accompanying notes
F-13
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
===================================================================================================================================
From Inception
For the Year Ended December 31, (October 21, 1983)
-------------------------------------------------------- Through
2000 2001 2002 December 31, 2002
---------------- ---------------- ---------------- ----------------
(Restated) (Restated)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock net of offering costs $ 274,288 $ 366,126 $ 1,153,735 $ 2,901,468
Costs incurred in offerings - (79,559) (261,474) (372,513)
Sale of common stock warrants - - - 18,250
Sale of preferred stock - - - 258,500
Sale of redeemable preferred stock - - - 150,000
Capital contributions - - - 301,068
Payment on proposed reorganization - - - (5,000)
Loans From officer 8,000 42,800 - 778,805
Officer advances and repayments (39,500) (53,300) (33,547) (542,379)
Increase in loan payable-others - - - 172,069
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES: 242,788 276,067 858,714 3,660,268
---------------- ---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (60,950) 172,515 77,313 251,782
BEGINNING BALANCE CASH AND
CASH EQUIVALENTS 62,904 1,954 174,469 -
---------------- ---------------- ---------------- ----------------
ENDING BALANCE CASH AND CASH
EQUIVALENTS $ 1,954 $ 174,469 $ 251,782 $ 251,782
================ ================ ================ ================
See accompanying notes
F-14
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization
---------------------
Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.
The Company is in the development stage, as defined in FASB Statement 7,
with its principal activity being research and development in the area of
metal fatigue technology with the intent of future commercial application.
The Company has not paid any dividends and dividends that may be paid in
the future will depend on the financial requirements of the Company and
other relevant factors.
Note 2 - Summary of Significant Accounting Policies
---------------------------------------------------
a. 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.
b. 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. Accounts receivable are charged
off against the allowance when collectibility is determined to be
permanently impaired (bankruptcy, lack of contact, account balance
over one year old, etc.).
c. 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:
F-15
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
Disposalof 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 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.
b. 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 EPS.
c. 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.
d) Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at
their current carrying amounts.
e) 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.
f) Revenue Recognition
During 2002, Significantly all of the Company's revenue was derived
F-16
from the Company's sub-contract with the United States Air Force
relating to the further development of the Electrochemical Fatigue
Fuse. Revenue on the sub-contract is recognized at the time services
are rendered. The Company bills monthly for services pursuant to this
sub-contract at which time revenue is recognized for the period that
the respective invoice relates. The objective of the contract with the
US Air Force is to further develop and validate a prototype
Electrochemical Fatigue Sensor (EFS) to inspect turbine engine blades
and components in the disassembled condition as well as without the
need to disassemble the engine. The project builds on work performed
through previous contracts with the Air Force. As required under the
contract and previous contracts with the Air Force, the technical data
and /or commercial computer software developed under the contracts
will be delivered to the Government with "Other Than Unlimited
Rights". Under the contracts, Material Technologies, Inc. has always
maintained a proprietary interest in the development of the data and
software for commercial use. The sub-contract expired in 2002.
All other income is reported in the period that the income was earned.
g) 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.
h) 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.
i) Recent Accounting Pronouncements
The FASB recently issued the following statements:
FASB 144 - Accounting for the Impairment or Disposal of
Long-Lived Assets
FASB 145 - Rescission of FASB Statements 4, 44 and 64 and
Amendment of FASB 13
FASB 146 - Accounting for Costs Associated with Exit or Disposal
Activities
FASB 147 - Acquisitions of Certain Financial Institutions
FASB 148 - Accounting for Stock-Based Compensation
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.
F-17
Note 3 - Accounts Receivable
----------------------------
Accounts receivable consists entirely of amounts due under the Company's
research and development sub-contract and consists of the following:
December 31,
2001 2002
------- ------
Accounts Receivable $ 285,677 $ 8,362
Less allowance for doubtful accounts -- (8,362)
--------- ---------
$ 285,677 $ --
========= =========
Note 4 - Intangibles
--------------------
Intangible assets consist of the following:
Period of December 31,
Amortization 2001 2002
------ ------
Patent Costs 17 Years $ 28,494 $ 28,494
License Agreement 17 Years 6,250 6,250
(See Note 4)
Website 5 Years 5,200 5,200
-------- --------
39,944 39,944
Less Accumulated Amortization (24,744) (27,824)
-------- --------
$ 15,200 $ 12,120
======== ========
Amortization charged to operations for 2000, 2001, and 2002 were $1,989,
and $2,249, and 3,080 respectively.
Estimated amortization expense for the remaining life of the contract is as
follows:
2003 $2,116
2004 $2,116
2005 $2,116
2006 $1,856
2007 $1,076
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
F-18
designed to measure electrochemically the state of fatigue damage in a
metal structural member. The Company is in the initial stage of developing
the EFS.
Under the terms of the agreement the Company issued to the University
12,500 shares of its common stock, and a 5% royalty on sales of the
product. The Company valued the licensing agreement at $6,250. The license
terminates upon the expiration of the underlying patents, unless sooner
terminated as provided in the agreement. The Company is amortizing the
license over 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, Mr. Bernstein agreed to limit his
compensation from the Company to $150,000 per year until the loan and
accrued interest is fully paid. Interest charged to operations for 2000,
2001, and 2002, relating to this obligation was $54,638, $64,472, and
$76,078, respectively. The balance of the note at December 31, 2001, and
2002, was $422.653 and $498,731, respectively,
As of December 31, 2001, the Company was required to issue an additional
1,404,464 shares to the University pursuant to the revised agreement. The
Company is currently in discussions with the University regarding the
issuance of the shares and other related matters. As indicated, the Note
matured on December 16, 2001 and the Company has not made any payments and
under the terms of the agreement is in default.
Note 6 - Property and Equipment
-------------------------------
The following is a summary of property and equipment:
F-19
December 31,
2001 2002
------ ------
Office and computer equipment $ 24,142 $ 24,142
Manufacturing equipment 100,067 129,675
--------- ---------
124,209 153,817
Less: Accumulated
Depreciation (121,501) (126,168)
--------- ---------
$ 2,708 $ 27,649
========= =========
Depreciation charged to operations was $959, and $1,044, and $4,667, in
2000, 2001, and 2002, respectively. The Company's equipment has been
pledged as collateral on the agreement with Advanced Technology Center (See
Note 9(b)).
Note 7 - Notes Payable
----------------------
On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a
current shareholder. The loan is evidenced by a promissory note that is
assessed interest at major bank prime rate. The note matures on May 31,
2002, when principal and accrued interest become 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, 2001, and 2002, was $57,237, and $58,859, respectively. Interest
charged to operations for 2000, 2001 and 2002 was $3,245, $3,246, and
$1,622, respectively.
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 2,500 shares of the Company's common stock at a price
of $1.00 per share. The loan balance as of December 31, 2000 and 2001 was
$25,527 and $25,527, respectively. Interest charged to operations on this
loan in 2000, 2001, and 2002, were $2,750, $2,750, and $2,750,
respectively.
The Company did not pay any amounts due on this note when it matured on
October 15, 2000, and the note is in default.
F-20
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 2000, 2001 and 2002
was $1,199,695, $3,548,559, and $3,852,296, respectively. As of December
31, 2002, the Company has unused operating loss carryforwards, which may
provide future tax benefits in the amount of $12,653,467 which expire in
various years through 2022.
The Company's use of its net operating losses may be restricted in future
years due to the limitations pursuant to IRC Section 382 on changes in
ownership.
Note 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, 2001, and 2002, the
future royalty commitment was limited to $227,149 and $252,136,
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.
F-21
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, 2001, and 2002, the total future royalty commitments,
including the accumulated 26% annual rate of return, were limited to
approximately $1,725,234, and $2,173,795, 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 733,280 shares of
its Common Stock to Variety, Variety reduced its royalty interest to
5%.
e. As discussed in Note 6, the Company granted a 1% royalty interest in
the Company's Fatigue Fuse and a .5% royalty interest in its
Electrochemical Fatigue Sensor to Mr. Sherman Baker as part
consideration on a $25,000 loan made by Mr. Baker to the Company.
A summary of royalty interests that the Company has granted and are
outstanding as of December 31, 2001, 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%
---------- ----------
F-22
12.00% 10.00%
========== ==========
* Royalties limited to specific rates of return as discussed in
Notes 8(a) and (b) above.
** The Company granted 12% royalties on sales from sublicensing.
These royalties are also limited to specific rates of return as
discussed in Note 9(b) and (c) above.
h. Operating Leases
The Company leases its existing office under a non-cancelable lease,
which expires on June 30, 2003.
Rental expense charged to operations for the years ended December 31,
2000, 2001, and 2002 was approximately $23,129, $29,468, and $28,176
which consisted solely of minimum rental payments.
In addition to rent, the Company is obligated to pay property taxes,
insurance, and other related costs associated with the leased office.
Minimum rental commitments under the noncancelable leases expire as
follows:
Year Ended 2003 $ 11,740
i. Straight Documentary Credit
On October 10, 2001, the Company entered into an arrangement whereby
Allied Boston Group will provide the Company with a Straight
Documentary Credit (a letter of credit) for $12,500,000. Under the
terms of the commitment, the Company will pledge sufficient shares of
its common stock to equal 125% of the Straight Documentary Credit.
Under the initial terms, the shares were valued at $.27 per share. If
the Company's stock price goes lower, then additional shares will be
pledged. If the stock price goes to a $1.00 per share, then Allied
Boston is required to liquidate a sufficient number of shares to pay
off the amount funded through this Straight Documentary Credit. After
the amount is paid off, Allied Boston will retain 25 million shares of
the Company's common stock. Any remaining shares will be returned to
the Company;
Upon funding through the Straight Documentary Credit, the Company is
required to pay a Success Fee to Allied Boston in the amount of 8% of
the amount funded of which 50% will be paid in cash and the remainder
of the fee will be paid through the issuance of the Company's common
stock to be valued at market value at the time of issuance. As long as
F-23
the Documentary Credit is in force, Allied Boston will have 2 voting
seats on the Company's Board. All out-of-pocket expenses pertaining to
the issuance of the instrument will be borne by the Company.
In October 2001, the Company issued 60,000,000 shares of its common
stock as collateral to Allied Boston pursuant to the terms of the
agreement, and in January 2002, the Company issued 40,000,000 shares
as additional collateral. As indicated the selling of these shares are
contingent upon the occurrence of future events. Further, this shares
can not be voted on by Allied Boston until such time as the credit has
been funded. Therefore as these shares can not be sold or voted, the
Company treats the shares issued, held in reserve, and not
outstanding.
As of the balance sheet date, the Credit has not been funded, however
the Company is in discussions with funding sources.
j) Litigation
In July 2002, the Company settled its pending lawsuit with Mr. Beck.
Under the terms of the settlement, Mr. Beck received 1,000,000 shares
of the Company common stock. The shares to be issued are non-dilutive
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.
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. This fee,
however, is payable out of the Company's earnings derived before
interest, taxes, depreciation and amortization (EBIDA), limited each
year to 25% of EBIDA. Unpaid amounts owed towards the fee accrue
interest at a rate of 6% per annum until paid in full. The balance of
this obligation at December 31 2002 including accrued interest is
$1,519,166. Interest charged to operations for 2002 totaled $37,271.
As the amounts due the attorneys are paid out of profits and amounts
paid annually are limited as indicated, management does not believe
that the liability to the attorneys will have any impact on the
Company's ability to continue operating. However, payments made to the
attorneys will obviously have a impact on the Company's future cash
flow that could limit the amounts spent on future projects or
expansion.
Note 10 - Investments
---------------------
a) The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
Corporation. At December 31, 2002, there was no market for these
shares and the Company valued its interest at $0.
F-24
d) During 2001, the Company abandoned its 5% interest in Antaeus
Research, LLC. and charged its total investment of $33,000 to
operations. Prior to its abandonment, the Company accounts for this
investment under the Cost Method.
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 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
350,000 shares of the Company's Class A Convertible Preferred Stock
and 300,000 shares of its Common Stock. The holders of these shares
have a liquidation preference to receive out of assets of the Company,
an amount equal to $.72 per one share of Class A Preferred Stock. Such
amounts shall be paid upon all outstanding shares before any payment
shall be made or any assets distributed to the holders of the common
stock or any other stock of any other series or class ranking junior
to the Shares as to dividends or assets.
These shares are convertible to shares of the Company's common stock
at a conversion price of $.72 ("initial conversion price") per share
of Class A Preferred Stock that will be adjusted depending upon the
occurrence of certain events. The holders of these preferred shares
shall have the right to vote and cast that number of votes which the
holder would have been entitled to cast had such holder converted the
shares immediately prior to the record date for such vote.
The holders of these shares shall participate in all dividends
declared and paid with respect to the Common Stock to the same extent
had such holder converted the shares immediately prior to the record
date for such dividend.
F-25
In 2000, a holder of 12,259 shares of preferred stock exchanged these
shares for 12,259 shares of the Company's common. The 12,259 shares of
preferred were subsequently cancelled.
d. Class C Preferred Stock
During 2002, the Company sold to its legal counsel 143,250 shares of
its Class C preferred stock for $141,250. 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. Dividends accrued but not actually payable at
December 31, 2002 totaled $4,022.
e. 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.
On January 31, 2000, the Company issued 50,000 shares of common stock
to a member of its advisory board. These shares were valued at
$59,375. On February 8, 2000, the Company issued 10,000 shares of
common stock to a consultant who assisted in developing the Company's
web site. The Company valued these shares at $26,563. On February 28,
2000, the Company issued 200,000 of common stock to a consultant for
financial services. These shares were valued at $381,250. Also on
February 28, 2000, the Company issued 4,500 of common stock to a
public relations consultant. These shares were valued at $8,578. On
March 9, 2000, the Company issued 100,000 of common stock to a
consultant in cancellation of $100,000 due. On March 13, 2000, the
Company issued two consultants a total of 75,000 shares of common
stock for services relating to the development of the fatigue fuse. .
These shares were valued at $140,625. On March 21, 2000, the Company's
President returned to the Company 40,000 shares of Common stock in
exchange for receiving 40,000 shares of Class B common stock. On March
29, 2000, the Company issued 50,000 shares of common stock to a
consultant for financial services. These shares were valued at
$81,250. On April 11, 2000, the Company issued 15,000 shares of common
stock to consultant relating to the operations of the Company joint
venture. These shares were valued at $15,469. On April 11, 2000, the
Company issued 25,000 shares of common stock for advisory services.
These shares were valued at $25,781. On April 28, 2000, the Company
issued 30,000 shares of common stock for advisory services. These
shares were valued at $26,250. On May 4, 2000, the Company issued
12,529 shares of its common stock in exchange for 12,529 shares of its
preferred stock. The preferred shares were subsequently cancelled. On
May 25, 2000, the Company issued its President 4,650,000 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
F-26
day, the Company issued 350,000 shares its common stock to a Director
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. On July 13, 2000, the Company issued 40,000 shares of its
common stock for legal services. These shares were valued at $21,875.
On October 27, 2000, the Company issued 4,183,675 to its President for
futures services to be rendered pursuant to a stock grant and escrow
agreement. As discussed further in Note 11, these shares are held in
escrow, subject to substantial restrictions and the actual shares that
may vest to the President could be substantially less then the number
of shares placed in escrow. These shares were valued at par. On
November 14, 2000, pursuant to the stock grant and escrow agreement,
the President returned 400,000 shares of common stock to the Company
that were subsequently cancelled. On the same day, 400,000 shares were
issued in exchange for $22,490. On December 19, 2000, the Company
issued 200,000 shares of its common stock to a consultant. These
shares were valued at $37,500. During January and February 2000, the
Company issued 65,028 shares of its common stock to investors who were
defrauded by a former consultant of the Company. These shares were
valued at par. In February 2000, the Company received $251,798 from
the proceeds from the sale of shares of DCH Technologies, Inc. These
shares were placed in a brokerage account in 1998 by a shareholder of
the Company on the Company's behalf. The Company had no access to the
account. Due to the restrictive covenants of the brokerage account,
the Company did not reflect the transaction on its financial
statements prior to 2000, when the shares were sold. The Company
credited the proceeds to additional paid-in capital.
On January 9, 2001, the Company issued 100,000 shares of its common
stock to a member of the Company's advisory board for consulting
services. These shares were valued at $18,800. Also on January 9,
2001, the Company issued 50,000 shares of its common stock to a
consultant for services rendered. These shares were valued at $9,400.
On January 10, 2001, the Company issued 100,000 shares each to two
employees pertaining to services rendered on the Company's research
project. These shares were valued at $31,200. On January 11, 2001, the
Company issued 100,000 shares of its common stock to an attorney for
legal services. These shares were valued at $12,500. On March 6, 2001,
the Company issued its President 6,000,000 shares of common stock for
services rendered. These shares were valued at $1,128,000. On April 6,
2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered. These shares were valued at $21,800. On
April 17, 2001, the Company issued a consultant 250,000 shares of its
common stock for services rendered. These shares were valued at
$22,500. On April 20, 2001, the Company issued to two consultant
50,000 shares each of its common stock for marketing services
rendered. These shares were valued at $9,000. On May 3, 2001, the
Company issued to one of its employee's 100,000 shares of its common
stock for services rendered on the Company's research project. These
shares were valued at $9,000. Also May 3, 2001, the Company issued a
consultant 100,000 shares of its common stock for services rendered.
These shares were valued at $9,000. On June 8, 2001, the Company
issued a consultant 1,000,000 shares of its common stock for past
F-27
marketing services rendered. These shares were valued at $50,000. The
balance due for the services. On June 12, 2001, the Company issued its
executive assistant 25,000 shares of its common stock for services
rendered. These shares were valued at $2,750. On July 5, 2001, the
Company issued an attorney 50,000 shares of its common stock for legal
services rendered. These shares were valued at $5,000. On July 26,
2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered. These shares were valued at $26,000. On
August 6, 2001, the Company issued a consultant 125,000 shares of its
common stock for services rendered. These shares were valued at
$16,250. On August 9, 2001, the Company issued an attorney 265,000
shares of its common stock for services rendered. These shares were
valued at $39,750. On August 29, 2001, the Company issued 50,000
shares of its common stock to one consultant and 300,000 shares of its
common stock to another consultant for services rendered. These shares
were valued at $42,000. On September 6, 2001, the Company issued a
consultant 37,500 shares of its common stock for services rendered.
These shares were valued at $3,750. On September 14, 2001, the Company
issued a consultant 50,000 shares of its common stock for services
rendered. These shares were valued at $5,000. On September 19, 2001,
the Company issued a consultant 125,000 shares of its common stock for
services rendered. These shares were valued at $11,250. On October 8,
2001, the Company issued to two of its employees 300,000 shares of its
common stock each for services rendered in connection with the Company
research project. These shares were valued at $102,000. On October 16,
2001, the Company issued a consultant 50,000 shares of its common
stock for services rendered. These shares were valued at $4,560. On
October 18, 2001, the Company issued its executive assistant 20,000
shares of its common stock for services rendered. These shares were
valued at $4,000. On October 23, 2001, the Company issued an attorney
150,000 shares of its common stock for services rendered. These shares
were valued at $33,000. On October 25, 2001, the Company issued
697,853 as additional fees pertaining to its Regulation S offering..
These shares were valued at $118,635. On November 6, 2001, the Company
issued an attorney 350,000 shares of its common stock for legal
services rendered. These shares were valued at $56,000. On November
14, 2001, the Company issued a consultant 150,000 shares of its common
stock for services rendered. These shares were valued at $33,000. On
November 17, 2001, the Company issued to the same consultant 107,500
shares of its common stock for services rendered. These shares were
valued at $16,125. On December 20, 2001, the Company issued to three
consultants a total of 530,000 shares of its common stock for services
rendered. These shares were valued at $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 offering were charged
against the related proceeds received.
F-28
On January 11, 2002, the Company issued a consultant 20,000 shares of
its common stock for services rendered. These shares were valued at
$3,200. On January 30, 2002, the Company issued a consultant 15,000
shares of its common stock for services rendered. These shares were
valued at $2,850. On February 13, 2002, the Company issued 4,000
shares its common stock for clerical services rendered. These shares
were valued at $760. On February 14, 2002, the Company issued a
consultant 300,000 shares of its common stock for services rendered.
These shares were valued at $72,000. On March 4, 2002, the Company
issued its executive assistant 25,000 shares of its common stock.
These shares were valued at $6,750. Also on March 4, 2002, the Company
issued to six individuals a total of 650,000 shares of its common
stock for consulting services rendered. These shares were valued at
$175,500. On March 15, 2002, the Company issued 150,000 shares of its
common stock for consulting services rendered. These shares were
valued at $37,500. On March 18, 2002, the Company issued 150,000
shares of its common stock for consulting services rendered. These
shares were valued at $22,500. On March 19, 2002, the Company issued
to 125,000 shares of its common stock for legal services rendered.
These shares were valued at $20,000. On April 2, 2002, the Company
issued to two members of its advisory board a total of 469,918 shares
of its common stock for consulting services rendered. These shares
were valued at $65,789. On April 2, 2002, the Company issued its
executive assistant 25,000 shares of its common stock. These shares
were valued at $3,500. On April 4, 2002, the Company issued to 120,000
shares of its common stock for legal services rendered. These shares
were valued at $16,800. On April 4, 2002, the Company issued 4,000
shares its common stock for clerical services rendered. These shares
were valued at $560. On April 10, 2002, the Company issued to 42,100
shares of its common stock for legal services rendered. These shares
were valued at $5,473. On April 12, 2002, the Company issued to
105,000 shares of its common stock for legal services rendered. These
shares were valued at $14,000. On April 25, 2002, the Company issued
550,000 shares of its common stock for consulting services rendered.
These shares were valued at $49,500. On May 10, 2002, the Company
issued 215,000 shares of its common stock for legal services rendered.
These shares were valued at $32,250. On May 10, 2002, the Company
issued 115,000 shares of its common stock for legal services rendered.
These shares were valued at $17,250. On May 21, 2002, the Company
issued 400,000 shares of its common stock for consulting services
rendered. These shares were valued at $36,000. On May 22, 2002, the
Company issued 1,000,000 shares of its common stock for legal services
rendered. These shares were valued at $90,000. On June 5, 2002, the
Company issued 150,000 shares of its common stock for consulting
services rendered. These shares were valued at $9,000. On June 5,
2002, the Company issued 50,000 shares of its common stock for legal
services rendered. These shares were valued at $3,000. On June 6,
2002, the Company issued 50,000 shares of its common stock for
consulting services rendered. These shares were valued at $3,000. On
July 3, 2002, the Company issued 1,000,000 shares of its common stock
for legal services rendered. These shares were valued at $50,000. On
July 3, 2002, the Company issued 250,000 shares of its common stock
for consulting services rendered. These shares were valued at $12,500.
On July 8, 2002, the Company issued 200,000 shares of its common stock
F-29
for legal services rendered. These shares were valued at $8,000. On
July 8, 2002, the Company issued 200,000 shares of its common stock
for consulting services rendered. These shares were valued at $8,000.
On July 26, 2002, the Company issued 1,000,000 shares of its common
stock for consulting services rendered. These shares were valued at
40,000. On August 5, 2002, the Company issued 1,000,000 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
$40,000. On August 5, 2002, the Company issued 1,230,000 shares of its
common stock for legal services. These shares were valued at $49,200.
On August 14, 2002, the Company issued 1,000,000 shares of its common
stock for legal services. These shares were valued at $40,000. On
August 29, 2002, the Company issued 1,000,000 shares of its common
stock for legal services. These shares were valued at $30,000. On
September 5, 2002, the Company issued 300,000 shares of its common
stock for consulting services rendered. These shares were valued at
$6,000. On September 5, 2002, the Company issued 75,000 shares of its
common stock for legal services. These shares were valued at $1,500.
On September 10, 2002, the Company issued 2,000,000 shares of its
common stock for consulting services. These shares were valued at
$60,000. On September 11, 2002, the Company issued 1,000,000 shares of
its common stock for legal services. These shares were valued at
$20,000. On September 12, 2002, the Company issued 2,500,000 shares of
its common stock for legal services. These shares were valued at
$50,000. On October 7, 2002, the Company issued 2,500,000 shares of
its common stock for consulting services. These shares were valued at
$75,000. On October 9, 2002, the Company issued its executive
assistant 50,000 shares of its common stock. These shares were valued
at $1,500. On October 29, 2002, the Company issued 250,000 shares of
its common stock for consulting services. These shares were valued at
$5,000. On December 6, 2002, the Company issued 650,000 shares of its
common stock for consulting services. These shares were valued at
$19,500. On December 6, 2002, the Company issued 250,000 shares of its
common stock for legal services. These shares were valued at $7,500..
On December 16, 2002, the Company issued 1,000,000 shares of its
common stock to a member of the Company's advisory board. These shares
were valued at $30,000. On December 17, 2002, the Company issued
1,000,000 shares of its common stock for legal services. These shares
were valued at $30,000. On December 18, 2002, the Company issued
13,000,000 shares of its common stock to its president for past
compensation due hom. These shares were valued at $260,000.
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 2,042,080 shares of Class A Common Stock as additional
consideration in connection with the Company's Regulation S offering.
In addition, the Company issued 200,000 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 450,000 shares of its
common stock previously issued to consultants. The value assigned to
these cancelled shares was $48,250 was credited against operations.
F-30
The Company also issued 1,397,500 shares of its Class A Common Stock
to Mr. Stephen Beck pursuant to the anti-dilution provisions of the
settlement agreement (see note 9(j)). During 2002, the Company
cancelled 1,322,000 shares of originally issued to Mr. Bernstein
pursuant to the Stock Escrow/Grant Agreement.
Note 12 - Transactions with Management
--------------------------------------
a. During 1993, Mr. Bernstein exercised warrants to purchase 6,000 shares
of the Company's common stock. Pursuant to the resolution on April 12,
1993, adjusting the per share amount from $10.00 to $2.50, Mr.
Bernstein paid $60 and executed a five year non-interest bearing note
to the Company for $14,940. The Note is non-recourse and the only
security pledged for the obligation is the stock purchased. The
promissory note was extended to the year 2003.
b. During 2000, the President advanced the Company $8,000 and received
$39,500 from the Company. The outstanding amount due from the
President as of December 31, 2000 is $22,052. The amount of interest
credited to operations for 2000 totaled $822.
As of December 31, 2000, the Company accrued $40,000 of unpaid
compensation owed its President.
c. On May 25, 2000, the Company issued its President 4,650,000 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
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.
d. On October 27, 2000, the Company issued 4,183,675 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 4,183,675 shares
will also be escrowed under the same terms of the agreement.
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
F-31
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
their market value when issued and charged to operations as
compensation. As of December 31, 2002, 1,150,000 of these shares were
issued to an unrelated third party.
The original issuance of these shares had no impact on the financial
condition of the Company. As shares are issued out of escrow, the
Company will value the shares at their fair market value or the value
of the consideration received for the shares, whichever is more
readably determinable. Currently, any shares issued to the President
are contingent as discussed above.
e. On February 19, 2001, the Company issued its President 6,000,000
shares of common stock for services rendered. These shares were valued
at $1,128,000.
f. 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.
g. 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 is $35,880. The amount of interest
credited to operations for 2001 totaled $3,327.
For 2001, the Company accrued $30,000 of unpaid compensation owed its
President.
h. 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.
i. On December 18, 2002, the Company issued 13,000,000 shares of its
common stock to its president for past compensation due hom. These
shares were valued at $260,000.
j. During 2002, the Company cancelled 1,322,000 shares of originally
issued to Mr. Bernstein pursuant to the Stock Escrow/Grant Agreement.
k. During 2002, the Company made advances to its President amounting to
$34,826. The outstanding amount due from the President as of December
F-32
31, 2001 and 2002, is $35,880 and $76,109. The amount of interest
credited to operations for 2001 and 20002 was $3,327 and $6,682,
respectively.
Note 13 - Stock-Based Compensation Plans
----------------------------------------
a. In 1996, the Company adopted the 1996 Stock Option Plan and during the
year issued 70,000 shares of common stock through the plan for
$174,040. The plan was transferred in the July 1997 spin off to
Securephone, Inc.
b. In 1998, the Company adopted the 1998 Stock Option Plan and reserved a
total of 1,700,000 shares of Common Stock for distribution under the
plan. The Plan was adopted to provide a means by which the Company
could compensate key employees, advisors, and consultants by issuing
them stock in exchange for services and thereby conserve the Company's
cash resources. A Committee of the Board of Directors determines the
value of the services rendered and the related number of shares to be
issued through the Plan for these services.
In 1998, the Company granted options to acquire 900,000 shares of
which 500,000 shares were exercised for $125,000. In addition, under
the Plan, the Company issued additional 60,000 shares for consulting
services. The Company charged the fair value of the 60,000 shares of
$6,000 to operations. The remaining 340,000 options were cancelled.
In 1999, the Company granted options to acquire 750,000 shares of
Common Stock through the Plan. During 1999 the Company issued 100,000
shares in exchange of a $35,000 non-interest bearing promissory note.
The remaining 650,000 options were cancelled. The Company did not
issue any shares in 1999 under the Plan.
c. In 1998, the Company also adopted the 1988 Stock Plan and reserved a
total of 800,000 shares of common stock for distribution under the
plan. In 2000, the Company increased the number of shares reserved to
6,800,000. The Plan was adopted to provide a means by which the
Company could compensate key employees, advisors, and consultants by
issuing them stock in exchange for services and thereby conserve the
Company's cash resources. A Committee of the Board of Directors
determines the value of the services rendered and the related number
of shares to be issued through the Plan for these services.
In 1998, the Company issued 310,000 share of common stock through the
plan to various consultants for services rendered. The 310,000 shares
were valued at $31,000. In 2000, the Company issued options for the
issuance of 5,490,000 shares of common stock under the plan of which
4,650,000 shares were issued to its President and 350,000 shares were
issued to its Secretary. The 4,650,000 shares were issued in exchange
for $4,650 with the remaining balance due of $1,855,350 evidenced by
an unsecured non-recourse promissory note bearing interest at an
annual rate of 8%. The 350,000 shares were issued in exchange for $350
with the remaining balance due of $139,500 evidenced by an unsecured
non-recourse promissory note bearing interest at an annual rate of 8%.
In 2001, the balance of the two notes were reduced to $495,000 (See
Tansactions with Management - Note 12c and f). Also in 2000, the
Company issued 215,000 shares through the plan to various consultants.
The 215,000 shares were valued at $124,500 and charged to operations.
The options to acquire 275,000 shares were subsequently cancelled.
d. 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, date of grant or such other day
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 non
were exercised in 2002.
The following is a summary of the various plans' activities :
F-33
1998 Stock Plan 2002 Stock Plan
------------------------------ ------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
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
============== ============ ============== ============
Weighted Average Fair Value of Options Granted
During 200 $0.42
==============
Weighted Average Fair Value of Options Granted
During 2001 n/a
==============
Weighted Average Fair Value of Options Granted
During 2002 $0.01
==============
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:
2000 2001 2002
-------- -------- --------
Risk free interest rate: 5% n/a 4%
Expected life: 3 years n/a 1.5 years
Expected volatility 80% n/a 34%
F-34
Note 14. Adjustments to Prior Periods
-------------------------------------
For the years 2000 and 2001, the Company changed its method in determining
the value of the shares of stock it issued for non-monetary consideration
to the quoted market price of the shares on date of issue. In addition, in
2001, the Company changed the life of its license for amortization purposes
to 17 years. The adjustments are a result of correction of an error. The
following is a reconciliation of net loss as restated for the 2000 and 2001
two years.
2000 2001
-------- --------
Net loss as originally reported $ (459,129) $ (2,432,638)
Increase in operating loss due to
changes in valuation of non-monetary
consideration and amortization (740,566) (1,115,921)
------------- -------------
Net loss as adjusted $ (1,119,695) $ (3,548,559)
============= =============
Loss Per Share - as originally reported $ (.02) $ (.07)
Change due to adjustment (.04) (.04)
----- -----
Loss per share as adjusted $ (.06) $ (.11)
===== =====
Note 15 - Management's Discussion on Future Operations
------------------------------------------------------
Since its inception, the Company has had recurring losses totaling
$12,653,467. The Company has enough cash resources to meet its obligation
for the next six-months. The Company is attempting to raise additional
funding through the offering of its convertible preferred stock in a
private placement. Management is also attempting to seek additional funding
through debt offerings.
F-35