U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 1
Registration Statement Under the Securities Act of 1933
MATERIAL TECHNOLOGIES, INC.
(Name of Small Business Issuer)
Delaware 95-4622822
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1057
(Primary Standard Industrial
Classification Code)
11661 SAN VICENTE BOULEVARD GARY C. WYKIDAL
SUITE 707 245 FISCHER AVENUE
LOS ANGELES, CALIFORNIA 90049 SUITE A-1
(310) 208-5589 COSTA MESA, CALIFORNIA 92626
(Address and telephone number of (714) 751-8505
principal executive offices) (Name, address, and telephone number of
agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are to be offered on the
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. /x/
-
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /_/
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
1
If delivery of the Prospectus is expected to be made pursuant to Rule 434
check the following box. /_/
PROPOSED
AMOUNT PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES BEING OFFERING PRICE AGGREGATE
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE
Common Stock offered by selling shareholders 6,367,585(1) $ 0.13(1) $ 827,786
Total Registration Fee
(1) Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457(a) of the Securities Act of 1933 and based on the average of the high and low price
per share of our common stock as quoted on the OTC Electronic Bulletin Board on February 4,
2002, $.13.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
2
TABLE OF CONTENTS
Pursuant to Item 502(f) of Regulation S-B
PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MATERIAL TECHNOLOGIES, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
OUR BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
THE SHARES BEING OFFERED HEREBY ARE HIGHLY SPECULATIVE AND ARE SUBJECT TO MANY SIGNIFICANT
RISKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
HISTORY OF LOSSES; ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIENCY. . . . . . . . . . . . . . . . . . 9
GOING CONCERN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
NO ASSURANCE OF PRODUCT DEVELOPMENT; NEED FOR ADDITIONAL RESEARCHAND DEVELOPMENT; MARKET UNCERTAINTY. 9
LIMITED CURRENT ABILITY TO MARKET PRODUCTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
LACK OF EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DEPENDENCE ON MANAGEMENT CONSULTANTS AND ADVISORS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
COMPETITION FROM OTHER TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
POSSIBLE LOSS OF PATENTS TO SECURED LENDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
WE FACE RISKS THAT OUR PROPRIETARY RIGHTS, WHICH ARE IMPORTANT IN OUR BUSINESS, ARE NOT
ADEQUATELY PROTECTED OR ARE NOT SUPERIOR TO THOSE OF OUR COMPETITORS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
NEED FOR ADDITIONAL FINANCING; LIKELY NEGATIVE CASH FLOW. . . . . . . . . . . . . . . . . . . . . . . 10
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET, INCLUDING THE SHARES OFFERED BY THIS
PROSPECTUS, COULD REDUCE THE VALUE OF YOUR INVESTMENT DUE TO THE VERY SIGNIFICANT
MARKET OVERHANG
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS DUE TO MANY
FACTORS, INCLUDING A SUBSTANTIAL MARKET OVERHANG
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
YOUR INVESTMENT MAY HAVE LIMITED LIQUIDITY IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP
OR CONTINUE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
IMPEDIMENTS TO OBTAINING ADDITIONAL FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ROYALTY OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
WE DO NOT PLAN TO PAY DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK OF NEW PRODUCT AND TECHNOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ROBERT M. BERNSTEIN'S CONTINUES TO CONTROL OUR AFFAIRS . . . . . . . . . . . . . . . . . . . . . . . 12
ROBERT M. BERNSTEIN'S CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
POTENTIAL STATUS AS A PSEUDO CALIFORNIA CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . 12
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 12
IMPEDIMENTS TO RESALE FROM PENNY STOCK REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 13
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MARKET PRICE OF REGISTRANT'S COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE FATIGUE FUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ELECTROCHEMICAL FATIGUE SENSOR ("EFS") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DEVELOPMENT OF TECHNOLOGIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
STATUS OF THE FATIGUE FUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
STATUS OF THE EFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
GOVERNMENT FUNDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
COMMERCIAL APPLICATIONS OF THE COMPANY'S TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . . . 17
THE BRIDGE MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
THE SECOND MARKET SECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PATENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PRODUCT DISTRIBUTION METHODS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXECUTIVE OFFICERS AND DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ROBERT M. BERNSTEIN - PRESIDENT/CHIEF EXECUTIVE OFFICER/CHAIRMAN OF THE BOARD. . . . . . . . . . 19
JOEL R. FREEDMAN - SECRETARY/TREASURER/DIRECTOR. . . . . . . . . . . . . . . . . . . . . . . . . 19
DR. JOHN W. GOODMAN - CHIEF ENGINEER/DIRECTOR. . . . . . . . . . . . . . . . . . . . . . . . . 19
WILLIAM BERKS - VICE PRESIDENT OF GOVERNMENT PROJECTS. . . . . . . . . . . . . . . . . . . . . . 19
ADVISORY BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DR. LAWRENCE CHIMERINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ADM. ROBERT P. COOGAN, USN (Ret.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ROBERT F. CUSHMAN, ESQ.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DAVID HABERMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CAMPBELL LAIRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
T.Y. LIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Y.C. YANG. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
THOMAS V. ROOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SAMUEL I. SCHWARTZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . 22
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF FEBRUARY 4, 2001. . . . . . . . . . . . . . 23
Security Ownership of Certain Beneficial Owners. . . . . . . . . . . . . . . . . . . . . . . . . 23
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INTEREST OF NAMED EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
5
PROSPECTUS
MATERIAL TECHNOLOGIES, INC.
6,367,585 Shares of Common Stock
(par value $.001)
Materials Technologies, Inc. is registering 6,367,585 shares for sale by
certain selling shareholders par value $.001 per share under this Prospectus.
See "Selling Shareholders."
We will not receive any of the proceeds from the sale of the shares of
common stock by our shareholders. There is presently no public market for these
shares. The expenses of the offering, estimated to be $33,576, will be paid by
us.
Bid and asked prices for our common stock are quoted, and the last sale is
reported, on the OTC Electronic Bulletin Board maintained by the National
Association of Securities Dealers under the symbol "MTEY." On February 4,
2002, the last bid price of the common stock as reported was $.13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss of your investment.
Information contained in this Prospectus is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is _______, 2001
6
PROSPECTUS SUMMARY
OUR BUSINESS
Material Technologies, Inc. ("we", "our" or the "Company") is engaged in
research and development of metal fatigue detection, measurement, and monitoring
technologies. We are a development stage company doing business as Tensiodyne
Scientific Corporation.
Our efforts are dedicated to developing devices and systems that indicate
the presence of very small cracks and the true fatigue status of a metal
component. We have developed two products. The first is a small, extremely
simple device that continuously monitors fatigue life in a structural member.
It is called a Fatigue Fuse. The second is an instrument that is expected to
detect very small cracks and is intended to determine crack growth rates and
measure the amount of fatigue life remaining in an existing structural member.
Nothing like it currently exists in materials technology. In the laboratory,
the crack detection modality has a resolution of a few microns, exceeding the
current state of the art by fifty times or more. It is called an
Electrochemical Fatigue Sensor (EFS). Both devices are pioneering technology in
the fatigue field that stands as cutting-edge solutions. They are both
patented.
We were formed as a Delaware corporation on March 4, 1997. We are the
successor to the business of Material Technologies, Inc., a Delaware
corporation, also doing business as Tensiodyne Scientific, Inc. (Matech 1),
which was the successor to the business of Tensiodyne Corporation that began
developing the Fatigue Fuse in 1983. Our two predecessors, Tensiodyne
Corporation and Matech 1, were engaged in developing and testing the Fatigue
Fuse and, beginning in 1993, developing the EFS.
We are offering 6,367,585 shares of common stock by Selling Shareholders.
Our principal executive office is located at 11661 San Vicente Boulevard,
Suite 707, Los Angeles, California 90049. Our telephone number is (310)
208-5589 and our fax number is (310) 473-3177.
7
FINANCIAL DATA
The following table summarizes the financial data of our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes to those statements included elsewhere in this Prospectus
(Unaudited) Year
Nine Months Ended Ended
September 30, 2001 December 31, 2000
-------------------------------- ------------------------------
2000 2001 1999 2000
--------------- --------------- -------------- --------------
Operating Data:
Income from Contract $ 601,936 $ 1,038,060 $ 924,484 $ 635,860
Net Income (Loss) $ (275,286) $ (2,192,298) $ (539,283) $ (459,129)
Net Income (Loss) Per Share:
Basic $ .00 $ (.07) $ (.04) $ (.02)
Weighted Average Shares
Outstanding:
Basic 17,483,267 31,272,062 12,242,534 18,900,019
September 30, September 30, December 31, December 31,
2000 2001 1999 2000
--------------- --------------- -------------- --------------
Balance Sheet Date:
Working Capital (Deficit) $ (357,843) $ (258,516) $ (180,157) $ (403,117)
Total Assets $ 172,817 $ 384,350 $ 250,041 $ 108,776
Net Stockholder's Equity (Deficit) $ (471,049) $ (606,921) $ (620,545) $ (710,460)
8
RISK FACTORS
THE SHARES BEING OFFERED HEREBY ARE HIGHLY SPECULATIVE AND ARE SUBJECT TO MANY
SIGNIFICANT RISKS
HISTORY OF LOSSES; ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIENCY
We have incurred losses of $133,578, $549,187, $539,283 and $459,129 for
the years ended December 31, 1997, 1998, 1999 and 2000, respectively. The
likelihood of our success must be considered in the light of the problems,
expenses, difficulties, complications, and delays frequently encountered in
connection with the development of a business and the competitive environment in
which we operate. Unanticipated delays, expenses and other problems such as
setbacks in research and development or product development and market
acceptance are frequently encountered in connection with the expansion of a
business. See "Need for Additional Financing; Likely Negative Cash Flow"
below. As a result of the fixed nature of many of our expenses, we may be
unable to adjust spending in a timely manner to compensate for any unexpected
delays in the development and marketing of our products or any capital raising
or revenue shortfall. Any such delays or shortfalls will have an immediate
adverse impact on our business, operations and financial condition.
GOING CONCERN
The financial statements as of and for the year ended December 31, 2000,
have been prepared assuming that we will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The carrying amounts of assets and liabilities
presented in the financial statements do not purport to represent the realizable
or settlement values. We have suffered recurring operating losses and had
limited working capital liquidity at December 31, 2000. As a result of these
factors, our independent certified public accountants have expressed substantial
doubt about our ability to continue as a going concern. We believe that our
efforts to reduce costs and operate more efficiently will generate improved cash
flows, although there can be no assurances that such efforts will be successful.
We currently have enough revenue from government contracts to sustain operations
through May of 2002.
NO ASSURANCE OF PRODUCT DEVELOPMENT; NEED FOR ADDITIONAL RESEARCH
AND DEVELOPMENT; MARKET UNCERTAINTY
Our products are in the research, development, and testing stage.
Unexpected problems, technological or specifications changes (1) may make the
technologies obsolete, (2) may affect the products' overall feasibility, or (3)
may delay completion and increase costs of research, development, and testing.
The time required to bring one or both products to market is uncertain. Market
acceptance cannot be determined until product development is complete.
LIMITED CURRENT ABILITY TO MARKET PRODUCTS
Our operating results will depend on our ability to market our products.
We have not yet established a direct sales force or distribution network.
Failure to put into place an experienced and skillful marketing infra-structure,
in a timely manner, could have a materially adverse impact upon our ability to
bring our products to market and continue operating.
LACK OF EMPLOYEES
We currently only have four (4) employees, Robert M. Bernstein, President,
John Goodman, a part-time engineer, a part-time vice president and a secretary.
There is a substantial risk that we may not have funds to hire additional
employees that may be needed to complete the development and marketing of our
products.
DEPENDENCE ON MANAGEMENT CONSULTANTS AND ADVISORS
Our success largely depends on the performance of our President and Chief
Executive Officer, Robert M. Bernstein, our consultants, and advisors. Failure
to attract and retain key consultants, advisors, and employees with necessary
skills could have a materially adverse impact on our ability to bring our
products to market and continue operating. We have an Advisory Board, the
members of which serve without compensation. We have no contracts with our
advisors or any consultants. Our advisors serve without compensation other than
common stock that they received. To date, these advisors have been willing to
provide advice based on their expertise when needed on an ad hoc basis generally
consisting of telephone conferences ranging from once a month to several times
in a week. There is a risk that these advisors will no longer be willing to
advise us without compensation and that we will not have the funds to retain
them. Loss of these advisors could seriously impair our ability to develop and
market our products.
9
COMPETITION FROM OTHER TECHNOLOGIES
The metal fatigue measuring industry has significant competition. Other
technologies exist which indicate the presence of metal 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. Tracking of load and strain history, for subsequent
estimation of fatigue damage by computer processing, is possible with recording
instruments such as strain gauges and counting accelerometers. These methods
have been in use for up to 40 years and offer the advantage that they have been
accepted in the marketplace, whereas our products will remain largely unproved
for some currently indeterminable time. Other companies with greater financial
and technical resources and larger marketing organizations than ours pose a
potential threat if they commence competing in our market segment. We are
unaware of any other companies developing technology similar to the Company's
technology and its patents protect its unique technologies. On the other hand,
companies marketing alternative technologies include Magnaflux Corporation,
Kraut-Kremer-Branson, Dunegan-Endevco, and MicroMeasurements. These companies
have more substantial assets, greater experience, more human and other resources
than ours, including but not limited to established distribution channels and an
established customer base. The familiarity and loyalty to these technologies
may be difficult to dislodge. See "Competition."
POSSIBLE LOSS OF PATENTS TO SECURED LENDERS
Our patents are encumbered by certain liabilities as described under the
heading, "Business." If we fail to discharge our obligations under those
liabilities to certain lenders including Robert M. Bernstein, a principal
shareholder, Director and Chief Executive Officer, we may lose our interests in
our patents or certain rights to exploit the technology. See "Management -
Certain Transactions." We are not in default on any of our indebtedness secured
by patents or out of compliance with any covenants of such indebtedness.
WE FACE RISKS THAT OUR PROPRIETARY RIGHTS, WHICH ARE IMPORTANT IN OUR BUSINESS,
ARE NOT ADEQUATELY PROTECTED OR ARE NOT SUPERIOR TO THOSE OF OUR COMPETITORS
We will rely on a combination of patent and trade secret protection,
non-disclosure agreements, licensing arrangements and new patent filings to
establish and protect our proprietary rights. We intend to file applications as
appropriate for patents covering our products. Due to the increasing number of
patent applications filed with the United States Patent and Trademark Office, we
are uncertain as to if or when patents will issue from any of our pending
applications or, if patents do issue, that claims allowed will be sufficiently
broad to protect our technology. In addition, there is a possibility that any
patents that may be issued could be challenged, invalidated or circumvented, or
that the rights granted to us as owners of the patents will not provide
proprietary protection to us. Since U.S. patent applications are maintained in
secrecy until patents issue, and since publication of inventions in the
technical or patent literature tend to lag behind such inventions by several
months, there is a possibility that we may not be the first creator of
inventions covered by such patents or pending patent applications or that we may
not be the first to file patent applications for such inventions. Despite our
efforts to safeguard and maintain our proprietary rights, we are uncertain as to
whether we will be successful in doing so or that our competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to our technologies.
NEED FOR ADDITIONAL FINANCING; LIKELY NEGATIVE CASH FLOW
If we fail to raise additional funds necessary for research, development,
and testing from either government grants, sale of securities, borrowings, or
other sources, we will not have a product for a potential market and
shareholders will have no possibility of any financial return or economic
benefit from their ownership of shares. Even if the necessary $5,000,000 is
raised and research, development, and testing is completed, no assurance can be
given that the results will establish that the products will be marketable.
Moreover, no assurance can be given that our products can be produced at a cost
which will make it possible to market them at a commercially feasible price. We
are likely to have negative cash flow through at least March 31, 2002. Over the
next 24 months, $5,000,000 will be required to complete research and development
of both products and market them. If we do not successfully raise these funds,
we may be compelled to halt all operations resulting in complete loss of share
value.
10
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET, INCLUDING THE SHARES OFFERED BY
THIS PROSPECTUS, COULD REDUCE THE VALUE OF YOUR INVESTMENT DUE TO THE VERY
SIGNIFICANT MARKET OVERHANG
The sale of shares of our common stock in the public market could cause a
reduction in the market price of our common stock. This Prospectus covers
6,367,585 shares or approximately 15% of our issued and outstanding common stock
at February 4, 2002. As of February 4, 2002,we had 43,092,678 common shares
issued and outstanding. Any substantial sale of our common stock may result in
the reduction of its market price, and as a result, a reduction in the value of
your investment. Moreover, the perceived risk of dilution may cause
shareholders to sell their shares, which would contribute to the downward
movement in the stock price of our common stock.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS DUE TO
MANY FACTORS, INCLUDING A SUBSTANTIAL MARKET OVERHANG
The market price of our common stock may be highly volatile and subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations, services, or affiliations or new
products by us or our competitors, changes in financial estimates by securities
analysts, lack of market acceptance of our products and services, or other
events or factors, including the risk factors described herein. In addition,
the stock market in general, and the technology stocks in particular, experience
significant price and volume fluctuations that are often unrelated to a
company's operating performance. As with any public company, we may be subject
to securities class action litigation following periods of volatility in the
market price of our securities which could result in substantial costs and a
diversion of management's attention and resources.
Additionally, the sale of a substantial number of shares of common stock,
or even the potential of sales, in the public market following this offering
could deflate the market price for the common stock and make it more difficult
for us to raise additional capital through the sale of our common stock.
YOUR INVESTMENT MAY HAVE LIMITED LIQUIDITY IF AN ACTIVE TRADING MARKET DOES NOT
DEVELOP OR CONTINUE
Your purchase of our common stock may not be a liquid investment because
our securities trade over the counter with quotes on the OTC electronic bulletin
board. You should consider carefully the limited liquidity of your investment
before purchasing any shares of our common stock. We have no obligation to
apply for quotation of our common stock on the NASDAQ Stock Market or for
listing of our common stock on any national securities exchange. Factors such
as our lack of earnings history, the absence of expectation of dividends in the
near future, mean that there can be no assurance that an active and liquid
market for our common stock will exist at any time, that a market can be
sustained, or that investors in the common stock will be able to resell their
shares. In addition, the free transferability of the common stock will depend on
the securities laws of the various states in which it is proposed that a sale of
the common stock be made.
IMPEDIMENTS TO OBTAINING ADDITIONAL FINANCING
Under modified agreements with the University of Pennsylvania to satisfy
the debt due them in the amount of $406,535 , we must pay a percentage of
amounts raised from financing other than from government contracts. We must pay
the University 30% of any such financing over $200,000. In addition, we are
obligated to pay royalties totaling 12% on revenues received from sale of the
Fatigue Fuse and 10% of revenues received from sale of the EFS. These
commitments are likely to increase the difficulty in finding third party
financing. Underwriters and other financing sources are less likely to agree to
finance our research and development if these amounts must be paid out rather
than used for additional research and development. See Notes 6, 10f, and 10g to
the Financial Statements and "Agreements and Royalty Obligations."
ROYALTY OBLIGATIONS
Over the years, to finance development of the Fatigue Fuse and
Electrochemical Sensor, our predecessors sold substantial royalty rights to
others. As of the date of this Prospectus, we were obligated to pay royalties
to others totaling 12% of revenues from sales of our Fatigue Fuse and 10% of
revenues from sales of EFS. If these products are manufactured and sold, these
royalty obligations will reduce our revenue from the sale of these products.
See Note 10g to the Financial Statements.
11
WE DO NOT PLAN TO PAY DIVIDENDS
We will not be able to pay dividends until we recover any losses that we
may have incurred and we become profitable. We intend to retain our earnings to
finance growth and expansion and for general corporate purposes. Any future
declaration and payment of dividends on the common stock will depend upon our
earnings and financial condition, liquidity and capital requirements, the
general economic and regulatory climate, our ability to service any equity or
debt obligations senior to the common stock, and other factors deemed relevant
by our Board of Directors. Holders of our preferred stock have the right to
dividends declared with respect to the common stock on an as-converted basis.
RISK OF NEW PRODUCT AND TECHNOLOGY
The manufacturing and marketing of our products which incorporate new
technology, has inherent risk. It is uncertain how each product will operate
over time and under various conditions of use. Even if one or both products are
successfully developed, manufactured, and marketed, warranty or product
liability, or lack of market acceptance due to product failure or failure to
meet expectations, could prevent us from becoming profitable. Developing new
technologies for manufacture is frequently subject to unforeseen expenses,
difficulties, and complications and, in some cases, such development cannot be
accomplished.
ROBERT M. BERNSTEIN'S CONTINUES TO CONTROL OUR AFFAIRS
Our President, Robert M. Bernstein, owns 100,000 shares of Class B stock,
each of which has 1,000 votes per share, which represents 100,000,000 votes, and
also owns 15,967,522 shares of our Class A common stock representing
approximately 37% of the total outstanding shares. Thus, in any shareholder
vote, Mr. Bernstein has 115,967,522 votes out of a total of 43,092,678 possible
votes equal to approximately 81% voting control of the Company. Mr. Bernstein
overwhelmingly controls our direction and management. Our Bylaws do provide for
cumulative voting. Nevertheless, a minority shareholder will have no control
over management and probably will be unable to elect any directors.
ROBERT M. BERNSTEIN'S CONFLICTS OF INTEREST
Mr. Bernstein controls our operations as majority shareholder, President,
Chief Executive Officer, and Chairman of the Board. He has a conflict of
interest since he has a lien on the Company's patents giving him the right to
foreclose on them if loans he made to the Company are not repaid. Mr.
Bernstein's right to foreclose means that, if our business fails, he could
potentially profit by gaining personal control its technology. On the other
hand, as a director, officer, and controlling shareholder, Mr. Bernstein owes a
fiduciary duty to the Company and its shareholders to act in the Company's and
shareholders best interests.
POTENTIAL STATUS AS A PSEUDO CALIFORNIA CORPORATION
Section 2115 of the California General Corporation Law subjects certain
foreign corporations doing business in California to various substantive
provisions of the California General Corporation Law in the event that the
average of its property, payroll and sales is more than 50% in California and
more than one-half of its outstanding voting securities are held of record by
persons residing in the State of California. Some of the substantive provisions
include laws relating to annual election of directors, removal of directors
without cause, removal of directors by court proceedings, indemnification of
officers and directors, directors standard of care and liability of directors
for unlawful distributions. The aforesaid Section does not apply to any
corporation which, among other things, has outstanding securities designated as
qualified for trading as a national market security on NASDAQ if such
corporation has at least eight hundred holders of its equity securities as of
the record date of its most recent annual meeting of shareholders. It is
currently anticipated that we may be subject to Section 2115 of the California
General Corporation Law which, in addition to other areas of the law, will
subject us to Section 708 of the California General Corporation Law which
mandates that shareholders have the right of cumulative voting at the election
of directors.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Cautionary statement about some of the statements in this Prospectus
contain "forward looking statements", including statements regarding, among
other items, our business strategies, projections, and anticipated trends in our
business and the industry in which it operates. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties,
certain of which are beyond our control. We caution that these statements are
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including those factors
described under "Risk Factors" and elsewhere herein. In light of these risks and
uncertainties, there can be no assurance that any forward-looking information
12
contained herein will in fact transpire or prove to be accurate. All subsequent
written forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this section.
IMPEDIMENTS TO RESALE FROM PENNY STOCK REGULATIONS
The Securities and Exchange Commission ("SEC") regulations generally define
"Penny Stock" to be any equity security that has a market price (as defined)
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. For transactions covered by these rules, the
broker dealer must make a delivery, prior to the transaction, of a disclosure
schedule prepared by the SEC relating to the penny stock market. The broker
dealer also must disclose the commissions payable to both the broker dealer and
registered representative, current quotations for the securities, and, if the
broker dealer is the sole market maker, the broker dealer must disclose this
fact and the broker dealer's presumed control over the market. Finally, monthly
statements must be sent out disclosing recent price information for the penny
stock held in the customer's account and information on a limited market in
penny stocks. Consequently, the "Penny Stock" rules may restrict the ability of
broker dealers to sell our securities and may affect the ability of stockholders
to sell our securities in the secondary market.
USE OF PROCEEDS
All shares of common stock being offered by this Prospectus are being sold
by Selling Shareholders. No proceeds will be received by us.
DIVIDEND POLICY
We have not paid dividends and do not plan on paying dividends in the near
future. Instead, we currently intend to retain any earnings for use in
expanding our business and, therefore, we do not anticipate paying cash
dividends in the foreseeable future.
MARKET PRICE OF REGISTRANT'S COMMON STOCK
Our common stock is traded on the NASDAQ Bulletin Board. Our symbol is
MTEY. From January, 2000 through December 31, 2001, our common stock was quoted
between a low bid of $.08 per share and a high bid of $2.875 per share. Such
over-the-counter quotations reflect inter-dealer prices, without retail markup,
markdown, or commission and may not necessarily represent actual transactions.
The following chart shows the high and low bid prices per share per calendar
quarter from January 2000 to December 31, 2001.
HIGH BID PRICE (1) LOW BID PRICE (1)
First Quarter 2000 $ 2.875 $ .343
Second Quarter 2000 $ 1.437 $ .42
Third Quarter 2000 $ .54 $ .22
Fourth Quarter 2000 $ .312 $ .13
First Quarter 2001 $ .23 $ .09
Second Quarter 2001 $ .12 $ .08
Third Quarter 2001 $ .22 $ .084
Fourth Quarter 2001 $ .25 $ .10
(1) All bid prices were supplied to us by Smith Barney.
13
PROPERTIES
We lease an office at 11661 San Vicente Blvd., Suite 707, Los Angeles,
California, 90049. The space consists of 830 square feet and will be adequate
for our current and foreseeable needs. The total rent is $2,348 per month and
expires on June 1, 2002.
We own a remote monitoring system and certain equipment that was being used
by the University of Pennsylvania for instructional and testing purposes. We
determined that the system has no future use and probably cannot be sold.
Therefore, we charged its full costs of $97,160 to operations, which are
included in general and administrative expenses.
LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings that, in our
opinion, might have a material effect on our operations.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
NONE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the nine months ended September 30, 2000 and 2001:
During the nine month period ended September 30, 2000, we generated
approximately $915,340 in revenue, which consisted of $601,936 under our
research and development contracts, $251,798 from the sale of marketable
securities, and $61,606 in interest. Of the $61,606 in interest earned, $55,572
relates to interest accrued on non-recourse stock subscription receivables due
from our President and a Director.
During the nine month period ended September 30, 2001, we generated
approximately $1,127,993 in revenue, which consisted of $1,038,060 under our
research and development contracts, and $89,933 in interest. Of the total
interest earned, $85,536 relates to interest accrued on non-recourse stock
subscription receivables due from our President and a Director.
During the nine month periods ended September 30, 2000 and 2001, we
incurred approximately $433,445 and $828,326, respectively, in development
costs, all of which related to the above indicated contracts.
General and administration costs were $443,777 and $2,402,032,
respectively, for the nine-month periods ended September 30, 2000, and 2001.
The major expenses incurred during the nine-month period ended September 30,
2000, consisted of $84,101 in consulting fees, $90,000 in officer's salary,
$109,315 in professional fees, $18,855 in rent, $14,577 in telephone expense,
$28,187 in salaries, office expense of $21,761, and $22,491 in travel costs.
The major expenses incurred during the nine-month period ended September
30, 2001, consisted of $1,500,000 relating to the modification of the amount
owed to us by our President and a Director on non-recourse stock subscriptions,
$420,000 of prior years' compensation due our President that was paid in stock
in 2001, $147,569 in consulting fees, $90,000 in officer's salary, $97,695 in
professional fees, $16,454 in rent, $11,706 in telephone expense, $26,200 in
office salaries, office expense of $16,454, and $25,643 in travel costs.
For the three months ended September 30, 2000 and 2001:
During the three-month period ended September 30, 2000, we generated
approximately $182,909 in revenue, which consisted of $143,781 under our
research and development contracts, and interest earned of $39,128 the majority
of which relates to interest accrued on non-recourse stock subscription
receivables due from our President and a Director.
During the three-month period ended September 30, 2001, we generated
approximately $438,491 in revenue, which consisted of $427,004 under our
research and development contracts, and interest earned of $11,487, the majority
of which related to interest accrued on non-recourse stock subscription
receivables due from our President and a Director.
14
During the three-month periods ended September 30, 2000 and 2001, we
incurred approximately $100,051 and $356,706, respectively, in development
costs, all of which related to the above-indicated contracts.
General and administration costs were $117,477 and $258,597, respectively,
for the three-month periods ended September 30, 2000 and 2001. The major
expenses incurred in 2000, consisted of officer's salaries of $30,000, office
salaries of $8,928, consulting fees of $8,591, professional services of $34,498,
rent of $6,411, office expense of $6,246, telephone expense of $5,236, and
travel expense of $3,672.
The major expenses incurred in 2001, consisted of officer's salaries of
$30,000, office salaries of $10,617, consulting fees of $113,066, professional
services of $46,486, rent of $6,833, office expense of $13,129, telephone
expense of $6,875, and travel expense of $16,674.
Liquidity and Capital Resources
Cash and cash equivalents as of September 30, 2000 and 2001 were 54,783,
and $101,610, respectively. During 2000, we received $841,647 through our
research contracts, $3,000 through advances from our President, $5,000 through
the issuance of our common stock, $251,798 through the sale of stock held for
investment, $3,990 from interest earned on savings, and other receipts totaling
$3,053. Of the $1,108,488 received, $1,070,988 was used in operations, $15,000
was invested in a joint venture, and $22,500 was repaid to our President.
During 2001, we received $885,808 through our research contracts, $14,800
through advances from our President, and $230,308 through the issuance of our
common stock. Of the $1,130,917 received, $949,580 was used in operations,
$5,600 was used in the development of our website, $47,281 was used in the
selling of the stock and $28,800 was advanced to our President.
BUSINESS
THE FATIGUE FUSE
The Fatigue Fuse is designed to be affixed to a structure to give warnings
as preselected portions of the fatigue life have been used up (i.e., how far to
failure the structure has progressed). It warns against a condition of
widespread generalized cracking due to fatigue.
The Fatigue Fuse is a thin piece of metal similar to the material being
monitored. It consists of a series of parallel metal strips connected to a
common base, much as fingers are attached to a hand. Each "finger" has a
different geometric pattern called "notches" defining its boundaries. Each
finger incorporates a design specific notch near the base. By applying the laws
of physics to determine the geometric contour of each notch, the fatigue life of
each finger is finite and predictable. When the fatigue life of a finger (Fuse)
is reached, the Fuse breaks.
By implementing different geometry for each finger in the array, different
increments of fatigue life are observable. Typically, notches will be designed
to facilitate observing increments of fatigue life of 10% to 20%. By
mechanically attaching or bonding these devices to different areas of the
structural member of concern, the Fuse undergoes the same fatigue history
(strain cycles) as the structural member. Therefore, breakage of a Fuse
indicates that an increment of fatigue life has been reached for the structural
member. The notch and the size and shape of the notch concentrate energy on
each finger. The Fuse is intimately attached to the structural member of
interest. Therefore, the Fuse experiences the same load and wear history as the
member.
We believe that the Fatigue Fuse will be of value in monitoring aircraft,
ships, bridges, conveyor systems, mining equipment, cranes, etc. No special
training will be needed to qualify individuals to report any broken segments of
the Fatigue Fuse to the appropriate engineering authority for necessary action.
The success of the device is contingent upon our successful development and
marketing of the Fatigue Fuse, and no assurance can be given that we will be
able to overcome the obstacles relating to introducing a new product to the
market. To determine its ability to produce and market the Fatigue Fuse, we
need substantial additional capital and no assurance can be given that needed
capital will be available.
In a new structure, we generally assume there is no fatigue and can thus
design the Fatigue Fuse for 100% of its life potential. But in an existing
structure, one that experienced loading and wear, we must determine the fatigue
status of that structural member so we can design the Fatigue Fuse to monitor
the remaining fatigue life potential. The EFS is dedicated to that purpose.
15
ELECTROCHEMICAL FATIGUE SENSOR ("EFS")
The EFS is a device that employs the principle of
electrochemical/mechanical interaction to measure the state of fatigue damage in
a metal structural member. It is expected to provide a means for determining
the fatigue age of that member so that appropriate action (monitor, replacement,
or repair) can be taken before structural failure occurs.
In conjunction with a license and development agreement with the University
of Pennsylvania, the Company is developing product designs to measure
electrochemically the status of fatigue in structures without knowing the
structure's past load history. This technology is known as electrochemical
fatigue sensor.
The EFS functions by treating the location of interest (the target)
associated with the structural member as an electrode of an electrochemical
cell. To complete the electro-cellular reaction an electrolyte, in the form of
a low corrosion gel, is placed in contact with the target. By imposing a
constant voltage-equivalent circuit as the control mechanism for the
electrochemical reaction at the target surface - current flows as a function of
stress action. The EFS is always a dynamic process; therefore stress action is
required, e.g. to measure a bridge structural member it is necessary that cyclic
loads be imposed, as normal traffic on the bridge would do. The results are a
specific set of current waveforms and amplitudes that is expected to
characterize and report fatigue damage (age).
Stress points are very often located in difficult-to-get-at places for
humans. Therefore, it has become desirable to miniaturize the process and
develop a means for delivery to inaccessible areas. The answer is borescope
technology, that is currently unproven and being developed. We are highly
dependent on this technology for much of its potential market.
DEVELOPMENT OF TECHNOLOGIES
STATUS OF THE FATIGUE FUSE
The development and application sequence for the Fatigue Fuse and EFS is
(a) basic research, (b) exploratory development, (c) advanced development, (d)
prototype evaluation, (e) application demonstration, and (f) commercial sales
and service. The Fatigue Fuse came first. The inventor, Professor Maurice
Brull, conducted the basic research at the University of Pennsylvania. We
conducted the advanced development, including variations of the adhesive bonding
process, and fabricating a laboratory-grade remote recorder for finger
separation events that constitute proper functioning of the Fatigue Fuse. The
next step, prototype evaluation which encompasses empirical tailoring of Fuse
parameters to fit the actual spectrum loading expected in specific applications,
needs to be done. The associated tests include both coupon specimens and
full-scale structural tests with attached Fuses. A prototype of a flight
qualifiable operational separation event recorder was designed, fabricated, and
successfully demonstrated. The next tasks will be to prepare a mathematical
analysis for more efficient selection of Fuse parameters and to conduct a
comprehensive test program to prove the ability of the Fatigue Fuse to
accurately indicate fatigue damage when subjected to realistically large
variations in spectrum loading. The final tasks prior to marketing will be an
even larger group of demonstration tests.
The Fatigue Fuse is at its final stages of testing and development. To
begin marketing, the Fuse will take from 6 to 12 months and cost approximately
$600,000, including technical and beta testing and final development. If
testing, development, and marketing are successful, we estimate we should begin
receiving revenue from the sale of the Fatigue Fuse within a year of receiving
the $600,000. However, we cannot estimate the amount of revenue that may be
realized from sales of the Fuse, if any.
To date, certain organizations have included our Fatigue Fuse in test
programs. We have already completed the tests for welded steel civil bridge
members conducted at the University of Rhode Island. In 1996, Westland
Helicopter, a British firm, tested the Fatigue Fuse on Helicopters. That test
was successful with the legs of the Fuses failing in sequence as predicted.
16
STATUS OF THE EFS
The existence and size of very small cracks can be determined by EFS, and
in this regard it appears superior in resolution to other current
non-destructive testing techniques. It has succeeded in regularly detecting
cracks as small as 40 microns in a titanium alloy, in a laboratory environment,
as verified by a scanning electronic microscope, and is probably capable of
detecting cracks down to 10 microns. This is much smaller than the capability of
any other practical non-destructive testing method for structural components.
There is also a vast body of testing supporting successful use of this
technology with selected aluminum alloys.
However, additional testing is required to verify EFS' crack detection
capabilities under variable amplitude environments which are more representative
of actual structures in the field, like a highway bridge or aircraft fuselage.
It is also believed that for the first time it is possible to conduct the
fatigue appraisal of steel structural members without requiring any knowledge of
past loading history. Until additional tests are completed and these
capabilities verified, we cannot assure that this technology will be successful.
GOVERNMENT FUNDING
In August 1996, we executed an agreement entitled, "Teaming Agreement,"
with Southwest Research Institute (SRI) and the University of Pennsylvania (the
"Team") for research and development efforts. On February 25, 1997, the "Team"
was awarded from the United States Air Force a $2.5 million Phase I contract to
determine the feasibility of the EFS to improve the U.S. Air Force capability to
perform durability assessments of military aircraft, including air frames and
engines through the application of the EFS to specific military aircraft alloys.
Our share of this award was approximately $550,000. On June 18, 1998 the Team,
with Material Technologies as the lead contractor, was awarded a second contract
in the amount of $2,061,642 to "determine the applicability of the EFS to
improve the U. S. Air Force capability to perform durability assessments of
military aircraft, including both air frames and engines through the application
of the EFS to specific military aircraft alloys." On February 5, 1999, a third
contract in the amount of $2,000,000 was awarded to us to continue and expand
the efforts for turbine engines. A fourth contract was awarded on November 3rd,
2000 to continue the borescope and EFS technologies, as well as alternate means
of fatigue sensing. Accordingly, over the last 4 years approximately $8.5
million was awarded to research and develop the EFS. The results of this
research are encouraging and provide a basis for us and our research partners to
obtain additional funding. No assurance can be given, however, that such
funding will be received.
COMMERCIAL APPLICATIONS OF THE COMPANY'S TECHNOLOGIES
No commercial application of our products has been arranged to date, but
the technology has matured to a point where we believe it can be applied to
certain markets. Our technology is applicable to many market sectors such as
bridges and aerospace as well as ships, cranes, power plants, nuclear
facilities, chemical plants, mining equipment, piping systems, and "heavy iron."
THE BRIDGE MARKET
In the U.S. alone there are more than 610,000 bridges of which over 260,000
are rated by the Federal Highway Administration as requiring major repair,
rehabilitation, or replacement. Although there are normal business imperatives,
the market is essentially macro-economically and government policy driven. In
our opinion, "only technology can provide the solution." The need for increased
spending accelerates significantly each year as infrastructure ages. Analysis
by infrastructure economic experts, including the Federal Highway
Administration, confirms that $9 billion per year, for bridges alone, is the
minimum amount required to maintain the status quo. Since that amount has not
been available, and a backlogged repair bill of more than $358 billion has
already accrued. In the 1991 ISTEA initiative (Intermodal Surface
Transportation and Efficiency Act) and recently in the $200 billion 1998 TEA-21
initiative (Transportation Equity Act) Bridge Management Systems have been
mandated as a matter of policy.
THE SECOND MARKET SECTOR
The second market sector that we intend to pursue is aerospace. The
aerospace industry is concerned with aluminum alloys and titanium alloys. This
market opportunity will follow a different time line, budget, and market model.
There can be no assurance of success until the technology is successfully
installed in the field and passed required testing and validation.
17
MANUFACTURING
Certain manufacturers are capable of producing the Fatigue Fuse and EFS at
reasonable cost. No assurance can be given, however, that these devices will be
successfully manufactured, that they can be commercially produced, that they
will perform to Management's expectations, or that they will be successfully
marketed. Moreover, significant competition may develop.
PATENTS
We are the assignee of four patents originally issued to Tensiodyne
Corporation. The first was issued on May 27, 1986, and expires on May 27, 2003.
It is titled "Device for Monitoring Fatigue Life" and bears United States Patent
Office Numbers 4,590,804. The second patent, titled "Method of Making a Device
for Monitoring Fatigue Life" was issued on February 3, 1987 and expires February
3, 2004, United States Patent Office Number 4,639,997. The third patent, titled
"Metal Fatigue Detector" was issued on August 24, 1993 and expires on August 24,
2010, United States Patent Number 5,237,875. The fourth patent, titled "Device
for Monitoring the Fatigue Life of a Structural Member and a Method of Making
Same," was issued on June 14, 1994 and expires on June 14, 2011, United States
Patent Number 5,319,982. In addition, we own a fifth patent, titled "Device for
Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,"
which was issued June 20, 1995, United States Patent Number 5,425,274, and
expires June 20, 2012.
PRODUCT DISTRIBUTION METHODS
Subject to available financing, we intend to exhibit the Fatigue Fuse and
the Electrochemical Fatigue Sensor at various aerospace trade shows and intend
to also market our products directly to end users, including aircraft
manufacturing and aircraft maintenance companies, crane manufactures and
operators, certain state regulatory agencies charged with overseeing bridge
maintenance, companies engaged in manufacturing and maintaining large ships and
tankers, and the military. Although we intend to undertake marketing, dependent
on the availability of funds, within and without the United States, no assurance
can be given that any such marketing activities will be implemented.
COMPETITION
Other technologies exist which measure and indicate fatigue damage. Single
cracks larger than a minimum size can be found by nondestructive inspection
methods such as dye penetrant, radiography, eddy current, acoustic emission, and
ultrasonics. Tracking of load and strain history, to subsequently estimate
fatigue damage by computer processing, is possible with recording instruments
such as strain gauges and counting accelerometers. These methods have been
used for 40 years and also offer the advantage of having been accepted in the
market, whereas our products remain largely unproven. Companies marketing these
alternate technologies include Magnaflux Corporation, Kraut-Kermer-Branson,
Dunegan-Endevco, and Micro Measurements. These companies have more substantial
assets, greater experience, and more resources than ours, including, but not
limited to, established distribution channels and an established customer base.
The familiarity and loyalty to these technologies may be difficult to dislodge.
Because we are still in the development stage, we are unable to predict whether
our technologies will be successfully developed and commercially attractive in
potential markets.
EMPLOYEES
We have four employees, Robert M. Bernstein, President and Chief Executive
Officer, a secretary, one part-time engineer and one part-time government
contract advisor. In addition, we retain consultants for specialized work such
as an accountant who oversees our government contracts.
18
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The name, age, office, and principal occupation of our executive officers and
directors and certain information relating to their business experiences are set
forth below:
NAME AGE POSITION
Robert M. Bernstein 67 President, Chief Executive Officer, Chairman of the
Board
Joel R. Freedman 42 Secretary, Treasurer, Director
Dr. John Goodman 68 Chief Engineer, Director
William Berks 71 Vice President of Government Projects
The term of the directors and officers is until the next annual meeting or
until their successors are elected.
ROBERT M. BERNSTEIN - PRESIDENT/CHIEF EXECUTIVE OFFICER/CHAIRMAN OF THE BOARD
Robert M. Bernstein received a Bachelor of Science degree from the Wharton
School of the University of Pennsylvania in 1956. From August 1959 until his
certification expired in August 1972, he was a Certified Public Accountant
licensed in Pennsylvania. From 1961 to 1981, he was a consultant specializing
in mergers, acquisitions, and financing. From 1981 to 1986, Mr. Bernstein was
Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc. of
Philadelphia, PA, an oil and gas exploration company. In December 1985, he
formed a research and development partnership for Tensiodyne, funding
approximately $750,000 for research on the Fatigue Fuse. In October, 1988, he
became Chairman of the Board, President and CEO.
JOEL R. FREEDMAN - SECRETARY/TREASURER/DIRECTOR
Joel R. Freedman has acted as our Secretary and Treasurer since 1989.
Since 1983, he has been President of Genesis Advisors, Inc., an investment
-
advisory firm in Bala Cynwyd, Pennsylvania. Since January 1, 2000, he has been
a Senior Vice President of PMG Capital Corp., a securities brokerage and
investment advisory firm in West Conshohocken, Pennsylvania. His duties there
are a full-time commitment. Accordingly, he does not take part in our daily
activities. He is not a director of any other company.
DR. JOHN W. GOODMAN - CHIEF ENGINEER/DIRECTOR
Dr. John W. Goodman is retired from TRW Space and Electronics and was
formerly Chairman of the Aerospace Division of the American Society of
Mechanical Engineers. He holds a Doctorate of Philosophy in Materials Science
that was awarded with distinction by the University of California at Los Angeles
in 1970. In 1957, he received a Masters of Science degree in Engineering
Mechanics from Penn State University and in 1955 he received a Bachelor of
Science degree in Mechanical Engineering from Rutgers University. From 1972 to
1987, Dr. Goodman was with the U. S. Air Force as lead Structural Engineer for
the B-1 aircraft, Chief of the Fracture and Durability Branch, and Materials
Group Leader, Structures Department, Aeronautical Systems Center,
Wright-Patterson Air Force Base. From 1987 to December 1993, he was on the
Senior Staff, Materials Engineering Department of TRW Space and Electronics. He
has been Chief Engineer for Development of Matech's products since May 1993.
Over the last four years he has consulted for us on a part time basis.
WILLIAM BERKS - VICE PRESIDENT OF GOVERNMENT PROJECTS
William Berks retired from TRW, Inc. in November 1992. Mr. Berks' last
assignment was as a project manager in the Advanced Systems Division of TRW's
Space and Technology Group. He managed the Structures and Mechanism Subsystem
of the Universal Test Bed Project, which is a three axis stabilized advanced bus
for large geostationary satellites. In a collateral assignment, he was
responsible for planning a building and its equipment for the National Space
Program Office of Taiwan, Republic of China, for the design, assembly,
integration and test of small three axis spacecraft and each of their
subsystems, and manpower planning for a spacecraft program. Recently he was the
19
Chief Mechanical Engineer for the Space and Technology Group's commercial
satellite operations. He served six years as Manager of the Mechanical Design
Laboratory, the engineering design skill center for the design and development
of spacecraft mechanical systems, which had as many as 350 individuals. For ten
years he was Manager of the Advanced Systems Design Department, which was
responsible for mechanical systems design for all spacecraft project. He was
Assistant Project Manager for Mechanical Subsystems for a major spacecraft
program, which included preparation of plans, specifications and drawings,
supervision of two major subcontracts, and responsibility for flight hardware
fabrication and testing. Mr. Berks has also managed independent research and
development projects (antennas, materials, solar arrays) and holds six patents.
He has over 30 years of experience in spacecraft mechanical systems engineering.
He was with TRW, Inc. for 26 years.
ADVISORY BOARD
Since 1987, we and our predecessors have had an Advisory Board consisting
of senior experienced businessmen and technologists, most of whom are nationally
prominent. These individuals consult with us on an as needed basis. Members of
the Advisory Board serve at will. The Advisory Board advises us on technical,
financial, and business matters and may in the future be additionally
compensated for these services. A biographical description of the members of
the Advisory Board is as follows:
DR. LAWRENCE CHIMERINE
Dr. Chimerine is President of Radnor International Consulting Inc. in
Radnor, PA., an economics consulting firm, and co-founder of igrandparents.com.
- -
From 1993 to 2000, he was Managing Director and Chief Economist of the Economic
Strategy Institute in Washington DC. He is the former Chairman, Chief
Executive, and Chief Economist of Chase Econometrics and The WEFA Group. For
more than 19 years, Dr. Chimerine has lent his advice and council to an
impressive resume of Fortune 500 companies, financial institutions, and
government agencies, providing private consultation on the state of the U.S. and
world economics, specific industries, and sectors, and the impact of economic
conditions on decision making, budgeting, and strategic planning. He has served
on numerous corporate boards, is a member of various professional associations,
and has held teaching positions at three universities. From 1965 to 1979, Dr.
Chimerine was Manager of the U.S. Economic Research and Forecasting for the IBM
Corporation. He left IBM to assume the chairmanship at Chase Economics and, in
1987, was appointed Chairman and CEO of the WEFA Group. Dr. Chimerine has
served on numerous governmental advisory boards including the House of
Representatives Task Force on International Competitiveness, the Census Advisory
Committee, and the Economic Policy Board of the Department of Commerce. He is
frequently called upon to testify on key economic issues before Congressional
committees including the House and Senate Budget Committee, Joint Economic
Committee, Senate Finance Committee, Senate Banking Committee, and the House
Committee on Monetary Policy.
ADM. ROBERT P. COOGAN, USN (Ret.)
Robert P. Coogan retired from a distinguished naval career spanning 40
years during which he held numerous posts including: Commander U.S. Third Fleet,
Commander Naval Air Force - U.S. Pacific Fleet, Commandant of Midshipmen - U.S.
Naval Academy, and Chief of Staff - Commander Naval Air Force - U.S. Atlantic
Fleet. From 1980 to 1991, he was with Aerojet General Company and served as
Executive Vice President of Aerojet Electrosystems Co. from 1982-1991. He has
his BS in Engineering from the US Naval Academy and MA in International Affairs
from George Washington University.
ROBERT F. CUSHMAN, ESQ.
Mr. Cushman is a partner in the Philadelphia office of Pepper Hamilton LLP,
and is also the permanent chairman of the Andrews Conference Group Construction
Super Conference, and is the organizing chairman of the Forbes Magazine
Conferences on Worldwide Infrastructure Partnerships, Rebuilding America's
Infrastructure Conference, Alternative Dispute Resolution, the Forbes/ Council
of the Americas Latin American Marketing Conference and the Forbes Environmental
Super Conference.
DAVID HABERMAN
Mr. Haberman is chairman and co-founder of DCH Technology Inc., a company
that specializes in hydrogen technology development, safety, process monitoring,
and hydrogen fuel cell power applications. In 1996, William Richardson, then
Secretary of the Department of Energy (DOE), appointed Mr. Haberman to represent
the perspectives of commercial product developers and safety engineers on the
Hydrogen Technical Advisory Board (HTAP). This panel, created by the Hydrogen
Futures Act, reports directly to the Secretary of Energy and is responsible to
the U.S. Congress to monitor the DOE's implementation of the National Hydrogen
Program. As a director of the National Hydrogen Association (NHA), Mr. Haberman
chairs the Implementation Planning Committee. He is a co-founder and President
of the California Hydrogen Business Council, an American delegate and member of
the International Standards Organization (ISO) Working Group on hydrogen system
safety, and works to define the commercial future of hydrogen energy.
20
CAMPBELL LAIRD
Campbell Laird received his Ph.D. in 1963 from the University of Cambridge.
His Ph.D. thesis title was "Studies of High Strain Fatigue." He is presently
Professor and graduate group Chairman in the Department of Materials, Science &
Engineering at the University of Pennsylvania. His research has focused on the
strength, structure, and fatigue of materials, in which areas he published in
excess of 250 papers. He is co-inventor of the EFS.
T.Y. LIN
Mr. Lin graduated from Tangshan College, Jiaotong University, and received
a M.S. degree in Civil Engineering from the University of California at
Berkeley. Since 1934, he taught and practiced civil engineering in China and
the U.S. and planned and designed highways, railways, and over 1,000 bridges and
buildings in Asia and the Americas. He is known as Mr. Prestressed Concrete in
the U.S., having pioneered both the technology and industry in the 1950s. He
authored and co-authored three textbooks in structural engineering and more than
100 technical papers. He was the founder of T.Y. Lin International that
provides design and analysis for all types of concrete and steel structures and
pioneered the design of long-span structures, prestressing technology, and new
design and construction methods over the past 40 years.
Y.C. YANG
Mr. Yang is a pioneer in "value engineering" which optimized many projects
with economic te-designs. He is a recipient of the 1988 Jiaotong University
Outstanding Alumnus Award, a citation from Engineering News Record, and the ACI
Mason Award. With their partnership dating back to wartime China in the early
1940s, Mr. Lin and Mr. Yang established their international stature in the U.S.
over the five decades that followed. In 1992, they formed the San Francisco, CA
headquartered firm, Lin Tung-Yen China, Inc., to continue their tradition of
excellence and innovation in structural and civil engineering and to serve as a
bridge between East and West. The firm serves its clients through various
tasks, ranging from planning and designs to construction management and the
introduction of financing.
THOMAS V. ROOT
Mr. Root is President and CEO of Optim Incorporated, a company that
develops, manufactures, markets, sells and services flexible endoscopic products
and solutions to medical and industrial markets. Optim Incorporated is ISO
2001certified and also manufactures and markets a complete line of industrial
fiberscopes to serve the remote inspection needs of aerospace, transportation,
energy generation, law enforcement, and school security markets. Mr. Root has
had 25 years of experience in all methods of nondestructive testing and was an
NDT, Level III, member of the American Society for Nondestructive Testing (ASNT)
Educational Council and Level III question committee. In addition, he is past
chairman of ASNT CT Yankee, and former member of SAE Committee . His career
began at General Dynamics in 1972 and after serving in the nondestructive test
engineering and education departments he joined Technical Operations as manager
of Technical Services in 1976. In 1978, Mr. Root co-founded Northeast NDE
Company, a private distribution and service company committed to providing
products and services for the development of nondestructive testing
applications. After completing a sale transaction to Northeast NDE's treasurer
in 1990, Mr. Root founded Valtec Systems, a private firm, for the development
and distribution of specialty nondestructive testing systems. In early 1996, he
sold Valtec and became Vice President of Operations and General Manager of the
industrial products company of Applied Fiberoptics, Inc., the predecessor of
Optim Inc. In 1997, he became the CEO of Optim.
SAMUEL I. SCHWARTZ
Samuel I. Schwartz, age 49, is presently President of Sam Schwartz Co.,
consulting engineers, primarily in the bridge industry. Mr. Schwartz received
his BS in Physics from Brooklyn College in 1969, and his Masters in Civil
Engineering from the University of Pennsylvania in 1970. From February 1986 to
March 1990, he was the Chief Engineer/First Deputy Commissioner, New York City
--
Department of Transportation and from April, 1990, to the present acted as a
director of the Infrastructure Institute at the Cooper Union College, New York
City, New York. From April, 1990 to 1994, he was a Senior Vice President of
Hayden Wegman Consulting Engineers, and is a columnist for the New York Daily
News.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On March 27, 2001, Mr. Robert Bernstein, Chief Executive Officer and
Chairman, filed a Form 5 relating to several transactions of stock issued to him
in 2000 and a Form 4 for a January 2001 transaction. Mr. Bernstein was late in
reporting these transactions.
21
On March 27, 2001, Dr. John Goodman, Director, filed a Form 4 for a
transaction in January, 2001.
In September, 2000, Joel Freedman, a Director, filed a Form 4 showing a
transaction of stock gifted in 1999 and a transaction of 350,000 shares issued
to him in May, 2000.
We are unaware of any other late filings or any other failures to file any
Form 3, 4 or 5.
EXECUTIVE COMPENSATION
Name and Principal Position Year Salary ($) Bonus ($) Other Annual Restricted Options (SARs)
Compensation Stock (#)
($) Awards($)
Robert M. Bernstein, CEO 1998 100,000 - - - 1,800,000(1)
1999 150,000 - - - -
2000 120,000 - - 4,183 (3) -
John W. Goodman, Director 1998 20,462 - - - -
and Engineer
1999 23,384 - - 11,700 (2) -
2000 26,614 - - - -
(1) In June 1998, we issued to Mr. Bernstein a warrant to purchase 1,800,000
shares of common stock for $.50 per share that was later reduced to $.10
per share. In November 1999, we canceled this warrant with Mr. Bernstein's
approval.
(2) In 1999, we issued to Mr. Goodman 142,000 shares of restricted common
stock. These shares were valued at $11,700.
(3) In 2000, we issued to Mr. Bernstein as escrow holder, 4,183,675 shares of
our common stock, in part, for future compensation, subject to
restrictions. See Exhibit 4.3. We included the par value of the shares
issued in Mr. Bernstein's 2000 compensation amounting to $4,183.
22
SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF FEBRUARY 4, 2002
Security Ownership of Certain Beneficial Owners
We do not know of any non-affiliated person or "group" as that term is used
in Section13(d)(3) of the Exchange Act that owns more than five percent of any
class of our voting securities.
Security Ownership of Management
CLASS OF STOCK NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF CLASS
BENEFICIAL OWNER OF BENEFICIAL
OWNERSHIP
Common Stock Robert M. Bernstein, CEO 15,967,522 37.3%
Suite 707
11661 San Vicente Blvd.
Loa Angeles, CA 90049
Joel R. Freedman, 826,471 1.9%
Director
1 Bala Plaza
Bala Cynwyd, PA 19004
John Goodman, Director 1,000,000 2.3%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
William Berks 1,000,000 2.3%
532 14th Street
Manhattan Beach, CA
90266
Directors and executive 18,793,993 43.6%
officers as a group (4
persons)
Class B Robert M. Bernstein, CEO 100,000 100.0%
Common Stock Suite 707
11661 San Vicente Blvd.
Loa Angeles, CA 90049
(1) Of these 15,967,522 shares, Mr. Bernstein has full rights to approximately
12,183,847 shares. The remaining shares are subject to options to purchase
by third parties or are in escrow. On October 27, 2000, we issued 4,183,675
shares to Mr. Bernstein pursuant to a Stock Escrow/Grant Agreement, of
which 400,000 shares have been returned to escrow. Under the terms of the
agreement, Mr. Bernstein is required to hold these shares in escrow. While
in escrow, he cannot vote the shares but has full rights as to cash and
non-cash dividends, stock splits or other change in shares. Any additional
shares issued to Mr. Bernstein by reason of the ownership of the 3,783,675
shares will also be escrowed under the same terms of the agreement. Upon
the exercise by certain holders of our options or warrants, or upon the
need by us, in the sole discretion of the Board, to issue common stock to
certain individuals or entities, the number of shares required for issuance
to these holders will be returned from escrow by Mr. Bernstein thereby
reducing the number of shares he holds. The shares held in escrow are
non-transferable and will be granted to Mr. Bernstein only upon the
exercise or expiration of all of the options and warrants, the direction of
the Board, in its sole discretion, or the mutual agreement of Mr. Bernstein
and the Board to terminate the agreement. We valued these shares at par.
Upon the actual grant of the remaining shares to Mr. Bernstein, the shares
issued will be valued at market value when issued and charged to operations
as compensation. As of the date of this filing, 400,000 of these 4,183,675
shares had been transferred to satisfy a stock agreement. Accordingly,
3,783,675 of these escrowed shares are included in the total of 17,034,876
shares beneficially owned by Mr. Bernstein. In addition, approximately
1,500,000 of these shares are subject to an option that Mr. Bernstein
granted to a group of investors in July 1998 in connection with the
settlement of a law suit between these investors, us and Mr. Bernstein. See
Note 11 to Financial Statements.
23
(2) Each of Mr. Bernstein's Class B Common Shares has 500 votes on any matter
on which the common stockholders vote. Accordingly, these shares give Mr.
Bernstein 50 million votes. Those votes give Mr. Bernstein voting control
of the Company.
SELLING SHAREHOLDERS
An aggregate of 6,367,585 shares of common stock are being registered in
this offering for the account of the Selling Shareholders. Subject to certain
restrictions discussed below, the shares of common stock being registered for
the account of the Selling Shareholders may be sold by the Selling Shareholders
or their transferees commencing on the third business day after the Registration
Statement has been declared effective. Sales of such shares of common stock by
the Selling Shareholders or their transferees may depress the price of the
common stock in any market that may develop for the common stock.
The following table sets forth certain information with respect to persons
for whom we are registering such shares of common stock for resale to the
public. We will not receive any of the proceeds from the sale of such shares of
common stock. None of the Selling Shareholders has had any position, office or
material relationship with the Company. The shares of common stock being
registered for the account of the Selling Shareholders are not being sold by the
Company. None of the Selling Shareholders has any plan, arrangement,
understanding, agreement, commitment or intention with us to sell their
securities.
Selling Shareholder Shares Beneficially Owned Percentage Total Shares
John Sheldon Legge Brandenburg 200,000 *
John Andrew and Alicia Elizabeth Law 25,000 *
Maria De La Rosario Leon 47,500 *
Philip Guilfoyle 120,000 *
James Auld 33,000 *
James Marshall 13,000 *
Willard Clapp 14,300 *
Brian Taylor 71,500 *
Luz Pelayo 8,400 *
Christopher Collins 10,000 *
Ali Siddiqui 18,000 *
Frank Alexander 10,000 *
Howard Wilson 50,000 *
Roderick L. Carter 10,000 *
Charles Hannan 32,000 *
Nancy Demarr 52,500 *
Carol Drugan 16,000 *
Jill Robinson 14,000 *
Strategic Growth Solutions 160,000 *
De Jong & Associates Inc. 370,000 *
24
John Darragh 160,000 *
Adrian Thomas William Bell 40,000 *
B&L Superannuation Fund 100,000 *
Robert John Guthrie 75,000 *
Robert Malcolm & Gwendolyn Smith 150,000 *
Garry Allan Smith 6,000 *
Perry Robert Smith 6,000 *
Russell Robert Charles Smith 24,000 *
Jeremy Robert Charles Smith 40,000 *
Sharene-Adelle Rebecca Jayne Smith 6,000 *
Sharene-Priscilla Joanna-Joy Smith 6,000 *
Graeme Thomas McLean 30,000 *
Erna May Gville & Maxwell Vincent Guille 200,000 *
Wallace Sew-Hoy 100,000 *
Colin Greegan 15,000 *
Christopher John Mackertich 37,500 *
Matthew Develin 100,000 *
Philip John Roden 37,500 *
Eva Pelayo 163,000 *
James R. Willman 170,000 *
George Amaro & Maria Amaro 55,000 *
International Prestige Promotions Inc. 12,000 *
Glen Harris 30,000 *
John Andrew Green 62,000 *
Preferential Publication Pty Ltd 55,000 *
25
Jamie Hull 55,000 *
Hun Teong Chew 100,000 *
George F. Johnson 55,000 *
David D. McNabb 50,000 *
Anthony Mark McCullough 100,000 *
Jack Walton Ingram Jr. 70,000 *
Adam Christopher Gilbert 80,000 *
Timothy Stuart Wheaton 55,000 *
Christine Ann Tysoe 32,000 *
Robert G. Adams 80,000 *
Deborah Anne Darragh 160,000 *
Clayton Gilbert 83,190 *
John Terrence Gilbert & Janice Rose Gilbert 25,000 *
Frank L. Jenkins 300,000 *
Valma Judith Wood 80,000 *
Amaro Superannuation Fund 145,000 *
Douglas McKay Hamilton 65,000 *
Gosling Superannuation Fund 80,000 *
Robert Lester Foster & Nicole Jane Foster 12,800 *
Bettyanne Frances Austen 45,000 *
Euan MacFarlane 160,000 *
R N Wickham & C A Wickham 45,000 *
Bahaderalli Keshani 100,000 *
Preferential Publication Pty Ltd 100,000 *
Clarence Bernard Fitzner 40,000 *
George F. Johnson 50,000 *
26
Bahaderalli Keshani 150,000 *
Mark Robert Israel 20,000 *
Ross Williams 100,000 *
Warren Arthur Heuston & Lynette Kay Heuston 62,000 *
Geoffrey Michael Rynne & Gregory David Rynne 200,000 *
Maria D. Sarabia 105,000 *
Bernard D. Coble & Laura L. Coble 30,000 *
Brad Anthony Smyth 6,500 *
Glen Andrew Humbert 50,000 *
Francis A. Sliwinski 11,000 *
George Wesley Moser 50,000 *
Gaynelle Williamson 7,000 *
Hubert S. Williams & Lyla M. Williams 15,000 *
Coslow E. Holt Jr. & Donna G. Holt 14,500 *
Genice Akins 28,500 *
Robert Lester Foster 32,357 *
Dorothy Ellerbe & Travis Ellerbe 13,611 *
A.A. Capital Ventures, LLC 116,309 *
Barry E. Mitchell 37,256 *
Reynolds Technologies, Inc. 81,462 *
Tyrone Moore 74,775 *
John R. Sarabia 29,565 *
Don L. Calhoun 6,257 *
Alex Greene 3,303 *
------------------------- -----------------------
Total 6,367,585 14.79
========================= =======================
* Less than 1% of total outstanding shares per Rule 507
27
PLAN OF DISTRIBUTION
We anticipate that the Selling Shareholders sell their shares directly into
the market on the NASD's Electronic Bulletin Board. The prices that the Selling
Shareholders receive will be determined by market conditions. These shares may
be sold by the Selling Shareholders, as the case may be, from time to time, in
one or more transactions. We do not intend to enter into any arrangements with
any securities dealers concerning solicitation of offers to purchase the shares.
Commissions and discounts paid in connection with the sale of shares by
Selling Shareholders will be determined through negotiations between them and
the broker-dealers through or to which the securities are to be sold and may
vary, depending on the broker-dealers fee schedule, the size of the transaction
and other factors. The separate costs of the Selling Shareholders will be borne
by them. The Selling Shareholders and any broker-dealer or agent that
participates with the Selling Shareholder in the sale of the shares by them may
be deemed an "underwriter" within the meaning of the Securities Act, and any
commissions or discounts received by them and any file reports and other
information with the Commission. All such reports and other information may be
inspected and copied at the Commission's public reference facilities described
above. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. In addition, we intend to make available to its shareholders
annual reports, including audited financial statements and such other reports as
we may determine.
28
DESCRIPTION OF SECURITIES
The Company is authorized to issue two hundred fifty million (250,000,000)
shares of stock, $.001 par value, in classes as follows:
a. Two hundred million (200,000,000) shares of stock designated as
"Common Stock", of which one hundred thousand (100,000) shares of
stock shall be designated as "Class B Common Stock", $.001 par value.
The holders of Common Stock shall be entitled to receive such
dividends out of the funds or assets of the Company legally available
therefore as, from time to time, the Board of Directors may declare.
The holders of Class B Common Stock shall not be entitled to receive
dividends. The holders of Common Stock and the holders of Class B
Common Stock shall vote as a single class on all matters submitted to
a vote of stockholders, with each share of Common Stock entitled to
one (1) vote and each share of Class B Common Stock entitled to one
thousand (1,000) votes. In all other aspects, the Common Stock and
Class B Common Stock shall be identical.
b. Fifty million (50,000,000) shares of stock designated as "Preferred
Stock", $.001 par value. The Board of Directors is granted the
authority by resolution to authorize the Company to issue one or more
series of the Preferred Stock and to determine the voting powers, full
or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights of each
and every series of Preferred Stock and the qualifications,
limitations or restrictions on such preferences and/or rights.
Class A Common stockholders are entitled to receive such dividends out of
the funds or assets of the Company legally available therefor as, from time to
time, the Board may declare. Upon liquidation, Class A Common stockholders are
entitled to distribution of any remaining assets after payment of all creditors
and payment of the liquidation preferences of the Class A and Class B Preferred
Stock. Class A Common stockholders, as holders, have no preemptive rights to
receive offers for additional stock issued by the Company. The Baker Group, by
agreement, has a right to purchase or receive from Mr. Bernstein, or any
affiliate of Mr. Bernstein, 35% of all Class A Common Stock Mr. Bernstein or any
such affiliate purchases or receives from the Company at the same price Mr.
Bernstein or such affiliate pays for such stock.
In electing directors, if one or more Stockholders or their proxy deliver
written notice to the Secretary of the Company prior to the meeting, or to the
Chairperson prior to the vote for directors, all Stockholders may cumulate their
votes in electing directors. If and only if such notice is given, every
Stockholder entitled to vote for directors shall have the number of votes
determined by multiplying the number of directors to be elected by the number of
shares the Stockholder is entitled to vote and each Stockholder may then give
one nominated candidate all such votes or distribute such votes in any
proportion among the nominated candidates.
The Company's Certificate of Incorporation provides that the designation of
powers, preferences and rights, including voting rights, if any, qualifications,
limitations or restrictions on Preferred Stock is to be fixed by resolution or
resolutions of the Board of Directors.
On April 28, 1997, the Company filed with the Secretary of State of the
State of Delaware a Certificate of Designation designating 350,000 shares of
preferred stock 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 in control. Each share of Class A Preferred is
convertible into common stock at the discretion of the holder, at the rate of
one share of Class A Preferred for each .72 share of common stock. Thus, the
350,000 outstanding shares of Class A Preferred Stock are convertible into
486,111 shares of Class A Common Stock. Under the Certificate of Designation,
the Company is not permitted to issue stock which is senior to or pari passu
with Class A Preferred without prior consent of a majority of the outstanding
Class A Preferred shares. Adjustment of the number of Class A Preferred
outstanding is provided for in the event of any reclassification of outstanding
securities or of the class of securities which are issuable upon conversion of
shares and in the event of any reorganization of the Company 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 the
Company'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)
the Company consolidates or merges with another corporation, or (c) the Company
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
29
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 of the Common Stock.
On April 28, 1997, the Company filed a Certificate of Designation bringing
into existence a Class B Preferred Stock. Class B Preferred Stock is junior and
subordinate to Class A Convertible Preferred Stock. One hundred (100) shares of
Class B Preferred Stock were authorized from the 550,000 undesignated preferred
shares. Fifteen (15) shares have been issued to Tensiodyne in exchange for
canceling its 15 Class B Preferred shares in Matech 1. In the event of
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, holders of Class B Preferred Stock are entitled to receive $10,000
per share as a liquidation preference. This liquidation preference is senior to
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, the Company has the option to
redeem Class B Preferred stock for $10,000 per share plus any unpaid dividends.
At any time after January 31, 2002, holders have the right to compel the Company
to redeem their shares for $10,000 per share plus any unpaid dividends. Holders
have the right to receive cash dividends as determined by a formula in the
Certificate of Designation which reads as follows: "Each time a cash dividend is
paid on the Common Stock there shall also be paid with respect to each
outstanding share of Class B Preferred Stock an 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 is 3,214,480 and (ii) the denominator of
which is the number of shares of Common Stock on 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(SEE NOTE 11 TO FINANCIAL STATEMENTS.)
From time to time, Robert M. Bernstein advanced us funds. At December 31,
2000, all such advances had been repaid. The Board approved paying Mr.
Bernstein interest at the rate of 10% per year on his advances. Robert M.
Bernstein is under no obligation to make further advances to the Company but may
continue to so do at his sole discretion. See Note 11r to Financial Statements.
In August, 1997, the Board signed a resolution recognizing our extreme
dependence on the experience, contacts, and efforts of Mr. Bernstein and
authorized to pay him a salary of $150,000 a year since 1991. In February 2001,
our Board authorized the issuance of 6,000,000 shares of our common stock to Mr.
Bernstein for $600,000 of past compensation due to him. This amount represents
the difference between the $150,000 a year and the compensation actually accrued
during the years 1991 through 2000.
On May 25, 2000, we issued 4,650,000 shares of common stock to Mr.
Bernstein in exchange for $4,650 and a $1,855,350 non-recourse promissory note
bearing interest at an annual rate of 8%. Approximately 1,500,000 of these
shares are subject to an option to purchase by a third party. On the same day,
we issued 350,000 shares of our common stock to a Director in exchange for $350
and a $139,650 non-recourse promissory note bearing interest at an annual rate
of 8%. Both notes mature on May 25, 2005, when the principal and accrued
interest becomes fully due and payable.
On October 27, 2000, we issued 4,183,675 shares to Mr. Bernstein for future
compensation pursuant to a Stock Escrow/Grant Agreement. Under the terms of the
agreement, he is required to hold these shares in escrow. While in escrow, he
cannot vote the shares but has full rights as to cash and non-cash dividends,
stock splits or other change in shares. Any additional shares issued to Mr.
Bernstein by reason of the ownership of the 4,183,675 shares will also be
escrowed under the same terms of the agreement. Upon the exercise by certain
holders of options or warrants or upon the need by us, in the sole discretion of
the Board, to issue common stock to certain individuals or entities, the number
of shares required for issuance to these holders will be returned from escrow by
Mr. Bernstein thereby reducing the number of shares he holds. The shares held
in escrow are non-transferable and will be granted to Mr. Bernstein only upon
the exercise or expiration of all of the options and warrants, the direction of
the Board, in its sole discretion, or the mutual agreement by Mr. Bernstein and
the Board of Directors to terminate the agreement. We valued these shares at
par. Upon the actual grant of the remaining shares to Mr. Bernstein, the shares
issued will be valued at market value when issued and charged to operations as
compensation. See Exhibit 4.3.
On January 9, 2001,we authorized the issuance of 100,000 shares of our
common stock to William Berks, a part-time employee, for engineering and other
services rendered to us.
On January 8, 2001, we authorized the issuance of 100,000 shares of our
common stock to Dr. Campbell Laird, an advisory board member, for services
rendered.
30
On January 9, 2001,we authorized the issuance of 100,000 shares of our
common stock to John Goodman, a director and part-time employee, for engineering
and other services rendered.
On January 9, 2001, we authorize the issuance of 100,000 shares of our
common stock to William Berks, vice president of government contracts, for
engineering and other services rendered.
On February 19, 2001, we authorized the issuance of 6,000,000 shares of our
common stock to Robert M. Bernstein for compensation due. Approximately
1,500,000 of these shares are subject to an option that Mr. Bernstein granted to
a group of investors in July, 1998, in connection with the settlement of a law
suit between these investors, us and Mr. Bernstein.
On October 4, 2001, we authorized the issuance of 300,000 shares of our
common stock each to William Berk and to John Goodman for services rendered.
TRANSFER AGENT
The transfer agent for the common stock of the Company is Interwest
Transfer Company, Inc., 1981 E. 4800 South, Ste. 100, Salt Lake City, Utah
84117, and its telephone number is (801) 272-9294.
LEGAL MATTERS
The legality of the shares offered hereby will be passed upon for us by
Gary C. Wykidal & Associates.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Jonathan P. Reuben, Independent Certified Public Accountant, to the
extent and for the periods set forth in his report thereon and are included in
reliance upon such report given upon the authority of such firm as an expert in
accounting and auditing.
INTEREST OF NAMED EXPERTS
The legality of the shares is being passed on by Gary C. Wykidal who has
received securities in the Company as partial payment for legal fees.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
with respect to the securities offered hereby with the Securities and Exchange
Commission. This Prospectus, which is a part of the Registration Statement,
does not contain all of the information contained in the Registration Statement
and the exhibits and schedules thereto. Certain items are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement, including all exhibits and schedules thereto, which
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
its Regional Offices located at 7 World Trade Center, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 at prescribed rates during regular business hours. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in its entirety by such reference. The Company
will provide, without charge upon oral or written request of any person, a copy
of any information incorporated by reference herein. Such request should be
directed to Material Technologies, Inc. at 11661 San Vicente Blvd., Ste. 707,
Los Angeles, California 90049, telephone (310) 208-5589.
31
BACK COVER OF PROSPECTUS
No dealer, salesman or other person is authorized to give any information
or to make any representations not contained in this Prospectus in connection
with the offer made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by us. This
Prospectus does not constitute an offer to sell or a solicitation to an offer to
buy the securities offered hereby to any person in any state or other
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PROSPECTUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MARKET PRICE OF REGISTRANT'S COMMON STOCK . . . . . . . . . . . . . . . 13
PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
DEVELOPMENT OF TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . 16
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SELLING SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 24
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . 27
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 27
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INTEREST OF NAMED EXPERTS . . . . . . . . . . . . . . . . . . . . . . . 30
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 30
MATERIAL TECHNOLOGIES, INC.
6,367,585 SHARES
PROSPECTUS
February , 2002
32
MATERIAL TECHNOLOGIES, INC.
PART II
Item 24. Indemnification of Directors and Officers
In accordance with Delaware general corporation law, the Company has
included a provision in its Certificate of Incorporation to limit the personal
liability of its directors for violation of fiduciary duty. The provision
serves to eliminate such directors' liability to the Company or its stockholders
for monetary damages, except for (i) any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts of omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) unlawful payment of dividends or unlawful stock purchases or redemptions,
or (iv) any transaction from which a director derived an improper personal
benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 being permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Filing fee under the Securities Act of 1933 $ 76.15
Printing and Engraving (1) $ 500.00
Blue Sky Fees $ 1,000.00
Auditing Fees (1) $ 5,000.00
Legal Fees (1) $ 25,000.00
Miscellaneous (1) $ 2,000.00
-----------
TOTAL $ 33,576.15
(1) Estimates
Item 26. Recent Sales of Unregistered Securities
At various times during 2000, we issued common stock to various persons
relying on Section4(2) of the Securities Act of 1933. Each and every such
person has been associated with us in some way, is sophisticated, and is
familiar with our business and our financial position.
On January 12, 2000, the Board authorized the issuance of up to 110,000
shares of common stock to a group of approximately 22 investors who were
defrauded by a former consultant to us in exchange for an assignment of their
claims to us and a release of all claims against us. During January, February,
and August 2000, we issued 65,028 shares of our common stock to these investors
in exchange for an assignment and release of claims.
On January 27, 2000, we issued 40,000 shares of our Class B common stock to
Robert M. Bernstein in exchange for 40,000 shares of common stock. Mr.
Bernstein, therefore, owns 100,000 shares of Class B common stock that has 1,000
votes per share. Therefore, Mr. Bernstein's Class B common stock has
100,000,000 votes and gives him effective control of the Company.
On January 31, 2000, we issued 50,000 shares of common stock to David
Haberman, a new member of the advisory board.
On February 8, 2000, we issued 10,000 shares of common stock to a
consultant for services.
On February 28, 2000, we issued 200,000 of common stock to a consultant for
financial services. Also on February 28, 2000, we issued 4,500 of common stock
to a public relations consultant.
On March 9, 2000, we issued 100,000 of common stock to a consultant in
cancellation of $100,000 due.
33
On March 13, 2000, we issued two consultants a total of 75,000 shares of
common stock for services relating to the development of our Fatigue Fuse.
On March 29, 2000, we issued 50,000 shares of common stock to a consultant
for services.
On April 11, 2000, we issued 15,000 shares of common stock to a consultant
relating to the operations of a joint venture.
On April 11, 2000, we issued 25,000 shares of common stock for advisory
services.
On April 12, 2000, we filed a registration statement to increase the number
of shares of common stock that may be issued under our 1998 Stock Plan from
1,800,000 to 6,800,000 shares of common stock.
On April 28, 2000, we issued 30,000 shares of common stock for advisory
services.
On May 25, 2000, we issued to our President, Robert M. Bernstein, 4,650,000
shares of common stock in exchange for $4,650 and a $1,855,350 non-recourse
promissory note bearing interest at an annual rate of 8%. On the same day, we
issued 350,000 shares of our common stock to a Director in exchange for $350 and
a $139,650 non-recourse promissory note bearing interest at an annual rate of
8%. Both notes mature on May 25, 2005, when the principal and accrued interest
are due and payable.
On July 13, 2000, we issued 40,000 shares of common stock for legal
services.
On October 27, 2000, we issued 4,183,675 shares to our President, Robert M.
Bernstein, for future compensation pursuant to a Stock Escrow/Grant Agreement.
Under the terms of the agreement, Mr. Bernstein is required to hold these shares
in escrow. While in escrow, he cannot vote the shares but has full rights as to
cash and non-cash dividends, stock splits or other change in shares. Any
additional shares issued to Mr. Bernstein by reason of the ownership of the
4,183,675 shares will also be escrowed under the same terms of the agreement.
On November 14, 2000, we issued 400,000 shares of common stock to one of
our stockholders in exchange for $22,490.
On December 13, 2000, we issued 250,000 shares of our common stock to an
individual to settle a lawsuit brought against us.
On December 19, 2000, we issued 200,000 shares of our common stock to a
consultant.
On January 8, 2001, we issued 50,000 shares of our common stock to a
consultant for technical services rendered.
On January 8, 2001, we issued 100,000 shares of our common stock to Dr.
Campbell Laird, an advisory board member, for services rendered.
On January 9, 2001, we issued 100,000 shares of our common stock to William
Berks, an officer and part-time employee, for engineering and other services
rendered.
On January 9, 2001,we issued 100,000 shares of our common stock to John
Goodman, a director and part-time employee, for engineering and other services
rendered.
On February 19, 2001, we issued 6,000,000 shares of our common stock to Mr.
Bernstein for past compensation due. Approximately 1,500,000 of these shares
are subject to an option that Mr. Bernstein granted to a group of investors in
July 1998 in connection with the settlement of a lawsuit between these
investors, the Company, and Mr. Bernstein. See, Notes 10e, 11, 12, and 13 of
the Financial Statements
Item 27. Exhibits and Financial Statement Schedules
a. Exhibits.
Exhibit No. Description of Document
3(i) Certificate of Incorporation of Material Technologies, Inc.
34
Certificate of Amendment, February 16, 2000(1)
Certificate of Amendment, July 12, 2000(2)
Certificate of Amendment, July 19, 2000(4)
Certificate of Amendment, July 31, 2000(2)
Certificate of Amendment, October 16, 2001(4)
3(ii) Bylaws of Material Technologies, Inc.(1)
4.1 Class A Convertible Preferred Stock
Certificate of Designations(1)
4.2 Class B Convertible Preferred Stock
Certificate of Designations(1)
4.3 Material Technologies, Inc. Stock Escrow/Grant(2)
10.1 License Agreement Between Tensiodyne Corporation and
the Trustees of the University of Pennsylvania(1)
10.2 Sponsored Research Agreement between Tensiodyne Corporation and
the Trustees of the University of Pennsylvania(1)
10.3 Amendment 1 to License Agreement Between Tensiodyne Scientific
Corporation and the Trustees of the University of Pennsylvania(1)
10.4 Repayment Agreement Between Tensiodyne Scientific Corporation and
the Trustees of the University of Pennsylvania(1)
10.5 Teaming Agreement Between Tensiodyne Scientific Corporation and
Southwest Research Institute(1)
10.6 Letter Agreement between Tensiodyne Scientific Corporation,
Robert M. Bernstein, and Stephen Forrest Beck and Handwritten
modification(1)
10.7 Agreement Between Tensiodyne Corporation and Tensiodyne 1985-1 R&D
Partnership(3)
10.8 Amendment to Agreement Between Material Technologies, Inc. and
Tensiodyne 1985-1 R&D Partnership(3)
10.9 Agreement Between Advanced Technology Center of Southeastern
Pennsylvania and Material Technology, Inc.(3)
10.10 Addendum to Agreement Between Advanced Technology Center of
Southeastern Pennsylvania and Material Technologies, Inc.(3)
10.11 Agreement Between Allied Boston International, Inc. and Material
Technologies, Inc.(4)
23 Consents of Experts and Counsel
23.1 Consent of Jonathan P. Reuben, Certified Public Accountant
23.2 Consent of Gary C. Wykidal & Associates
35
------------------------
1. Previously filed in connection with S-1Registration Statement which
became effective on July 31, 1997.
2. Previously filed.
3. Previously filed in connection with S-1 Registration Statement which
became effective on January 19, 1996.
4. Filed herein.
b. Reports on Form 8-K - none.
c. Financial Statements - attached.
Item 28. Undertakings.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the Prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the Registration Statement; and (iii)
include any material or changed information in the plan of distribution.
(2) For determining liability under the Securities Act of 1933, as
amended (the "Act"), treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities as at
that time to be the initial bona fide offering thereof.
(3) File a post effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) To provide to the underwriter at the Closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as may be required by the underwriter to permit prompt delivery to each
purchaser.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
that matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned small business issuer hereby undertakes that it will:
(1) For purposes of determining any liability under the Act that the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be a part of this Registration Statement as of
the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Act, that
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in the city of Los
Angeles, State of California, on the 4th day of February, 2002.
36
MATERIAL TECHNOLOGIES, INC.
By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein, President
Each person whose signature appears below hereby constitutes and appoints,
Robert M. Bernstein, his or her true and lawful attorneys-in-fact with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign a new
registration statement filed to register additional securities pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to cause the same to be
filed, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting to said
attorneys-in-fact and agent, full power and authority to do and perform each and
every act and thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 4th day
of February, 2002, in the capacities indicated.
MATERIAL TECHNOLOGIES, INC.
/s/ Robert M. Bernstein
Robert M. Bernstein, President
Pursuant to the requirements of the Securities Exchanges Act of 1933, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert M. Bernstein
Robert M. Bernstein, President, Director,
Chief Executive Officer, and Chief Financial Officer
(Principal Executive Officer, Principal Financial Officer,
and Principal Accounting Officer)
By: /s/ Joel Freedman
Joel Freedman, Secretary and Director
By: /s/ John Goodman
John Goodman, Director
37
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
Contents
Page
Independent Auditors' Report F-1
Balance Sheets F-2
Statements of Operations F-4
Statements of Comprehensive Loss F-5
Statement of Stockholders' Equity (Deficit) F-6
Statements of Cash Flows F-14
Notes to Financial Statements F-16
38
INDEPENDENT AUDITORS' REPORT
Board of Directors
Material Technologies, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 1999 and 2000, and the related
statements of operations, comprehensive income (loss), stockholders' equity
(deficit), and cash flows, for the years ended December 31, 1998, 1999, and 2000
and for the period from the Company's inception (October 21, 1983) through
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Technologies, Inc. as
of December 31, 1999 and 2000, and the results of its operations, its
comprehensive loss, and its cash flows for the years ended December 31, 1998,
1999, and 2000, and for the period from Company's inception (October 21, 1983)
through December 31, 2000, in conformity with generally accepted accounting
principles.
/s/ Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
March 19, 2001
F-1
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1999 2000
----------- ----------
CURRENT ASSETS
Cash and Cash Equivalents $ 62,904 $ 1,954
Accounts Receivable 144,796 33,932
Advances to Officer - 22,052
Employee Advance 1,500 -
----------- ----------
TOTAL CURRENT ASSETS 209,200 57,938
----------- ----------
FIXED ASSETS
Property and Equipment, Net
of Accumulated Depreciation 3,949 2,990
----------- ----------
OTHER ASSETS
Investments 20,055 33,000
Intangible Assets, Net of
Accumulated Amortization 14,701 12,712
Refundable Deposit 2,136 2,136
----------- ----------
TOTAL OTHER ASSETS 36,892 47,848
----------- ----------
TOTAL ASSETS $ 250,041 $ 108,776
=========== ==========
See accompanying notes.
F-2
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
----------------------------------------
December 31,
1999 2000
---------------- ---------------
CURRENT LIABILITIES
Legal Fees Payable $ 145,900 $ 209,306
Fees Payable to R&D Subcontractor 101,322 20,474
Consulting Fees Payable 159,000 50,000
Accounting Fees Payable 24,153 26,288
Other Accounts Payable 18,122 10,157
Accrued Expenses 24,269 24,982
Accrued Wages Due Officer - 40,000
Note Payable - Current Portion 25,688 25,688
Loan Payable - Officer 10,270 -
Loans Payable-Others 58,319 54,160
---------------- ---------------
TOTAL CURRENT LIABILITIES 567,043 461,055
Payable on Research and
Development Sponsorship 303,543 358,181
Notes Payable - Other - -
---------------- ---------------
TOTAL LIABILITIES 870,586 819,236
---------------- ---------------
STOCKHOLDERS' (DEFICIT)
Class A Common Stock, $.001 Par Value, Authorized 100,000,000
Shares, Outstanding 14,597,435 Shares at December 31, 1999,
and 24,618,167 Shares at December 31, 2000 14,597 24,618
Class B Common Stock, $.001 Par Value, Authorized 100,000
Shares, Outstanding 100,000 Shares 60 100
Class A Preferred, $.001 Par Value, Authorized 900,000 Shares
Outstanding 350,000 Shares at December 31, 1999, and 337,471
Shares at December 31, 2000 350 337
Additional Paid in Capital 3,455,004 5,909,782
Less Notes and Subscriptions Receivable - Common Stock (39,694) (2,133,251)
Deficit Accumulated During the Development Stage (4,052,917) (4,512,046)
Unrealized Holding Gain on Investment Securities 2,055 -
---------------- ---------------
TOTAL STOCKHOLDERS' (DEFICIT) (620,545) (710,460)
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 250,041 $ 108,776
================ ===============
See accompanying notes.
F-3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
From Inception
(October 21, 1983)
Through
1998 1999 2000 December 31, 2000
---------------- ------------ ------------ -------------------
REVENUES
Sale of Fatigue Fuses $ - $ - $ - $ 64,505
Sale of Royalty Interests - - - 198,750
Income from Research and Development Contract 374,324 924,484 635,868 2,983,666
Test Services - - - 10,870
---------------- ------------ ------------ -------------------
TOTAL REVENUES 374,324 924,484 635,868 3,257,791
---------------- ------------ ------------ -------------------
COSTS AND EXPENSES
Research and Development 252,257 536,237 496,501 2,871,700
General and Administrative 792,338 875,444 640,481 4,809,645
---------------- ------------ ------------ -------------------
TOTAL COSTS AND EXPENSES 1,044,595 1,411,681 1,136,982 7,681,345
---------------- ------------ ------------ -------------------
INCOME (LOSS) FROM OPERATIONS (670,271) (487,197) (501,114) (4,423,554)
---------------- ------------ ------------ -------------------
OTHER INCOME (EXPENSE)
Expense Reimbursed - - - 4,510
Interest Income 8 2,613 103,419 145,535
Miscellaneous Income - - - 25,145
Loss on Sale of Equipment - - - (12,780)
Settlement of Teaming Agreement - - - 50,000
Litigation Settlement - - - 18,095
Interest Expense (42,242) (58,295) (60,634) (245,519)
Modification of Royalty Agreement (7,332) - - (7,332)
Gain on Foreclosure - - - 18,697
Gain on Sale of Stock 171,450 4,396 - 207,497
---------------- ------------ ------------ -------------------
TOTAL OTHER INCOME 121,884 (51,286) 42,785 203,848
---------------- ------------ ------------ -------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (548,387) (538,483) (458,329) (4,219,706)
PROVISION FOR INCOME TAXES (800) (800) (800) (9,400)
---------------- ------------ ------------ -------------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (549,187) (539,283) (459,129) (4,229,106)
EXTRAORDINARY ITEMS
Forgiveness of Debt - - - (289,940)
Utilization of Operating Loss Carry forward - - - 7,000
---------------- ------------ ------------ -------------------
NET INCOME (LOSS) (549,187) $ (539,283) $ (459,129) $ (4,512,046)
================ ============ ============ ===================
PER SHARE DATA
Income (Loss) Before Extraordinary Item $ (0.0625) $ (0.0440) $ (0.0243)
Extraordinary Items - - -
---------------- ------------ ------------
NET (LOSS) PER SHARE (0.0625) $ (0.0440) $ (0.0243)
================ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,782,808 12,242,534 18,900,019
================ ============ ============
See accompanying notes.
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF COMPREHENSIVE LOSS
From Inception
(October 21, 1983)
Through
1998 1999 2000 December 31, 2000
------------- ----------- ------------ ------------------
NET (LOSS) $ (539,283) $ (207,331) $ (459,129) $ (4,512,046)
Other Comprehensive income (loss), net of tax
Unrealized gain (loss) on securities - (6,164) (2,054) -
------------- ----------- ------------ ------------------
Comprehensive Loss $ (539,283) $ (213,495) $ (461,183) $ (4,512,046)
============= =========== ============ ==================
See accompanying notes and accountants' report.
F-5
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK ACCUMULATED
--------------------- --------------------- --------------------- CAPITAL DURING THE
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Initial Issuance of Common
Stock October 21, 1983 2,408 $ 2 - $ - - $ - $ 2,498 $ -
Adjustment to Give Effect
to Recapitalization on
December 15, 1986
Cancellation of Shares (2,202) (2) - - - - (2) -
----------- -------- ----------- -------- ----------- -------- ------------- ------------
206 - - - - - 2,496 -
Balance - October 21, 1983
Shares Issued By Tensiodyne
Corporation in Connection
with Pooling of Interests 42,334 14 - - - - 4,328 -
Net (Loss), Year Ended
December 31, 1983 - - - - - - - (4,317)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1984 42,540 14 - - - - 6,824 (4,317)
Capital Contribution - 28 - - - - 21,727 -
Issuance of Common Stock 4,815 5 - - - - 10,695 -
Costs Incurred in Connection
with Issuance of Stock - - - - - - (2,849) -
Net (Loss), Year Ended
December 31, 1984 - - - - - - - (21,797)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1985 47,355 47 - - - - 36,397 (26,114)
Shares Contributed Back
to Company (315) (0) - - - - - -
Capital Contribution - - - - - - 200,555 -
Sale of 12,166 Warrants at
$1.50 Per Warrant - - - - - - 18,250 -
Shares Cancelled (8,758) (9) - - - - 9 -
Net (Loss), Year Ended
December 31, 1985 - - - - - - - (252,070)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
See accompanying notes and accountants' report.
F-6
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
ACCUMULATED
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK CAPITAL DURING THE
--------------------- --------------------- --------------------- ------------- ------------
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1986 38,282 38 - - - - 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 - - - - - - - (10,365)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1987 38,282 38 - - - - 255,211 (288,549)
Issuance of Common Stock upon
Exercise of Warrants 216 - - - - - 27,082 -
Net (Loss), Year Ended
December 31, 1987 - - - - - - - (45,389)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1988 38,498 38 - - - - 282,293 (333,938)
Issuance of Common Stock
Sale of Stock (Unaudited) 2,544 3 - - - - 101,749 -
Services Rendered (Unaudited) 3,179 3 - - - - 70,597 -
Net (Loss), Year Ended
December 31, 1988 (Unaudited) - - - - - - - (142,335)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1989
(Unaudited) 44,221 44 - - - - 454,639 (476,273)
Issuance of Common Stock
Sale of Stock 4,000 4 - - - - 1,996 -
Services Rendered 36,000 36 - - - - 17,964 -
Net (Loss), Year Ended
December 31, 1989 - - - - - - - (31,945)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance, January 1, 1990 84,221 84 - - - - 474,599 (508,218)
Issuance of Common Stock
Sale of Stock 2,370 2 - - - - 59,248 -
Services Rendered 6,480 7 - - - - 32,393 -
Net Income, Year Ended
December 31, 1990 - - - - - - - 133,894
----------- -------- ----------- -------- ----------- -------- ------------- ------------
See accompanying notes and accountants' report.
F-7
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK ACCUMULATED
--------------------- --------------------- --------------------- CAPITAL DURING THE
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1991 93,071 93 - - - - 566,240 (374,324)
Issuance of Common Stock
Sale of Stock 647 1 - - 350,000 350 273,335 -
Services Rendered 4,371 4 - - - - 64,880 -
Conversion of Warrants 30 - -
Conversion of Stock (6,000) (6) 60,000 60 - - - -
Net (Loss), Year Ended
December 31, 1991 - - - - - - - (346,316)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1992 92,119 92 60,000 60 350,000 350 904,455 (720,640)
Issuance of Common Stock
Sale of Stock 20,000 20 - - - - 15,980 -
Services Rendered 5,400 5 - - - - 15,515 -
Conversion of Warrants 6,000 6 - - - - 14,994 -
Sale of Class B Stock - - 60,000 60 - - 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 - - - - 71,659 -
Conversion of Stock 6,000 6 (60,000) (60) - - - -
Cancellation of Shares (6,650) (7) - - - - 7 -
Net (Loss), Year Ended
December 31, 1992 - - - - - - - (154,986)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1993 127,620 127 60,000 60 350,000 350 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement 12,500 13 - - - - 6,237 -
Services Rendered 67,030 67 - - - - 13,846 -
Warrant Conversion 56,000 56 - - - - 304,943 -
Cancellation of Shares (31,700) (32) - - - - (7,537) -
Net (Loss) for Year Ended
December 31, 1993 - - - - - - - (929,900)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
See accompanying notes and accountants' report.
F-8
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK ACCUMULATED
--------------------- --------------------- --------------------- CAPITAL DURING THE
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1994 231,449 231 60,000 60 350,000 350 1,355,039 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,818 31 - - - - 385,393 -
Issuance of Shares for
Services Rendered 223,000 223 - - - - - -
Sale of Stock 1,486,112 1,486 - - - - 23,300 -
Issuance of Shares for
the Modification of Agreements 34,000 34 - - - - (34) -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - - - (377,063)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1995 2,005,380 2,005 60,000 60 350,000 350 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 153 - - - - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - - - - (197,546)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1996 2,157,880 2,157 60,000 60 350,000 350 1,763,698 (2,380,135)
Issuance of Shares for
Services Rendered 164,666 165 - - - - 16,301 -
Sale of Stock 70,000 70 - - - - 173,970 -
Issuance of Shares for the
Modification of Agreements 250,000 250 - - - - (250) -
Cancellation of Shares Held
in Treasury (62,000) (62) - - - - (154,538) -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - - - (450,734)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
See accompanying notes and accountants' report.
F-9
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK ACCUMULATED
--------------------- --------------------- --------------------- CAPITAL DURING THE
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance January 1, 1997 2,580,546 2,580 60,000 60 350,000 350 1,799,181 (2,830,869)
Sale of Stock 100,000 100 - - - - 99,900 -
Conversion of Indebtedness 800,000 800 - - - - 165,200 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 - - - - 370,500 -
Issuance of Shares for
Services Rendered 247,000 247 - - - - 2,224 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-1997 560,000 560 - - - - (560) -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - - - (133,578)
5,787,000 5,787 60,000 60 350,000 350 2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 - - - - 167,570 -
Conversion of Options 500,000 500 - - - - 124,500 -
Issuance of Shares for
Services Rendered 1,121,617 1,122 - - - - 111,040 -
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 - - - - 149,950 -
Shares Returned to Treasury
and Cancelled (560,000) (560) - - - - 560 -
Modification
of Royalty Agreement 733,280 733 - - - - 6,599 -
Issuance of Warrants to Officer - - - - - - 27,567 -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - - - (549,187)
See accompanying notes and accountants' report.
F-10
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
CLASS A COMMON CLASS B COMMON CLASS A PREFERRED STOCK ACCUMULATED
--------------------- --------------------- --------------------- CAPITAL DURING THE
SHARES SHARES SHARES IN EXCESS OF DEVELOPMENT
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT PAR VALUE STAGE
----------- -------- ----------- -------- ----------- -------- ------------- ------------
10,061,897 $10,062 60,000 $ 60 350,000 $ 350 $ 3,024,231 $(3,513,634)
Shares Issued in Cancellation
of Indebtedness 2,175,000 2,175 - - - - 164,492 -
Issuance of Shares for
Services Rendered 1,255,000 1,255 - - - - 93,844 -
Shares Issued in Modification
of Licensing Agreement 672,205 672 - - - - (672) -
Sale of Stock 433,333 433 - - - - 173,107 -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - - - (539,283)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
14,597,435 $14,597 60,000 $ 60 350,000 $ 350 $ 3,455,002 $(4,052,917)
Issuance of Shares for
Services Rendered 699,500 699 - - - - 83,251 -
Shares Issued to
Pursuant to Investors
Settlement Agreement 65,028 65 - - - - (65) -
Shares Issued for Cash and
Non-Recourse Promissory Notes 5,000,000 5,000 - - - - 1,990,000 -
Shares Issued for Cash 400,000 400 - - - - 29,496 -
Shares Issued in Cancellation
of Indebtedness 100,000 100 - - - - 99,900 -
Shares Issued as Compensation
Pursuant to Escrow Agreement 4,183,675 4,184 - - - - - -
Shares Returned from Escrow (400,000) (400) - - - - 400 -
Common Shares Converted
into Class B Common (40,000) (40) 40,000 40 - - - -
Preferred Shares Converted
into Common 12,529 13 - - (12,529) (13)
Net (Loss) for the Year - -
Ended December 31, 2000 - - - - - - - (207,331)
----------- -------- ----------- -------- ----------- -------- ------------- ------------
Balance December 31, 2000 24,618,167 24,618 100,000 100 337,471 337 5,657,984 (4,260,248)
=========== ======== =========== ======== =========== ======== ============= ============
See accompanying notes and accountants' report.
F-11
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Inception
(October 21, 1983)
Through
1998 1999 2000 December 31, 2000
---------- ---------- --------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(549,187) $(539,283) (459,129) $ (4,512,046)
---------- ---------- --------- -------------------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization 4,889 2,242 2,948 174,573
Interest Income Accrued on Stock Subcription Receivable - (1,432) (98,557) (99,989)
Bad Debts 50,000 - 50,000
Gain on Sale of Securities (171,450) (4,396) - (196,596)
Charge off of Deferred Offering Costs - - 36,480
Charge off Long-lived Assets due to Impairment 92,919 - 92,919
Gain on Foreclosure - - (18,697)
Modification of Royalty Agreement 7,332 - 7,332
(Increase) Decrease in Receivables (140,405) 57,941 112,364 (80,932)
(Increase) Decrease in Prepaid Expenses - (268) 53
Loss on Sale of Equipment - - 12,780
Issuance of Common Stock for Services 139,729 95,100 88,133 621,397
Issuance of Common Stock for Agreement Modifications - - 152
Forgiveness of Indebtedness - - 165,000
Increase (Decrease) in Accounts
Payable and Accrued Expenses 104,049 222,471 8,441 919,872
Interest Accrued on Notes Payable 50,658 57,500 57,062 205,037
Increase in Research and Development
Sponsorship Payable - - 218,000
(Increase) in Note for Litigation Settlement - - (25,753)
(Increase) in Deposits - - - (2,189)
---------- ---------- --------- -------------------
TOTAL ADJUSTMENTS 137,721 429,158 170,391 2,079,439
---------- ---------- --------- -------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (411,466) (110,125) (288,738) (2,432,607)
---------- ---------- --------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From Sale of Equipment - - - 10,250
Purchase of Property and Equipment (3,304) (1,490) - (230,903)
Proceeds from Sale of Securities 261,450 4,396 - 283,596
Purchase of Securities (90,000) - - (90,000)
Proceeds from Foreclosure - - - 44,450
Investment in Joint Venture - (18,000) (15,000) (102,069)
Payment for License Agreement - - - (6,250)
---------- ---------- --------- -------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 168,146 (15,094) (15,000) (90,926)
---------- ---------- --------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 125,000 150,000 274,288 1,381,607
Costs incurred in Offering - - - (31,480)
Sale of Common Stock Warrants - - - 18,250
Sale of Preferred Stock - - - 258,500
Sale of Redeemable Preferred Stock - - - 150,000
Capital Contributions - - - 301,068
Payment on Proposed Reorganization - - - (5,000)
Loans From Officers 150,500 102,198 8,000 736,005
Repayments to Officer (34,611) (71,500) (39,500) (455,532)
Increase in Loan Payable-Others - 7,405 - 172,069
---------- ---------- --------- -------------------
See accompanying notes.
F-12
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
From Inception
(October 21, 1983)
Through
1998 1999 2000 December 31, 2000
-------------- ------------ ------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 240,889 $ 188,103 $ 242,788 $ 2,525,487
-------------- ------------ ------------ ------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,431) 62,884 (60,950) 1,954
BEGINNING BALANCE - CASH AND
CASH EQUIVALENTS 2,451 20 62,904 -
-------------- ------------ ------------ ------------------
ENDING BALANCE - CASH AND CASH
EQUIVALENTS $ 20 $ 62,904 $ 1,954 $ 1,954
============== ============ ============ ==================
SUPPLEMENTAL INFORMATION: -
A. Definition of Cash and Cash Equivalents
For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered
to be cash equivalents.
B. Interest and Income Taxes Paid
Interest Paid During Period $ 2,500 $ 2,565 $ 2,565
============== ============ ============
Income Taxes Paid $ - $ 2,400 $ 800
============== ============ ============
C. Non Cash Investing and Financing Activities
During 1998, the Company issued 2,430,000 shares of Class A Common Stock to its
President in exchange for the cancellation of $170,000 of indebtedness.
During 1998, the Company issued 733,280 shares of Class A Common Stock in
exchange for the reduction of a royalty on the fatigue fuse from 20% to 5%. The
Company valued the shares issued at $7,332 which was charged to operations.
During 1998, the Company issued 50,000 shares of Class A Common Stock in
exchange for the cancellation of the $150,000 redeemable preferred stock.
During 1999, the Company issued 175,000 shares of its Class A Common Stock in in
exchange for the cancellation of the $66,667 of indebtedness due a consultant
During 1999, the Company issued 2,000,000 shares of its Class A Common Stock to
its President in exchange for the cancellation of $100,000 of indebtedness due
him.
During 1999, the Company issued 100,000 shares of its Class A Common Stock to a
consultant for $.35 a share, payable by a non-recourse, non-interest bearing
promissory note payable on or before June 15, 2003, and is secured by the stock.
During 2000, a holder of 12,259 shares of the the Company's Preferred Stock
converted all of his shares into 12,259 shares of common.
Under a settlement agreement, during 2000, the Company issued 65,028 shares of
common stock to investors who were defrauded by a former consultant of the
Company.
During 2000, the Company issued to its President 4,650,000 shares of its common
stock in exchange for $4,650 and a $1,855,350 promissory note bearing interest
at 8% due May 2005 Shares issued were valued at $.40 per share.
During 2000, the Company issued to a Director 350,000 shares of its common stock
in exchange for $350 and a $139,650 promissory note bearing interest at 8% due
May 2005 Shares issued were valued at $.40 per share.
Through a stock grant, the Company in 2000 issued to its President 4,183,675
shares of its common stock for future compensation. These shares are held in
escrow and have restrictive covenants.
See accompanying notes.
F-13
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.
The Company is in the development stage, as defined in FASB Statement 7,
with its principal activity being research and development in the area of
metal fatigue technology with the intent of future commercial application.
The Company has not paid any dividends and dividends that may be paid in
the future will depend on the financial requirements of the Company and
other relevant factors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Property and Equipment
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and for income
tax reporting purposes.
b. Intangible Assets
Intangibles are amortized on the straight-line method over periods
ranging from 5 to 20 years (see Note 3).
c. Net Loss Per Share
Net loss per share is computed under FASB Statement 128. Under this
statement, when common shares are issued to acquire a business in a
transaction accounted for as a purchase business combination, the
computation of earnings (loss) per share shall recognize the existence
of the new shares only from the acquisition date. The Company was
formed in 1997 and through the issuance of its common stock, acquired
all of the assets and liabilities of Material Technology, Inc. The
Company accounted for this recapitalization as a purchase, therefore
loss per share is computed only for 1997 and subsequent periods.
d. Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
e) Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at
their current carrying amounts.
F-14
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
f) Concentration of Credit Risk
Currently, the Company's only source of income comes from its
sub-contracts for Electrochemical Fatigue Sensor ("EFS") research with
the United States Air Force contractors. The Company believes these
contracts will continue through 2001.
g) Stock Based Compensation
For 1998 and subsequent years, the Company has adopted FASB Statement
123 which establishes a fair value method of accounting for its
stock-based compensation plans. Prior to 1998, the Company used APB
Opinion 25.
h) Investments in companies in which the Company has less than a 20%
interest are carried at cost. The Company includes dividends received
from those companies in other income. The Company applies dividends
received in excess of the Company's proportionate share of accumulated
earnings as a reduction of the cost of the investment.
NOTE 3 - INTANGIBLES
Intangible assets consist of the following:
Period of December 31,
Amortization 1999 2000
-------- --------- -------
Patent Costs 17 Years $ 28,494 $28,494
License Agreement 20 Years 6,250 6,250
(See Note 5) _____ _____
34,744 34,744
Less Accumulated Amortization (20,043) (22,032)
-------- --------- -------
$ 14,701 $12,712
========= =======
Amortization charged to operations for 1998, 1999, and 2000, were $1,990,
$1,989, and $1,989, respectively.
F-15
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - LICENSE AGREEMENT
The Company has entered into a license agreement with the University of
Pennsylvania regarding the development and marketing of the EFS. The EFS is
designed to measure electrochemically the status of a structure without
knowing the structure's past loading history. The Company is in the initial
stage of developing the EFS.
Under the terms of the agreement the Company issued to the University
12,500 shares of its common stock, and a 5% royalty on sales of the
product. The Company valued the licensing agreement at $6,250. The license
terminates upon the expiration of the underlying patents, unless sooner
terminated as provided in the agreement. The Company is amortizing the
license over 20 years.
In addition to entering into the licensing agreement, the Company also
agreed to sponsor the development of the EFS. Under the Sponsorship
agreement, the Company agreed to reimburse the University development costs
totaling approximately $200,000 that was to be paid in 18 monthly
installments of $11,112.
Under the agreement, the Company reimbursed the University $10,000 in 1996
for the cost it incurred in the prosecution and maintenance of its patents
relating to the EFS.
The Company and the University agreed to modify the terms of the licensing
agreement and related obligation. The modified agreements increase the
University's royalty to 7% of the sale of related products, the issuance of
additional shares of the Company's Common Stock to equal 5% of the
outstanding stock of the Company as of the effective date of the modified
agreements, and to pay to the University 30% of any amounts raised by the
Company in excess of $150,000 (excluding amounts received on government
grants or contracts) up to the amount owed to the University.
The parties agreed that the balance owed on the Sponsorship Agreement was
$200,000 and commencing June 30, 1997, the balance due will accrue interest
at a rate of 1.5% per month until the loan matures on December 16, 2001,
when the loan balance and accrued interest become fully due and payable. In
addition, under the agreement, Mr. Bernstein agreed to limit his
compensation from the Company to $150,000 per year until the loan and
accrued interest is fully paid. Interest charged to operations for 1998,
1999, and 2000, relating to this obligation was $39,240, $46,303, and
$54,638, respectively. The balance of the note at December 31, 1999, and
2000, was $257,240 and $303.543, respectively,
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
F-16
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31,
1999 2000
----------- ------------
Office Equipment $ 23,380 $ 23,380
Remote Monitoring System -- --
Manufacturing Equipment 100,067 100,067
----------- ------------
123,447 123,447
Less: Accumulated
Depreciation (119,498) (120,457)
----------- ------------
$ 3,949 $ 2,990
=========== ============
Depreciation charged to operations was $2,900, $253, and $959, in 1998,
1999, and 2000, respectively. The useful lives of office equipment for the
purpose of computing depreciation are five years. Management will commence
depreciating its manufacturing equipment upon the commencement of the
manufacturing of its products.
The Company's equipment has been pledged as collateral on the agreement
with Advanced Technology Center (See Note 8(b)).
In 1998, the Company had determined that based upon its current research
and development program, its current Remote Monitoring System has no future
use and probably cannot be sold. Therefore, the Company charged its full
cost of $97,160 to operations. The $97,160 is included in general and
administrative expenses. The Company determined the current value and
impairment loss of $97,160 based upon the present value of the expectant
future cash flows generated from the current system.
NOTE 6 - NOTES PAYABLE
On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a
current shareholder. The loan is evidenced by a promissory note that is
assessed interest at major bank prime rate. The Company has pledged its
patents as collateral against this loan.
As additional consideration for the loan, the Company granted to Mr. Baker,
a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty interest in
the Electrochemical Fatigue Sensor. The Company has not placed a value on
the royalty interest granted. The balance due on this loan as of December
31, 1999, and 2000, was $42,851, and $53,991, respectively. Interest
charged to operations for 1998, 1999 and 2000 was $2,993, $4,640, and
$3,245, 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-17
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
In October 1996, the Company borrowed $25,000 from an unrelated third
party. Under the terms of the promissory note, the loan was assessed
interest at an annual rate of 10% and matured on October 15, 1998. The
Company renegotiated the terms of the loan. Under the revised terms, the
note is assessed interest at a rate of 11% per annum commencing January 1,
1999, and matures on October 15, 2000. In addition the Company issued
warrants to the lender for the purchase of 2,500 shares of the Company's
common stock at a price of $1.00 per share. The loan balance as of December
31, 1999 and 2000 was $25,527 and $25,527, respectively. Interest charged
to operations on this loan in 1998, 1999, and 2000, were $2,500, $2,750,
and $2,750, respectively.
The Company did not pay any amounts due on this note when it matured on
October 15, 2000, and the note is in default.
NOTE 7 - INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ("FASB 109").
FASB 109 uses the asset and liability method to account for income taxes.
That requires recognizing deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between tax basis
and financial reporting basis of assets and liabilities.
An allowance has been provided for by the Company which reduced the tax
benefits accrued by the Company for its net operating losses to zero, as it
cannot be determined when, or if, the tax benefits derived from these
operating losses will materialize. As of December 31, 2000, the Company has
unused operating loss carryforwards, which may provide future tax benefits
in the amount of approximately $2,393,000 which expire in various years
through 2020.
The Company's use of its net operating losses may be restricted in future
years due to the limitations pursuant to IRC Section 382 on changes in
ownership.
F-18
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, to provide funding for research and development
related to the Fatigue Fuse, the Company entered into various
agreements with the Tensiodyne 1985-I R & D Partnership. These
agreements were amended on October 9, 1989, and under the revised
terms, obligated the Company to pay the Partnership a royalty of 10%
of future gross sales. The Company's obligation to the Partnership is
limited to the capital contributed to it by its partners in the amount
of approximately $912,500 and accrued interest.
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, 1999, and 2000, the
future royalty commitment was limited to $184,359 and $204,639,
respectively.
The payment of future royalties is secured by equipment used by the
Company in the development of technology as specified in the funding
agreement.
c. On May 4, 1987, the Company entered into a funding agreement with ATC,
whereby ATC provided $63,775 to the Company for the purchase of a
royalty of 3% of future gross sales and 6% of sublicensing revenues.
The agreement was amended August 28, 1987, and as amended, the royalty
cannot exceed the lesser of (1) the amount of the advance plus a 26%
annual rate of return or, (2) total royalties earned for a term of 17
years.
At December 31, 1999, and 2000, the total future royalty commitments,
including the accumulated 26% annual rate of return, were limited to
approximately $1,086,693, and $1,369,233, respectively. If the Company
defaults on the agreement, then the obligation relating to this
agreement becomes secured by the Company's patents, products, and
accounts receivable, which may be related to technology developed with
the funding.
d. In 1994, the Company issued to Variety Investments, Ltd. of Vancouver,
Canada ("Variety"), and a 22.5% royalty interest on the Fatigue Fuse
in consideration for the cash advances made to the Company by Variety.
In December 1996, in exchange for the Company issuing 250,000 shares
of its Common Stock to Variety, Variety reduced its royalty interest
to 20%. In 1998, in exchange for the Company issuing 733,280 shares of
its Common Stock to Variety, Variety reduced its royalty interest to
5%.
F-19
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
e. In 1995, the Company entered into an agreement with an unrelated third
party for providing the idea of pursuing government contracts for the
funding of the development of the Company's technologies, under which
he would receive a number of the Company's Common Stock equal to 2.5%
of the number of shares outstanding as of the date a government
contract is signed, 15% of the amount of the respective government
contract, and an appointment to the Company's Board of Directors.
Funds due him are to be paid only when such funds become available to
the Company. The Company and the third part disagree as to the amount
owed and the timing of payment under the Agreement and are attempting
to settle the disagreements amicably.
Under the agreement, the Company's obligation is created on the date
the government contract is signed. Under the agreement with this
individual, the amounts due are to be evidenced by a promissory note
bearing interest at major bank prime.
The Agreement contains anti-dilution provisions relating to the shares
to be issued that 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,
subject to a prior lien in favor of the Company's President. The
personal guarantee expires upon the individual receiving $100,000.
f. In 1999, the Company was notified that a former consultant used
company materials to sell shares of the Company's stock to the public.
The Consultant defrauded 25 investors out of $112,000. The Company had
no knowledge of his actions. But in order to avoid potential
litigation and have the ability to pursue the claims of these
investors, the Company authorized issuance of up to 110,000 shares of
its restricted Common Stock to these investors in exchange for the
assignment of their respective claims to the Company and a release of
any claims against the Company. During 2000, 65,028 shares of the
Company's common stock were issued to these defrauded investors.
g. As discussed in Note 6, the Company granted a 1% royalty interest in
the Company's Fatigue Fuse and a .5% royalty interest in its
Electrochemical Fatigue Sensor to Mr. Sherman Baker as part
consideration on a $25,000 loan made by Mr. Baker to the Company.
A summary of royalty interests that the Company has granted and are
outstanding as of December 31, 1999, follows:
F-20
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Fatigue Fatigue
Fuse Sensor
--------- --------
Tensiodyne 1985-1 R&D Partnership -- * --
Advanced Technology Center
Future Gross Sales 6.00%* --
Sublicensing Fees -- ** --
Variety Investments, Ltd 5.00% --
University of Pennsylvania
Net Sales of Licensed Products -- 7.00%
Net Sales of Services -- 2.50%
Sherman Baker 1.00% 0.50%
--------- --------
12.00% 10.00%
========= ========
* Royalties limited to specific rates of return as discussed in Notes 8(a)
and (b) above.
** The Company granted 12% royalties on sales from sublicensing. These
royalties are also limited to specific rates of return as discussed in Note
8(b) and (c) above.
g) Operating Leases
The Company leases its existing office under a non-cancelable lease,
which expires on May 31, 2002.
Rental expense charged to operations for the years ended December 31,
1998, 1999, and 2000 was approximately $22,632, $25,375, and $23,129,
which consisted solely of minimum rental payments.
In addition to rent, the Company is obligated to pay property taxes,
insurance, and other related costs associated with the leased office.
Minimum rental commitments under the noncancelable leases expire as
follows:
Year Ended 2001 $ 27,121
Year Ended 2002 $ 11,740
NOTE 9 - INVESTMENTS
a) The Company acquired 6,625,000 of Class A Common Stock of Tensiodyne
Corporation. During 1996, the Company received approximately $17,750
through the sale of 50,000 shares of Tensiodyne Corporation stock. Of
the 6,575,000 shares of Tensiodyne shares held as of December 31,
1996, only 690,000 shares were unrestricted and available for sale.
The Company valued these 690,000 shares at their quoted market price
on December 31, 1996 of $.08 per share totaling $55,200.
F-21
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997, all of the 6,575,000 shares were unrestricted
and available for sale. The quoted market price of these shares as of
December 31, 1997, was $.10 per share. However, due to the share's
limited market, the Company could not sell any of these shares at that
price. Tensiodyne Corporation is a development stage company with no
sales history and little prospect of commencing operations in the near
future. The Company believed that its inability to sell the Tensiodyne
shares held at their quoted market price would continue indefinitely.
Therefore, as of December 31, 1997, the Company continued to value the
Tensiodyne shares at $55,200, the estimated net proceeds that the
Company believed it would receive if it sold the shares at that date
in bulk.
In 1998, the Board of Shareholders' of Tensiodyne authorized two
reverse stock splits that reduced the total shares owned by the
Company to 65,750. These shares were valued at December 31, 1998, at
their quoted market price of $.1250 per share totaling $8,219. As of
December 31, 2000, the Company determined that these shares had no
market value and valued its interest in these shares at $ 0.
b) In 1998, the Company acquired through a private stock offering,
115,000 shares of DCH Technology for $90,000. The Company sold these
shares throughout 1998 and 1999 for net proceeds totaling $265,846,
thereby reporting a net gain from these sales in 1998 of $171,450 and
in 1999 of $4,396.
c) The Company owns a .5% interest in Antaeus Research, LLC. During 1999
and 2000, the Company invested $33,000. The Company accounts for this
investment under the Cost Method.
NOTE 10 - STOCKHOLDERS' EQUITY
a. Warrants
On June 25, 1998, the Company granted warrants to Mr. Robert M.
Bernstein and Mr. Joel Freedman to acquire 1,800,000, and 200,000
shares of the Company's Common Stock, respectively. The exercise price
at June 25, 1998, was initially $.50, but on November 6, 1998, the
Company's Board reduced the purchase price to $.10 a share. The
warrants were to expire on June 30, 2002.
F-22
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The Company valued the warrants issued to Mr. Bernstein using the
Black-Sholes option pricing model using with the following
assumptions: risk-free interest rate of 5.5%, dividend yield of 0%,
volatility factor of the expected market price of the Company's common
stock of .12 and the expected life of the warrants of 42 months. For
1998, and 1999, the Company charged the fair value of the warrants
totaling $27,567 in each year to operations. These warrants were
cancelled in 1999.
b. Common Stock
The holders of the Company's Common Stock are entitled to one vote per
share of common stock held.
c. Class B Common Stock
The holders of the Company's Class B Common Stock are not entitled to
dividends, nor are they entitled to participate in any proceeds in the
event of a liquidation of the Company. However the holders are
entitled to 500 votes for each share of Class B Common held.
d. Class A Preferred Stock
During 1991, the Company sold to a group of 15 individuals, 2,585
shares of $100 par value preferred stock and warrants to purchase
2,000 shares of common stock for a total consideration of $258,500.
In the Company's 1994 spin off, these shares were exchanged for
350,000 shares of the Company's Class A Convertible Preferred Stock
and 300,000 shares of its Common Stock. The holders of these shares
have a liquidation preference to receive out of assets of the Company,
an amount equal to $.72 per one share of Class A Preferred Stock. Such
amounts shall be paid upon all outstanding shares before any payment
shall be made or any assets distributed to the holders of the common
stock or any other stock of any other series or class ranking junior
to the Shares as to dividends or assets.
These shares are convertible to shares of the Company's common stock
at a conversion price of $.72 ("initial conversion price") per share
of Class A Preferred Stock that will be adjusted depending upon the
occurrence of certain events. The holders of these preferred shares
shall have the right to vote and cast that number of votes which the
holder would have been entitled to cast had such holder converted the
shares immediately prior to the record date for such vote.
The holders of these shares shall participate in all dividends
declared and paid with respect to the Common Stock to the same extent
had such holder converted the shares immediately prior to the record
date for such dividend.
F-23
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
In 2000, a holder of 12,259 shares of preferred stock exchanged these
shares for 12,259 shares of the Company's common. The 12,259 shares of
preferred were subsequently cancelled.
e. Issuances Involving Non-cash Consideration
All issuances of the Company's stock for non-cash consideration have
been assigned a dollar amount equaling either the market value of the
shares issued or the value of consideration received whichever is more
readily determinable. The majority of the non-cash consideration
received pertains to services rendered by consultants and others.
During 1998, the Company issued a total of 1,121,617 shares of its
Common Stock in exchange for services. During 1999, the Company issued
a total of 4,202,205 shares of its Common Stock for services and other
non-cash consideration. During 2000, the Company issued a total of
9,620,732 shares of its Common Stock for services and other non-cash
consideration. A summary of each transaction follows:
On May 1, 1998, the Company issued 259,427 shares to two consultants.
These shares were valued at $25,943. Also on May 1, 1998, the Company
issued 302,190 to Joel Freedman, a Director of the Company, for
services rendered. These shares were valued at $30,219. On September
1, 1998, the Company issued to a consultant 200,000 shares of stock
for services relating to marketing efforts. These shares were valued
at $20,000. On October 9, 1998, Company issued 100,000 shares for
consulting services. These shares were valued at $10,000. In November
1998, the Company issued 60,000 shares to a company for public
relations and marketing services. These shares were valued at $6,000.
On November 24, 1998, the Company issued to a consultant 200,000
shares of stock for consulting services. These shares were valued at
$20,000.
On February 4, 1999, the Company issued 175,000 shares in exchange for
the cancellation of $66,667 of indebtedness due to a consultant. On
March 5, 1999, the Company issued 50,000 shares to Mr. John Goodman
for services rendered relating to the research and development
projects. These shares were valued at $2,500. Also on March 5, 1999,
the Company issued 50,000 shares to a consultant. These shares were
valued at $2,500. On April 15, 1999, the Company issued 50,000 shares
to a consultant. These shares were valued at $2,500. On June 9, 1999,
the Company issued 2,000,000 shares to its President in exchange for
canceling $100,000 of indebtedness due him. On May 27, 1999, the
Company issued its director, Joel Freedman, 200,000 shares of stock
from services. These shares were valued at $10,000. On June 21, 1999,
the Company issued 100,000 shares to a consultant for $.35 a share
payable by a non-recourse, non-interest bearing promissory note
payable on or before June 15, 2003 and is secured by the 100,000
F-24
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
shares. The shares were valued at the present value of the note of
$23,541. On June 12, 1999, the Company issued 200,000 shares to an
attorney for services. These shares were valued at $10,000. On July 7,
1999, the Company issued 672,205 shares to the University of
Pennsylvania pursuant to the terms of the modified licensing agreement
as discussed in Note 4. These shares were valued at par. On August 23,
1999, the Company issued 50,000 shares to a consultant. These shares
were valued at $2,500. On September 29, 1999, the Company issued 8,000
shares for public relations services. These shares were valued at
$400. On October 27, 1999, the Company issued 300,000 to its board of
advisors. These shares were valued at $30,000. On November 12, 1999,
the Company issued 25,000 shares to a consultant. These shares were
valued at $2,500. On November 14, 1999, the Company issued 92,000
shares to Mr. John Goodman for services rendered in connection with
the development of the fatigue fuse. These shares were valued at
$9,200. On December 14, 1999, the Company issued 50,000 shares to a
consultant. These shares were valued at $5,000. On December 21, 1999,
the Company issued 20,000 shares to a consultant for public relations
services. These shares were valued at $1,500. On December 21, 1999,
the Company issued 10,000 shares to an individual who is on the
Company's advisory board. These shares were valued at $1,000. On
December 30, 1999, the Company issued 150,000 shares to a consultant.
These shares were valued at $15,000.
On January 31, 2000, the Company issued 50,000 shares of common stock
to a member of its advisory board. These shares were valued at $5,000.
On February 8, 2000, the Company issued 10,000 shares of common stock
to a consultant who assisted in developing the Company's web site. The
Company valued these shares at $1,000. On February 28, 2000, the
Company issued 200,000 of common stock to a consultant for financial
services. These shares were valued at $20,000. Also on February 28,
2000, the Company issued 4,500 of common stock to a public relations
consultant. These shares were valued at $4,500. On March 9, 2000, the
Company issued 100,000 of common stock to a consultant in cancellation
of $100,000 due. On March 13, 2000, the Company issued two consultants
a total of 75,000 shares of common stock for services relating to the
development of the fatigue fuseThese shares were valued at $7,500. On
March 21, 2000, the Company's President returned to the Company 40,000
shares of Common stock in exchange for receiving 40,000 shares of
Class B common stock. On March 29, 2000, the Company issued 50,000
shares of common stock to a consultant for financial services. These
shares were valued at $10,000. On April 11, 2000, the Company issued
15,000 shares of common stock to consultant relating to the operations
of the Company joint venture. These shares were valued at $3,000. On
April 11, 2000, the Company issued 25,000 shares of common stock for
advisory services. These shares were valued at $5,000. On April 28,
2000, the Company issued 30,000 shares of common stock for advisory
services. These shares were valued at $12,000. On May 4, 2000, the
Company issued 12,529 shares of its common stock in exchange for
12,529 shares of its preferred stock. The preferred shares were
subsequently cancelled. On May 25, 2000, the Company issued its
F-25
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
President 4,650,000 shares its common stock in exchange for $4,650 and
a $1,855,350 non-recourse promissory note bearing interest at an
annual rate of 8%. On the same day, the Company issued 350,000 shares
its common stock to a Director in exchange for $350 and a $139,650
non-recourse promissory note bearing interest at an annual rate of 8%.
Both notes mature on May 25, 2005, when the principal and accrued
interest becomes fully due and payable. On July 13, 2000, the Company
issued 40,000 shares of its common stock for legal services. These
shares were valued at $10,000. On October 27, 2000, the Company issued
4,183,675 to its President for futures services to be rendered
pursuant to a stock grant and escrow agreement. As discussed further
in Note 11, these shares are held in escrow, subject to substantial
restrictions and the actual shares that may vest to the President
could be substantially less then the number of shares placed in
escrow. These shares were valued at par. On November 14, 2000,
pursuant to the stock grant and escrow agreement, the President
returned 400,000 shares of common stock to the Company that were
subsequently cancelled. On the same day, 400,000 shares were issued in
exchange for $22,490. On December 19, 2000, the Company issued 200,000
shares of its common stock to a consultant. These shares were valued
at $10,000. During January and February 2000, the Company issued
65,028 shares of its common stock to investors who were defrauded by a
former consultant of the Company. These shares were valued at par. In
February 2000, the Company received $251,798 from the proceeds from
the sale of shares of DCH Technologies, Inc. These shares were placed
in a brokerage account in 1998 by a shareholder of the Company on the
Company's behalf. The Company had no access to the account. Due to the
restrictive covenants of the brokerage account, the Company did not
reflect the transaction on its financial statements prior to 2000,
when the shares were sold. The Company credited the proceeds to
additional paid-in capital.
NOTE 11 - TRANSACTIONS WITH MANAGEMENT
a. During 1993, Mr. Bernstein exercised warrants to purchase 6,000 shares
of the Company's common stock. Pursuant to the resolution on April 12,
1993, adjusting the per share amount from $10.00 to $2.50, Mr.
Bernstein paid $60 and executed a five year non-interest bearing note
to the Company for $14,940. The Note is non-recourse and the only
security pledged for the obligation is the stock purchased. The
promissory note was extended to the year 2003.
. In 1998, the Company issued 2,430,000 shares of its common stock to
Mr. Bernstein in exchange for the cancellation of $170,000 of
indebtedness.
b. In 1998, the Company issued to a Director 302,190 shares of its common
stock for consulting services valued at $30,219
F-26
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
c. In 1998, the Company granted warrants to Mr. Bernstein and Mr. Joel
Freedman to acquire 1,800,000 and 200,000 shares of the Company's
Common Stock, respectively, at a price of $.10 a share. These warrants
were cancelled in 1999.
d. In 1999, the Company issued 2,000,000 shares of its Common Stock in
exchange for the cancellation of $100,000 of indebtedness owed its
President.
e. During 2000, the President advanced the Company $8,000 and received
$39,500 from the Company. The outstanding amount due from the
President as of December 31, 2000 is $22,052. The amount of accrued
interest charged to operations on the President's loans in 1998, 1999
were $8,425, and $3,516, respectively. The amount of interest credited
to operations for 2000 totaled $822.
As of December 31, 2000, the Company accrued $40,000 of unpaid
compensation owed its President.
f. On May 25, 2000, the Company issued its President 4,650,000 shares its
common stock in exchange for $4,650 and a $1,855,350 non-recourse
promissory note bearing interest at an annual rate of 8%. On the same
day, the Company issued 350,000 shares its common stock to a Director
in exchange for $350 and a $139,650 non-recourse promissory note
bearing interest at an annual rate of 8%. Both notes mature on May 25,
2005, when the principal and accrued interest becomes fully due and
payable. At the date of issuance, the shares were valued by the
Company at $.40 per share.
g. On October 27, 2000, the Company issued 4,183,675 shares to its
President for future compensation pursuant to a Stock Escrow/Grant
Agreement. Under the terms of the agreement, the President is required
to hold these shares in escrow. While in escrow, the President cannot
vote the shares but has full rights as to cash and non-cash dividends,
stock splits or other change in shares. Any additional shares issued
to the President by reason of the ownership of the 4,183,675 shares
will also be escrowed under the same terms of the agreement.
Upon the exercise by certain holders of Company options or warrants or
upon the need by the Company, in the sole discretion of the Board, to
issue common stock to certain individuals or entities, the number of
shares required for issuance to these holders will be returned from
escrow by the President thereby reducing the number of shares he
holds. The shares held in escrow are non-transferable and will be
granted to the Company's President only upon the exercise or
expiration of all of the options and warrants, the direction of the
Board, in its sole discretion, or the mutual agreement by the
President and the Board of Directors to terminate the agreement. The
Company valued these shares at par. Upon the actual grant of the
remaining shares to the President, the shares issued will be valued
its market value when issued and charged to operations as
compensation.
F-27
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCK-BASED COMPENSATION PLANS
a In 1996, the Company adopted the 1996 Stock Option Plan and reserved
1,700,000 shares of Common Stock for distribution under the Plan.
Eligible Plan participants include employees, advisors, consultants,
and officers who provide services to the Company. A Committee
appointed by the Company's Board of Directors determines the option
price and the number of shares subject to each option granted. In the
case of Incentive Stock Options granted to an optionee who owns more
than 10% of the Company's outstanding stock, the option price shall be
at least 110% of the fair market value of a share of common stock at
date of grant. In 2000, the Company increased the number of reserved
shares to 6,800,000.
In 1998, the Company granted options to acquire 900,000 shares of
which 500,000 shares were exercised for $125,000. In addition, under
the Plan, the Company issued additional 50,000 shares for consulting
services. The Company charged the fair value of the 50,000 shares of
$5,000 to operations.
In 1999, the Company granted options to acquire 775,000 shares of
Common Stock through the Plan. The Company did not issue any shares in
1999 under the Plan.
b. In 1998, the Company adopted the 1998 Stock Plan and reserved 800,000
shares of Common Stock for distribution under the plan. The Plan was
adopted to provide a means by which the Company could compensate key
employees, advisors, and consultants by issuing them stock in exchange
for services and thereby conserve the Company's cash resources. A
Committee of the Board of Directors determines the value of the
services rendered and the related number of shares to be issued
through the Plan for these services. In 2000, the Company increased
the number of reserved shares to 6,800,000.
In 1998, the Company issued 310,000 shares of Common Stock through the
plan in exchange for consulting services. The Company valued these
shares at $31,000, the fair value of the services rendered.
The following is summary of the 1996 and 1998 Stock option plans:
F-28
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Material Technologies, Inc.
Reconcilation of Stock Option Plans
1996 STOCK OPTION PLAN 1998 STOCK OPTION PLAN 1998 STOCK PLAN
---------------------- -------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ------------ ------------ ----------- ---------
OUTSTANDING JAN 1, 1997 1) - $ - - $ - - $ -
========= ========= ============ ============ =========== =========
GRANTED - $ - - $ - $ -
EXERCISED - $ - - $ - $ -
FORFIETED - $ - - $ - $ -
--------- --------- ------------ ------------ ----------- ---------
OUTSTANDING JAN 1, 1998 - $ - - $ - - $ -
========= ========= ============ ============ =========== =========
GRANTED - $ - 900,000.00 $ 0.64 310,000.00 $ 0.10
EXERCISED - $ - 550,000.00 $ 0.19 310,000.00 $ 0.10
FORFIETED - $ - - $ - - $ -
--------- --------- ------------ ------------ ----------- ---------
OUTSTANDING DEC 31, 1998 - $ - 350,000.00 $ - - $ -
========= ========= ============ ============ =========== =========
GRANTED - $ - 750,000.00 $ 0.25 - $ -
EXERCISED - $ - 100,000.00 $ 0.35 - $ -
FORFIETED - $ - - $ - $ -
--------- --------- ------------ ------------ ----------- ---------
OUTSTANDING DEC 31, 1999 - $ - 1,000,000.00 $ - $ - $ -
========= ========= ============ ============ =========== =========
GRANTED - $ - - $ 6,800,000 $ -
EXERCISED - $ - 50,000.00 $ 0.25 5,894,500 $ 0.41
FORFIETED - $ - - $ - $ -
--------- --------- ------------ ------------ ----------- ---------
OUTSTANDING DEC 31, 2000 - $ - 950,000.00 $ - $905,500.00 $ -
========= ========= ============ ============ =========== =========
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 1998 $ 0.19
============
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 1999 $ 0.00
============
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED
DURING 2000 $ 0.00
============
1) Plan transferred to SecureFone America in February 1997 reoganization
F-29
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
In January 2001, the Company's Board of Directors authorized the
issuance of 450,000 shares of its Common Stock to individuals for
legal and consulting services.
In February 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its Common Stock to the Company's
President for past compensation due valued at $.10 per share.
F-30