<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number
3383526
MATERIAL TECHNOLOGY, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4453386
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11835 West Olympic Boulevard
East Tower 705
Los Angeles, CA
-----------------------------------------------------
(Address of principal executive offices)
(310) 208-5589
-----------------------------------------------------
(Registrant's telephone number including area code)
Securities Registered pursuant to Section 12(g) of the Act:
Common
-----------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy of information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by Non-affiliates of
the registrant at March 20, 1997 was $1,872,110.
Documents incorporated by reference - None.
<PAGE>
PART I
MATERIAL TECHNOLOGY, INC.
ITEM 1. BUSINESS
Material Technology, Inc. ("Matech") a development stage company, successor in
February, 1994, to Tensiodyne Corporation's business ("Tensiodyne"), is the
owner of 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 have been
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 Fatigue Fuse is in its final stages of testing and development. To begin
marketing the Fatigue Fuse, it will take from 6 to 12 months and cost
approximately $2,000,000, including technical testing and final development. If
testing, development, and marketing are successful, management estimates Matech
should begin receiving revenue from the sale of the Fatigue Fuse within a year
of receiving the $2,000,000. Management cannot at this time estimate the
amount of revenue that may be realized. On the other hand, management estimates
the Electronic Fatigue Sensor will require two years and approximately
$2,875,000 to develop and bring to market. In August 1996, Matech entered into
a teaming arrangement with Southwest Research Institute (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 that additional military and congressional funding should be
forthcoming based upon the success of Phase I.
Management anticipates marketing the Fatigue Fuse separately at first. If the
Electronic 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,
2
<PAGE>
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.
Basic Research for the Electrochemical Fatigue sensor was conducted at the
University of Pennsylvania. It defined the unique physical effect on which the
Electrochemical Fatigue Sensor is based, and the materials, configuration,
instrumentation and procedures to be employed therein. The next phase will be
Advanced Development with more complex load cycles, additional alloys,
fabrication of a movable Electrochemical Fatigue Sensor device, and production
of another body of reproducible test data. Prototype Applications will then
include fabrication of a truly portable near operational load spectra. And
again the final steps are multiple demonstration tests followed by routine
sales.
To date, certain organizations have included Matech's Fatigue Fuse in test
programs. Already completed are tests for lightweight military bridges, and
welded steel civil bridge members. 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, developed by Tensiodyne and now owned by Matech, was designed
to be affixed to a structure and to give a number of 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
3
<PAGE>
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 train 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 which are subject
to fatigue to be extremely conservative and they have attempted to design
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. Management estimates
that it will require an outlay of approximately $355,00 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 development of such value 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 the
introduction to the market of a new product. In order to determine its ability
to produce and market the Fatigue Fuse, it will be necessary for Matech to have
substantial capitalization and no assurance can be given that the needed capital
will be available to Matech.
Electrochemical Fatigue Sensor
In July, 1993, Tensiodyne entered into a license and 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 this Agreement, 12,500 shares of
Tensiodyne's common stock were issued, a 5% royalty on sales of this product was
granted, and Tensiodyne undertook to pay $11,112 per month for a total of 18
months, for a total payment of $200,000. As of March 20, 1997, neither
Tensiodyne nor Matech has made any payments on this obligation. 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,
4
<PAGE>
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). The Electrochemical Fatigue Sensor, as this product is
known, is in the initial stage of research. No assurance can be given that it
can successfully be developed and that even if it is successfully developed that
it can be produced at a price which will permit it being marketed, and that even
if these two conditions obtain, that the Electrochemical Fatigue Sensor will, in
fact, find a market.
PATENTS
Matech is the assignee of four patents originally issued to Tensiodyne. 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. It bears 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. It bears 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. It bears United States Patent Number 5,319,982. This latter patent
was pending when Tensiodyne assigned the rights to Matech in February 1994 and
was assigned to Matech upon issuance later in 1994.
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.
5
<PAGE>
Competitor's Products
Nevertheless, other technologies exist which indicate fatigue damage. Single
cracks larger than a certain 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 marketplace, 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, more human and other 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
stages, Matech is unable to predict whither its technologies may be successfully
developed and commercially attractive to its various potential markets.
ITEM 2. PROPERTIES
Matech currently leases the facility previously occupied by Tensiodyne at 11835
West Olympic Boulevard, Suite 705, Los Angels, California, 90064. The leased
premises consist of approximately 1,400 square feet and are considered adequate
for Matech's current and foreseeable needs. The lease expires on May 30, 1997.
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 of the leasing of this equipment, the University of
Pennsylvania has agreed to perform 1,200 hours of testing on materials to be
used in conduction 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 had the right to purchase the equipment at
its then fair market value.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the period
of this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 12,1996, Matech's S-1 registration became effective for distribution
of 262.267 shares of Class A Common Stock to 391 shareholders of Tensiodyne
Corporation as of February 2, 1994. Of these shares, 132,565 shares were
distributed to Robert M. Bernstein.
6
<PAGE>
Approximately two weeks later, Matech Class A Common Shares were quoted on the
NASDAQ Bulletin Board.
On December 31, 1996, there were 405 shareholder.
No dividends on any of the Company's shares were declared or paid during 1996
nor are any dividends contemplated in the foreseeable future.
On February 20, 1996, Matech filed a Form 8 registration statement registering
120,000 shares of the Company's Class A Common Stock to be issued to employees,
advisors and consultants under the Company's 1996 Stock Option Plan adopted by
the Board of Directors on February 19, 1996. As of December 31, 1996, 70,000
shares have been issued under this plan to various consultants.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
From Inception
through
1992 1993 1994 1995 1996 Dec. 31, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) From
Continued Operations $(51,180) $(714,605) $(377,063) $(197,546) $(450,734) $(2,830,869)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) From
Continued Operations Per
Common Share (0.17)
Weighted Average Shares
Outstanding $2,580,546
- ---------------------------------------------------------------------------------------------------------------
Total Assets $178,944 $167,858 $184,579 $150,692 $208,299 $208,299
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities $46,481 $401,600 $620,375 $783,882 $1,046,516 $1,046,516
- ---------------------------------------------------------------------------------------------------------------
Redeemable Preferred
Stock 0 0 $150,000 $150,000 $150,000 $150,000
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity
(Deficit) $132,463 $(619,166) $(585,796) $(783,190) $(988,217) $(988,217)
- ---------------------------------------------------------------------------------------------------------------
Dividends 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</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 Tensiodyne Corporation for
1994 and of the Company for the two years ended December 31, 1996. Since
February 1994, the Company has been successor to all of the assets and
operations of Tensiodyne pertaining to the Fatigue Fuse and the Electrochemical
Fatigue Sensor.
7
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
Revenues
Neither the Company's parent Tensiodyne or Company generated any significant
revenue in 1996, 1995, or 1994.
COSTS AND EXPENSES
Research and Development costs (pertaining to testing) in 1996 were $699, as
compared t $15,104 in 1995 and $83,360 in 1994. The amount spent in development
costs by the Company is directly related to its available funds.
General and Administrative costs were $421,053 for 1996, $188,745 for 1995, and
$295,488 for 1994. The major cost 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 major costs incurred during 1995 were professional fees of $33,206, the
charge-off of the third 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.
The major cost incurred in 1994 were officer salaries of $72,000, professional
fees of $55,824, office related expenses of $32,206, travel costs of $36,991,
rent of $16,169, and utilities of $23,023.
Liquidity and Capital Resources
Cash and cash equivalents at December 31,1996 amounted to zero. During 1996,
the Company's president advanced $51,324, including direct loans to the Company
and payment of Company Expenses, and $64,676 was repaid towards his loan
account. In addition, an individual purchased a $25,000 convertible note, the
Company sold 50,000 of its shares of Tensiodyne Corporation for $17,750, and
$174,040 was received through the issuance of 70,000 shares of the Company's
Class A Common Stock through its 1996 stock option plan.
Cash and cash equivalents at December 31, 1995 amounted t $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.
Cash and cash equivalents at December 31,1994 amounted to zero. During 1994,
the Company received $24,787 form its officers through the sale of its Class A
Common Stock, $140,000 from the sale of its Redeemable Class B Preferred Stock,
$135,050 from officer loans, and $78,495 from third-party loans. Of the total
amount received during the period, $275,441 was used in operations and $31,480
was paid in fees relating to the preparation and filing of the Registration
Statement and $78,446 was repaid to the Company's president.
8
<PAGE>
ITEM 8. FINICAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and incorporated herein by reference are audited finical
statements of the Registrant as at December 31, 1996 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 t their business
experiences are set forth below:
NAME AGE POSITION
Robert M. Bernstein 62 President/Chief Financial Officer
Chairman of the Board
Joel R. Freedman 36 Secretary/Director
Dr. John Goodman 62 Chief Engineer/Director
The Term of the directors and officers of Matech is until the next annual
meeting to be held on the second Tuesday in April 1997.
ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD
Robert M. Bernstein is 62 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
Presidents and CEO of Matech and retained these positions with Matech after the
reorganization in February 1994.
JOEL R. FREEDMAN, SECRETARY/DIRECTOR
Joel R. Freedman is 36 years of age. From October 1989 until February 1994, Mr.
Freedmen was Secretary and a Director of Tensiodyne and Matech, retaining these
positions with Matech after the reorganization in February 1994. 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.
9
<PAGE>
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 61 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 Rugers 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 from August 1993 to December 1994, when he returned
to TRW. Since the he has consulted with Matech periodically.
ADVISORY BOARD
Since 1987, Tensiodyne and then Matech, as the successor to Tensiodyne's former
business, has had an Advisory Board presently consisting of Alexander M.
Adelson, William F. Ballhaus, Robert P. Coogan, Campbell Laird, Ronald Landgraf,
Robert Maddin, And Samuel I. Schwartz. 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 62 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 78, 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.
10
<PAGE>
ROBERT P. COOGAN
Robert P. Coogan, age 72, retired from a distinguished naval career spanning 40
years during which he held numerous posts including: Commander U.S. Third Fleet,
Commander Naval Air Force - U.S. Pacific Fleet, Commandant of Midshipmen - U.S.
Naval Academy, and Chief of Staff - Commander Naval Air Force - U.S. Atlantic
Fleet. From 1980 to 1991 he was with Aerojet General Company and served as
Executive Vice President of Aerojet Electrosystems Co. from 1982-1991. He has
his B.S. in Engineering from the U.S Naval Academy and M.A. in International
Affairs from George Washington University.
JOHN C. EKVALL Mr. Ekvall, age 70, received his M.S. in 1964 in Civil
Engineering from the University of California, Berkeley. He is currently
teaching fatigue and fracture mechanics design and analysis at UCLA. From
1985 to his retirement from Lockheed in 1990, he was Program Manager for Air
Force Contracts on Developing Elevated Temperature Powered Aluminum Alloys
for Aircraft Structures.
DR. MALCOLM H. HODGE
Dr. Hodge, age 54, 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 60, 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 57, 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 77, 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
resently has been an honorary curator of archaeological sciences, Peabody Museum
of Archaeology and Ethnology, Harvard University.
11
<PAGE>
MARK S. SINGEL Mr. Singel, age 43, is the founding partner of Singel
Associates, a consulting marketing and legislative services formed in
Harrisburg, Pennsylvania. He is the current Chair of the Pennsylvania
Democratic Party. He also teaches Public Policy at the Pennsylvania State
University in Harrisburg. From 1987 to 1995, he served as the Lieutenant
Governor of Pennsylvania.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Other Restricted All Other
Name and Annual Stock Options/ LTIP Compen-
Principal Salary Bonus Compen- Awards SARs Payouts sations
Position Year ($) ($) sation ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. 1993 $295,000(1) 0 0 $300(2) 0 0 0
Bernstein 1994 $72,000(3) 0 0 $10(4) 0 0 0
CEO 1995 0 0 0 0 0 0 0
1996 $200,000 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------
John W. 1993 $55,796 0 0 0 0 0 0
Goodman 1994 $71,096 0 0 0 0 0 0
Director 1995 $2,745 0 0 0 0 0 0
and 1996 0 0 0 0 0 0 0
Engineer
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Of this $295,000, $30,000 was paid, $100,000 was accrued, and $165,000
results from Tensiodyne agreeing to reduce the purchase price of stock
that Mr. Bernstein purchased in 1992 from $30 per share to $2.50 per share
by reducing a promissory note from Mr. Bernstein by $265,000.
(2) In 1993, Tensiodyne issued 300,000 shares to Mr. Bernstein at par value of
$.001 per share.
(3) This $72,000 was accrued.
(4) In February 1994, Matech issued 10,000 shares of Class A Common Stock, par
value $.001, to Mr. Bernstein.
12
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF
DECEMBER 31,1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Class A Common Amount and Nature of
Stock Name and Address of Owner Ownership Percent of Class
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Robert M. Bernstein 942,676 Shares 36.53%
Common Stock 11835 Olympic Blvd.
East Tower, Suite 705
Los Angeles, CA 90064
- -------------------------------------------------------------------------------------------
Joel R. Freedman 113,481 Shares 4.40%
11835 Olympic Blvd.
East Tower, Suite 705
Los Angeles, CA 90064
- -------------------------------------------------------------------------------------------
Directors and Executive 1,056,157 Shares 40.93%
Officers as a group
(2 persons)
- -------------------------------------------------------------------------------------------
Sherman Baker Group 507,744 Shares 19.67%
555 Turnpike Street
Canton, MA 02021
- -------------------------------------------------------------------------------------------
Class B Robert M. Bernstein 60,000 Shares 100.00%
Preferred
- -------------------------------------------------------------------------------------------
Class A Sherman Baker 131,600 Shares 37.60%
Preferred
- -------------------------------------------------------------------------------------------
Nathan Greenberg 35,000 Shares 10.00%
306 Main Street
Worchester, MA 01608
- -------------------------------------------------------------------------------------------
Melvin Nessel 35,000 Shares 10.00%
180 Beacon Street
Boston, MA 01608
- -------------------------------------------------------------------------------------------
Eugene Ribakoff 35,000 Shares 10.00%
46 W. Boylston Street
Worchester, MA 01608
- -------------------------------------------------------------------------------------------
Norman Fain 21,000 Shares 6.00%
505 Central Avenue
Pawtucket, RI 02862
- -------------------------------------------------------------------------------------------
Morris Leob 21,000 Shares 6.00%
2368 Century Hill
Los Angeles, CA 90067
- -------------------------------------------------------------------------------------------
A. Sandler 21,000 Shares 6.00%
139 Atlantic Avenue
Sawmscott, MA 01907
- -------------------------------------------------------------------------------------------
Class B Tensiodyne Cooperation 15 Shares 100.00%
Preferred
- -------------------------------------------------------------------------------------------
</TABLE>
As of March 20, 1997 Robert Bernstein, Joel R. Freedman, John Goodman, Sherman
Baker, Nathan Greenberg, Melvin Nessel, and Eugene Ribakoff had not filed Form
3, Initial Statement of Beneficial Ownership of Securities pursuant to Rule 16
a-3 of the Exchange Act.
13
<PAGE>
Description of Capital Stock
Matech is authorized to issue 113,000,000 shares of stock. Each of the
133,000,000 shares of stock has a par value of $.001. Of the Shares authorized,
100,00,000 are Class A Common Shares; 3,000,000 are Class B Common shares; and
10,000,000 are Class A 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 February 1, 1994, the Company filed with the Secretary of State of the State
of Delaware a Certificate of Designation pertaining to 350,000 of the 10,000,000
shares of the Class A Preferred convertible stock authorized by the Certificate
of Incorporation. 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 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 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.
14
<PAGE>
In February 1994, 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. Five hundred ten
(510) 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 to 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, 2,580,546 shares of Class A Common Stock are outstanding
and held by 405 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Robert M. Bernstein had advanced funds to Matech and at
December 31, 1996 Matech owed him $179,544. Robert M. Bernstein has generally
waived interest on these advances. Robert M. Bernstein is under no obligation
to make further advances to Matech but may continue to so do at his sole
discretion. In addition, at December 31,1996, Matech was obligated to Robert M.
Bernstein in the amount of $372,000 for accrued salary.
On July 24, 1995, the Company authorized the issuance of notes convertible to
common stock to Robert M. Bernstein and the Sherman Baker Group. The note to
Robert M. Bernstein will be in the amount of $108,000 and the consideration for
that note was $108,000 in cash advances to the Company. The term note will be
for three (3) years. Mr. Bernstein will have there right at any time to convert
the note or any ratable portion thereof into 520,000 shares of the Company's
Class A Common Stock. The note to the Sherman Baker Group will be in the amount
of $58,000 and the consideration for that not will be $58,000 cash to the
Company. The term of this note will also be three (3) years. The Sherman Baker
Group will have the right at any time to convert the
15
<PAGE>
note or any ratable portion thereof into 280,000 shares of the Company's Class A
Common Stock.
On February 21, 1997, Matech 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. Under that agreement, the parties intend to spin-off Matech's business
into a newly formed corporation ("Matech 2") as described below and effect a
reverse merger of SecurFone into Matech. Upon closing, SecurFone's shareholders
will acquire 90% of Matech's outstanding capital stock in exchange for 100% of
SecurFone's outstanding capital stock. On March 9, 1997, Matech authorized
issuance of 2,319,454 shares of its Class A Common Stock so that the total
number of shares outstanding was increased from 2,680,546 shares to 5,000,000
shares as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Number of shares Issued to all Number of Shares Issued to Robert
Description Shareholders M. Bernstein
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding as of March 9, 1997 2,680,546 916,676
- -------------------------------------------------------------------------------------------------------
Issued to Robert M. Bernstein for
60,000 Class B 1,499,454 1,499,454
- -------------------------------------------------------------------------------------------------------
Issued to Robert M. Bernstein for
$108,000 Note 520,000 520,000
- -------------------------------------------------------------------------------------------------------
Issued to the Baker Group
$58,000 Note 280,000 0
- -------------------------------------------------------------------------------------------------------
Issued to Matech 1's Counsel for
Services in 1995 and 1996 20,000 0
- -------------------------------------------------------------------------------------------------------
TOTAL ISSUED 2,319,454
- -------------------------------------------------------------------------------------------------------
TOTAL OUTSTANDING 5,000,000 2,936,130
- -------------------------------------------------------------------------------------------------------
</TABLE>
On March 4,1997, Material Technologies, Inc. ("Matech 2") was incorporated in
Delaware for this transaction. On March 9, Matech 2's Board authorized the
issuance of 5,560,000 shares of its Class A Common Stock to Matech in exchange
for all of Matech's assets and liabilities. It also authorized issuance of
60,000 shares of its 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, 15 shares of the
Company's Class B Preferred Stock to Tensiodyne Corporation in exchange for its
preferred stock in Matech, and 1,700,000 warrants to purchase 1,700,000 shares
of Matech 2's Class A Common Stock for $.50 per share in exchange for
cancellation of like warrants to purchase Matech common stock. The rights,
privileges, and designations of the Matech 2's Class B Common Stock, warrants,
and its preferred stock will be the same as the corresponding Matech securities
except that the redemption date of Matech 2's Class B Preferred Stock was
changed from January 31, 2004 to January 1, 2002.
16
<PAGE>
On March 9, 1997 Matech's Board authorized the exchange of its assets and
liabilities for 5,560,000 shares of Matech 2's Class A Common Stock. In
early April that transaction will be presented for approval to the majority
of Matech shareholders and, if approved, an information statement will be
mailed to Matech's shareholders who will not vote on the transaction. The
exchange may take effect 21 days after that mailing. Matech also agreed to
distribute 5 million shares of Matech 2's Class A Common Stock to Matech
shareholders in a ratio of one to one. The distribution to Matech's public
shareholders is intended to be accomplished under an S-1 Registration
Statement that Matech 2 filed with the Securities and Exchange Commission on
March 19, 1997 but which has not yet become effective. Matech will retain
560,000 shares of the Matech 2's Class A Common Stock to 10.1% of the
outstanding shares.
After the distribution, Matech intends to reverse spilt its 5,000,000
outstanding shares, 1 for 10, leaving approximately 500,000 shares
outstanding. Fractional shares will be rounded up. Thus, stockholders owning
less than ten Matech shares will still receive one share in the reverse split.
Matech intends to then issue 4,500,000 new shares to SecurFone shareholders
in exchange for all of SecurFone's outstanding shares leaving Matech's
present shareholders with 10% interest in SecurFone. SecurFone will pay
Matech 2 $120,000 to cover expenses of the transaction. Matech intends to
then change its name to SecurFone. Securfone is a start-up company providing
prepaid cellular and telephone line calling cards. SecurFone utilizes an
advanced switching platform to provide prepaid debit products to telephone
customers. SecurFone's principal offices are in San Diego, California and its
primary network facilities are in Miami, FL.
The purpose of the distribution is to spin-off Matech's metal fatigue
technologies business allowing Matech's shareholders to retain an interest in
Matech's business, while keeping that business separate from SecurFone's new
business. If this transaction is completed, Matech's shareholders will retain
approximately 90% of their interest in the Company's metal fatigue technologies
business and own 10% of SecurFone's prepaid cellular and calling business as
well.
The transfer of Matech's assets and liabilities to Matech 2 and the distribution
of its shares is 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
enables 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 - none.
b. Reports on From 8-K - none.
c. Financial Statements - attached.
17
<PAGE>
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.
Date: March 31, 1997 /s/ Robert M. Bernstein
------------------------- ----------------------------
Robert M. Bernstein, President
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.
Date: March 31, 1997 By: /s/ Robert M. Bernstein
------------------------- ----------------------------
Robert M. Bernstein, President
Date: March 31, 1997 By: /s/ Joel R. Freedmen
------------------------- ----------------------------
Joel R. Freedmen, Secretary
Date: March 31, 1997 By: /s/ John Goodman
------------------------- ----------------------------
John Goodman, Director
18
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
CONTENTS
Page
----
Independent Auditors' Report F1
Balance Sheets F3
Statements of Operations F5
Statement of Stockholders' Equity (Deficiency) F6
Statements of Cash Flows F13
Notes to Financial Statements F15
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Material Technology, Inc.
(Formerly Tensiodyne Scientific Corporation)
Los Angeles, California
We have audited the accompanying balance sheets of Material Technology, Inc.
(Formerly Tensiodyne Scientific Corporation) (A Development Stage Company) as
of December 31, 1996 and 1995, and the related statements of operations, cash
flows, and stockholders' equity (deficit) for each of the three years in the
period ended December 31, 1996, and for the period from January 1, 1991,
through December 31, 1996. 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 3,
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.
F-1
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Technology, Inc.
(Formerly Tensiodyne Scientific Corporation) as of December 31, 1996, and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 and for the period from January 1, 1991
through December 31, 1996, 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 3 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 3. 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
March 10, 1997
F-2
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1995 1996
--------- ---------
CURRENT ASSETS
Cash and Cash Equivalents $ 1,226 $ --
Prepaid Expenses -- 6,472
--------- ---------
TOTAL CURRENT ASSETS 1,226 6,472
--------- ---------
FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciation 100,958 98,016
--------- ---------
OTHER ASSETS
Investments -- 55,200
Intangible Assets, Net of
Accumulated Amortization 22,658 20,669
Note Receivable (Including
Accrued Interest) 23,661 25,753
Refundable Deposit 2,189 2,189
--------- ---------
TOTAL OTHER ASSETS 48,508 103,811
--------- ---------
TOTAL ASSETS $ 150,692 $ 208,299
--------- ---------
--------- ---------
See accompanying notes and independent accountants' report.
F-3
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
<TABLE>
<CAPTION>
December 31,
1995 1996
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Bank Overdraft $ -- $ 2,422
Legal Fees Payable 111,343 128,191
Other Accounts Payable 18,185 33,220
Accrued Officers Salary 172,000 372,000
Accrued Payroll Taxes Payable 12,051 19,124
Loan Payable - Officer 23,272 56,846
Loans Payable-Others 84,439 32,627
Payable on Research and
Development Sponsorship 188,495 188,495
--------- ---------
TOTAL CURRENT LIABILITIES 609,785 832,925
Loan Payable - Officer 113,268 122,698
Loans Payable - Other 60,829 90,893
--------- ---------
TOTAL LIABILITIES 783,882 1,046,516
--------- ---------
REDEEMABLE PREFERRED STOCK
Class B Preferred Stock, $.001 Par Value
Authorized 510 Shares, Outstanding 15 Shares at December
31, 1996; Redeemable at $10,000 Per Share After January 31, 2004 150,000 150,000
--------- ---------
STOCKHOLDERS' (DEFICIT)
Class A Common Stock, $.001 Par Value, Authorized 100,000,000
Shares, Outstanding 2,157,880 Shares at December 31, 1995,
and 2,580,546 Shares at December 31, 1996 2,157 2,581
Class B Common Stock, $.001 Par Value, Authorized 300,000
Shares, Outstanding 60,000 Shares 60 60
Class A Preferred, $.001 Par Value, Authorized 10,000,000 Shares
Outstanding 350,000 Shares 350 350
Additional Paid in Capital 1,763,698 1,799,181
Less Notes Receivable - Common Stock (14,720) (14,720)
Deficit Accumulated During the Development Stage (2,380,135) (2,830,869)
Unrealized Holding Gain on Investment Securities -- 55,200
--------- ---------
--------- ---------
TOTAL STOCKHOLDERS' (DEFICIT) (783,190) (988,217)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 150,692 $ 208,299
--------- ---------
--------- ---------
</TABLE>
See accompanying notes and independent accountants' report.
F-4
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From Inception
(October 21, 1983)
Through
1994 1995 1996 December 31, 1996
---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Sale of Fatigue Fuses $ -- $ -- $ -- $ 64,505
Sale of Royalty Interests -- -- -- 198,750
Research and Development Revenue -- -- -- 712,580
Test Services -- -- -- 10,870
---------- ---------- ---------- ----------
TOTAL REVENUES -- -- -- 986,705
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Research and Development 83,360 15,104 10,700 1,508,296
General and Administrative 295,488 188,745 472,486 2,150,508
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 378,848 203,849 483,186 3,658,804
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (378,848) (203,849) (483,186) (2,672,099)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Expense Reimbursed -- -- 12,275 (6,527)
Interest Income 1,785 1,928 2,427 39,487
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 Sale of Stock -- -- 17,750 17,750
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 1,785 6,303 32,452 131,170
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (377,063) (197,546) (450,734) (2,540,929)
PROVISION FOR INCOME TAXES -- -- -- (7,000)
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (377,063) (197,546) (450,734) (2,547,929)
EXTRAORDINARY ITEMS
Forgiveness of Debt -- -- -- (289,940)
Utilization of Operating Loss Carry forward -- -- -- 7,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (377,063) $ (197,546) $ (450,734) $(2,830,869)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE DATA
Income (Loss) Before Extraordinary Item $ (0.17)
Extraordinary Items --
----------
NET INCOME (LOSS) $ (0.17)
----------
----------
COMMON SHARES OUTSTANDING 2,580,546
----------
----------
</TABLE>
See accompanying notes and independent accountants' report.
F-5
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 -- -- -- --
Balance,October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
With Pooling of Interests 42,334 14 -- -- -- --
Net (Loss), Year Ended
December 31, 1983 -- -- -- -- -- --
------- --- ------- ------- ------- -------
Balance, January 1, 1984 42,540 14 -- -- -- --
Capital Contribution -- 28 -- -- -- --
Issuance of Common Stock 4,815 5 -- -- -- --
Costs Incurred in Connection
with Issuance of Stock -- -- -- -- -- --
Net (Loss), Year Ended
December 31, 1984 -- -- -- -- -- --
------- ---- ------- ------- ------- -------
<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>
Initial Issuance of Common Stock,
October 21, 1983 -- $ -- $ 2,498 $ --
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares -- -- (2) --
------- ------- --------- ---------
-- -- 2,496 --
Balance,October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
With Pooling of Interests -- -- 4,328 --
Net (Loss), Year Ended
December 31, 1983 -- -- -- (4,317)
------- ------- --------- ---------
Balance, January 1, 1984 -- -- 6,824 (4,317)
Capital Contribution -- -- 21,727 --
Issuance of Common Stock -- -- 10,695 --
Costs Incurred in Connection
with Issuance of Stock -- -- (2,849) --
Net (Loss), Year Ended
December 31, 1984 -- -- -- (21,797)
------- ------- --------- ---------
</TABLE>
See accompanying notes and independent accountants' report.
F-6
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 -- -- -- -- -- --
------- --- ------- ------- ------- -------
<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, January 1, 1985 -- -- 36,397 (26,114)
Shares Contributed Back
to Company -- -- 0 --
Capital Contribution -- -- 200,555 --
Sale of 12,166 Warrants at
$1.50 Per Warrant -- -- 18,250 --
Shares Cancelled -- -- 9 --
Net (Loss), Year Ended
December 31, 1985 -- -- -- (252,070)
------- --------- --------- -------
Balance, January 1, 1986 -- -- 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 -- -- -- (10,365)
------- --------- --------- -------
Balance, January 1, 1987 -- -- 255,211 (288,549)
Issuance of Common Stock Upon
Exercise of Warrants -- -- 27,082 --
Net (Loss), Year Ended
December 31, 1987 -- -- -- (45,389)
------- --------- --------- -------
</TABLE>
See accompanying notes and independent accountants' report.
F-7
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 -- -- -- -- -- --
------- --- ------- ------- ------- -------
<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, January 1, 1988 -- -- 282,293 (333,938)
Issuance of Common Stock
Sale of Stock (Unaudited) -- -- 101,749 --
Services Rendered (Unaudited) -- -- 70,597
Net (Loss), Year Ended
December 31, 1988 (Unaudited) -- -- -- (142,335)
------- --------- --------- -------
Balance, January 1, 1989
(Unaudited), -- -- 454,639 (476,273)
Issuance of Common Stock
Sale of Stock -- -- 1,996 --
Services Rendered -- -- 17,964 --
Net (Loss), Year Ended
December 31, 1989 -- -- -- (31,945)
------- --------- --------- -------
Balance, January 1, 1990 -- -- 474,599 (508,218)
Issuance of Common Stock
Sale of Stock -- -- 59,248 --
Services Rendered -- -- 32,393 --
Net Income, Year Ended
December 31, 1990 -- -- -- 133,894
------- --------- --------- -------
</TABLE>
See accompanying notes and independent accountants' report.
F-8
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 -- -- -- -- -- --
--------- ----- ------- ------- ------- -------
<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 January 1, 1991 as Restated -- -- 566,240 (374,324)
Issuance of Common Stock
Sale of Stock -- -- 273,335 --
Services Rendered -- -- 64,880 --
Conversion of Warrants -- -- -- --
Conversion of Stock -- -- -- --
Net (Loss), Year Ended
December 31, 1991 -- -- -- (346,314)
------- --------- --------- -------
Balance January 1, 1992 -- -- 904,455 (720,640)
Issuance of Common Stock
Sale of Stock -- -- 15,980 --
Services Rendered -- -- 15,515 15,520
Conversion of Warrants -- -- 14,994 --
Sale of Class B Stock -- -- 14,940 --
Issuance of Stock to
Unconsolidated Subsidiary -- -- 71,659 --
Conversion of Stock -- -- -- --
Cancellation of Shares -- -- 7 --
Net (Loss), Year Ended
December 31, 1992 -- -- -- (154,986)
------- --------- --------- -------
</TABLE>
See accompanying notes and independent accountants' report.
F-9
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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
--------- ----- ------- ------- ------- -------
<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
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 Agreements 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
--------- ----- ------- ------- ------- -------
--------- ----- ------- ------- ------- -------
<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 Agreements -- -- (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
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 Agreements 250,000 250 -- -- -- --
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
--------- ----- ------- ------- ------- -------
--------- ----- ------- ------- ------- -------
<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 Agreements -- -- (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)
------- ------- ---------- ----------
------- ------- ---------- ----------
</TABLE>
See accompanying notes and independent accountants' report.
F-12
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Inception
(October 21, 1983)
December 31, Through
1994 1995 1996 December 31, 1996
---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (377,063) $ (197,546) $ (450,734) $ (2,830,869)
---------- ---------- ---------- ------------
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided
(Used) by Operating Activities
Depreciation and Amortization 5,553 5,555 4,931 159,715
Charge off of Deferred Offering Costs -- 31,480 -- 31,480
Increase in Prepaid Expenses -- -- (1,472) (1,472)
Loss on Sale of Equipment -- -- -- 12,780
Issuance of Common Stock for Services 223 -- 16,467 295,965
Issuance of Common Stock for Agreement Modifications -- 152 -- 152
Forgiveness of Indebtedness -- -- -- 165,000
Increase (Decrease) in Accounts
Payable and Accrued Expenses 97,612 16,032 238,957 552,535
Interest Accrued on Notes Payable 10,870 17,681 28,551
Increase in Research and Development --
Sponsorship Payable -- -- -- 188,495
(Increase) in Note for Litigation Settlement (1,766) (1,921) (2,092) (25,753)
(Increase) in Deposits -- -- -- (2,189)
---------- ---------- ---------- ------------
TOTAL ADJUSTMENTS 101,622 62,168 274,472 1,405,259
---------- ---------- ---------- ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (275,441) (135,378) (176,262) (1,425,610)
---------- ---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of Equipment -- -- -- 10,250
Purchase of Property and Equipment -- -- -- (226,109)
(Increase) in Other Assets -- -- -- (69,069)
Payment for License Agreement -- -- -- (6,250)
---------- ---------- ---------- ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES -- -- -- (291,178)
---------- ---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock
Net of Offering Costs 24,787 -- 174,040 732,319
Costs incurred in Offering (31,480) -- -- (31,480)
Sale of Common Stock Warrants -- -- -- 18,250
Sale of Preferred Stock -- -- -- 258,500
Sale of Redeemable Preferred Stock 140,000 -- -- 150,000
Capital Contributions -- -- -- 301,068
Proceeds From Note Payable -- -- --
Payment on Proposed Reorganization -- -- (5,000) (5,000)
Loans From Officers 135,050 100,874 43,250 356,307
Repayments to Officer (78,446) (16,000) (64,676) (230,262)
Increase in Loan Payable-Others 78,495 58,000 25,000 164,664
---------- ---------- ---------- ------------
</TABLE>
See accompanying notes and accountants' report.
F-13
<PAGE>
MATERIAL TECHNOLOGY, INC.
(Formerly Tensiodyne Scientific Corporation)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Inception
(October 21, 1983)
December 31, Through
1994 1995 1996 December 31, 1996
--------- ------------ --------- -----------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 268,406 $ 142,874 $ 172,614 $ 1,714,366
--------- ------------ --------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (7,035) 7,496 (3,648) (2,422)
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS 765 (6,270) 1,226 --
--------- ------------ --------- -------------
ENDING BALANCE - CASH AND CASH
EQUIVALENTS $ (6,270) $ 1,226 $ (2,422) $ (2,422)
--------- ------------ --------- -------------
--------- ------------ --------- -------------
</TABLE>
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 1994, the Company authorzed the issuance to certain
directors and to members of its advisory board a total of 198,000
shares of its Class A Common Stock.
Also in 1994, the Company authorized the issuance of 15,000 to unrelated
third parties for services rendered to the Company and also authorized
the issuance of 10,000 shares of Class A Common Stock to its president
for past services.
During 1995, the Company forgave $154,600 on an obligation due
from the Company's President in exchange 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 A
Common stock to third parties in consideration for the modification
of certain agreements.
During 1996, the Company issued 250,000 shares of its Class A Common
stock 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 1996, the Company cancelled 62,000 shares of Class A Common which
it held in its treasury.
See accompanying notes and accountants' report.
F-14
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Tensiodyne Scientific Corporation (the "Company") was organized on November
7, 1985, under the laws of the state of Delaware.
On November 29, 1985, all of the Company's, outstanding stock was acquired
by Tensiodyne Corporation (the "Parent"). The Company had little activity
from its inception through 1992. In 1993, the Company received $385,424 in
exchange for the issuance of 30,818 of the Company's common stock.
On December 20, 1993, the Company entered into an agreement to distribute
262,267 of its Class A Common Stock, 60,000 shares of its Class B Common
stock, and 350,000 shares of its Class A Preferred Convertible Stock to the
existing shareholders of Tensiodyne Corporation. In exchange for the
issuance of these shares, the Company received all of the assets and
assumed all of the liabilities of the Parent. A schedule of the assets and
liabilities acquired is as follows:
Assets
Cash $ 765
Loan Receivable
- Officer 10,205
Property & Equipment
at Net 108,091
Licensing Agreement and
Patents 26,634
Notes Receivable 19,974
Other Assets 2,189
----------
$ 167,858
----------
Liabilities
Accrued Expenses $ (91,935)
Accrued Salaries
- Officer (108,000)
Deposit Payable (10,000)
Loans Payable (3,169)
Note Payable on
Licensing Agreement (188,495)
--------
$ (401,599)
----------
Liabilities in Excess
of Assets Transferred $ (233,741)
----------
----------
F-15
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION (CONTINUED)
For financial reporting purposes, the above transaction was treated as a
recapitalization. Therefore, the assets and liabilities transferred have
been recorded at historical cost.
On January 30, 1994, the Company filed with the office of the Secretary of
State of Delaware an Amended and Restated Certificate of Incorporation
whereby its capital structure was changed to provide for the authorization
to issue 100,000,000 shares of Class A Common Stock, $.00l par value;
3,000,000 shares of Class B Common Stock, $.00l par value; and 10,000,000
shares of Class A Convertible Preferred Stock, $.00l par value.
The Company authorized a 1 for 10 reverse stock split of its Class A common
shares on June 22, 1994. All references to the Company's Class A Common
Stock as reflected in the accompanying financial statements and notes have
been restated to reflect the 1:10 reverse stock split.
On July 19, 1994, the Company filed with the Secretary of State of
Delaware, an amendment to its Certificate of Incorporation changing its
name from Tensiodyne Scientific Corporation to Material Technology, Inc.
The Company is in the development stage, as defined in FASB Statement 7,
with its principal activity being research and development in the area of
metal fatigue technology with the intent of future commercial application.
The Company has not paid any dividends and dividends which may be paid in
the future will depend on the financial requirements of the Company and
other relevant factors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PROPERTY AND EQUIPMENT
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and for income
tax reporting purposes.
F-16
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. INTANGIBLE ASSETS
Intangibles are amortized on the straight-line method over periods
ranging from 5 to 20 years (see Note 4).
C. NET LOSS PER SHARE
Net loss per share is computed pursuant to SAB Topic 1.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.
NOTE 3 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company
has sustained substantial operating losses totaling $2,830,869 since
its inception through December 31, 1996. These continuing losses are
an indication that the Company may not be able to continue to operate.
The Company anticipates that it needs approximately $5,000,000 in
order to complete the development and marketing of its two products.
Management believes the source of the $5,000,000 will be through
government grants, sale of the Company's stock, entering into joint
ventures, and or through the sale of royalty interests.
F-17
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INTANGIBLES
Intangible assets consist of the following:
Period of December 31,
Amortization 1995 1996
------------- ------- -------
Patent Costs 17 years $ 28,494 $ 28,494
Organization Costs 5 Years 9,076 9,076
License Agreement 20 Years 6,250 6,250
-------- --------
43,820 43,820
Less Accumulated Amortization (21,162) (23,151)
-------- --------
$ 22,658 20,669
-------- --------
-------- --------
Amortization charged to operations for 1994, 1995, and 1996, were
$1,988, $1,988 and $1,989, respectively.
NOTE 5 - 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 is non-interest bearing and due and payable upon either the
death of the individual's spouse or upon conveyance or attempted
conveyance of any interest in the individual's residence. Interest has
been imputed pursuant to APB-21 at an annual rate of 8.5% The balance
of this note as of December 31, 1995, and 1996, was $23,661 and
$25,753, respectively.
F-18
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - LITIGATION SETTLEMENT
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. The Company commenced foreclosure proceedings with a
public foreclosure sale pending and scheduled for March 1997.
Management estimates that the net amount the Company should receive on
the sale of the property approximates the balance of the note as of
December 31, 1996.
Accrued interest credited to operations for the years 1994, 1995 and
1996 were $1,766, $1,929 and $2,091, respectively.
NOTE 6 - 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.
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, using an annual interest rate of
8.5%. At December 31, 1995, and 1996, the present value 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.
F-19
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - LICENSE AGREEMENT (CONTINUED)
Pursuant to the terms of the agreement, the Company reimbursed the
University in 1996, $10,000 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.
NOTE 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
December 31,
1995 1996
---------- ----------
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 (110,614) (113,556)
---------- ----------
$ 100,958 $ 98,016
---------- ----------
---------- ----------
Depreciation charged to operations was $3,567, $3,566 and $2,942 in
1994, 1995, and 1996, 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 note
payable to Advanced Technology Center (See Note 10(b).
F-20
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - PROPERTY AND EQUIPMENT (CONTINUED)
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.
NOTE 8 - 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 .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, 1995, and 1996, was $29,270 and $32,459,
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.
F-21
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE (CONTINUED)
In addition, the Company borrowed an additional $58,000 from Mr. Baker
in 1995. Under the terms of the loan agreement, interest accrues on
this loan at the prime lending rate of Mellon Bank N.A., and is fully
payable with accrued interest on June 11, 2000. At the option of Mr.
Baker, he can convert the balance due at any time into approximately
280,000 shares of the Company's Class A common stock. The balance due
on this note as of December 31, 1995, and 1996 was approximately
$60,829 and $65,893, respectively.
In October 1997, the Company borrowed $25,000 from an unrelated third
party. Under the terms of the loan agreement, interest accrues on this
loan at an annual interest 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
amounted to approximately $527.
NOTE 9 - INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109 ("FASB 109"). The provision for
income taxes differs from the amounts currently payable because of
timing differences in the recognition of certain income and expense
items for financial and tax reporting purposes.
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.
F-22
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (CONTINUED)
For income tax purposes, the Company has approximately $413,000 in net
operating losses available to offset future income through the year
2011, however, the actual losses which may used in future years could
be limited due to recapitalization or other factors.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, in order to provide funding for research and
development related to the Fatigue Fuse, the Company entered into
various agreements with the Tensiodyne 1985-I R & D Partnership.
These agreements were amended on October 9, 1989, and under the
revised terms, the Company is obligated 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
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.
F-23
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1995, and 1996, the total future royalty commitments,
including the accumulated 26% annual rate of return, was limited to
approximately $440,265, and $554,734, 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 to the Company.
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.
F-24
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - 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 snares to reduce the amount due.
The shares received are subject to restrictions imposed under SEC Rule
144. Based upon these restrictions and 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 currently owns for 15 shares of Redeemable Class B Preferred Stock
of the Company's subsidiary. The rights of the new issuance will be
the same as the rights of the shares exchanged except the shares in
the Subsidiary will be redeemable two years earlier on January 31,
2002. In consideration for the exchange, the Company paid Tensiodyne
$5,000.
The exchange was made in view of the fact that the Company has entered
into an agreement with an unrelated third party to reverse merge with
this party and to transfer to the subsidiary the Company's current
operations including all of its assets and liabilities (See Note 15,
"Subsequent Events").
F-25
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
$l,000,0000 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 8, 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, 1996, follows:
F-26
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Fatigue Fatigue
Fuse Sensor
------- ---------
Tensiodyne 1985-1 R&D Partnership --* --
Advanced Technology Center
Future Gross Sales -- * --
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%
------- ---------
1.00% 0.50%
------- ---------
21.00% 10.00%
------- ---------
------- ---------
* Royalties limited to specific rates of return as discussed in
Note 10(a) and (c) 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(c) above.
Note 11 - Investments
The Company through a settlement with Tensiodyne Corporation received
6,625,000 of Class A Common Stock of Tensiodyne Corporation. These
shares are restricted and subject to Rule 144 of the Securities and
Exchange Commission. During 1996, the Company received approximately
$17,750 through the sale of 50,000 shares of Tensiodyne Corporation
stock.
As of December 31, 1996, of the remaining 6,575,000 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 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.
F-27
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - 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 entitles 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 date of grant, the exercise price was greater than market
value, therefore, no compensation costs were recognized.
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 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.
F-28
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)
The holders of these shares have a liquidation preference to receive
out of assets of the Company, an amount equal to $.72 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.
These shares are convertible to shares of the Company's common stock
at a conversion price of $.72 ("initial conversion price") which will
be adjusted depending upon the occurrence of certain events. The
holders of these preferred shares shall have the right to vote and
cast that number of votes which the holder would have been entitled to
cast had such holder converted the shares immediately prior to the
record date for such vote.
The holders of these shares shall participate in all dividends
declared and paid with respect to the Common Stock to the same extent
had such holder converted the shares immediately prior to the record
date for such dividend.
e. REDEEMABLE PREFERRED STOCK
The Company has authorized a class of 10,000,000 shares of preferred
stock ($.001 par value) of which 510 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
F-29
<PAGE>
MATERIAL TECHNOLOGY, INC.
FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)
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's Class B Preferred Stock
Certificate of Designation.
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.
NOTE 13 - TRANSACTIONS WITH MANAGEMENT
a. On December 10, 1992 The Company issued to Mr. Robert M. Bernstein,
the President of the Company, 60,000 shares of the Company's Class B
common stock. In exchange for the stock, Mr. Bernstein executed a
five year non-interest bearing note for $15,000. The Note is
non-recourse as the only security pledged for the obligation was the
stock purchased.
b. During 1993, Mr. Bernstein exercised warrants to purchase 56,000
shares of the Company's 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.
F-30
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - TRANSACTIONS WITH MANAGEMENT (CONTINUED)
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.
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. 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.
h. 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.
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.
F-31
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - TRANSACTIONS WITH MANAGEMENT (CONTINUED)
During 1996, a loan owed by the Company to an unrelated third party in
the amount of $55,000 was assigned to the Company's President. The
total amounts owed the President of the Company as of December 31,
1995, and 1996, amounted to $136,540 and $179,544, respectively. The
amount of accrued interest charged to operations on the President's
loans were $5,268 in 1995, and $9,430 in 1996.
j. During 1996, the Company issued 62,000 shares of the Company's Class A
Common Stock to the President for services.
NOTE 14 - STOCK OPTION PLAN
a. In January 1996, the Company 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 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 15 - SUBSEQUENT EVENTS
a. In February 1997, the Company entered into an agreement with
Montpilier Holding, Inc.("Montpilier") and its wholly owned
subsidiary SecurFone America, Inc. ("SecurFone"), and Robert M.
Bernstein, the Company's president. Under the terms of the agreement,
the Company
F-32
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
will sell 4,500,000 shares of authorized but unissued shares
comprising 90% of the outstanding stock at the date of closing to
Montpilier (adjusted for a 1:10 reverse stock split) in exchange for
3,000 shares of SecurFone's common stock, which constitutes 100% of
the SecurFone's outstanding shares as of the closing date. In
addition, Montpilier agrees to reimburse the Company for its expenses
in an amount equal to $120,000.
The $120,000 expense reimbursement will be paid to the subsidiary upon
the effective date of the registration statement ("Closing Date").
The $120,000 is paid in three installments with the first installment
amounting to $70,000 being due on the closing. The second installment
of $25,000 is due 30 days after closing, and the third installment of
$25,000 is due 75 days of closing. The second and third installments
will be evidenced by a non-interest bearing promissory secured by the
shares of the subsidiary owned by the Company.
Under the terms of the agreement, the Company will transfer its
current operations, including all of its assets and liabilities to a
wholly owned subsidiary which was formed on March 7, 1997, in exchange
for receiving 5,560,000 shares of the Subsidiary's common stock. Of
these shares, approximately 5,000,000 shares will be distributed to
the Company's current shareholders.
In connection with the above transaction, the Company authorized the
issuance of 520,000 shares of its Class A Common Stock to Mr.
Bernstein in exchange for the convertible note issued to him; the
issuance of 1,499,454 shares of Class A Common Stock to Mr. Bernstein
in exchange for the cancellation of the 60,000 shares of Class B
Common Stock currently owned by him; the issuance of 280,000 shares of
the Company's Class A Common Stock to Mr. Baker in exchange for the
convertible note issued to him; the authorization to enter into an
agreement with the holders of the Company's Class A Preferred Stock to
exchange these shares, which will be cancelled, for Class A Preferred
Stock of the Company's subsidiary; and the issuance of 20,000 shares
of the Company's Class A Common Stock as partial payment to the
Company's legal council
F-33
<PAGE>
MATERIAL TECHNOLOGY, INC.
(FORMERLY TENSIODYNE SCIENTIFIC CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
for services rendered in relation to the above transaction and related
matters. Robert M. Bernstein has agreed to assign any accrued
salaries owed him by the Company to the Subsidiary.
In connection with the above transaction, the Company entered into a
consulting agreement with Mr. Bernstein. Under the terms of this
agreement, Mr. Bernstein has agreed to act as a consultant to the
Company for a period of 18 months beginning upon the effective date of
the registration statement. In consideration for his services, Mr.
Bernstein will receive $5,000 and will receive stock options entitling
him to purchase Class A Common Stock of the Company equalling 7% of the
sum of the total number of shares of any class of equity securities of
the Company, that, during the five years following the closing, the
Company registers on Form S-B and sells through Regulation S.
b. On January 2, 1997, the Company authorized the issuance of 100,000
shares of Class A Common Stock through its 1996 Stock Option Plan at a
price of $1.00 per share.
c. During 1996, the Company entered into a teaming agreement with
Southwest Research Institute ("SWRI") and the University of
Pennsylvania. 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 United States Air Force capability to perform
durability assessments of military aircraft, including both airframes
and engines through the application of EFS to specific military
aircraft alloys."
The Company is a subcontractor to SWRI and its share of this award is
approximately $550,000 which is required to be disbursed for specific
purposes as defined in the subcontractor's agreement.
F-34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,472
<PP&E> 211,572
<DEPRECIATION> (113,556)
<TOTAL-ASSETS> 208,299
<CURRENT-LIABILITIES> 832,925
<BONDS> 0
0
150,000
<COMMON> 2,581
<OTHER-SE> (985,630)
<TOTAL-LIABILITY-AND-EQUITY> 208,299
<SALES> 0
<TOTAL-REVENUES> 32,452
<CGS> 0
<TOTAL-COSTS> 483,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (450,734)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450,734)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
