UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number - 33-23617
MATERIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-4622822 State or other jurisdiction of
(I.R.S. Employer incorporation or organization
Identification No.)
Suite 707, 11661 San Vicente Boulevard, Los Angeles, California 90049
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 208-5589
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ __ _ _ _ _ None_ _ _ _ _ _ _ _ _
Securities Registered pursuant to section 12(g) of the Act:
Class A Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed allreports
required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [
State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)
The aggregate market value of the voting stock and non-voting commonequity
held by non-affiliates computed by reference to the price at whichsuch common
equity was sold on February 5, 1998 is $1,985,542.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). S-1 Registration Statement for
Material Technologies, Inc., effective July 31, 1997.
PART I
MATERIAL TECHNOLOGY, INC.
ITEM 1. BUSINESS
Material Technologies, Inc. ("Matech"), a development stage company, successor
on July 31, 1997, to Material Technology, Inc.'s ("Matech 1") business, owns
that certain device known as the Fatigue Fuse, which requires additional testing
to more precisely identify appropriate commercial uses prior to manufacturing
and marketing. Matech is also the exclusive licensee of the Electrochemical
Fatigue Sensor, which requires substantial additional development. These
technologies are intended to indicate the level of fatigue of certain metal
structures including aircraft, bridges, cranes, ships, and other structures. No
commercial application of Matech's products hasbeen arranged to date and it will
be Matech's aim to develop a market for the Fatigue Fuse once testing is
completed and for the Electrochemical Fatigue Sensor once it has been fully
developed.
The Company is seeking to raise funds from numerous sources, including various
state and federal governmental agencies and/or private or public offerings of
securities. At this time, however, the Company has no firm agreements other than
a teaming agreement with Southwest Research Institute ("SWRI") related tothe Air
Force contract signed on February 25,1997. In August 1996, Matech entered into a
teaming agreement with SWRI, San Antonio, Texas (a non-profit research facility)
and the University of Pennsylvania. On February 25, 1997 the team was awarded a
$2.5 million Phase I contract to "determine the feasibility of the EFS to
improve the United States Air Force capability to perform durability
assessments of military aircraft, including both air frames and engines through
the application of the EFS to specific military aircraft alloys." Matech's share
of this award is approximately $550,000. Sufficient interest has been generated
by the military and the Pentagon and Congress has appropriated an additional
$5,000,000 for further development related to the EFS technology. The
contracting process for the additional funding has begun. The Company
anticipates that process will take two to three months from the date of this
filing.
Management anticipates marketing the Fatigue Fuse separately at first. If the
Electrochemical Fatigue Sensor is successfully developed, the two products will
complement each other. Matech is aware of several manufacturers capable of
producing the Fatigue Fuse at a reasonable cost. No assurance can be given,
however, that these devices will be successfully completed, that they can be
commercially produced, that they will perform to Management's expectations, or
that commercial markets will be successfully developed. Moreover, there may be
significant competition for the fatigue Fuse if and when it is marketed.
DEVELOPMENT OF TECHNOLOGIES
The development and application sequence for the Fatigue Fuse and
Electrochemical Fatigue Sensor consists of Basic Research, Exploratory
Development, Advanced Development, Prototype Evaluation, Application
Demonstration, and Commercial Sales and Service. The Fatigue Fuse came first and
is furthest along the path, beginning with the Basic Research by the inventor,
Professor Maurice Brull of the University of Pennsylvania. Matech conducted the
Advanced Development, including variations of the adhesive bonding process, and
fabrication of a laboratory grade recorder for the separation events which
constitute proper functioning of the Fatigue Fuse. The next step, Prototype
Applications, is almost complete, encompassing empirical tailoring of Fuse
parameters to fit the actual spectrum loading expected in specific applications.
The associated tests include both coupon specimens and full scale structural
tests with attached Fuses. A prototype of a flight qualifiable operational
separation event recorder was designed, fabricated, and successfully
demonstrated. The next tasks will be to prepare a mathematical analysis for more
efficient selection of Fuse parameters and to conduct a comprehensive test
program to prove the ability of the Fatigue Fuse to accurately indicate fatigue
damage when subjected to realistically large variations in spectrum loading. The
final tasks prior to marketing will be an even larger group of demonstration
tests.
The Fatigue Fuse is in its final stages of testing and development. To
beginmarketing the Fatigue Fuse, will take from 6 to 12 months and cost
approximately $600,000, including technical and beta testing and final
development. Iftesting, development, and marketing are successful, management
estimates Matechshould begin receiving revenue from the sale of the Fatigue Fuse
within a yearof receiving the $600,000. Management cannot estimate the amount
of revenuethat may be realized.
To date, certain organizations have included Matech's Fatigue Fuse in test
programs. Already completed are tests for welded steel civil bridge members. In
1996, Westland Helicopter, a British firm, tested the Fatigue Fuse on
Helicopters. That test was successful in that the legs of the fuses failed in
sequence as predicted. British Aerospace is conducting a full scale, 3 year test
of the Fatigue Fuse on Grumman T-38 training aircraft. Matech has also received
commercial inquires on the availability of fatigue Fuses for windmills, marine
cranes, and refinery pressure vessels.
DESCRIPTION OF TECHNOLOGIES
The Fatigue Fuse
The Fatigue Fuse was designed to be affixed to a structure to give warnings as
preselected portions of the fatigue life have been used up (i.e., how far to
failure the object has progressed).It will give warnings 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 of the "fingers" has a
different geometric pattern called "notches" defining its boundaries. By
application of the laws of physics in determining the geometric contour of each
of the notches, the fatigue life of each of the fingers should be finite and
predictable. When the fatigue life of a given finger (or Fuse) is reached, the
fuse breaks. By implementing different geometry of each finger in the array,
different increments of fatigue life become observable. Typically, notches will
be designed to facilitate the observation of increments of fatigue life of 10%
to 20%. By mechanically attaching or bonding these devices to different areas of
the structural member of concern, the Fuse undergoes the same fatigue history as
the structural member. Therefore, breakage of a Fuse will indicate that an
increment of fatigue life has been reached for the structural member.
Fatigue results from a metal object being subjected to repeated cyclic strain.
In a commercial context this strain and concomitant stress comes about as a
result of a large number of cycles of loading and unloading. Sudden fracture can
result. Fatigue damage and the resultant compromise of the stability and
integrity on the member experiencing fatigue can present the potential for
structural failure and extreme danger. Such objects as bridges and the wings of
airplanes are subject to fatigue and it is obvious that the sudden fracture of
such an object would have disastrous results. It is presently impossible, under
any generally acceptable theory of fatigue phenomena, to predict by analysis
alone when the limit is reached and when a fracture may take place. Further, in
normal usage, the damage occurs cumulatively, at microscopic levels and can only
be detected in the early stages at a time when dire results can be avoided by
examination of the microscopic structure.
This difficulty has caused designers of objects and structures subject to
fatigue to be extremely conservative by designing structures in a manner which
maintains the stresses presented in critical areas of a structure at a level
well below the know endurance limits of the material employed. In many instances
this has resulted in extreme expense. In spite of this "overdesigning",
catastrophic fatigue failures still occur. Although tests of the Fatigue Fuse
have been performed in independent laboratories and the Fuse has been shown to
perform as designed and as expected, Management has determined that substantial
additional testing is necessary to ensure that it will be possible to calibrate
various types of loading spectra, i.e., the range and types of stresses which a
metal object experiences during usage. Management estimates that it will
require an outlay of approximately $350,000 to accomplish this additional
testing. If this money were available, Management estimates that such additional
testing could be accomplished in 6 to 12 months.
Management believes that the Fatigue Fuse will be of value in monitoring
aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc. No
special training will be needed to qualify individuals to report any broken
segments of the Fatigue Fuse to the appropriate engineering authority for
necessary action. The success of the device is contingent upon Matech's
successful development and marketing of the Fatigue Fuse, and no assurance can
be given that Matech will be able to overcome the obstacles relating to
introducing a new product to the market. To determine its ability to produce and
market the Fatigue Fuse, Matech needs substantial additional capital and no
assurance can be given that needed capital will be available.
Electrochemical Fatigue Sensor ("EFS")
In August, 1993, Tensiodyne, a predecessor of Matech 1, entered into two
agreements, a license and a development agreement, with the University of
Pennsylvania regarding a new invention designed to measure electrochemically the
status of fatigue of a structure without knowing the structure's past loading
history. Pursuant to the license agreement, 12,500 shares of Tensiodyne's common
stock were issued, a 5% royalty on sales of this product was granted, and under
the development agreement Tensiodyne undertook to pay $11,112 per month for a
total of 18 months, for a total payment of $200,000. As of this date, no
payments have been made on this obligation. On December 17, 1997, the company
and the University modified the terms of the licensing agreement and related
obligation. The terms of the modified agreements include an increase in the
University's royalty to 7% of the sale of related products, the issuance of
additional shares of the Company's Class A Common Stock to equal 5% of the
outstanding stock of the Company as of December 17, 1997, 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 $200,000
plus interest at 1 (r) % per month from June 30, 1997.
The EFS is a high precision instrument consisting of (a) a cell which can be
attached to a structure to measure electrical current and (b) software to
interpret the current measurements. The cell is an enclosure which contains a
fluid or gel which conducts electricity and two metal electrodes connected to
external wires leading to a battery and the current measuring instrument. The
sensor is temporarily attached to a structural member, then the member is
subjected to multiple loads while the instrument records the current. A computer
analyzes the current record to determine the degree of fatigue damage present at
the location of the sensor in the structure. Then the sensor is removed.
Preliminary tests at the University of Pennsylvania on different metals
indicates that various stages of fatigue in each metal produce a current
specifically associated with each stage. For example, if the specific metal has
experienced 20% of its fatigue life, the current produced with the EFS
technology has certain characteristics, i.e. a signature. If the metal has
experienced 40% of its fatigue life, the current has a different but distinct
signature associated with that amount of fatigue.
The EFS is in the initial stage of research. No assurance can be given that it
can be successfully developed or that, if successfully developed, it can be
produced at a commercially acceptable price, and that even if these two
conditions are met, that there will be a market for the EFS.
PATENTS
Matech is the assignee of four patents originally issued to Tensiodyne
Corporation, a predecessor of Matech. The first was issued on May 27, 1986, and
expires on May 27, 2003. It is entitled "Device for Monitoring Fatigue Life" and
bears United States Patent Office Numbers 4,590,804. The second patent, entitled
"Method of Making a Device for Monitoring Fatigue Life" was issued on February
3, 1987 and expires February 3, 2004, United States Patent Office Number
4,639,997. The third patent, entitled "Metal Fatigue Detector" was issued on
August 24, 1993 and expires on August 24, 2010, United States Patent Number
5,237,875. The fourth patent, entitled "Device for 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.
STRATEGIC ALLIANCE WITH STRUCTURAL INTEGRITY MONITORING SYSTEMS
The Company has entered into a strategic alliance with Structural Integrity
Monitoring Systems ('SIMS') of Willimantic, Connecticut. The company and SIMS
are in the final stages of planning to obtain government funding to develop and
demonstrate a bridge monitoring systems. The Company and SIMS have formed a
Delaware corporation, Millennium Bridge Monitoring, Inc. The Company and SIMS
will each own 50% of Milllennium Bridge and will each license its technology to
that Company. Millennium Bridge will then apply for federal government funds
for development and a demonstration project. As this plan is in its early
stages, the Company can
DISTRIBUTION METHODS OF PRODUCT
Provided there are funds to support such activities, as to which no assurance
can be given, Matech intends to exhibit the Fatigue Fuse and the Electrochemical
Fatigue Sensor at various aerospace trade shows and will also market its
products directly to end users, including aircraft manufacturing and aircraft
maintenance companies, manufactures and operators of cranes, certain state
regulatory agencies charged with overseeing maintenance of bridges, and
companies engaged in manufacturing and maintaining large ships and tankers, and
to the military. Although management intends to undertake marketing, dependent
on the availability of funds, within and with out the United States, no
assurance can be given that any such marketing activities will be implemented.
Competition
Matech's Products
1. The Electrochemical Fatigue Sensor is intended to provide a fatigue
measurement which cannot now be obtained from any other instrument, namely, an
assessment of the extent of fatigue damage before cracks have grown to a size
detectable by nondestructive inspection, in a structure which has not previously
been instrumented or monitored to record the loads or strains experienced in
service.
2. The Fatigue Fuse provides a simple low-tech way to assess and predict fatigue
damage, which otherwise requires complex instrumentation, precision data
recording, and sophisticated analytical programs.
Competitor's Products
Other technologies exist which indicate fatigue damage. Single cracks larger
than a minimum size can be found by nondestructive inspection methods such as
dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics.
Track of load and strain history, for subsequent estimation of fatigue damage by
computer processing, is possible with recording instruments such as stain gauges
and counting accelerometers. These methods have been used for up to 40 years and
also offer the advantage that they have been accepted in the market, whereas
Matech's products will remain largely unproven for some currently indeterminable
period. Companies marketing these alternate technologies include Magnaflux
Corporation, Kraut-Kermer-Branson, Dunegan-Endevco, and MicroMeasurements. These
companies have more substantial assets, greater experience, and more resources
than Matech, including but not limited to, established distribution channels and
an established computer base. The familiarity and loyalty to these technologies
may be difficult to dislodge. Because Matech is still in its development stage,
it is unable to predict whether its technologies will be successfully developed
and commercially attractive in potential markets.
ITEM 2. PROPERTIES
As of April 10, 1997, the Company entered into a lease at 11661 San Vincente
Boulevard, Suite 707, Los Angeles, California, 90049, which has a term of 24
months beginning June 1, 1997. The space consists of 830 square feet and will be
adequate for the Company's current and foreseeable needs. The total rent is
$40,464.00 payable at $1,868.00 per month.
Matech owns a remote monitoring system and certain manufacturing equipment which
is presently leased to the University of Pennsylvania (Laboratory for Research
on the Structure of Matter) for instructional and testing purposes. In
consideration for leasing this equipment, the University has agreed to perform
1,200 hours of testing on materials to be used in connection with the Fatigue
Fuse. The first five year term of this lease will expire on March 31,1998.
Lessee has the right to borrow the equipment for a further five year period.
Upon the expiration of the second five year period, the University has the right
to purchase the equipment at its then fair market value.
ITEM 3. LEGAL PROCEEDINGS
On August 26, 1997, the Company and its President, Robert M. Bernstein filed a
complaint in the Superior Court of the Commonwealth of Massachusetts, Suffolk
Co., Material Technologies, Inc. and Robert M. Bernstein v. Sherman Baker et
al., No. 97-4590B. The complaint seeks a declaratory judgment that, under a 1994
agreement with a group of investors known as the Baker Group, that group is not
entitled to receive shares of the Company without payment of consideration.
Under the 1994 agreement, Robert M. Bernstein is required to provide the Baker
Group with the opportunity to purchase 35% of any and all shares that the
Company issues to him.
On October 22, 1997, the Baker Group defendants filed an answer and
counterclaims against Robert M. Bernstein only. The Baker Group also seeks a
declaratory judgment and damages against Mr. Bernstein for breach of contract
and for inducing the group to enter into an exchange agreement in connection
with the SecurFone transaction that was closed on July 31, 1997. As a result of
the Baker Group's claims against Mr. Bernstein and in order to close the
SecurFone transaction, Mr. Bernstein placed 150,000 of his SecurFone shares in
escrow subject to a resolution of the Baker Group's claims and SecurFone has
withheld payment of $50,000 to the Company until those claims are resolved. The
Company's failure to receive that $50,000 has had an adverse impact on the
Companies operating capital. The parties are in the midst of settlement
discussions.
On January 13, 1998 Linda Biron, an individual, served a Complaint on Robert M.
Bernstein, the Company's President, claiming breach of a contract between Ms.
Biron and Mr. Bernstein. Ms. Biron alleges that she had an agreement with Mr.
Bernstein that she would be paid $100,000 if the Company received government
funding as a result of her efforts in introducing Mr. Bernstein to certain
individuals, that she made the introductions, and that such funding was received
but she was not paid the $100,000. Matech is not a party to the suit but the
Company is paying for Mr. Bernstein's defense in the action. Mr. Bernstein
denies the material allegations of the Complaint. In management's opinion the
allegations are spurious as there was no enforceable contract between Ms. Biron
and Mr. Bernstein and Ms. Biron's introductions were not a cause of the funding
the Company received.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 31, 1997, Robert M. Bernstein, as the holder of 2,426,130 shares of
Class A Common Stock in Matech 1 and 60,000 shares of Class B Common Stock in
Matech 1 with 200 votes per share, Joel Freedman as the holder of 113,481 shares
of Class A Common Stock in Matech 1, and John Goodman as the holder of 58,000
shares of Class A Common Stock in Matech 1 authorized the transfer of all Matech
1's assets and liabilities to the Company (Matech 2) in exchange for 5,560,000
shares of the Company's (Matech 2) common stock and the distribution of
5,000,000 of those shares to the Matech 1's shareholders under an S-1
Registration Statement which became effective on July 31, 1997, leaving Matech 1
with 560,000 shares of Matech 2. Matech 1's shareholders received a 14C
Information Statement prior to the vote. These shareholders also (a) authorized
Matech 1 to reverse split its stock one for ten (1 for 10) reducing Matech 1's
outstanding shares from 5 million to 500,000, (b) authorized the closing of the
Stock Purchase agreement among Montpilier Holdings, Inc., SecurFone America,
Inc., Matech 1, and Robert M. Bernstein, (c) the issuance of 4,500,000 of Matech
1's Class A Common Stock in exchange for all the stock of SecurFone America,
Inc., and (d) that Matech 1's name be changed to SecurFone America, Inc.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 31,1997, Matech 2's S-1 registration became effective for distribution
of 707,911 shares of Class A Common Stock to 408 shareholders of Material
Technology, Inc. as of July 31, 1997.
The Company's Class A Common Shares were then quoted on the NASDAQ Bulletin
Board. Its trading symbol is MTEY.
On November 3, 1997, the Board authorized the Corporation to issue 100,000shares
of Class A Common Stock to Miles Wilson for his valuable consultingservices.
On November 21, 1997, the Board authorized the Corporation to issue
100,000shares of Class A Common Stock to Alex Adelson for his valuable
consultingservices.
From July 31 through December 31, 1997, Matech's Class A Common Stock was quoted
between a low bid of $.2812 per share and a high bid of $2.50 per share on the
NASDAQ Bulletin Board. Such over-the-counter quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions. The following chart contains the high and low bid
prices per share in the last two calendar quarters of 1997.
High Low
---- ---
Third Quarter $1.75 per share $.50 per share
Fourth Quarter $2.50 per share $.2812 per share
On December 31, 1997, there were 419 shareholders.
No dividends on any of the Company's shares were declared or paid during 1997
nor are any dividends contemplated in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Corporation are derived from the
Corporation's consolidated financial statements. The selected financial data
should be read in conjunction with the Corporation's financial statements
attached hereto.Fiscal Year Ending December 31d
<TABLE>
<CAPTION>
Inception to
1993 1994 1995 1996 1997 12/31/1997
<S> <C> <C> <C> <C> <C> <C>
Net
Sales . . . . 0 0 0 0 0 0
Income from
Research and
Development
Contract. . . 0 0 0 0 $ 336,410 $ 336,410
Income
(Loss)
From
Continued
Operations. . (714,605) (377,063) (203,849) (483,186) (177,221) (2,849,320)
Income
(Loss)
From
Continued
Operations
Per Common
Share . . . . $ (.51)
Common
Shares
Out-
standing. . . 5,787,000
Total
Assets. . . . $ 167,858 $ 184,579 $ 150,692 $ 208,299 $ 287,257
Total
Liabil-
ities . . . . $ 401,600 $ 620,375 $ 783,882 $1,046,517 $ 618,582
Redeem-
able
Preferred
Stock . . . . 0 $ 150,000 $ 150,000 $ 150,000 $ 150,000
Total
Stock-
holders'
Equity
(Deficit) . . $ (619,166) $(585,796) $(783,190) $ (988,218) $(481,325)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations, capital resources, and
liquidity pertains to the consolidated activities of Material Technology, Inc.,
("Matech 1") for 1996 and of the Company for the year ended December 31, 1997.
Since July 31, 1997, the Company has been successor to all of the assets and
operations of Matech 1.
Results of Operations for the Years Ended December 31, 1995, 1996, and 1997
Revenues
Neither Matech 1 nor the Company generated any significant revenue in 1996, or
1995. In 1997, the Company received $336,410 under its contract with Southwest
Research Institute ("SWRI"). In addition, the Company received $70,000 to
reimburse expenses for the SecurFone transaction and is due another $50,000
which is being retained by SecurFone until the claims of the Baker Group are
resolved. (See, "Legal Proceedings").
COSTS AND EXPENSES
General and Administrative costs were $435,222 for 1997, $472,486 for 1996, and
$188,745 for 1995. The major costs in 1997 were legal costs of $166,102 incurred
in contracting for government funds for research and development of the EFS
technology and effecting the SecurFone transaction, officers' salaries of
$90,417, consulting fees of $111,013, filing and public relations costs of
$31,917 primarily for the Company's filings with the SEC relating to the
SecurFone transaction, employee expenses of $27,286, travel expenses of $20,744,
and rent of $28,136.88.
The major costs in 1996 were officers' salaries of $200,000, professional fees
of $111,080, office related expenses of $45,136, travel expenses of $21,902,
rent of $16,742 and consulting fees totaling $34,631. The primary increase in
these expenses from 1995 resulted from the Board approving compensation of
$200,000 to Robert M. Bernstein for his successful negotiation of the teaming
agreement with SWRI and the University of Pennsylvania which resulted in the
United States Air Force awarding SWRI a $2,500,000 contract in February 1997 to
conduct research on the Company's EFS technology.
The major costs incurred during 1995 were professional fees of $33,206, the
charge-off of offering costs of $31,480, office related expenses of $19,751,
travel cost of $28,298, rent of $28,514, interest of $10,817, and consulting
fees of $15,362.
Liquidity and Capital Resources
The Company's accountant has opined that the Company's financial condition
raises substantial doubt concerning the Company's ability to continue as a going
concern. As a result of the Company's subcontract with SWRI related to its
contract with the U.S. Air Force which is providing $2.5 million for research on
the EFS technology and the possibility of additional government funding in
addition to that contract, it appears that the Company will have sufficient
funds to continue operating at least through 1998.
As reflected in the numbers below, over the past three years, to continue
seeking capital and to maintain its patents, the Company was totally dependent
on the willingness of the Company's President, Mr. Bernstein, and long time
investors in the Company to loan the Company money or purchase additional
securities from the Company. Over the next year, the Company expects to receive
additional funds from a subcontract with SWRI relating to its research contract
that the United States Air Force awarded to SWRI on February 25, 1997 plus an
extension of that contract. These funds, however, are not guaranteed. In
addition, once the Baker law suit is resolved, the Company expects to receive an
additional $50,000 from SecurFone America, Inc. under the Stock Purchase
Agreement which will provide the Company additional working capital. These
funds, however, are only a beginning, the Company estimates substantial
additional funds will have to be raised to complete research and development and
bring its products to market. Although, Mr. Bernstein intends to continue to
loan the Company funds as required to seek additional financing, he is under no
obligation to do so. The Company does not expect to receive any additional
material financing from its other long time investors.
Any prediction of the likelihood or timing of obtaining the required funding
would be highly speculative. The Company's ability to obtain such financing may
depend on the results of the research contract with SWRI which will not be
evident for a year or more.
Cash and cash equivalents at December 31,1997 were $2,451. During 1997, the
Company received $100,000 from the sale of its Class A common stock under the
Company's 1996 Stock Option Plan. The Company's president advanced $119,000,
including direct loans to the Company and payment of Company expenses, and
$79,659 was repaid towards his loan account.
As of December 31, 1996, cash and cash equivalents were 0. During 1996, the
Company received $242,290 including $170,040 for the issuance of Class A common
stock under the Company's 1996 Stock Option Plan, a $43,250 loan from the
President, and a $25,000 loan from an unrelated third party. Of the $242,290
received, $64,676 repaid loans from the President, $5,000 paid legal fees in
connection with the S-1 Registration Statement, and the remaining $172,614 was
used in operations.
Cash and cash equivalents at December 31, 1995 amounted to $1,226. During 1995,
the Company's president advanced $100,874, including direct loans to the Company
and payment of Company expenses, of which $16,000 was repaid. Also in 1995, the
Company borrowed $58,000 from Mr. Sherman Baker. Of the amounts received in
1995, $135,378 was used in Company operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as at December 31, 1997 prepared in accordance with
Regulation S-X (17C.F.R. 210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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 63 President/Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 37 Secretary/Director
Dr. John Goodman 63 Chief Engineer/Director
The Term of the directors and officers of Matech is until the next annual
meeting or until their successors are elected.
ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.
Robert M. Bernstein is 63 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 acted as a consultant
specializing in mergers, acquisitions, and financing. From 1981 to 1986, Mr.
Bernstein was Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc.
of Philadelphia, Pennsylvania, an oil and gas exploration company. In December
1986, he formed a research and development partnership for Tensiodyne funding
approximately $750,000 for research on the Fatigue Fuse. From January 1986 until
September 1986, Mr. Bernstein was President and Chief Executive Officer of
Tensiodyne Corporation and in October 1988 became Chairman of the Board,
President, Chief Financial Officer, and CEO of Matech 1 and retained these
positions with the Company after the spin off from Matech 1 on July 31, 1997.
JOEL R. FREEDMAN, SECRETARY/DIRECTOR. Joel R. Freedman is 37 years of age. From
October 1989 until February 1994, Mr. Freedmen was Secretary and a Director of
Tensiodyne and Matech 1, retaining these positions with the Company after the
spinoff from Matech 1 on July 31, 1997. Mr. Freedman attends board meetings and
provides advice to the Company as needed. Since 1983, he has been president of
Genesis Securities, Inc., a full-serve brokerage firm in Philadelphia,
Pennsylvania. His duties there are a full-time commitment. Accordingly, he does
not take party in Matech's day to day activities, He is not a director of any
other company.
DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR. Dr. John W. Goodman is 63 years of
age. Dr. John Goodman is presently Senior Staff Engineer, Materials Engineering
Department of TRW Space and Electronics and was formerly Chairmen of the
Aerospace Division of the American Society of Mechanical Engineers. He holds a
Doctorate of Philosophy in Materials Science which was awarded with distinction
by the University of California at Los Angeles in 1970, received in 1957 a
Masters of Science degree in Applied Mechanics from Penn State University and in
1955 he received a Bachelor of Science degree in Mechanical Engineering from
Rutgers University. From 1972 to 1987 Dr. John Goodman was with the United
States 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 Development
of Matech's products since May 1993. He worked full time for Matech 1 from
August 1993 to December 1994, when he returned to TRW. Since then he has
consulted with the Company periodically.
ADVISORY BOARD
Since 1987, Tensiodyne and then Matech 1, as the successor to Tensiodyne, and
then the Company as successor to Matech 1's business, has had an Advisory Board
presently consisting of Alexander M. Adelson, William F. Ballhaus, Robert P.
Coogan, Dr. Malcolm H. Hodge, Campbell Laird, Ronald Landgraf, Robert Madden,
Samuel I. Schwartz and Miles Wilson. These individuals consult with the Company
on an as needed basis ranging form one hour per week to a few minutes every
other month. The 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 if the members of the advisory board is as follows:
ALEXANDER M. ADELSON. Alexander M. Adelson is age 63 and has thirty years as an
applied physicist and businessman specializing in technical marketing matters.
Since 1974, Mr. Adelson has led the Technology Resource Group of RTS Research
Lab, Inc. ("RTS). This group provides management, product development, and
related marketing services to various clients with specialization in technical
marketing matters. For example, RTS helped conceive and develop the first
portable bar code scanner and acted as program manager for 12 years while
developing two generations of portable bar code laser scanners for Symbol
Technologies, Inc. Mr. Adelson holds 64 patents in the fields of optical
electronics, bar code technology, automatic inspection, and medical software.
Mr. Adelson serves on the board of directors of Base 10, Inc. Nocopi
Technologies, Inc., and PatComm Corporation.
WILLIAM F. BALLHAUS. William F. Ballhaus, age 79, now retired, was an
Aerodynamacist with Douglas Aircraft Company, a Vice President and General
Manager, Nortonics Division of Northrop Aircraft, Inc., Executive Vice President
of Northrop Corporation, and was President of Beckman Instruments, Inc. from
1965-1983. He is director of Republic Automotive Parts, Microbics Corp., and
Nucio Industries.
ROBERT P. COOGAN. Robert P. Coogan, age 73, 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 t 1991 he was with Aerojet
General Company and served as Executive Vice President of Aerojet Electrosystems
Co. from 1982-1991. He has his B.S. in Engineering from the US Naval Academy and
M.A. in International Affairs from George Washington University.
DR. MALCOLM H. HODGE. Dr. Hodge, age 55, received his Ph.D. in Ceramic Science
from Penn State. He is currently the President and CEO of Structural Integrity
Monitoring Systems, Inc. (SIMS). From 1994 to 1996, he was Chairman and
President of Applied Fiberoptics, Inc. Previous to that he spent ten years with
Ensign-Bickford Industries, Inc. as Corporate Vice President of Technology.
CAMPBELL LAIRD. Campbell Laird, age 61, 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 has published in excess of 250 papers. He is the
co-inventor of the EFS.
RONALD W. LANDGRAF. Ronald W. Landgraf, age 58, is presently a Professor in the
Department of Engineering Science & Mechanics at Virginia Tech, Blacksburg,
Virginia. He spent 20 years in the industrial sector, first as a Material
Engineer in the Micro Switch Division of Honeywell, Inc. in Freeport, Illinois,
and later as a Research Scientist, Metallugy Dept., Engineering & Research Staff
of Ford Motor Company in Dearborn, Michigan. In 1988, he became a Visiting
Professor at Virginia Tech and in 1990, a Professor.
ROBERT MADDEN. Robert Madden, age 78, is presently retired. He received his BS
from Purdue University in 1942 and Doctor of Engineering from Yale University in
1948. From 1957 to 1972, he was director and later chairman of the Department of
Metallurgy, University of Pennsylvania; from 1973 to 1983 was Professor of
Metallurgy at the University of Pennsylvania, from 1984 to 1987 was a visiting
professor of Anthropology at Harvard University and from February 1987 until
recently has been an honorary curator of archaeological sciences, Peabody Museum
of Archaeology and Ethnology, Harvard University.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 48, is presently President of Sam
Swartz Co., a consulting engineers, primarily in the bridge industry. Mr.
Schwartz received his BS in Physics for Brooklyn College in 1969, and his
Masters in Civil Engineering for 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
has acted as a director of 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 a columnist for the New York Daily
News.
MYLES WILSON. Myles Wilson, age 62, is Chief Executive Officer of Specialized
Executives Unlimited, a 60 person consulting and interim management firm. He
received his MBA in Industrial Management and his BS in Economics and Accounting
from The Wharton School of the University of Pennsylvania. From 1983 to 1986, he
was Vice President of Alexander's department store chain responsible for
management information systems and the Chief Information Officer. From 1986 to
1989, he was a Senior Vice President of the Gimbel/Saks Fifth Avenue
Corporation.
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and
Principal Other Annual
Position Year Salary($) Bonus($) Compensation($)
<S> <C> <C> <C> <C>
Robert M. 1994 (1)$72,000 0 0
Bernstein 1995 0 0 0
1996 (3)$200,000 0 0
1997 $ 90,417 0 0
</TABLE>
<TABLE>
<CAPTION>
Restricted All
Stock Options/ LTIP Compen-
Awards($) SARs(#) Payouts($) sation($)
<S> <C> <C> <C> <C>
Robert M. 1994(2) $ 10 0 0 $ 104
Bernstein 1995 0 0 0 0
1996(3) $ 620 0 0 0
1997 $ 1,500 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Name and
Principal Other Annual
Position Year Salary($) Bonus($) Compensation($)
<S> <C> <C> <C> <C>
John W.
Goodman. . . . . . 1994 $ 71,096 0 0
Director and . . . 1995 $ 2,745 0 0
Engineer . . . . . 1996 0 0 0
1997 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Restricted All Other
Stock Options/ LTIP Compen-
Awards($) SARs(#) Payouts($) sation($)
<S> <C> <C> <C> <C>
John W.
Goodman. . . 1994 0 0 0 0
Director and 1995 0 0 0 0
Engineer . . 1996 0 0 0 0
1997 0 0 0 0
</TABLE>
(1) This $72,000 was accrued.
(2) In February 1994, Matech 1 issued 10,000 shares of
Class A Common Stock, par value $.001, to Mr. Bernstein.
(3) In 1996, Matech 1 issued 62,000 shares of Class A Common
Stock par value $.001, to Mr. Bernstein.
(4) On July 31, 1997, Matech 1 issued 1,049,454 shares of
Class A Common Stock to Mr. Bernstein in exchange for
$372,000 in accrued salary owed to Mr. Bernstein and
the Company authorized issuing Mr. Bernstein an
additional 450,000 shares of its Class A common stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS
OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Class of Name and Address Amount and Nature Percent of Percent of
Stock of Beneficial of Beneficial Class Votes Entitled
Owner Ownership To Be Cast
<S> <C> <C> <C> <C>
Class A Robert M. 2,578,700 44.6% 14.2%
Common Bernstein, CEO Shares
Stock 1161 San Vicente
Blvd., Suite 707
Los Angeles, CA
90049
Joel R. 114,281 Shares 2% 6%
Freedman
Director
1 Bala Plaza
Bala Cynwyd,
PA 19004
John Goodman, 58,000 Shares 1% 3%
Director
1161 San Vicente
Blvd., Suite 707
Los Angeles, CA
90049
Directors and 2,750,981 Shares 47.5% 15.2%
Executive
Officers as a
Group (3)persons
SecurFone 560,000 Shares 9.7% 3.1%
America, Inc.
5850 Oberlin
Drive Suite 220
San Deigo, CA
92121
Sherman Baker 505,700 Shares 8.7% 2.8%
555 Turnpike St.
Canton, MA 02021
Class B Robert M. 60,000 Shares 100% 66.1%
Common Bernstein
1161 San Vicente
Blvd., Suite 707
Los Angeles, CA
90049
Class A Sherman Baker 131,600 Shares 37.6%(3) .7%
Preferred 555 Turnpike St. Beneficial
Canton, MA 02021 Owner (1)
Nathan Greenberg 35,000 Shares 10% .2%
306 Main Street Beneficial
Worchester, MA Owner (1)
01608
Melvin Nessel 35,000 Shares 10% .2%
180 Beacon St. Beneficial
Boston, MA Owner (1)
02111
Eugene Ribakoff 35,000 Shares 10% .2%
46 W. Boylston Beneficial
Street, Boston, Owner (1)
MA 01608
Norman Fain 21,000 Shares 6% .1%
505 Central Ave. Beneficial
Pawtucket, RI Owner (1)
02862
Morris Loeb 21,000 Shares 6% .1%
2368 Century Beneficial
Hill, Los Angeles Owner (1)
CA 90067
A. Sandler 21,000 Shares 6% .1%
139 Atlantic Ave. Beneficial
Swamscott, MA Owner (1)
01907
Class B Tensiodyne Corp. 15 Shares 100% .000001%
Preferred 400 S. Colorado
Blvd., Denver,
CO 80222
</TABLE>
Description of Capital Stock
The Company is authorized to issue 11,000,000 shares of stock. Each of the
11,000,000 shares of stock has a par value of $.001. Of the Shares authorized,
10,000,000 are Class A Common Shares; 100,000 are Class B Common shares; and
900,000 are Preferred shares.
Holders of the Class A common stock are entitled to one vote per share of common
stock held.
Holders of the Class B Common stock are entitled to 200 votes for each share of
Class B Common held but are not entitled to dividends by reason of their holding
shares of Class B Common stock; nor are they entitled to participate in any
proceeds in the event of a liquidation of the Company.
The Certificate of Incorporation of the Company provides that the designation of
powers, preferences and rights, including voting rights, if any, qualifications,
limitations or restrictions on Preferred Stock is to be fixed by resolution or
resolutions of the Board of Directors.
On April 30, 1997, the Company filed with the Secretary of State of the State of
Delaware a Certificate of Designation designating 350,000 of the 900,000
preferred shares as Class A Preferred convertible stock. Under the Certificate
of Designation, 350,000 shares of preferred stock were designated Class A
Convertible Preferred Stock (hereinafter referred to as "Class A Preferred").
Class A preferred has a liquidation preference. In the event of liquidation,
holders of Class A Preferred have the right to receive $.72 for Each Share of
Class A Preferred held; before any payment is made or any assets are distributed
to holders of Common Stock, or any other stock of any other series or class
ranking junior to these shares. In the event of liquidation, holders of Class A
Preferred are not entitled to payment beyond $.72 per share. These provisions
may have the effect of delaying, deferring or preventing a change of control.
Each share of Class A Preferred is convertible into common stock at the
discretion of the holder, at the rate of one share of Class A Preferred for each
.72 share of common stock. Under the Certification of Designation, Matech is not
permitted to issue stock which is senior to or pari passu with Class A Preferred
without prior consent of a majority of the outstanding Class A Preferred shares.
Adjustment of the number of Class A Preferred outstanding is provided for in the
event of any reclassification of outstanding securities or of the class of
securities which are issuable upon conversion of shares and in the event of any
reorganization of Matech which results in any reclassification or change in the
number of shares outstanding. Similarly, in the event of any such change, the
conversion price is subject to adjustment to reflect such change. If at any time
while shares of Class A Preferred are outstanding a stock dividend on the Common
Stock is issued, the conversion price will be adjusted to prevent any dilution
of the holders' of Class A Preferred right of conversion. If (a) there is a
reclassification or change in Matech's Common Stock to which the Class A is
convertible other than stock splits or other decrease or increase in the number
of shares outstanding, (b) Matech consolidates or merges with another
corporation, or (c) Matech sells or transfers substantially all of its assets,
then the Class A preferred shareholders are entitled to the same consideration
as they would have been entitled to if their shares had been converted prior to
the reclassification, change, consolidation, merger, sale or transfer. This
provision may have the effect of delaying, deferring or preventing a change in
control. Voting rights and the right to receive dividends inherent in Class A
Preferred are similar to those rights which inure to the Common Stock.
On April 30 1997, the Company filed a Certificate of Designation bringing into
existence a Class B Preferred Stock. Class B Preferred Stock is junior and
subordinate to Class A Convertible Preferred Stock. Fifteen (15) shares of Class
B Preferred Stock were authorized from the 9,650,000 undesignated preferred
shares in connection with the Agreement and Plan of Reorganization. Fifteen (15)
shares have been issued to Tensiodyne in connection with the reorganization on
exchange for $150,000. In the event of liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary holder of Class B Preferred Stock
are entitled t receive $10,000 per share as a liquidation preference. this
liquidation preference is senior to the liquidation rights of all other classes
of stock except the Class A Preferred's liquidation rights. This provision may
have the effect of delaying, deferring or preventing a change in control. At any
time, Matech has the option to redeem Class B Preferred stock of $10,000 per
share plus any unpaid dividends. After January 31, 2004, holders have the option
to redeem their shares at any time. The holders have the right to receive cash
dividends, which are determined pursuant to a formula set forth in the
Certificate of Designation. That formula reads as follows: "Each time cash
dividend is paid on the Common Stock there shall also be paid with respect to
each outstanding share of Class B Preferred Stock and amount determined by
multiplying the aggregate amount of the dividend paid with respect to the Common
Stock by a fraction (i) the numerator of which the dividend was paid, and (x)
multiplying the resulting product by thirty percent (30%) and then (y) dividing
the resulting product by five hundred and ten (510)." Holders of Class B
Preferred Stock shall have one (1) vote per share and shall be entitled by class
vote to elect one (1) director and to vote, as a class, on removal of any
director so elected. Otherwise, holders of Class B Preferred Stock shall not
have the right to vote as a class on any matter.
As of date hereof, 5,787,000 shares of Class A Common Stock are outstanding and
held by 419 shareholders; 60,000 shares of Class "B" Common Stock are
outstanding and are held by one shareholder, Robert M. Bernstein; 350,000 shares
of Class A Convertible Preferred Stock are outstanding and are held by 12
shareholders; and 15 shares of Class B Preferred Stock are outstanding and are
held by one shareholder, Tensiodyne Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Robert M. Bernstein advanced funds to the Company and at
December 31, 1997 the Company owed him $118,863. The Board has approved paying
Mr. Bernstein interest at the rate of 10% per year on his advances. Robert M.
Bernstein is under no obligation to make further advances to the Company but may
continue to so do at his sole discretion.
In March 1998, the Board authorized the Corporation to issue a total of2,430,000
shares of Class A Common Stock and to sell those shares at $.07 pershare to
Robert M. Bernstien for a total of $170,000 that he has lent to theCorporation,
including $25,000 on March 9, 1998. Mr. Bernstein will offer tosell part of
these Class A Common Stock at $.07 per share to a group ofpreferred shareholders
known as the Baker Group in accordance with a 1994agreement between the Company,
Mr. Bernstein and that Group. The sale of thestock provided needed working
capital.
On August 7, 1997, the Company's Board of Directors passed the following
resolution:
IT IS RESOLVED that, if the Corporation profits substantially from the work of
Robert M. Bernstein by obtaining what the Board determines to be substantial
funding, licensing its technology, selling its technology, merging with another
company, or otherwise profiting in a substantial manner from Mr. Bernstein's
efforts (the "triggering event"), the Corporation shall pay Mr. Bernstein a
minimum of $150,000 in salary for each year that he has acted as President and
Chief Executive Officer from 1991 to the date of the triggering event. This
amount is intended to be a minimum salary and not in addition to any other
salary paid to or accrued for Mr. Bernstein.
On February 21, 1997, Matech 1 entered into a Stock Purchase Agreement with
Montpelier Holdings, Inc., ("MHI") SecurFone America, Inc., ("SecurFone") and
Robert M. Bernstein, the Chief Executive Officer and controlling shareholder of
Matech 1. Under that agreement, on March 4, 1997, the Company (Matech 2) was
formed. On July 31, 1997, Matech 1 transferred all of its assets and liabilities
to Matech 2 in exchange for 5,560,000 shares of the Company's Class A Common
Stock and the parties to the Agreement effected a reverse merger of SecurFone
into Matech 1. Upon closing, Matech 1 acquired SecurFone America, Inc., and
issued 4,5000,000 shares of Matech 1's common stock to SecurFone's shareholders
representing 90% of Matech 1's outstanding capital stock. Matech 2 then caused
4,550,000 of its Class A Common shares to be distributed to Matech 1's
shareholders, one share of Matech 2's shares for each share of Matech 1. As part
of this distribution, on July 31, 1997, a registration statement became
effective with the Securities and Exchange Commission under which 707,911 of
these Matech 2 shares were distributed to 408 shareholders with a prospectus.
The Company also issued 450,000 shares to two individuals who arranged the
SecurFone transaction. Matech 1 changed its name to SecurFone America, Inc. and
retained 560,000 shares of the Company's Class A Common Stock.
On March 9, 1997, the Company's Board authorized the issuance of 60,000 shares
of it Class B Common Stock to Robert M. Bernstein, 350,000 shares of its Class A
Convertible Preferred Stock to the Baker Group in exchange for that group's
350,000 shares of preferred stock in Matech 1 which is the subject of litigation
(See, Legal Proceedings), and 15 shares of the Company's Class B Preferred Stock
to Tensiodyne Corporation in exchange for its preferred stock in Matech1. The
rights, privileges, and designations of the Company's Class B Common Stock and
its preferred stock are the same as the corresponding Matech 1 securities except
that the redemption date of Matech 2's Class B Preferred Stock was changed from
January 31,2004 to January 1,2002.
The transfer of Matech's assets and liabilities to Matech 2 and the
distribution of its shares was designed to provide Matech's shareholders with an
interest in SecurFone's business while separating the two businesses which have
distinct missions and distinct financial, investment, and operating
characteristics, as well as different management teams. Maintaining the
separation allows each company to adopt strategies and pursue objectives
appropriate to its specific business and to be valued independently from the
other. The distribution enabled Matech's management to concentrate its attention
and resources on developing its Fatigue Fuse and Electrochemical Fatigue Sensor
without regard to the corporate and financial objectives and policies of
SecurFone.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS IN FORM 8-K
a. Exhibits.
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement among Montpilier Holdings,
Inc., SecurFone America, Inc., Material Technology, Inc., and
Robert M. Bernstein incorporated by reference from the Company's
S-1 Registration Statement effective July 31, 1997.
- --------------------------------------------------------------------------------
2.2 Letter Agreement among Montpilier Holdings, Inc.,
Material Technology, Inc., and Robert M. Bernstein incorporated
by reference from the Company's S-1 Registration Statement effec-
tive July 31, 1997.
- --------------------------------------------------------------------------------
3(i) Certificate of Incorporation is incorporated by
reference from the Company's S-1 Registration Statement that
became on July 31, 1997.
- --------------------------------------------------------------------------------
3(ii) Bylaws of Material Technology, Inc. is incorporated
by reference from the Company's S-1 Registration Statement that
became effective on July 31. 1997
- --------------------------------------------------------------------------------
4.1 Class A Convertible Preferred Stock Certificate of
Designations is incorporated by reference from the Company's S-1
Registration Statement that became effective on July 31, 19, 1997
- --------------------------------------------------------------------------------
4.2 Class B Convertible Preferred Stock Certificate of
Designations is incorporated by reference from the Company's S-1
Registration Statement that became effective on July 31, 1997
- --------------------------------------------------------------------------------
10.1 License Agreement Between Tensiodyne Corporation
and the Trustees of the University of Pennsylvania is
incorporated by reference from the Company's S-1 Registration
Statement that became effective on July 31, 1997
- --------------------------------------------------------------------------------
10.2 Sponsored Research Agreement between Tensiodyne
Corporation and the Trustees of the University of Pennsylvania is
incorporated by reference from the Company's S-1 Registration
Statement that became effective on July 31, 1997
- --------------------------------------------------------------------------------
10.3 December 17, 1997 Amendment 1 to License Agreement
Between Tensiodyne Scientific Corporation and the Trustees of the
University of Pennsylvania is attached hereto.
- --------------------------------------------------------------------------------
10.4 December 17, 1997 Repayment Agreement Between
Tensiodyne Scientific Corporation and the Trustees of the
University of Pennsylvania is attached hereto.
- --------------------------------------------------------------------------------
10.5 Teaming Agreement Between Tensiodyne Scientific
Corporation and Southwest Research Institute is incorporated by
reference from the Company's S-1 Registration Statement that
became effective on July 31, 1997.
- --------------------------------------------------------------------------------
10.6 Letter Agreement between Tensiodyne Scientific
Corporation, Robert M. Bernstein, and Stephen Forrest Beck and
Handwritten modification is incorporated by reference from the
Company's S-1 Registration Statement that became effective on
July 31, 1997.
- --------------------------------------------------------------------------------
10.7 Agreement Between Tensiodyne Corporation and
Tensiodyne 1985-1 R&D Partnership is incorporated by reference
from the Company's S-1 Registration Statement that became
effective on July 31, 1997
- --------------------------------------------------------------------------------
10.8 Amendment to Agreement Between Material Technology,
Inc. and Tensiodyne 1985-1 R&D Partnership is incorporated by
reference from Exhibit 10.6 of Material Technology, Inc.'s S-1
Registration Statement which became effective on July 31, 1997.
- --------------------------------------------------------------------------------
10.9 Agreement Between Advanced Technology Center of
Southeastern Pennsylvania and Material Technology, Inc. is
incorporated by reference from the Company's S-1 Registration
Statement that became effective on July 31, 1997
- --------------------------------------------------------------------------------
10.10 Addendum to Agreement Between Advanced Technology
Center of Southeastern Pennsylvania and Material Technology, Inc.
is incorporated by reference from the Company's S-1 Registration
Statement that became effective on July 31, 1997.
- --------------------------------------------------------------------------------
10.11 Shareholder Agreement Between Tensiodyne
Corporation, Variety Investments, Ltd. and Countryman
Investments, Ltd. is incorporated by reference from the Company's
S-1 Registration Statement that became effective on July 31,
1997.
- --------------------------------------------------------------------------------
10.12 Equipment Loan Agreement between Tensiodyne and the
University of Pennsylvania is incorporated by reference from the
Company's S-1 Registration Statement that became effective on
July 31, 1997.
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule.
- --------------------------------------------------------------------------------
b. Reports on From 8-K - none.
c. Financial Statements - attached.
SIGNATURES
Pursuant to the Requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant had 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 6, 1998
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 6, 1998
By: /s/ Joel Freedman
------------------------
Joel Freedman, Secretary and Director
Date: March 6, 1998
By: /s/ John Goodman
------------------------
John Goodman, Director
Date: March 6, 1998
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Contents
Page
<S> <C>
Independent Auditors Report F-1
Balance Sheets
Statements of Operations F-5
Statement of Stockholders Equity (Deficit) F-6
Statements of Cash Flows F-14
Notes to Financial Statements F-16
</TABLE>
Independent Auditors' Report
Board of Directors
Material Technologies, Inc.
Los Angeles, California
Independent Auditors' Report
Board of DirectorsMaterial Technologies, Inc.Los Angeles, California
We have audited the accompanying balance sheets of Material Technologies, Inc.
(A Development Stage Company) as of December 31, 1997, and the related
statements of operations, cash flows, and stockholders' equity (deficit) for the
year then ended, and for the period from January 1, 1991, through December 31,
1997. These financial statements are the responsibility of the Company's
management.
Our responsibility is to express an opinion on these financial statements based
on our audits. Statements of operations and cash flows for the period from
October 21, 1983 (inception) through December 31, 1990, (with the exception of
1989 which was unaudited) were audited by other auditors whose reports dated on
various dates, expressed unqualified opinions including an explanatory
paragraph, as discussed in Note 4, regarding the Company's ability to continue
as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Technologies, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, and for the period from January 1, 1991 through December
31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 4. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Jonathon P. Reuben
- -----------------------
Jonathon P. Reuben
Certified Public Accountant
Torrance, California
March 5, 1998
F-1
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1996 1997
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivale $ $ 2,451
Accounts Receivable 62,332
Reimbursement Receivable 50,000
Employee Advance 1,500
Prepaid Expenses 6,472 -
TOTAL CURRENT ASSETS 6,472 116,283
FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciatio 98,016 95,227
OTHER ASSETS
Investments 55,200 55,200
Intangible Assets, Net of
Accumulated Amortization 20,669 18,679
Note Receivable (Including
Accrued Interest) 25,753 -
Refundable Deposit 2,189 1,868
TOTAL OTHER ASSETS 103,811 75,747
TOTAL ASSETS $ 208 $ 287,257
</TABLE>
See accompanying notes and independent accountants' report.
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
December 31,
1996 1997
<S> <C> <C>
CURRENT LIABILITIES
Bank Overdraft $ - $ -
Legal Fees Payable 128,191 103,757
Consulting Fees Payable 13,350 67,778
Other Accounts Payable 19,871 17,108
Accrued Officers Salary 372,000 -
Accrued Payroll Taxes 19,124 24,269
Loan Payable - Officer 56,846 118,863
Loans Payable-Others 32,627 68,807
TOTAL CURRENT LIABILITIES 644,431 400,582
Payable on Research and
Development Sponsorship 188,495 218,000
Loan Payable - Officer 122,698 -
Loans Payable - Other 90,893 -
TOTAL LIABILITIES 1,046,517 618,582
REDEEMABLE PREFERRED STOCK
Class B Preferred Stock,
$.001 Par Value
Authorized 510 Shares,
Outstanding 15 Shares
at December 31, 1996;
Redeemable at $10 150,000 150,000
STOCKHOLDERS' (DEFICIT)
Class A Common Stock,
$.001 Par Value,
Authorized 10,000,000
Shares, Outstanding
2,586,546 Shares at
December 31, 1996,
5,787,000 Shares at
Decem 2,580 5,787
Class B Common Stock,
$.001 Par Value,
Authorized 100,000
Shares, Outstanding
60,000 60 60
Class A Preferred,
$.001 Par Value,
Authorized 900,000 Shares
Outstanding 350,000 Shares 350 350
Additional Paid in Capital 1,799,181 2,436,445
Less Notes and Subscriptions R (14,720) (14,720)
Deficit Accumulated During the (2,830,869) (2,964,447)
Unrealized Holding Gain on Inv 55,200 55,200
TOTAL STOCKHOLDERS' (DEFICIT) (988,218) (481,325)
TOTAL LIABILITIES AN $ 208 $ 287,257
</TABLE>
See accompanying notes and independent accountants' report.
F-3
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
From Inception
(October 21, 1983)
Through
1995 1996 1997 Dec. 31, 1997
<S> <C> <C> <C> <C>
REVENUES
Sale of Fatigue
Fuses . . . . . . . . . . . . . . . . . - - - 64,505
Sale of Royalty
Interests . . . . . . . . . . . . . . . - - - 198,750
Income from Research
and Development Contract. . . . . . . . - - 336,410 1,048,990
Test Services . . . . . . . . . . . . - - - 10,870
TOTAL REVENUES. . . . . . . . . . . - - 336,410 1,323,115
COSTS AND EXPENSES
Research and
Development . . . . . . . . . . . . . . 15,104 10,700 78,409 1,586,705
General and
Administrative. . . . . . . . . . . . . 188,745 472,486 435,222 2,585,730
TOTAL COSTS AND
EXPENSES. . . . . . . . . . . . . . . . 203,849 483,186 513,631 4,172,435
INCOME (LOSS)
FROM OPERATIONS . . . . . . . . . . . . (203,849) (483,186) (177,221) (2,849,320)
OTHER INCOME (EXPENSE)
Expense Reimbursed. . . . . . . . . . - 12,275 11,037 4,510
Interest Income . . . . . . . . . . . 1,928 2,427 8 39,495
Miscellaneous Income. . . . . . . . . 4,375 - - 25,145
Loss on Sale of
Equipment . . . . . . . . . . . . . . . - - - (12,780)
Settlement of Teaming
Agreement . . . . . . . . . . . . . . . - - - 50,000
Litigation Settlement . . . . . . . . - - - 18,095
Gain on Foreclosure . . . . . . . . . - - 18,697 18,697
Gain on Sale of Stock . . . . . . . . - 17,750 13,901 31,651
TOTAL OTHER INCOME. . . . . . . . . 6,303 32,452 43,643 174,813
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR
INCOME TAXES. . . . . . . . . . . . . . (197,546) (450,734) (133,578) (2,674,507)
PROVISION FOR INCOME
TAXES . . . . . . . . . . . . . . . . . -- -- -- (7,000)
NET INCOME (LOSS)
BEFORE EXTRAORDINARY
ITEMS . . . . . . . . . . . . . . . . . (197,546) (450,734) (133,578) (2,681,507)
EXTRAORDINARY ITEMS
Forgiveness of Debt . . . . . . . . . (289,940)
Utilization of Operating
Loss Carry forward. . . . . . . . . . . 7,000
NET INCOME (LOSS) . . . . . . . . . (197,546) (450,734) (133,578) (2,964,447)
PER SHARE DATA
Income (Loss) Before
Extraordinary Item. . . . . . . . . . . (0.51)
Extraordinary Items . . . . . . . . . -
NET (LOSS) PER SHARE. . . . . . . . (0.51)
COMMON SHARES OUTSTANDING . . . . . . 5,787,000
</TABLE>
See accompanying notes and accountants' report.
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From Inception
(October 21, 1983)
Through
1995 1996 1997 Dec. 31, 1997
<S> <C> <C> <C> <C>
REVENUES
Sale of Fatigue
Fuses . . . . . . . . . . . . . . . . . - - - 64,505
Sale of Royalty
Interests . . . . . . . . . . . . . . . - - - 198,750
Income from Research
and Development Contract. . . . . . . . - - 336,410 1,048,990
Test Services . . . . . . . . . . . . - - - 10,870
TOTAL REVENUES. . . . . . . . . . . - - 336,410 1,323,115
COSTS AND EXPENSES
Research and
Development15,104 . . . . . . . . . . . 10,700 78,409 1,586,705
General and
Administrative. . . . . . . . . . . . . 188,745 472,486 435,222 2,585,730
TOTAL COSTS AND
EXPENSES. . . . . . . . . . . . . . . . 203,849 483,186 513,631 4,172,435
INCOME (LOSS)
FROM OPERATIONS . . . . . . . . . . . . (203,849) (483,186) (177,221) (2,849,320)
OTHER INCOME (EXPENSE)
Expense Reimbursed. . . . . . . . . . - 12,275 11,037 4,510
Interest Income . . . . . . . . . . . 1,928 2,427 8 39,495
Miscellaneous Income. . . . . . . . . 4,375 - - 25,145
Loss on Sale of
Equipment . . . . . . . . . . . . . . . - - - (12,780)
Settlement of Teaming
Agreement . . . . . . . . . . . . . . . - - - 50,000
Litigation Settlement . . . . . . . . - - - 18,095
Gain on Foreclosure . . . . . . . . . - - 18,697 18,697
Gain on Sale of Stock . . . . . . . . - 17,750 13,901 31,651
TOTAL OTHER INCOME. . . . . . . . . 6,303 32,452 43,643 174,813
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR
INCOME TAXES. . . . . . . . . . . . . . (197,546) (450,734) (133,578) (2,674,507)
PROVISION FOR INCOME
TAXES . . . . . . . . . . . . . . . . . -- -- -- (7,000)
NET INCOME (LOSS)
BEFORE EXTRAORDINARY
ITEMS . . . . . . . . . . . . . . . . . (197,546) (450,734) (133,578) (2,681,507)
EXTRAORDINARY ITEMS
Forgiveness of Debt . . . . . . . . . (289,940)
Utilization of Operating
Loss Carry forward. . . . . . . . . . . 7,000
NET INCOME (LOSS) . . . . . . . . . (197,546) (450,734) (133,578) (2,964,447)
PER SHARE DATA
Income (Loss) Before
Extraordinary Item. . . . . . . . . . . (0.51)
Extraordinary Items . . . . . . . . . -
NET (LOSS) PER SHARE. . . . . . . . (0.51)
COMMON SHARES OUTSTANDING . . . . . . 5,787,000
</TABLE>
See accompanying notes and accountants' report.
F-5
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Class A Common Class B Common Class A Preferred Stock
--------------- --------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- -------- ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Initial Issuance of Common Stock
October 21, 1983 2,408 $ 2 -- $ -- -- $ --
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2,202) (2) -- -- -- --
------- ---- ------- ------- ------- -------
206 0 -- -- -- --
BalanceOctober 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
With Pooling of Interests 42,334 14 -- -- -- --
December 31, 1983 -- -- -- -- -- --
------- --- ------- ------- ------- -------
Balance, January 1, 1984 42,540 14 -- -- -- --
Capital Contribution -- 28 -- -- -- --
Issuance of Common Stock 4,815 5 -- -- -- --
Costs Incurred in Connection
with Issuance of Stock -- -- -- -- -- --
Net (Loss), Year Ended
December 31, 1984 -- -- -- -- -- --
------- ---- ------- ------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage Total
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Initial Issuance of Common Stock
October 21, 1983 -- $ -- $ 2,498 $ -- $ 2,500
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares -- -- (2) -- --
------- ------- --------- --------- -----
-- -- 2,496 -- 2,500
BalanceOctober 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
With Pooling of Interests -- -- 4,328 -- 4,342
December 31, 1983 -- -- -- (4,317) (4,317)
------- ------- --------- --------- -----
Balance, January 1, 1984 -- -- 6,824 (4,317) 2,520
Capital Contribution -- -- 21,727 -- 21,755
Issuance of Common Stock -- -- 10,695 -- 10,700
Costs Incurred in Connection
with Issuance of Stock -- -- (2,849) -- (2,849)
Net (Loss), Year Ended
December 31, 1984 - -- -- -- (21,797) (21,797)
------- ------- --------- --------- ------
</TABLE>
See accompanying notes and independent accountants' report.
F-6
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
----------------- ---------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- ------ ---------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1985 47,355 47 -- -- -- --
Shares Contributed Back
to Company (315) (0) -- -- -- --
Capital Contribution -- -- -- -- -- --
Sale of 12,166 Warrants at
$1.50 Per Warrant -- -- -- -- -- --
Shares Cancelled (8,758) (9) -- -- -- --
Net (Loss), Year Ended
December 31, 1985 -- -- -- -- -- --
------- --- ------- ------- ------- -------
Balance, January 1, 1986 38,282 38 -- -- -- --
Net (Loss), Year Ended
December 31, 1986 -- -- -- -- -- --
------- --- ------- ------- ------- -------
Balance, January 1, 1987 38,282 38 -- -- -- --
Issuance of Common Stock Upon
Exercise of Warrants 216 0 -- -- -- --
Net (Loss), Year Ended
December 31, 1987 -- -- -- -- -- --
------- --- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage Total
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1985 -- -- 36,397 (26,114) 10,329
Shares Contributed Back
to Company -- -- 0 -- --
Capital Contribution -- -- 200,555 -- 200,555
Sale of 12,166 Warrants at
$1.50 Per Warrant -- -- 18,250 -- 18,250
Shares Cancelled -- -- 9 -- --
Net (Loss), Year Ended
December 31, 1985 -- -- -- (252,070) (252,070)
------- ------- --------- --------- -------
Balance, January 1, 1986 -- -- 255,211 (278,184) (22,936)
Net (Loss), Year Ended
December 31, 1986 -- -- -- (10,365) (10,365)
------- ------- --------- --------- -------
Balance, January 1, 1987 -- -- 255,211 (288,549) (33,300)
Issuance of Common Stock Upon
Exercise of Warrants -- -- 27,082 -- 27,082
Net (Loss), Year Ended
December 31, 1987 -- -- -- (45,389) (45,389)
------- ------- --------- --------- -------
</TABLE>
See accompanying notes and independent accountants' report.
F-7
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
------------------- ------------------- -------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1988. . . . 38,498 38 -- -- -- --
Issuance of Common Stock
Sale of Stock (Unaudited) . . . 2,544 3 -- -- -- --
Services Rendered (Unaudited) . 3,179 3 -- -- -- --
Net (Loss), Year Ended
December 31, 1988 (Unaudited) -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
Balance, January 1, 1989
(Unaudited), . . . . . . . . 44,221 44 -- -- -- --
Issuance of Common Stock
Sale of Stock. . . . . . . . 4,000 4 -- -- -- --
Services Rendered. . . . . . 36,000 36 -- -- -- --
Net (Loss), Year Ended
December 31, 1989. . . . . . -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
Balance, January 1, 1990. . . . 84,221 84 -- -- -- --
Issuance of Common Stock
Sale of Stock. . . . . . . . 2,370 2 -- -- -- --
Services Rendered. . . . . . 6,480 7 -- -- -- --
Net Income, Year Ended
December 31, 1990. . . . . . -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage Total
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1988 -- -- 282,293 (333,938) (51,607)
Issuance of Common Stock
Sale of Stock (Unaudited) -- -- 101,749 -- 101,752
Services Rendered (Unaudited -- -- 70,597 70,600
Net (Loss), Year Ended
December 31, 1988 (Unaudited) -- -- -- (142,335) (142,335)
------- ------- --------- --------- -------
Balance, January 1, 1989
(Unaudited), -- -- 454,639 (476,273) (21,590)
Issuance of Common Stock
Sale of Stock -- -- 1,996 -- 2,000
Services Rendered -- -- 17,964 -- 18,000
Net (Loss), Year Ended
December 31, 1989 -- -- -- (31,945) (31,945)
------- ------- --------- --------- -------
Balance, January 1, 1990 -- -- 474,599 (508,218) (33,535)
Issuance of Common Stock
Sale of Stock -- -- 59,248 -- 59,250
Services Rendered -- -- 32,393 -- 32,400
Net Income, Year Ended
December 31, 1990 -- -- -- 133,894 133,894
------- ------- --------- --------- -------
</TABLE>
See accompanying notes and independent accountants' report.
F-8
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
------------------- -------------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- -------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1991
as Restated 93,071 93 -- -- -- --
Issuance of Common Stock
Sale of Stock 647 1 -- -- 350,000 350
Services Rendered 4,371 4 -- -- -- --
Conversion of Warrants 30 -- -- -- -- --
Conversion of Stock (6,000) (6) 60,000 60 -- --
Net (Loss), Year Ended
December 31, 1991 -- -- -- -- -- --
------- --- ----- --- ------- -------
Balance January 1, 1992 92,119 92 60,000 60 350,000 350
Issuance of Common Stock
Sale of Stock 20,000 20 -- -- -- --
Services Rendered 5,400 5 -- -- -- --
Conversion of Warrants 6,000 6 -- -- -- --
Sale of Class B Stock -- -- 60,000 60 -- --
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 -- -- -- --
Conversion of Stock 6,000 6 (60,000) (60) -- --
Cancellation of Shares (6,650) (7) -- -- -- --
Net (Loss), Year Ended
December 31, 1992 -- -- -- -- -- --
--------- ----- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Class B Preferred Stock Accumulated
------------------------ Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage Total
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1991 as Rest -- -- 566,240 (374,324) 192,009
Issuance of Common Stock
Sale of Stock -- -- 273,335 -- 273,686
Services Rendered -- -- 64,880 -- 64,884
Conversion of Warrants --
Conversion of Stock -- -- -- -- --
Net (Loss), Year Ended
December 31, 1991 -- -- -- (346,316) (346,314)
------- ------- --------- --------- -------
Balance January 1, 1992 -- -- 904,455 (720,640) 184,265
Issuance of Common Stock
Sale of Stock -- -- 15,980 -- 16,000
Services Rendered -- -- 15,515 -- 15,520
Conversion of Warrants -- -- 14,994 -- 15,000
Sale of Class B Stock -- -- 14,940 -- 15,000
Issuance of Stock to
Unconsolidated Subsidiary -- -- 71,659 -- 71,664
Conversion of Stock -- -- -- -- --
Cancellation of Shares -- -- 7 -- --
Net (Loss), Year Ended
December 31, 1992 -- -- -- (154,986) (158,196)
------- ------- --------- --------- -------
See accompanying notes and independent accountants' report.
F-9
</TABLE>
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
-------------- --------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- ------ ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 127,620 127 60,000 60 350,000 350
Issuance of Common Stock
Licensing Agreement 12,500 13 -- -- -- --
Services Rendered 67,030 67 -- -- -- --
Warrant Conversion 56,000 56 -- -- -- --
Cancellation of Shares (31,700) (32) -- -- -- --
Net (Loss) for Year Ended
December 31, 1993 (Restated -- -- -- -- -- --
--------- ----- ------- ------- ------- ------
Balance December 31, 1993 231,449 231 60,000 60 350,000 350
--------- ----- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance December 31, 1992 -- -- 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement -- -- 6,237 --
Services Rendered -- -- 13,846 --
Warrant Conversion 304,943 --
Cancellation of Shares -- -- (7,537) --
Net (Loss) for Year Ended
December 31, 1993 (Restated -- -- -- (929,900)
------- ------- --------- ---------
Balance December 31, 1993 -- -- 1,355,039 (1,805,526)
------- ------- --------- ---------
</TABLE>
See accompanying notes and independent accountants' report.
F-10
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
-------------- -------------- ----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- ------- ----------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,818 31 -- -- -- --
Issuance of Shares for
Services Rendered 223,000 223 -- -- -- --
Sale of Stock 1,486,112 1,486 -- -- -- --
Issuance of Shares for
the Modification of
Agreement 34,000 34 -- -- -- --
Net (Loss) for the Year
Ended December 31, 1994 -- -- -- -- -- --
--------- ----- ------- ------- ------- -------
Balance - December 31, 1994 2,005,380 2,005 60,000 60 350,000 350
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 153 -- -- -- --
Net (Loss) for the Year
Ended December 31, 1995 -- -- -- -- -- --
--------- ----- ------- ------- ------- -------
Balance - December 31, 1995 2,157,880 2,157 60,000 60 350,000 350
========= ===== ======= ======= ======== =====
</TABLE>
<TABLE>
<CAPTION>
Redeemable Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 -- -- 385,393 --
Issuance of Shares for
Services Rendered -- -- -- --
Sale of Stock 15 150,000 23,300 --
Issuance of Shares for
the Modification of
Agreemrnt -- -- (34) --
Net (Loss) for the Year
Ended December 31, 1994 - -- -- -- (377,063)
------- ------- --------- ---------
Balance - December 31, 1994 15 150,000 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement -- -- -- --
Net (Loss) for the Year
Ended December 31, 1995 - -- -- -- (197,546)
------- ------- --------- ---------
Balance - December 31, 1995 15 150,000 1,763,698 (2,380,135)
======= ======= ========== ==========
</TABLE>
See accompanying notes and independent accountants' report.
F-11
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
-------------- --------------- ----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- -------- ----------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Shares for
Services Rendered 164,666 165 -- -- -- --
Sale of Stock 70,000 70 -- -- -- --
Issuance of Shares for
the Modification of
Agreement 50,000 250 -- -- -- --
Cancellation of Shares Held
in Treasury (62,000) (62) -- -- -- --
Net (Loss) for the Year
Ended December 31, 1996 -- -- -- -- -- --
--------- ----- ------- ------- ------- -------
Balance - December 31, 1996 2,580,546 2,580 60,000 60 350,000 350
Sale of Stock 100,000 100 -- -- -- --
Conversion of Indebtedness 800,000 800 -- -- -- --
Class A Common Stock Issued
in Cancellation of
$372,000
Accrued Wages Due Officer 1,499,454 1,500 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Redeemable Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Issuance of Shares for
Services Rendered -- -- 16,301 --
Sale of Stock -- -- 173,970 --
Issuance of Shares for
the Modification of Agreem -- -- (250) --
Cancellation of Shares Held
in Treasury -- -- (154,538) --
Net (Loss) for the Year
Ended December 31, 1996 -- -- -- (450,734)
------- ------- --------- ---------
Balance - December 31, 1996 15 150,000 1,799,181 (2,830,869)
Sale of Stock -- -- 99,900 --
Conversion of Indebtedness -- -- 187,793 --
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer -- -- 370,500 --
</TABLE>
See accompanying notes and independent accountants' report.
F-12
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1997
Class A Common Class B Common Class A Preferred Stock
-------------------- --------------------- -----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
---------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Shares for
Services Rendered 247,000 247 -- -- -- --
Adjustment to Give Effect
to Recapitalization on
March 9, 1997 560,000 560 -- -- -- --
Net (Loss) for the Year
Ended December 31, 1997 -- -- -- -- -- --
--------- -------- ------- ------- ------- -------
5,787,000 $ 5,787 60,000 $ 60 350,000 $ 350
========= ===== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Redeemable Deficit
Class B Preferred Stock Accumulated
------------------------- Capital During the
Shares in Excess of Development
Outstanding Amount Par Value Stage
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Issuance of Shares for
Services Rendered -- -- 2,223 --
Adjustment to Give Effect
to Recapitalization on
March 9, 1997 -- -- (560) --
Net (Loss) for the Year
Ended December 31, 1997 -- -- -- (104,073)
------- ------- --------- ---------
15 $ 150,000 $ 2,459,037 $ (2,934,942)
======= ======= ========== ==========
</TABLE>
See accompanying notes and independent accountants' report.
F-13
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Inception
October 21, 1983
Through
1995 1996 1997 December 31, 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . (197,546) (450,734) (133,578) 2,964,447
Adjustments to
Reconcile Net Income (Loss)
to Net Cash Provided (Used)
by Operating Activities
Depreciation and
Amortization. . . . . . . . . . . . . 5,555 4,931 4,779 164,494
Gain on Sale of
Tensiodyne Corporation Co
Common Stock. . . . . . . . . . . . . - (17,750) - (17,750)
Charge off of Deferred
Offering Costs. . . . . . . . . . . . 31,480 - 5,000 36,480
Gain on Foreclosure . . . . . . . . . . - - (18,697) (18,697)
(Increase) Decrease
in Receivables. . . . . . . . . . . - - (113,832) (113,832)
(Increase) Decrease
in Prepaid Expenses. . . . . . . . . - (1,472) 1,793 321
Loss on Sale of Equipment . . . . . . . - - - 12,780
Issuance of Common
Stock for Services . . . . . . . . . - 16,467 2,470 298,435
Issuance of Common
Stock for Agreement M. . . . . . . . 152 - - 152
Forgiveness of Indebtedness . . . . . . - - - 165,000
Increase (Decrease) in
Accounts Payable and
Accrued Expenses. . . . . . . . . . . 16,032 238,957 32,376 584,911
Interest Accrued on
Notes Payable . . . . . . . . . . . . 10,870 17,681 11,266 39,817
Increase in Research
and Development
Sponsorship Payable . . . . . . . . . - - 29,505 218,000
(Increase) in Note for
Litigation Settlement . . . . . . . . (1,921) (2,092) - (25,753)
(Increase) in Deposits. . . . . . . . . - - - (2,189)
TOTAL ADJUSTMENTS . . . . . . . . . 62,168 256,722 (45,340) 1,342,169
NET CASH PROVIDED
(USED) BY
OPERATING ACTIVITIES . . . . . . . . (135,378) (194,012) (178,918) (1,622,278)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of
Equipment . . . . . . . . . . . . . . - - - 10,250
Purchase of Property
and Equipment . . . . . . . . . . . . - - - (226,109)
Proceeds from Sale of
Tensiodyne Corporation
Common Stock. . . . . . . . . . . . . - 17,750 - 17,750
Proceeds from Foreclosure . . . . . . . - - 44,450 44,450
(Increase) in Other Assets. . . . . . . - - - (69,069)
Payment for License
Agreement . . . . . . . . . . . . . . - - - (6,250)
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES . . . . . . . . -- 17,750 44,450 (228,978)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock
Net of Offering Costs . . . . . . . . -- 174,040 100,000 832,319
Costs incurred in Offering. . . . . . . - - - (31,480)
Sale of Common
Stock Warrants. . . . . . . . . . . . - - - 18,250
Sale of Preferred Stock . . . . . . . . - - - 258,500
Sale of Redeemable
Preferred Stock . . . . . . . . . . . - - - 150,000
Capital Contributions . . . . . . . . . - - - 301,068
Proceeds From Note Payable. . . . . . . - - - --
Payment on Proposed
Reorganization. . . . . . . . . . . . - (5,000) - (5,000)
Loans From Officers . . . . . . . . . 100,874 43,250 119,000 475,307
Repayments to Officer . . . . . . . . . (16,000) (64,676) (79,659) (309,921)
Increase in Loan
Payable-Others. . . . . . . . . . . . 58,000 25,000 - 164,664
</TABLE>
See accompanying notes and accountants' report.
F-14
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Inception
(October 21, 1983)
Through
1995 1996 1997 December 31, 1997
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY
FINANCING ACTIVITIES. 142,874 172,614 139,341 1,853,707
NET INCREASE (DECREASE)
IN CASHAND CASH
EQUIVALENTS . . . . . 7,496 (3,648) 4,873 2,451 -11266
BEGINNING BALANCE
CASH AND CASH
EQUIVALENTS . . . . . (6,270) 1,226 (2,422) --
ENDING BALANCE
- CASH AND CASH
EQUIVALENTS . . . . . 1,226 (2,422) 2,451 2,451
</TABLE>
<TABLE>
<CAPTION>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Inception
October 21, 1983
Through
1995 1996 1997 December 31, 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . (197,546) (450,734) (133,578) 2,964,447
Adjustments to
Reconcile Net Income (Loss)
to Net Cash Provided (Used)
by Operating Activities
Depreciation and
Amortization. . . . . . . . . . . . . 5,555 4,931 4,779 164,494
Gain on Sale of
Tensiodyne Corporation Co
Common Stock. . . . . . . . . . . . . - (17,750) - (17,750)
Charge off of Deferred
Offering Costs. . . . . . . . . . . . 31,480 - 5,000 36,480
Gain on Foreclosure . . . . . . . . . . - - (18,697) (18,697)
(Increase) Decrease
in Receivables. . . . . . . . . . . - - (113,832) (113,832)
(Increase) Decrease
in Prepaid Expenses. . . . . . . . . - (1,472) 1,793 321
Loss on Sale of Equipment . . . . . . . - - - 12,780
Issuance of Common
Stock for Services . . . . . . . . . - 16,467 2,470 298,435
Issuance of Common
Stock for Agreement M. . . . . . . . 152 - - 152
Forgiveness of Indebtedness . . . . . . - - - 165,000
Increase (Decrease) in
Accounts Payable and
Accrued Expenses. . . . . . . . . . . 16,032 238,957 32,376 584,911
Interest Accrued on
Notes Payable . . . . . . . . . . . . 10,870 17,681 11,266 39,817
Increase in Research
and Development
Sponsorship Payable . . . . . . . . . - - 29,505 218,000
(Increase) in Note for
Litigation Settlement . . . . . . . . (1,921) (2,092) - (25,753)
(Increase) in Deposits. . . . . . . . . - - - (2,189)
TOTAL ADJUSTMENTS . . . . . . . . . . . 62,168 256,722 (45,340) 1,342,169
NET CASH PROVIDED
(USED) BY
OPERATING ACTIVITIES . . . . . . . . (135,378) (194,012) (178,918) (1,622,278)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of
Equipment . . . . . . . . . . . . . . - - - 10,250
Purchase of Property
and Equipment . . . . . . . . . . . . - - - (226,109)
Proceeds from Sale of
Tensiodyne Corporation
Common Stock. . . . . . . . . . . . . - 17,750 - 17,750
Proceeds from Foreclosure . . . . . . . - - 44,450 44,450
(Increase) in Other Assets. . . . . . . - - - (69,069)
Payment for License
Agreement . . . . . . . . . . . . . . - - - (6,250)
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES . . . . . . . . -- 17,750 44,450 (228,978)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock
Net of Offering Costs . . . . . . . . - 174,040 100,000 832,319
Costs incurred in
Offering . . . . . . . . . . . . - - - (31,480)
Sale of Common
Stock Warrants. . . . . . . . . . . . - - - 18,250
Sale of Preferred Stock . . . . . . . . - - - 258,500
Sale of Redeemable
Preferred Stock . . . . . . . . . . . - - - 150,000
Capital Contributions . . . . . . . . . - - - 301,068
Proceeds From Note Payable. . . . . . . - - - --
Payment on Proposed
Reorganization. . . . . . . . . . . . - (5,000) - (5,000)
Loans From Officers . . . . . . . . . 100,874 43,250 119,000 475,307
Repayments to Officer . . . . . . . . . (16,000) (64,676) (79,659) (309,921)
Increase in Loan
Payable-Others. . . . . . . . . . . . 58,000 25,000 - 164,664
</TABLE>
See accompanying notes and accountants' report.
F-15
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.
On March 9, 1997, the Company's Board of Directors authorized the issuance of
5,560,000 of its Class A Common Stock to Material Technology, Inc. ("Matech 1")
in exchange for all of Matech 1's operations including all of its assets and the
assumption of all of Matech 1's liabilities.
The formation of this subsidiary and related transfer of assets and liabilities
is in connection with a February 17, 1997 Stock Purchase Agreement among Matech
1, Montpilier Holdings, Inc., SecurFone America, Inc. and the Company's
President. Under this agreement, the parties effected a reverse merger of
SecurFone into Matech 1 immediately after the distribution of this Company's
stock to the shareholders of Matech 1. A schedule of the assets and liabilities
acquired is as follows:PP
<TABLE>
<CAPTION>
Assets
<S> <C>
Prepaid Expenses $ 6,472
Property & Equipment
Net 98,016
Licensing Agreement and
Patents 20,669
Notes Receivable 25,753
Other Assets 57,389
$ 208,299
</TABLE>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization (continued)
Liabilities
<TABLE>
<CAPTION>
<S> <C>
Bank Overdraft $ (2,422)
Payables and Other
Accrued Expenses (180,536)
Accrued Salaries
- Officer (372,000)
Loans Payable - Officer (56,846)
Loans Payable - Other (57,627)
Note Payable on
Licensing Agreement (188,495)
(857,926)
Redeemable Preferred
Stock (150,000)
Liabilities in Excess
of Assets Transferred $ (799,627)
</TABLE>
The amounts reflected above are the balances reflected in Matech 1's audited
balance sheet as of December 31, 1996, adjusted to take into effect the
conversion of certain loans due a shareholder and the Company's President as
discussed further in Notes 9 and 14. Management has determined that the activity
between this balance sheet date and the actual date of transfer is immaterial.
For financial reporting purposes, the above transaction was treated as a
recapitalization. Therefore, the assets and liabilities transferred have been
recorded at historical cost.
The Company is in the development stage, as defined in FASB Statement 7, with
its principal activity being research and development in the area of metal
fatigue technology with the intent of future commercial application. The Company
has not paid any dividends and dividends which may be paid in the future will
depend on the financial requirements of the Company and other relevant factors.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies
a. Property and Equipment
The cost of property and equipment is depreciated overthe estimated useful lives
of the related assets.Depreciation is computed on the straight-line method
forfinancial reporting purposes and for income tax reportingpurposes.
b. Intangible Assets
Intangibles are amortized on the straight-line methodover periods ranging from 5
to 20 years (see Note 5).
c. Net Loss Per Share
Net loss per share is computed pursuant to SAB Topic1.B.2.
d. Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
e) Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at their
current carrying amounts.
Note 3 - Receivable from Montpilier Holdings, Inc
Under the merger agreement with Montpilier Holding, Inc. as discussed in Note 1,
the Company is to be reimbursed by Montipilier approximately $120,558 of which
the Company received $70,558 in 1997. The remaining balance will be paid upon
the settlement of a lawsuit between the Company and its President against
certain shareholders relating to the right of these shareholders to acquire
shares of the Company's common stock without payment of consideration. The
receivable due the Companyis secured by 560,000 shares of the Company's Class A
Common Stock.re
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Realization of Assets
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses totaling $2,934,942 since its inception through December
31,1997. These continuing losses are an indication that the Company may not be
able to continue to operate.
The Company anticipates that it needs approximately $600,000 in order to
complete the development and marketing of its Fatigue Fuse and approximately
$2,000,000 to develop the Electrochemical Fatigue Sensor.Management believes the
source of the $2,600,000 will be through government grants, sale of the
Company's stock, entering into joint ventures, and or through the sale of
royalty interests.
Note 5 - Intangibles
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Period of December 31,
Amortization 1996 1997
<S> <C> <C> <C>
Patent Cost. . . . . . . . . . 17 Years $ 28,494 $28,494
Organization Costs . . . . . . 5 Years 9,076 9,076
License Agreement. . . . . . . 20 Years 6,250 6,250
(See Note 7). . . . . . . 43,820 43,820
Less Accumulated Amortization. 23,151) (25,141)
$ 20,669 $18,679
</TABLE>
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Litigation Settlement
On October 26, 1992, the Company agreed to an out-of-court settlement resulting
from improprieties by its chief technical consultant, who was also an officer
and director. The settlement resulted in a return from the individual of 5,650
shares of the Company's common stock, a return of 600 warrants to purchase 600
shares of common stock, and a promissory note for $50,000 secured by a mortgage
interest on the individual's residence.
The note was non-interest bearing due and payable upon either the deathof the
individual's spouse or upon conveyance or attempted conveyance of any interest
in the individual's residence. Interest was imputed pursuant to APB-21 at an
annual rate of 8.5%. The balance of this note as of December 31, 1996 was
$25,753. Accrued interest credited to operations for the years 1995 and 1996
were $1,929 and $2,091, respectively.
As of December 31, 1996, the note was in default due to the failure by the
individual to maintain insurance on the property and to pay property taxes.
During 1997, the Company foreclosed on the property and then sold it. The
proceeds received from the sale net of related costs and attorney's fees
amounted to approximately $44,450. The company realized a net gain from the
foreclosure of approximately $18,697.
Note 7 - License Agreement
The Company has entered into a license agreement with the University of
Pennsylvania regarding the development and marketing of the Electrochemical
Fatigue Sensor. The Sensor is designed to measure electrochemically the status
of a structure without knowing the structure's past loading history. The Company
is in the initial stage of developing the Sensor.
Under the terms of the agreement the Company issued to the University 12,500
shares of its common stock, and a 5% royalty on sales of the product. The
Company valued the licensing agreement at $6,250. Under the terms of the
agreement, the license terminates upon the expiration of the underlying patents,
unless sooner terminated as provided in the agreement. The Company is amortizing
the license over 20 years.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 7 - License Agreement (continued)
In addition to entering into the licensing agreement, the Company also agreed to
sponsor the development of the Sensor. Under the Sponsorship agreement, the
Company agreed to reimburse the University development costs totaling
approximately $200,000 which was to be paid in 18 monthly installments of
$11,112. The research and development costs are recorded at present value,
usingan annual interest rate of 8.5%. At December 31, 1995, and 1996, the
presentvalue of this obligation was $188,494. The Company charged the full
$188,494 to operations as research and development in 1993. The Company has not
made any payments toward this obligation.
Pursuant to the terms of 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 Electrochemical Fatigue Sensor.
The Company and the University have agreed to modify the terms of the licensing
agreement and related obligation. The terms of the modified agreements include
an increase in the University's royalty to 7% of the sale of related products,
the issuance of additional shares of the Company's Class A Common Stock to equal
5% of the outstanding stock of the Company as of the effective date of the
modified agreements, and to pay to the University 30% of any amounts raised by
the Company in excess of $150,000 (excluding amounts received on government
grants or contracts) up to the amount owed to the University.
The parties agreed that the balance owed on the Sponsorhip Agreement is $200,000
and commencing June 30, 1997, the balance due will accrue interest at a rate of
1.5% per month until the loan matures on December 16, 2001, when the loan
balance and accrued interest becomes fully due and payable. In addition, under
the agreement, Mr. Bernstein agreed to limit his compensation from the Company
to $150,000 per year until the loan and accrued interest is fully paid. Interest
charged to operations for 1997 relating to this obligation was approximately
$29,505.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Property and Equipment
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31,
1996 1997
<S> <C> <C>
Office Equipment $ 14,345 $ 14,345
Remote Monitoring system 97,160 97,160
Manufacturing Equipment 100,067 100,067
211,572 211,572
Less: Accumulated
Depreciation (113,556) (116,345)
$ 98,016 $ 95,227
</TABLE>
Depreciation charged to operations was $3,566, $2,942 and $2,789 in 1995, 1996,
and 1997, respectively. The useful lives of office and manufacturing equipment
for the purpose of computing depreciation is five years.
The Company's equipment has been pledged as collateral on the agreement with
Advanced Technology Center (See Note 11(b)).
The Company has entered into an agreement dated April 1, 1993, with the
University of Pennsylvania acting through the Laboratory for Research on the
Structure of Matter ("LRSM") to loan certain manufacturing equipment to the LRSM
for instructional and research related purposes for a period of 5 years,
beginning December 1, 1992, and ending December 1, 1997. Upon expiration of the
five year period, LRSM may retain the right to borrow the equipment for another
5 year period. In exchange for loaning the equipment to LRSM, the Company
receives substantial testing from LRSM which aides the Company in the
development of the Fatigue Fuse. Upon the expiration of the second five year
period, LRSM has the option to purchase the equipment at its fair market value
then prevailing.
Under the terms of the agreement, LRSM shall perform 1,200 hours of research and
testing of materials to be used in conjunction with the Fatigue Fuse.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 9 - 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 which is assessed
interest at major bank prime rate. The principal and all accrued interest is
fully due and payable in 2 years, but the Company is required to pay-off the
loan and accrued interest in full from the proceeds of any independent
financing.
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, 1996
and 1997 was $32,459 and $35,218, respectively. Interest charged to operations
for 1995, 1996, and 1997 were $2,775, $3,189, and $2,759, respectively.
The Company did not pay any amounts due on this note when it matured on May 26,
1996, and the note is in default.
In addition, the Company borrowed an additional $58,000 from Mr. Baker in 1995.
The loan was evidenced by a convertible debenture and under its terms, interest
accrued on this loan at the prime lending rate of Mellon Bank N.A., and was
fully payable with accrued interest on June 11, 2000. In March 1997, Mr. Baker
exercised his option and converted the balance due him on the note into 280,000
shares of the Company's Class A common stock. The balance due on this note as of
December 31, 1996, was approximately $65,893. interest charged to operations in
1995 and 1996 were approximately $2,828 and $5,065, respectively
In October 1996, the Company borrowed $25,000 from an unrelated third party.
Under the terms of the promissory note, the loan is assessed interest at an
annual rate of 10% and matures on October 15, 1998. The loan is convertible at
any time prior to payoff at the option of the payee into 25,000 shares of the
Company's Class A Common Stock. Interest charged to operations on this loan in
1996 and 1997 were approximately $527, and $2,500, respectively
Note 10 - 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").
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 10 - Income Taxes (continued)
FASB 109 uses the asset and liability method to account for income taxes which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax basis and financial
reporting basis of assets and liabilities.
An allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses to zero, as it can-not be
determined when, or if, the tax benefits derived from these operating losses
will materialize.
Note 11 - Commitments and Contingencies
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, in order to provide funding for research
and development related to the Fatigue Fuse, the Company entered into various
agreements with the Tensiodyne 1985-I R & D Partnership. These agreements were
amended on October 9, 1989, and under the 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, 1995, and 1996, the future royalty commitment
was limited to $107,510 and $119,336, respectively.
The payment of future royalties is secured by equipment used by the Company in
the development of technology as specified in the funding agreement.
c. On May 4, 1987, the Company entered into a funding agreement with
ATC, whereby ATC provided $63,775 to the Company for the purchase of a royalty
of 3% of future gross sales and 6% of sublicensing revenues. The agreement was
amended August 28, 1987, and as amended, the royalty
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
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, 1996, and 1997, the total future royalty commitments, including
the accumulated 26% annual rate of return, was limited to approximately
$554,734, and $698,965, respectively. The future royalties are secured by the
Company's patents, products, and accounts receivable, which may be related to
technology developed with the funding.
d. In 1994, the Company issued to Variety Investments, Ltd. of
Vancouver, Canada ("Variety"), a 22.5% royalty interest on the Fatigue Fuse in
consideration for the cancellation of cash advances made to the Company by
Variety.
In December 1996, in exchange for the issuance by the Company of 250,000 shares
of its Class A Common Stock, Variety reduced its royalty interest to 20%.
e. Under an agreement which was effective February 2, 1994, Tensiodyne
Corporation, the Company's former parent, was obligated to provide $5,100,000 in
financing.
During 1994, the Company received $150,000 under this agreement in exchange for
the issuance of 7,560 shares of its Class A common stock and 15 shares of its
Redeemable Class B Preferred Stock. The $150,000 has been classified for
financial purposes as Redeemable Preferred Stock.
The Shareholders of the preferred stock have the right of redemption at $10,000
per share, if the preferred shares are not redeemed by the Company within 10
years of issuance.
Dividends are payable on the preferred shares to the same extent as aggregate
dividends on the number of shares of common stock equal to 30% of shares of the
Company's common stock outstanding on the closing date. The holders of the
preferred shares will be allowed to elect a director of the Company.
Tensiodyne was not able to fund the full amount of its obligation to the Company
and on November 22, 1994, the Company filed suit against
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
Tensiodyne was not able to fund the full amount of its obligation to the
Company and on November 22, 1994, the Company filed suit against Tensiodyne for
breach of contract. On March 28, 1995, a settlement agreement was entered into
whereby Tensiodyne issued to the Company 6,375,000 shares of its Common Stock.
The proceeds received from the sale of these shares will be used to reduce
Tensiodyne's obligation to pay the remaining balance owing of $4,950,000 and
accrued interest which is assessed under the settlement agreement at 7% per
annum.
The Company also received upon the signing of the settlement agreement 250,000
shares of Tensiodyne common stock.
Management believes that Tensiodyne has insufficient capital to meet its
obligation to pay any of the amounts owed and the Company will have to rely on
the proceeds it receives through the sale of the Tensiodyne shares to reduce the
amount due.
The shares received were subject to restrictions imposed under SEC Rule 144. As
of December 31, 1997, the restrictions imposed by SEC Rule 144 are lifted, but
due to the limited market in which to sell the Tensiodyne stock, it is
impractical to estimate the full value of the obligation owed the Company by
Tensiodyne.
On December 30, 1996, an agreement was entered into whereby Tensiodyne agreed to
exchange the 15 shares of Redeemable Class B Preferred Stock it owned in Matech
1 for 15 shares of the Company's Redeemable Class B Preferred Stock. The rights
of the new issuance will be the same as the rights of the shares exchanged
except the shares in the Company will be redeemable two years earlier on January
31, 2002. In consideration for the exchange, the Company paid Tensiodyne
$5,000.pp ??
f. The Company entered into an agreement with an unrelated third party
for providing the idea of pursuing a government contract for the funding of the
development of the Company's technologies, under which he would receive a number
of the Company's Class A Common Stock equal to 2.5% of the number of shares
outstanding as of the date a government contract is signed, 15% of the amount of
the government contract, and an appointment to the Company's Board of Directors.
Funds due him will be paid only when such funds become available to the Company.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
The Company's obligation is created on the date the government contract is
signed. Under the agreement with this individual, the amounts due will be
evidenced by a promissory note bearing interest at major bank prime.
Interest accrues nine months after the government contract is executed, and is
payable quarterly. The principal balance and any accrued interest is paid
through funds raised or earned by the Company. The Company is obligated to pay
12.5% of the first $1,000,000 earned or raised and 15% of any amount in excess
of the $1,000,000.
The Agreement contains anti-dilution provisions relating to the shares to be
issued which expire once $50,000 is paid. The Company's obligation to have this
person as a Director expires once all amounts due are paid. The contingent
amount due has been personally guaranteed by the Company's President and is
secured by the Company's patents. The personal guarantee expires upon the
individual receiving $100,000.
g. As discussed in Note 9, 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 which the Company has granted and are outstanding
as of December 31, 1997, follows:
<TABLE>
<CAPTION>
Fatigue Fatigue
Fuse Sensor
<S> <C> <C>
Tensiodyne 1985-1 R&D Partnership --* --
Advanced Technology Center
Future Gross Sales 6.00%* --
Sublicensing Fees -- ** --
Variety Investments, Ltd. 20.00% --
University of Pennsylvania
Net Sales of Licensed Products -- 7.00%
Net Sales of Services -- 2.50%
Sherman Baker 1.00% 0.50%
27.00% 10.00%
</TABLE>
* Royalties limited to specific rates of return as discussed in Notes 11(a)
and (b) above.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
*Royalties limited to specific rates of return as discussed in Notes 11(a)
and (b) above.
**The Company granted 12% royalties on sales from sublicensing. These royalties
are also limited to specific rates of return as discussed in Note 11(b) and (c)
above.
h. The Company has a teaming agreement with Southwest Research
Institute ("SWRI") and the University of Pennsylvania (Collectively known as the
"Team"). On February 25, 1997, the United States Air Force awarded the Team a
$2,500,000 Phase I contract to "determine the feasibility of [the Company's
Electrochemical Fatigue Sensor ("EFS")
to improve the Unites States Air Force capability to perform durability
assessments of military aircraft, including both air frames and engines through
the application of EFS to specific military aircraft alloys". The Company is
performing services for SWRI and its share of the award is approximately
$550,000 which is to be disbursed for specific purposes as defined in the
contract.
During 1997, the Company earned approximately $336,410 from this agreement
of which approximately $62,332 was due the Company as of December 31, 1997
i) Operating Leases
The Company leases its existing office under a noncancelable lease which expires
on May 31, 1999.
Rental expense charged to operations for the years ended December 31, 1995,
1996, and 1997 were approximately $28,514, $29,017, and $28,137, which consisted
solely of minimum rental payments.
Minimum rental commitments under the noncancelable lease expires as follows:
Year Ended 1998 $ 22,416
Year Ended 1999 $ 11,208
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
In addition to rent, the Company is obligated to pay property taxes, insurance,
and other related costs associated with the leased office.
Note 12 - Investments
The Company through a settlement with Tensiodyne Corporation received 6,581,250
of Class A Common Stock of Tensiodyne Corporation. During 1996, the Company
received approximately $17,750 through the sale of 50,000 shares of Tensiodyne
Corporation stock.
As of December 31, 1996, these shares were restricted and subject to Rule 144 of
the Securities and Exchange Commission. Of the remaining 6,581,250 shares owned
by the Company, approximately 690,000 shares were free trading. The Company is
accounting for the free trading shares pursuant to FASB Statement 115. The
690,000 shares were valued at their market value using the price as quoted on
the bulletin board at December 31, 1996, of $.08 per share. The Company has
classified these shares as available for sale and the unrealized gain on these
shares at December 31, 1996, amounting to $55,200 has been classified to
stockholders' deficit.
In 1997, the sales restrictions of Rule 144 expired. Using the price as quoted
on the bulletin board at December 31, 1997, of approximately $.10 per share, the
market value of the 6,531,250 shares would be approximately $653,125. However
due to the share's limited market, the Company believes that the actual proceeds
it would derive from the sale of these shares at December 31, 1997 would be far
lower then its $653125 computed value. The Company believes that the decline in
value is other than temporary, and therefore has continued to value these shares
at $55,200.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 13 - Stockholders' Equity
a. Warrants
On August 10, 1994, the Company granted 994,500 Class A Warrants to Mr. Robert
Bernstein, 170,000 Class A Warrants to Mr. Joel Freedman, and 535,500 Class A
Warrants to certain preferred shareholders. Each Class A Warrant entitled the
registered holder to purchase one share of Class A Common Stock of the Company
for $.50. On December 15, 1995, the Company's Board of Directors extended the
expiration date of the Warrants from August 22, 1996 to August 22, 1999.
At the dates of the original grant and subsequent extension, the exercise price
was greater than market value, therefore, no compensation costs were recognized.
On July 31, 1997, all warrants were canceled.
b. Class A Common Stock
The holders of the Company's Class A Common Stock are entitled to one vote per
share of common stock held.
c. Class B Common Stock
The holders of the Company's Class B Common Stock are not entitled to dividends,
nor are they entitled to participate in any proceeds in the event of a
liquidation of the Company. However the holders are entitled to 200 votes for
each share of Class B Common held.
d. Class A Preferred Stock
During 1991, the Company sold to a group of 15 individuals 2,585 shares of $100
par value preferred stock and warrants to purchase 2,000 shares of common stock
for a total consideration of $258,500.
In the Company's 1994 spin off, these shares were exchanged for 350,000 shares
of the Company's Class A Convertible Preferred Stock and 300,000 shares of its
Class A Common Stock. The holders of these shares have a liquidation preference
to receive out of assets of the Company, an amountequal 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
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 13 - Stockholders' Equity (Continued)
any assets distributed to the holders of the common stock or any other stock of
any other series or class ranking junior to the Shares as to dividends or
assets.
These shares are convertible to shares of the Company's common stock at a
conversion price of $.72 ("initial conversion price") per share of Class A
Preferred Stock which will be adjusted depending upon the occurrence of certain
events. The holders of these preferred shares shall have the right to vote and
cast that number of votes which the holder would have been entitled to cast had
such holder converted the shares immediately prior to the record date for such
vote.
The holders of these shares shall participate in all dividends declared and paid
with respect to the Common Stock to the same extent had such holder converted
the shares immediately prior to the record date for such dividend.
e. Redeemable Preferred Stock
The Company has authorized a class of 900,000 shares of preferred stock ($.001
par value) of which 15 shares have been designated Class B Preferred Shares.
The holders of these shares have a liquidation preference to receive out of
assets of the Company, an amount equal to $10,000 per share. 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.
The holders of these preferred shares shall have the right to vote and cast one
vote per share on all matters on which the holders of common stock have the
right to vote. The holders of these shares shall be entitled by class to vote to
elect one member of the board of directors and to vote as a class to remove any
director so elected. The holders of these shares shall participate in all cash
dividends declared and paid with respect to the Common Stock based upon a set
formula as defined in the Company'sClass B Preferred Stock Certificate of
Designation.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 13 - Stockholders' Equity (Continued)
These shares may be redeemed at the option of the Corporation at any time upon
the payment of $10,000 per share, plus any unpaid dividend to which the holders
are entitled. The shares shall be redeemed at the option of the holders thereof
at any time after January 31, 2002.
g. Issuances Involving Non-cash Consideration
All issuances of the Company's stock for non-cash consideration have been assign
a dollar amount equaling either the market value of the shares issued or the
value of consideration received whichever is more readably determinable. The
majority of the non-cash consideration received pertains to services rendered by
consultants and others.
Note 14 - Transactions With Management
a. On December 10, 1992, the Company issued to Mr. Robert M. Bernstein,
the President of the Company, 60,000 shares of the Company's Class B common
stock. In exchange for the stock, Mr. Bernstein executed a five year
non-interest bearing note for $15,000. The Note is non-recourse as the only
security pledged for the obligation was the stock purchased.
b. During 1993, Mr. Bernstein exercised warrants to purchase 56,000
shares of the Company's Class A common stock. Pursuant to the resolution on
April 12, 1993, adjusting the per share amount from $10.00 to $2.50, Mr.
Bernstein paid $560 and executed two five year non-interest bearing notes to the
Company for $124,500 and $14,940. The Note is non-recourse as the only security
pledged for the obligation was the stock purchased.
c. On February 28, 1994, the Company authorized the issuance of
10,000 shares of Class A Common Stock to Mr. Bernstein for past services.
d. In March 1994, Mr. Bernstein advanced the Company $48,750 of which
$12,000 was canceled in exchange for the issuance of 1,200,000 shares of the
Company's Class A Common Stock. Of these shares purchased, Mr. Bernstein sold
420,000 shares for $4,200 to Joel Freedman and certain preferred shareholders.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 14 - Transactions With Management (Continued)
e. In 1994, the president and a director of the Company purchased
278,550 shares of the Company's Class A common stock for $2,786.
f. In 1995, the Company's Board of Directors amended the Company's
By-laws increasing the number of Directors from 2 to 3, and establishing an
advisory board consisting of 7 people.
The Company authorized the issuance of 58,000 shares of its Class A Common Stock
to the new board member and authorized the issuance of 20,000 shares of its
Class A Common Stock to each member of the advisory board. Each member must
serve on the advisory board for at least 2 years or will have to return the
issued shares back to the Company.
g. On June 12, 1995, $108,000 of the total advances made by the
Company's President to the Company was converted into an interest bearing loan.
The loan is assessed interest at Mellon Bank, N.A. prime lending rate and is
convertible into 520,000 shares of the Company's Class A Common Stock on a pro
rata basis. The loan matures in five years and the conversion of the $108,000 or
any portion thereof can occur any time prior to maturity.
In March 1997, the President converted the balance owed him into 520,000 shares
of Common Stock.
h. In 1995, the Company forgave $154,600 on an obligation due from the
Company's President in consideration for the President returning 62,000 shares
of the Company's Class A Common Stock to the Company's Treasury.
i. During 1996, the Company's President made advances to the Company
totaling approximately $43,250. During 1996, the Company paid back to the
President approximately $64,676.
j. In 1996, the Company issued the President 62,000 shares of its Class
A Common Stock for services.
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 14 - Transactions With Management (Continued)
k. During 1997, the President advanced $119,000 of which $79,659 was
repaid. In the past, the Company only paid the President interest on his
convertible note. All other loans were made interest free. In 1998, the
Company's board of directors authorized the Company to pay the President
interest on all amounts due him as of January 1, 1997, and on any future loan
activity at an annual rate of 10%.The total amounts owed the president of the
Company as of December 31, 1996 and 1997 amounted to $179,544 and $118,863,
respectively. The amount of accrued interest charged to operations on the
President's loans in 1995, 1996, 1997, were $5,268, $9,430, and $7,978,
respectively.
l. During 1997, the Company canceled the approximately $372,000 of accrued
salary owed the Company's President in exchange for issuing to him 1,499,454
shares of the Company's Class A Common Stock.
m. In August, 1997, the Company's board of directors signed a
resolution recognizing the Company's extreme dependence on the experience,
contacts, and efforts of Mr. Bernstein and authorized to pay him a salary of
$150,000 a year since 1991. Mr. Bernstein will receive the compensation at such
time as the board has determined that the Company has profited from Mr.
Bernstein's efforts in regards to the Company receiving substantial funding, the
licensing of its technology, the selling of its technology, the Company's merger
with another company, or otherwise profiting in a substantial manner. The amount
which would be due to Mr. Bernstein as of December 31, 1997, had the board so
declared, is approximately $557,583. This amount represents the difference
between the $150,000 a year and the compensation actually accrued during the
year 1991 through 1997.
Note 15 - Stock Option Plan
In January 1996, Matech 1 registered with the Securities Exchange Commission its
1996 Stock Option Plan. The plan was formed to encourage ownership of the Common
Stock of the Company by key employees, advisors, consultants, and officers
providing service to the Company. 120,000 shares of Class A Commonar
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 15 - Stock Option Plan (Continued)
Class A Common Stock are reserved under the plan. The option price will be
determined by a Committee appointed by the Company's Board of Directors. In the
case of Incentive Stock Options granted to an optionee who owns more than 10% of
the Company's outstanding stock, the option price shall be at least 110% of the
fair market value of a share of common stock at date of grant. During 1996, the
Company received $174,040 through the issuance of 70,000 shares of the Company's
Class A Common Stock through the plan.
Note 16 - Subsequent Events
In March 1998, The Company's Board of Directors authorized the issuance and
offer to sell 2,430,000 shares of its Class A common stock at a price of $.07
per share to Robert M. Bernstein which will be paid through the cancellation of
$170,000 of indebtedness owed him by the Company. Of the 2,430,000 shares to be
issued, Mr. Bernstein will offer a certain number of these share at $.07 per
share to the Baker Group in accordance with the January 18, 1994 Agreement among
Tensiodyne Corporation. Robert M. Bernstein, and the holder's of Class A
Convertible Preferred Stock.
F-16
SUPPLEMENTAL INFORMATION:
A. Definition of Cash and Cash Equivalents
For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
B. During the periods from the date of inception (October 21, 1983) to
December 31, 1995, there have been no cash payments for income taxes or
interest.
During 1996, the Company made interest payments totalling $2,000.
There were no payments in 1996 for income taxes.
C. Non Cash Investing and Financing Activities
During 1995, the Company forgave $154,600 on an obligation duefrom the
Company's President in consideration for the President returning 62,000 shares
of the Company's Class A Common Stock to its treasury.
During 1995, the Company also issued 152,500 shares of its Class ACommon
stock to third parties in consideration for the modification of certain
agreements.
During 1996, the Company issued 250,000 shares of its Class A Commonstock in
consideration for the cancellation of a 2.5% royalty interest in the Company's
Fatigue Fuse.
During 1996, a unrelated third party assigned his interest in a $55,000 loan
owed him by the Company to the Company's President.
During 1997, the Company issued 1,499,454 shares of Class A CommonStock to its
President in exchange for the cancellation of accrued salary due him in the
amount of $372,000.
During 1997, the Company issued 520,000 shares of Class A Common Stock to the
Company's President through the conversion of a convertible note.
During 1997, the Company issued 280,000 shares of Class A Common Stock to a
third party through the conversion of a convertible note.
See accompanying notes and accountants' report.
F-17
Amendment 1
License Agreement between
Tensiodyne Scientific Corporation
and
The Trustees of the University of Pennsylvania
This Amendment 1 ("AMENDMENT 1") to the License Agreement effective October
15, 1993 ("AGREEMENT") between Tensiodyne Scientific Corporation ("LICENSEE")
and the Trustees of the University of Pennsylvania ("PENN") is made between
Material Technologies, Inc. ("MATECH") and PENN effective by the parties as
of the date of the last signature executing this AMENDMENT 1.
BACKGROUND
WHEREAS, MATECH, is a successor to LICENSEE's business, and therefore, is
obligated to perform the obligations of LICENSEE under the AGREEMENT, and this
AMENDMENT 1 thereto.
NOW, THEREFORE, the parties agree as follows:
1. Unless otherwise defined in this Amendment 1, all capitalized terms shall
have the same meaning as set forth in the AGREEMENT.
2. The parties hereby agree that PENN, no later than thirty (30) days after
the date of the last signature executing this AMENDMENT 1, will be issued
shares of common stock in MATECH as will cause PENN to own shares of common
stock representing at least five percent (5%) of the outstanding shares of
capital stock of MATECH on a fully diluted basis subsequent to an additional
two million dollars of paid in capital invested in MATECH. The issuance of
the shares of common stock will be conveyed by a mutually acceptable Stock
Purchase Agreement.
3. MATECH hereby represents and warrants that it is the lawful successor to
LICENSEE's rights and obligations under the AGREEMENT.
4. The parties hereby agree that Section 3.2 of the AGREEMENT is hereby
amended to obligate MATECH to pay to PENN a royalty of seven percent (7%) of
NET SALES.
5. Pursuant to Section 7.2 of the AGREEMENT, the parties hereby agree that,
LICENSEE will reimburse PENN, with funds from 30% of any equity investment,
debt, or any other capital with the exception of funds provided by any public
sector funding, (FUNDING) as set forth in paragraph 5 of REPAYMENT AGREEMENT,
for all documented attorney's fees, expenses, official fees and other charges
incident to the preparation, prosecution, licensing and maintenance of PENN
PATENT RIGHTS, including patents and patent applications in the United States
and in countries foreign to the United States on developments set forth in
foregoing Sections 4.2 of the AGREEMENT. However, such remittance to PENN
will be subsequent to the first $150,000.00 of such FUNDING raised by LICENSEE
after the date of the last signature executing this AMENDMENT1.
6. LICENSEE will have the right to cause its patent counsel, providing that
such patent counsel is acceptable to PENN, to pursue work, at the sole cost of
LICENSEE, on the PENN PATENT RIGHTS.
7. Except as set forth in the foregoing provisions of this AMENDMENT 1. all
of the terms and conditions of the AGREEMENT shall apply, and such AGREEMENT,
as amended, shall remain in full force and effect.
In WITNESS THEREOF, the parties have executed the AMENDMENT 1, through their
duly authorized representatives as set forth below, and this AMENDMENT 1 shall
be attached to, and shall become a part of, the AGREEMENT between the parties.
THE TRUSTEES OF THE
UNIVERSITY of PENNSYLVANIA MATERIAL TECHNOLOGIES INC.
By: /s/ Louis P Berneman By: /s/ Robert M. Bernstein
----------------------- -------------------
Name: Louis P Berneman Name: Robert M. Bernstein
------------------ -------------------
Title: Managing Director - Center Title: President
for Technology Transfer ---------
-------------------------
Date: 12/17/97 Date:12/19/97
-------- --------
Repayment Agreement between
Material Technologies, Inc.
and
The Trustees of the University of Pennsylvania
This Repayment Agreement is made between Material Technologies, Inc.
("MATECH") and the The Trustees of the University of Pennsylvania ("PENN") in
reference to the Sponsored Research Agreement effective October 15, 1993
("SRA") between Tensiodyne Scientific Corporation ("SPONSOR") and PENN and is
made effective as of the date of the last signature executing this Repayment
Agreement.
BACKGROUND
WHEREAS, pursuant to the terms and conditions of the SRA, SPONSOR agreed to
sponsor the research of Dr. Cambell Laird of PENN's School of Engineering in
fatigue properties of metals by payment of costs incurred in such research in
an amount of $200,000 ("OBLIGATIONS").
WHEREAS, SPONSOR has not made payments as required under the SRA.
WHEREAS, Material Technologies, Inc. ("MATECH") is a successor as to
SPONSOR's business, and therefore, is obligated to perform the obligations of
SPONSOR under the SRA and this REPAYMENT AGREEMENT thereto.
WHEREAS, PENN and MATECH wish to provide for the repayment of the OBLIGATION
on the following terms:
NOW, THEREFORE, the parties agree as follows:
1. Unless other wise defined in the Repayment Agreement, all capitalized
terms shall have the same meaning as set forth in the SRA.
2. MATECH hereby represents and warrants that it is the lawful successor to
SPONSOR's rights and obligations under the AGREEMENT.
3. MATECH agrees that the amount outstanding and due to PENN under the SRA is
$200,000.00.
4. MATECH shall pay the OBLIGATION in accordance with the following terms:
5. The entire obligation with accrued interest at the rate of 1.5% per month
beginning June 30, 1997 shall be paid to PENN no later than four (4) years
from the date of the last signature executing this agreement.
6. In the event that MATECH secures any proceeds in the form of an equity
investment, debt, or any other capital with the exception of funds provided by
any public sector entity ("FUNDING"), MATECH will immediately remit to PENN
30% of such FUNDING until OBLIGATION is paid in full. However, such remittance
to PENN will be subsequent to the last signature executing this AGREEMENT.
7. In the event that MATCH remits payment or other consideration to Mr.
Roberts M. Bernstein in partial or full satisfaction of any dept owned by
MATECH to Mr. Berstein MATECH will remit to PENN, within five (5) working
days after such payment is made, cash equal to such payment, until the
OBLIGATION is fully repaid to PENN. The foregoing provision shall not apply to
monies which MATECH repays to Mr. Bernstein which were and/or are used by
MATECH as Working Capital. As used herein, the term Working Capital is
defined by the Generally Accepted Accounting Principles of the Federal
Accounting Standards Board, except that Working Capital shall not include any
form of payment to Mr. Bernstein and/or Mr. Bernstein's Family other than the
salary described in Section 8 of this AGREEMENT.
8. MATECH will not remit to Mr. Bernstein an annual salary, or any other
consideration in lieu of a salary, exceeding $150,000 per annum until
OBLIGATION is paid in full.
9. PENN will have the right to review or audit all the books and records of
MATECH. If in the course of such a review or audit, PENN determines in good
faith that it SPONSOR has not met any of the duties defined in paragraph 5, 6,
7 and above, PENN will, by written notice, notify MATECH that PENN has
determined that it determines that MATECH has not met a duty (duties). If
MATECH determines in good faith that MATECH has met all of the duties defined
in paragraphs 5, 6, 7 and 8 above then MATECH and PENN shall choose a mutually
agreeable independent auditor to review or audit all the books and records and
records of MATECH at PENN'S expense. If such an auditor determines that MATECH
has not met any of the duties in paragraphs 5, 6, 7 and 8, the entire unpaid
OBLIGATION together with the accrued interest shall become immediately due and
payable. Such payment will not forgive MATECH of any of the duties as defined
in paragraphs 5, 6, 7 and 8 above. If such an auditor determines that MATECH
has not met all of the duties defined in paragraphs 5, 6, 7 and 8 MATECH will
reimburse PENN for all costs associated with such review or audit.
10. Notwithstanding anything to the contrary contained in this REPAYMENT
AGREEMENT, MATECH shall pay any balance remaining on the OBLIGATION no later
than four (4) years from last signature executing this AGREEMENT.
11. The parties agree that no default and/or breach under the Repayment
Agreement by MATECH shall be construed as, or shall result in a default and/or
breach under the License Agreement made effective as of October 15, 1993
between Tensiodyne Scientific Corporation and PENN. Notwithstanding the
foregoing, it is understood and agreed that this agreement does no modify,
alter or amend the License Agreement in any manner and that by entering into
the Agreement, Penn does not and shall not waive any default and/or breach by
MATECH of that License Agreement.
IN WITNESS THEREOF, the parties have executed this Repayment Agreement through
their duly authorized representatives as set forth below, and the Repayment
Agreement shall be attached to, and shall become a part of. the SRA between
the parties
THE TRUSTEES OF THE
UNIVERSITY of PENNSYLVANIA MATERIAL TECHNOLOGIES INC.
By: /s/ Louis P Berneman By: /s/ Robert M. Bernstein
--------------------- -----------------------
Name: Louis P Berneman Name: Robert M. Bernstein
------------------ -------------------
Title: Managing Director - Center Title: President
for Technology Transfer ---------
-------------------------
Date: 12/17/97 Date:12/19/97
-------- --------
ACKNOWLEDGEMENT
I have read the terms of the Agreement and the Amendment (Amendment 1).
By: /s/ Campbell Laird
--------------------
Name: Campbell Laird
---------------
Title: Professor
---------
Date: 12/17/97
--------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2451
<SECURITIES> 0
<RECEIVABLES> 62332
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 116283
<PP&E> 211572
<DEPRECIATION> (116345)
<TOTAL-ASSETS> 287257
<CURRENT-LIABILITIES> 400582
<BONDS> 0
<COMMON> 60
150000
0
<OTHER-SE> (481389)
<TOTAL-LIABILITY-AND-EQUITY> 287257
<SALES> 0
<TOTAL-REVENUES> 336410
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 513631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42242
<INCOME-TAX> (133578)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133578)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
