Form 10-K for Material Technologies Inc
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number - 33-23617
MATERIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4622822
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 707, 11661 San Vicente Boulevard,
Los Angeles, California 90049
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 208-5589
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities Registered pursuant to section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)
The aggregate market value of the common stock held by non-affiliates of
the registrant as of March 20, 2003, was $1,301,361 based on the average of the
bid and asked prices of $.015 as reported by the Over The Counter Electronic
Bulletin Board on such date.
1
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the last practicable date.
As of March 20, 2003, there were 117,928,688 shares of common stock, $.001
par value issued and outstanding. In addition, At March 20, 2003, the Company
held in reserve 101,342,800 shares of which 100,000,000 shares were held
pursuant to the terms of the Company's Straight Documentary Credit (See Note 8i
to the accompanying financial statements) and 1,342,800 shares were held in
reserve pursuant to the terms of the settlement with a consultant (see Note 8j
of the financial statements.)
As of March 20, 2003, there were 300,000 shares of Class B Common Stock,
$.001 par value issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
There is no annual report, proxy statement, or prospectus to incorporate by
reference.
The S-1 Registration Statement for Material Technologies, Inc., effective
July 31, 1997 with exhibits is incorporated by reference. The SB-2 Registration
Statement and related amendment filed on February 7, 2002, for Material
Technologies, Inc., with exhibits is also incorporated by reference, as is the
SB-2 Registration Statement filed by the Company on August 8, 2002, with
exhibits and as amended thereafter.
PART I
MATERIAL TECHNOLOGIES, INC.
ITEM 1.-BUSINESS
We are engaged in research and development of metal fatigue detection,
measurement, and monitoring technologies. As such, we are developing a
comprehensive system of monitoring devices for metal fatigue measurement. We are
a development stage company doing business as Tensiodyne Scientific Corporation.
Our efforts are dedicated to developing devices and systems that indicate
the true fatigue status of a metal component. We have developed two products,
with a third product now under development. The first is a small, extremely
simple device that continuously integrates the effect of fatigue loading in a
structural member, called a Fatigue Fuse. The second an instrument that detects
very small cracks and is intended to determine crack growth rates, is the
Electrochemical Fatigue Sensor. It has demonstrated that it can detect cracks,
in the laboratory, as small as 10 microns (0.0004 inches), which is smaller than
any other practical technologies, as acknowledged by the United States Air Force
and confirmed by Rockwell Scientific Corporation. We believe that nothing
comparable to this instrument currently exists in materials technology.
2
Both devices are pioneering technology in the fatigue field that we believe
provide cutting-edge solutions in materials technology. Both products are
protected by patents: we hold the patents on the Fatigue Fuse and license the
technology on the Electrochemical Fatigue Sensor.
Another product currently under development is a borescope, which comprises
a fiber optic bundle and light source together with a working channel, through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures such as the interior of jet turbine engines.
The fiber optic bundle provides very clear video resolution, utilizing a
video camera integrated in the borescope handle. Images are then displayed on a
monitor and can be recorded. The borescope is derived from similar devices in
wide use in medicine. Its uniqueness is its small diameter and its capability
for applying multiple sensors, such as ultrasound and/or eddy current. Developed
under United States Air Force auspices to inspect internal components of fully
assembled jet turbine engines using the existing inspection holes in assembled
engine outer surfaces, it can be used to access remote areas of bridges and
other structures to monitor fatigue and other cracks, permitting good visual
access to otherwise inaccessible areas.
We were formed as a Delaware corporation on March 4, 1997. It is the
successor to the business of Material Technology, Inc., a Delaware corporation,
also doing business as Tensiodyne Scientific, Inc. Material Technology, Inc. was
the successor to the business of Tensiodyne Corporation that began developing
the fatigue fuse in 1983. Our two predecessors, Tensiodyne Corporation and
Material Technology, Inc. were engaged in developing and testing the Fatigue
Fuse and, beginning in 1993, developing the Electrochemical Fatigue Sensor.
The Fatigue Fuse
The Fatigue Fuse is designed to be affixed to a structure to give warnings
as pre-selected portions of the fatigue life have been used up (i.e., how far to
failure the structure has progressed). It warns against a condition of
widespread generalized cracking due to fatigue.
The Fatigue Fuse is a thin piece of metal similar to the material being
monitored. It consists of a series of parallel metal strips connected to a
common base, much as fingers are attached to a hand. Each "finger" has a
different geometric pattern, called "notches," defining its boundaries. Each
finger incorporates a design specific notch near the base. By applying the laws
of physics to determine the geometric contour of each notch, the fatigue life of
each finger is finite and predictable. When the fatigue life of a finger (Fuse)
is reached, the Fuse breaks.
By implementing different geometry for each finger in the array, different
increments of fatigue life are observable. Typically, notches will be designed
to facilitate observing increments of fatigue life of 10% to 20%. By
mechanically attaching or bonding these devices to different areas of the
structural member of concern, the Fuse undergoes the same fatigue history
(strain cycles) as the structural member. Therefore, breakage of a Fuse
indicates that an increment of fatigue life has been reached for the structural
member. The notch and the size and shape of the notch concentrate energy on each
finger. The Fuse is intimately attached to the structural member of interest.
Therefore, the Fuse experiences the same load and wear history as the member.
Methods are available for remote indication of Fuse fracturing.
3
We believe that the Fatigue Fuse will be of value in monitoring aircraft,
ships, bridges, conveyor systems, mining equipment, cranes, etc. No special
training will be needed to qualify individuals to report any broken segments of
the Fatigue Fuse to the appropriate engineering authority for necessary action.
The success of the device is contingent upon our successful development and
marketing of the Fatigue Fuse, and no assurance can be given that we will be
able to overcome the obstacles relating to introducing a new product to the
market. To determine its ability to produce and market the Fatigue Fuse, we need
substantial additional capital and no assurance can be given that needed capital
will be available.
In a new structure, we generally assume there is no fatigue and can thus
design the Fatigue Fuse for 100% of its life potential. But in an existing
structure, one that has experienced loading and wear, we must determine the
fatigue status of that structural member so we can design the Fatigue Fuse to
monitor the remaining fatigue life potential.
The Electrochemical fatigue sensor ("EFS")
The EFS is a device that employs the principle of electrochemical/
mechanical interaction to find cracks. It is an instrument that detects very
small cracks and is intended to determine crack growth rates. The
Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can
detect cracks as small as 10 microns (0.0004 inches), which is smaller than any
other practical technologies, as acknowledged by the United States Air Force and
Rockwell Scientific Corporation. We believe that nothing comparable to this
instrument currently exists in materials technology.
The EFS functions by treating the location of interest (the target)
associated with the structural member as an electrode of an electrochemical
cell. By imposing a constant voltage-equivalent circuit as the control mechanism
for the electrochemical reaction at the target surface - current flows as a
function of stress action. The EFS is always a dynamic process; therefore stress
action is required, e.g. to measure a bridge structural member it is necessary
that cyclic loads be imposed, as normal traffic on the bridge would do. The
results are a specific set of current waveforms and amplitudes that is expected
to characterize and report fatigue damage i.e., fatigue cracks.
The borescope
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 borescope comprises a
fiber optic bundle and light source together with a working channel through
which certain non-destructive test sensors such as ultrasound and/or eddy
current devices can be passed, to inspect visually or manually inaccessible
regions of structures. The device as presently implemented has a maximum
diameter of 6 mm (0.236 inches) and length of 1.5m (60 inches.). Contained
within this diameter is a working channel of 2.8 mm (0.11 inches) diameter,
through which proprietary eddy current or ultrasonic sensors may be passed and
used to examine areas of interest.
4
The borescope's uniqueness is its small diameter and its capability for
applying multiple non-destructive test sensors. Developed under United States
Air Force auspices to inspect internal components of fully assembled jet turbine
engines using the existing inspection holes in assembled engine outer surfaces,
it can be used to access remote areas of bridges and other structures to monitor
fatigue and other cracks, permitting good visual access to otherwise
inaccessible areas.
During the quarter ended December 31, 2002, we announced preliminary
discussions to launch a joint venture with Optim, Incorporated of Sturbridge,
Massachusetts, which is intended to commercially introduce a new borescope
product known as the OptiSpec Flaw Detection System. This new product combines
remote visual inspection with ultrasonic and eddy current non-destructive
testing methods which rapidly and accurately determine if the observed
indication is, in fact, a flaw that merits evaluation or repair. Optim,
Incorporated designs, manufactures, markets and sells flexible endoscopy
products for both the medical and industrial markets. Our discussions with
Optim, Incorporated have resulted in a preliminary arrangement whereby we may
enter into a formal supply and license agreement with Optim enabling us to
access technology developed by Optim for our planned marketing and distribution
of the OptiSpec Flaw Detection System. Our early planning for our borescope
product includes our recent formation of a wholly-owned subsidiary, Matech
Aerospace, Inc., from which we intend to further develop, market and distribute
our borescope products. We are uncertain at this juncture when a formal supply
and license agreement will be entered into with Optim and if entered into, the
extent to which revenues may be generated from the commercial development of the
OptiSpec Flaw Detection System and when product sales will begin. No assurances
can be given by us at this time that we will be in a position to develop and
market the OptiSpec Flaw Detection System.
Development of our technologies
Status of the fatigue fuse
The development and application sequence for the Fatigue Fuse and EFS is
(a) basic research, (b) exploratory development, (c) advanced development, (d)
prototype evaluation, (e) application demonstration, and (f) commercial sales
and service. The Fatigue Fuse came first. The inventor, Professor Maurice Brull,
conducted the basic research at the University of Pennsylvania. We conducted the
advanced development, including variations of the adhesive bonding process, and
fabricating a laboratory-grade remote recorder for finger separation events that
constitute proper functioning of the Fatigue Fuse. The next step, prototype
evaluation, that encompasses empirical tailoring of Fuse parameters to fit the
actual spectrum loading expected in specific applications, needs to be done. The
tests associated with further development of the Fatigue Fuse include full-scale
structural tests with attached Fuses. A prototype of the Fatigue Fuse has been
designed, fabricated, and successfully demonstrated. The next tasks will be to
prepare an analysis for more efficient selection of Fuse parameters and to
conduct a comprehensive test program to prove the ability of the Fatigue Fuse to
accurately indicate fatigue damage when subjected to realistically large
variations in measuring stresses and strains in fatiguing metal. The final tasks
prior to marketing will be an even larger group of demonstration tests.
The Fatigue Fuse is at its final stages of testing and development. To
begin marketing, the Fuse will take from six to 12 months and cost approximately
$600,000, including technical and beta testing and final development. If
testing, development, and marketing are successful, we estimate we should begin
receiving revenue from the sale of the Fatigue Fuse within a year of receiving
the $600,000. However, we cannot estimate the amount of revenue that may be
realized from sales of the Fuse, if any.
5
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.
Status of the EFS
The existence and size of very small cracks can be determined by EFS, and
in this regard it appears superior in resolution to other current
non-destructive testing techniques. It has succeeded in regularly detecting
cracks as small as 40 microns in a titanium alloy, in a laboratory environment,
as verified by a scanning electronic microscope, and has proven to be capable of
detecting cracks down to 10 microns, as acknowledged by the Materials Laboratory
at Wright Patterson Air Force and confirmed by evaluations at Rockwell
Scientific Corporation. This is much smaller than the capability of any other
practical non-destructive testing method for structural components. There is
also a vast body of testing supporting successful use of this technology with
selected aluminum alloys. However, additional testing is required to verify EFS'
crack detection capabilities under various industrial environments which are
more representative of actual structures in the field, like a highway bridge or
aircraft fuselage.
Joint Technology Venture with Integrated Technologies, Inc.
By agreement dated January 1, 2003, a new co joint venture subsidiary we
formed, Integrated Technologies, Inc. a Delaware corporation and Austin Tech,
LLC, a Texas limited liability company, entered into a license agreement. We own
51% of the outstanding capital stock of Integrated Technologies, Inc. and Austin
Tech, LLC owns the remaining 49% of the outstanding capital stock. We jointly
formed Integrated Technologies, Inc. for the purpose of jointly developing,
marketing and licensing a new brand of remote transmittal monitoring products
from our combined technologies. Integrated Technologies, Inc. as the licensee of
the technologies owned by Austin Tech, LLC, has also entered into a form of
license agreement directly with us for the purpose of having access to our
technologies for joint development purposes. The license agreements granted to
Integrated Technologies, Inc. by Austin Tech, LLC and by us, expire on January
1, 2005 unless terminated earlier under the provisions of the agreements. The
terms of the licenses granted to Integrated Technologies, Inc. are exclusive,
royalty free and are geographically limited to certain territories described in
the license agreements, which include the United States, Canada, Middle Eastern
countries, several Northern European countries, Mexico and Brazil.
Government contract funding
Historically, we have generated contract revenue by seeking research and
development contracts awarded by agencies of the United States government, such
as the U.S. Air Force. In developing our contract revenue, we have enlisted the
assistance of research and development partners that have used us as
subcontractors in the research and development effort. In August 1996, we
executed an agreement entitled, "Teaming Agreement," with the Southwest Research
Institute and the University of Pennsylvania for coordinated research and
development efforts.
6
We have also entered into similar relationships with Universal Technology
Corporation, which is a government contractor that acts as a pass-through or
monitor of our contracts. Universal Technology Corporation has acted as the
prime contractor with the Air Force, and we function as a first tier
subcontractor. Other than our association with these groups as research and
development partners, we have no other affiliation. Our contract revenue from
all sources of research and development agreements concluded in the third
quarter of fiscal year 2002, and we do not have any additional contract revenue
anticipated during the next 12 months.
On February 25, 1997, the Southwest Research Institute was awarded from the
United States Air Force, a $2,500,000 phase one contract to determine the
feasibility of the EFS to improve the U.S. Air Force capability to perform
durability assessments of military aircraft, including air frames and engines
through the application of the EFS to specific military aircraft alloys. Our
share of this award was approximately $550,000. On June 18, 1998 Universal
Technology Corporation, one of our contracting partners, was awarded a second
contract in the amount of $2,061,642 to determine the applicability of the EFS
to improve the U. S. Air Force capability to perform durability assessments of
military aircraft, including both air frames and engines through the application
of the EFS to specific military aircraft alloys. Our share of this award was
approximately $538,000. On February 5, 1999, a third contract in the amount of
$2,000,000 was awarded to Universal Technology Corporation to continue and
expand the efforts for turbine engines. Our directly subcontracted share was
approximately $382,000. A fourth contract was awarded to Universal Technology
Corporation on November 3, 2000 in the amount of approximately $2,000,000 to
continue the borescope and EFS technologies, as well as alternate means of
fatigue sensing. This fourth contract has been fully performed. Our directly
subcontracted share is approximately $700,000. Accordingly, over the last four
years we have been awarded approximately $8,500,000 in research and develop
services covering the EFS. The results of this research are encouraging and
provide a basis for us and our contract partners to obtain additional funding.
However, we cannot provide any assurance that additional contract revenue will
be generated by us or received in the future.
Commercial markets for our products and technologies
No commercial application of our products has been arranged to date, but
the technology has matured to a point where we believe it can be applied to
certain markets. Our technology is applicable to many market sectors such as
bridges and aerospace as well as ships, cranes, power plants, nuclear
facilities, chemical plants, mining equipment, piping systems, and heavy iron.
We anticipate that our planned supply and licensing arrangement with Optim,
Incorporated for the commercial sale and distribution of the OptiSpec Flaw
Detection System, will begin to generate material product sales from the
borescope, in the third quarter of the current fiscal year. We cannot provide
assurances that the marketing and distribution of the OptiSpec Flaw Detection
System will in fact occur at any specific time in the future due to the
possibility that we may not enter into a formal agreements with Optim
Incorporated or if we do, we may experience delays or difficulties in the
initial marketing, sales and distribution of the product. Nor can we provide
assurances that our results of operations and our financial condition will
materially improve from the planned commercial distribution of the OptiSpec Flaw
Detection System.
7
Application of our technologies for bridges
Our EFS and fatigue fuse products primarily address the detection of
fatigue in structures such as bridges. In the United States alone there are more
than 610,000 bridges of which over 260,000 are rated by the Federal Highway
Administration as requiring major repair, rehabilitation, or replacement. Our
EFS and Fatigue Fuse products can be effectively used as fatigue detection
devices for all metal bridges located within the United States. Our detection
devices also address maintenance problems associated with bridge structures.
Although there are normal business imperatives, the bridge market is
essentially macro-economically and government policy driven. In our opinion,
only technology can provide the solution. The need for increased spending
accelerates significantly each year as infrastructure ages. The Federal
government has recently mandated bridge repair and detection through the passage
of the Intermodal Surface Transportation and Efficiency Act in 1991 and again
recently in the $200 billion, 1998 Transportation Equity Act. We do not
currently have contracts in place to install our fatigue detection products on
bridge structures within the United States.
Our patent protections
We are the assignee of four patents originally issued to Tensiodyne
Corporation. The first was issued on May 27, 1986, and expires on May 27, 2003.
It is titled "Device for Monitoring Fatigue Life" and bears United States Patent
Office Numbers 4,590,804. The second patent, titled "Method of Making a Device
for Monitoring Fatigue Life" was issued on February 3, 1987 and expires February
3, 2004, United States Patent Office Number 4,639,997. The third patent, titled
"Metal Fatigue Detector" was issued on August 24, 1993 and expires on August 24,
2010, United States Patent Number 5,237,875. The fourth patent, titled "Device
for Monitoring the Fatigue Life of a Structural Member and a Method of Making
Same," was issued on June 14, 1994 and expires on June 14, 2011, United States
Patent Number 5,319,982. In addition, we own a fifth patent, titled "Device for
Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,"
which was issued June 20, 1995, United States Patent Number 5,425,274, and
expires June 20, 2012.
Our patents are encumbered
The patents described in the preceding section are pledged as collateral to
secure the repayment of loans extended to us or indebtedness that we currently
owe. On August 30, 1986, we entered into a funding agreement with the Advanced
Technology Center, whereby ATC paid $45,000 to us for the purchase of a royalty
of 3% of future gross sales and 6% of sublicensing revenue. The royalty is
limited to the $45,000 plus an 11% annual rate of return. At December 31, 2000,
and 2001, the future royalty commitment was limited to $204,639 and $227,149,
respectively. The payment of future royalties is secured by equipment we use in
the development of technology as specified in the funding agreement, however, no
lien against our equipment or our patents in favor of ATC vests until we
generate royalties from product sales.
On May 4, 1987, we entered into a funding agreement with ATC whereby ATC
provided $63,775 to us for the purchase of a royalty of 3% of future gross sales
and 6% of sublicensing revenue. The agreement was amended August 28, 1987, and
as amended, the royalty cannot exceed the lesser of (1) the amount of the
advance plus a 26% annual rate of return or, (2) total royalties earned for a
term of 17 years. As with our first agreement with ATC, no lien or encumbrance
against our assets, including our patents, vests in favor of ATC until we
generate royalties from product sales. If we were to default on these payments
to ATC, our obligations relating to these agreements then become secured by our
patents, products and accounts receivable.
8
On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our
shareholders. We gave Mr. Sherman a promissory note due May 31, 2002 and we
pledged our patents as collateral to secure the repayment of this note. As of
the date of this prospectus, there is a first priority security interest in our
patents as collateral for the repayment of the amounts we owe to Mr. Baker. As
additional consideration for this loan, we granted to Mr. Baker, a 1% royalty
interest in the fatigue fuse and a 0.5% royalty interest in the Electrochemical
Fatigue Sensor. We are in default of the repayment terms of the note held by Mr.
Baker, and at the date of this prospectus, we owe Mr. Baker approximately
$60,000 in principal and accrued interest. Mr. Baker has not taken any action to
foreclose his interest in the collateral and we are in discussions with Mr.
Baker, with the expectation that we will cure any default in the note he holds
and avoid any foreclosure of his security interest held in our patents. We
believe, that although we have not yet cured our defaults on the loans to Mr.
Baker, our current communications with him suggest that Mr. Baker does not have
the present intention of foreclosing on the patents as collateral or the pursuit
of legal action against us to collect the balance due under our note.
Distribution of our products
Subject to available financing, we intend to exhibit the Fatigue Fuse and
the Electrochemical Fatigue Sensor at various aerospace trade shows and intend
to also market our products directly to end users, including aircraft
manufacturing and aircraft maintenance companies, crane manufactures and
operators, certain state regulatory agencies charged with overseeing bridge
maintenance, companies engaged in manufacturing and maintaining large ships and
tankers, and the military. Although we intend to undertake marketing, dependent
on the availability of funds, within and without the United States, no assurance
can be given that any such marketing activities will be implemented.
Competition
Other technologies exist which measure and indicate fatigue damage. Single
cracks larger than a minimum size can be found by nondestructive inspection
methods such as dye penetrate, radiography, eddy current, acoustic emission, and
ultrasonics. Tracking of load and strain history, to subsequently estimate
fatigue damage by computer processing, is possible with recording instruments
such as strain gauges and counting accelerometers. These methods have been used
for 40 years and also offer the advantage of having been accepted in the market,
whereas our products remain largely unproven. Companies marketing these
alternate technologies include Magnaflux Corporation, Kraut-Kermer-Branson,
Dunegan-Endevco, and Micro Measurements. These companies have more substantial
assets, greater experience, and more resources than ours, including, but not
limited to, established distribution channels and an established customer base.
The familiarity and loyalty to these technologies may be difficult to dislodge.
Because we are still in the development stage, we are unable to predict whether
our technologies will be successfully developed and commercially attractive in
potential markets.
9
Employee
The Company has four employees, Robert M. Bernstein, President and Chief
Executive Officer, a Secretary, and two part time engineers. In addition, the
Company retains consultants for specialized work.
ITEM 2. PROPERTIES
The Company leases an office at 11661 San Vicente Blvd., Suite 707, Los
Angeles, California, 90049. The space consists of 830 square feet and will be
adequate for the Company's current and foreseeable needs. The total rent is
payable at $2,348 per month through June 30, 2003. The Company has an option to
extend the lease at the same rent through December 31, 2003.
Matech owns a remote monitoring system and certain equipment that is being
used by the University of Pennsylvania for instructional and testing purposes.
The Company determined that the system has no future use and probably cannot be
sold. Therefore, the Company charged its full costs of $97,160 to operations in
1998.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Over-the-Counter Electronic
Bulletin Board maintained by the NASD ("Bulletin Board")under the symbol "MTEY."
From January 2001 through December 31, 2002, Matech's Common Stock was
quoted between a low bid of $.08 per share and a high bid of $2.875 per share on
the Bulletin Board. Such over-the-counter quotations reflect inter-dealer
prices, without retail markup, markdown, or commission and may not necessarily
represent actual transactions. The following chart shows the high and low bid
prices per share per calendar quarter from January 2001 to December 2002.
High Bid Price(1) Low Bid Price(1)
First Quarter 2001 $ .23 $ .09
Second Quarter 2001 $ .12 $ .08
Third Quarter 2001 $ .22 $ .084
Fourth Quarter 2001 $ .25 $ .10
First Quarter 2002 $ .27 $ .10
Second Quarter 2002 $ .10 $ .07
Third Quarter 2002 $ .02 $ .02
Fourth Quarter 2002 $ .015 $ .015
On December 31, 2002, there were 733 holders of record of the Company's
common stock and one holder of its Class B common stock. Our Class B common
stock is not quoted on the Bulletin Board.
10
No dividends on any of the Company's shares were declared or paid during
the years 2001 or 2002, nor are any dividends contemplated in the foreseeable
future.
At various times during the years 2001 and 2002, the Company issued common
stock to various persons which issuances we believe to be exempt from
registration under Section 4(2) of the Securities Act of 1933 or under
Regulation D promulgated under the Securities Act of 1933, and comparable state
law exemptions. Each and every such person that received shares of our common
stock had a pre-existing relationship with Matech and has been associated with
the Company in some way, is sophisticated in investment and financial matters,
and is familiar with the Company, its business, and its financial position.
Common stock issuances in 2003
On January 7, 2003, the Company issued 260,000 shares of its common stock
to Mr. Stephen Beck pursuant to the anti-dilution provisions of his settlement
agreement.
On January 22, 2003, the Company issued 2,000,000 shares of its common
stock for legal services.
On January 23, 2003, the Company issued 312,500 shares of its common stock
for consulting services.
On January 30, 2003, the Company issued 2,046,933 shares of its common
stock through its Regulation S offering.
On February 10, 2003, the Company issued 2,549,620 to various consultants
pertaining to its Regulation S offering.
On March 4, 2003, the Company issued 1,500,000 shares of its common stock
for legal services.
On March 11, 2003, the Company issued 300,000 shares of its common stock
for consulting services.
On March 11, 2003, the Company issued 1,500,000 shares of its common stock
for legal services.
On March 11, 2003, the Company cancelled 260,000 of its common stock that
was held in reserve for issuance to Mr. Beck pursuant to the anti-dilution
provisions of his settlement agreement.
Common stock issuances in 2002
Since the end of our last fiscal year, the Company has had a series of
transactions resulting in the issuance of shares of our common stock, some of
which shares are exempt from registration under the Securities Act of 1933, as
amended and some of which shares issued in exchange for services, were the
subject of registration on Form S-8 filed under the Securities Act of 1933.
Each of these transactions are described below:
On January 9, 2002, the Company issued 14,300 shares of its common stock
through its Regulation S offering.
11
On January 10, 2002, the Company issued 20,000 shares of its common stock
to a consultant for services rendered.
On January 17, 2002, the Company issued 213,500 shares of its common stock
through its Regulation S offering.
On January 22, 2002, the Company issued 40,000,000 shares of its common
stock to Allied Boston pursuant to the terms of the Straight Documentary Credit
as discussed in Note 8(i) to the financial statements.
On January 25, 2002, the Company issued 15,000 shares of its common stock
to a consultant for services rendered.
On January 30, 2002, the Company issued 296,500 shares of its common stock
through its Regulation S offering.
On February 11, 2002, the Company issued 4,000 shares of its common stock
to a consultant for services rendered.
Also on February 11, 2002, the Company issued 150,000 shares of its common
stock to a consultant for services rendered.
On February 13, 2002, the Company issued 400,000 shares of its common stock
to a consultant for services rendered.
On February 20, 2002, the Company issued 195,000 shares of its common
stock through its Regulation S offering.
On February 27, 2002, the Company issued 50,000 shares of its common stock
to a consultant for services rendered.
On February 28, 2002, the Company issued 250,000 shares of its common stock
to a consultant for services rendered.
Also on February 28, 2002, the Company issued 100,000 shares of its common
stock to a consultant for services rendered.
Also on February 28, 2002, the Company issued its Executive Assistant
25,000 shares of its common stock for services rendered.
Also on February 28, 2002 the Company issued 50,000 shares of its common
stock to a consultant for services rendered.
On March 1, 2002, the Company issued 100,000 shares of its common stock to
a consultant for services rendered.
Also on March 1, 2002, the Company issued 100,000 shares of its common
stock to a consultant for services rendered.
Also on March 1, 2002, the Company issued 580,824 shares of its common
stock through its Regulation S offering.
On March 12, 2002, the Company issued 5,000 shares of its common stock to
a consultant for services rendered.
12
Also on March 12, 2002, the Company issued 180,000 shares of its common
stock to a consultant for services rendered.
On March 13, 2002, the Company issued 125,000 shares of its common stock
for legal services. Also on March 13, 2002, the Company issued 150,000 shares of
its common stock to a consultant for services rendered.
On March 19, 2002, the Company issued 150,000 shares of its common stock
through its Regulation S offering.
On March 20, 2002, the Company issued 25,000 shares of its common stock to
the Company's executive assistant.
On March 26, 2002, the Company issued to two members of its advisory board
a total of 469,918 shares of its common stock for consulting services rendered.
On March 26, 2002, the Company issued 1,096,476 shares of its common stock
to the University of Pennsylvania pursuant to the terms of its licensing
agreement.
On March 27, 2002, the Company issued its executive assistant 25,000 shares
of its common stock.
On March 31, 2002, the Company issued 4,000 shares its common stock for
clerical services rendered.
On April 1, 2002, the Company issued to 120,000 shares of its common stock
for legal services rendered.
On April 5, 2002, the Company issued 2,046,580 shares of its common stock
through its Regulation S offering.
On April 10, 2002, the Company issued to 42,100 shares of its common stock
for legal services rendered.
On April 12, 2002, the Company issued to 105,000 shares of its common stock
for legal services rendered.
On April 22, 2002, the Company issued 154,100 shares of its common stock
through its Regulation S offering.
On April 23, 2002, the Company issued 550,000 shares of its common stock
for consulting services rendered.
On May 6, 2002, the Company issued 674,267 shares of its common stock to
various consultants.
On May 6, 2002, the Company issued 215,000 shares of its common stock for
legal services rendered.
On May 8, 2002, the Company issued 415,000 shares of its common stock
through its Regulation S offering.
On May 10, 2002, the Company issued 115,000 shares of its common stock for
legal services rendered.
13
On May 17, 2002, the Company issued 400,000 shares of its common stock for
consulting services rendered.
On May 21, 2002, the Company issued 1,000,000 shares of its common stock
for legal services rendered.
On May 27, 2002, the Company issued 562,704 shares of its common stock
through its Regulation S offering.
On May 29, 2002, the Company issued 50,000 shares of its common stock for
consulting services rendered.
On June 3, 2002, the Company issued 150,000 shares of its common stock for
consulting services rendered.
On June 3, 2002, the Company issued 50,000 shares of its common stock for
legal services rendered.
On July 3, 2002, the Company issued 1,000,000 shares of its common stock
for legal services rendered.
On July 3, 2002, the Company issued 250,000 shares of its common stock for
consulting services rendered.
On July 8, 2002, the Company issued 200,000 shares of its common stock for
legal services rendered.
On July 8, 2002, the Company issued 200,000 shares of its common stock for
consulting services rendered.
On July 26, 2002, the Company issued 1,000,000 shares of its common stock
to Mr. Stephen Beck for services rendered pursuant to a settlement agreement.
On July 26, 2002, the Company issued 3,563,300 shares of its common stock
through its Regulation S offering.
14
On August 5, 2002, the Company issued 2,000,000 shares of its common stock
to two employees for services rendered in connection for the development of the
fatigue fuse.
On August 5, 2002, the Company issued 230,000 shares of its common stock
for legal services.
On August 14, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.
On August 16, 2002, the Company issued 749,260 shares of its common stock
through its Regulation S offering.
On August 29, 2002, the Company issued 1,000,000 shares of its common stock
for legal services.
On September 5, 2002, the Company issued 300,000 shares of its common stock
for consulting services rendered.
On September 5, 2002, the Company placed in reserve 2,000,000 shares of its
common stock pursuant to the terms of the settlement agreement with Stephen Beck.
On September 5, 2002, the Company issued 75,000 shares of its common stock
for legal services.
On September 5, 2002, the Company issued 771,040 shares of its common stock
for services rendered in connection with its Regulation S offering.
On September 10, 2002, the Company issued 2,000,000 shares of its common
stock for consulting services.
On September 11, 2002, the Company issued 1,000,000 shares of its common
stock for legal services.
On September 11, 2002, the Company issued 2,500,000 shares of its common
stock for legal services.
On October 7, 2002, the Company issued 2,500,000 shares of its common stock
for consulting services.
On October 7, 2002, the Company issued its executive assistant 50,000
shares of its common stock.
On October 10, 2002, the Company issued 500,000 shares of its common stock
for services rendered in connection with its Regulation S offering.
On October 18, 2002, the Company issued 11,445,872 shares of its common
stock through its Regulation S offering.
On October 29, 2002, the Company issued 250,000 shares of its common stock
for consulting services.
On November 6, 2002, the Company issued 1,077,500 shares of its common
stock through its Regulation S offering.
On November 25, 2002, the Company issued 912,000 shares of its common stock
through its Regulation S offering.
On December 5, 2002, the Company issued 650,000 shares of its common stock
for consulting services.
On December 5, 2002, the Company issued 250,000 shares of its common stock
for legal services.
On December 15, 2002, the Company issued 1,000,000 shares of its common
stock to a member of the Company's advisory board.
On December 16, 2002, the Company issued 1,000,000 shares of its common
stock for legal services.
On December 17, 2002, the Company issued 3,950,000 shares of its common
stock through its Regulation S offering.
15
On December 18, 2002, the Company issued 13,000,000 shares of its common
stock to its president for past services. These shares were issued subject to
forfeiture in the event that our president is no longer employed by the Company.
In February 2002, the Company adopted the 2002 Stock Issuance/Stock Option
Plan, and reserved 20,000,000 shares of its common stock for distribution under
the Plan. At the date of this report, we have issued all shares of common stock
authorized by us under the 2002 Stock Issuance/Stock Option Plan. On March 4,
2003, we amended the 2002 Stock Issuance/Stock Option Plan by authorizing an
additional 20,000,000 shares of common stock for issuance under the plan.
Eligible Plan participants include employees, advisors, consultants, and
officers who provide services to the Company. The option price shall be 100% of
the fair market value of a share of common stock at either, a) date of grant or
such other day as the as the Board of Directors may determine. Options issued
under this plan expire five years from date of grant.
Common stock issuances in 2001
During 2001, the Company has had a series of transactions resulting in the
issuance of shares of our common stock, all of which we believe were exempt from
registration under the Securities Act of 1933. Each of these transactions is
described below:
On January 8, 2001, the Company issued 100,000 shares of its common stock
to Mr. Campbell Laird, a member of the Company's advisory board, for consulting
services.
Also on January 8, 2001, the Company issued 50,000 shares of its common
stock to a consultant for services rendered.
On January 9, 2001, the Company issued 100,000 shares each to Mr. John
Goodman and Mr. William Berks, two employees, pertaining to services rendered on
the Company's research project. Mr. Goodman is also a member of the Company's
Board of Directors.
On January 11, 2001, the Company issued 100,000 shares of its common stock
to the attorney handling the Beck matter for legal services.
On February 19, 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its common stock to the Company's President for
past compensation due.
On April 6, 2001, the Company issued a consultant 200,000 shares of its
common stock for services rendered.
On April 17, 2001, the Company issued a consultant 250,000 shares of its
common stock for services rendered.
On April 20, 2001, the Company issued to two consultant 50,000 shares each
of its common stock for marketing services rendered.
On May 3, 2001, the Company issued 100,000 shares of its common stock to
Mr. Berks for services rendered on the Company's research project.
16
Also on May 3, 2001, the Company issued 100,000 shares of its common stock
to Mr. Thomas Root, a member of the Company's advisory board, for consulting
services.
On June 8, 2001, the Company issued a consultant 1,000,000 shares of its
common stock for past marketing services rendered.
On June 12, 2001, the Company issued its Executive Assistant 25,000 shares
of its common stock for services rendered.
On July 5, 2001, the Company issued to an attorney 50,000 shares of its
common stock for legal services rendered.
On July 26, 2001, the Company issued a consultant 200,000 shares of its
common stock for services rendered.
On August 6, 2001, the Company issued to Mr. Samuel Schwartz, a member of
the Company's advisory board, 125,000 shares of its common stock for services
rendered.
On August 9, 2001, the Company issued 265,000 shares of its common stock to
the attorney handling the Beck matter for legal services rendered.
On August 29, 2001, the Company issued 50,000 shares of its common stock to
one consultant and 300,000 shares of its common stock to Mr. Samuel Schwartz,
for services rendered.
On September 6, 2001, the Company issued a consultant 37,500 shares of its
common stock for services rendered.
On September 14, 2001, the Company issued a consultant 50,000 shares of its
common stock for services rendered.
On September 19, 2001, the Company issued a consultant 125,000 shares of
its common stock for services rendered.
On October 8, 2001, the Company issued to Mr. Goodman and Mr. Berks,
300,000 shares of its common stock each for services rendered in connection with
the Company's research project.
On October 16, 2001, the Company issued a consultant 50,000 shares of its
common stock for services rendered.
On October 18, 2001, the Company issued its Executive Assistant 20,000
shares of its common stock for services rendered.
On October 23, 2001, the Company issued to the attorney handling the Beck
matter, 150,000 shares of its common stock for services rendered.
On October 24, 2001, the Company reserved for issuance 60,000,000 shares of
its common stock to Allied Boston pursuant to the terms of the Straight
Documentary Credit as discussed in Note 8(i) to the financial statements.
On October 25, 2001, the Company issued 697,853 as additional fees p
ertaining to its Regulation S offering.
On October 30, 2001, the Company issued 4,538,458 shares of its common
stock pursuant to its Regulation S offering.
On November 5, 2001, the Company issued 84,500 shares of its common stock
pursuant to its Regulation S offering.
17
On November 6, 2001, the Company issued 350,000 shares of its common stock
to an attorney assisting in the Beck matter for legal services rendered.
On November 14, 2001, the Company issued a consultant 150,000 shares of its
common stock for services rendered.
On November 17, 2001, the Company issued to the same consultant 107,500
shares of its common stock for services rendered.
On November 19, 2001, the Company issued 10,000 shares of its common stock
pursuant to its Regulation S offering.
On November 20, 2001, the Company issued 144,000 shares of its common stock
pursuant to its Regulation S offering.
On November 28, 2001, the Company issued 90,000 shares of its common stock
pursuant to its Regulation S offering.
On December 4, 2001, the Company issued 81,400 shares of its common stock
pursuant to its Regulation S offering.
On December 20, 2001, the Company issued to three consultants a total of
530,000 shares of its common stock for marketing services rendered.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company is derived from the Company's
financial statements. The selected financial data should be read in conjunction
with the Company's financial statements and the notes to the financial
statements that are attached hereto.
Fiscal Year Ending December 31, Inception
to
December 31,
1998 1999 2000 2001 2002 2002
(restated) (restated)
___________ ___________ ___________ ___________ ___________ ___________
Net Sales $ - $ - $ - $ - $ - $ -
___________ ___________ ___________ ___________ ___________ ___________
Income from Research
Development Contract $ 373,324 $ 924,484 $ 635,868 $ 1,579,823 $ 461,323 $ 5,024,812
Income (Loss) from
Continued Operations $ (549,187) $ (539,283) $(1,241,690) $(3,546,574) $(3,785,818) $(12,185,680)
___________ ___________ ___________ ___________ ___________ ___________
Income (Loss) from
Continued Operations
Per Common Share $ (.06) $ (.04) $ (.06) $ (.11) $ (.06)
___________ ___________ ___________ ___________ ___________ ___________
Basic Weighted
Average - Common
Shares Outstanding 8,782,808 12,242,534 18,900,019 33,640,393 63,073,970
___________ ___________ ___________ ___________ ___________ ___________
18
Total Assets $ 233,746 $ 250,041 $ 108,776 $ 516,282 $ 372,620
___________ ___________ ___________ ___________ ___________ ___________
Total Liabilities $ 618,582 $ 719,178 $ 870,586 $ 1,154,696 $ 2,466,937
___________ ___________ ___________ ___________ ___________ ___________
Redeemable Preferred
Stock $ - $ - $ - $ - $ -
___________ ___________ ___________ ___________ ___________ ___________
Total
Stockholders'
Equity (Deficit) $ (485,432) $ (620,545) $ (710,459) $ (638,414) $(2,094,317)
___________ ___________ ___________ ___________ ___________ ___________
Dividends $ - $ - $ - $ - $ -
___________ ___________ ___________ ___________ ___________ ___________
Statements of operations for the years 2000 and 2001 have been restated to
reflect shares issued at the respective share's market value at date of
issuance.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of operations, capital resources, and
liquidity pertains to the activities of the Company for the years ended December
31, 2000, 2001 and 2002.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
In 2002, we completed our two subcontracts on programs with the United
States Air Force for application engineering and enhancement of the EFS and
earned $461,323 in contract revenue. In 2001, and 2000, we earned $1,579,823,
and $635,868, respectively, from the same two subcontracts. In 2002, interest
income totaled $52,782 of which $729 was earned from investments and the
remaining $52,053 was accrued on loans due the Company from its president, and
from stock subscriptions due from the president, a director, and a third party.
In 2001, interest income totaled $102,283, of which $657 was from investments
and the remaining $101,626 was accrued on loans due the Company from its
president, and from stock subscriptions due from the president, a director, and
a third party. In 2000, interest income was $103,419, the majority of which
pertains to interest accruing on subscriptions due from the Company's president
and a director. The major difference in the amount of accrued interest in 2002
as compared to 2001 and 2000 pertains to the June 2001 modification of certain
stock subscription agreements that reduced the amounts due from the president
and a director from $1,995,000 to $495,000. Our sole source of contract revenue
from our research and development contracts with the United States Air Force
concluded in the second quarter of 2002 and we have not replaced any contract
revenue since that contract concluded.
Costs and expenses
Expenses for 2001 and 2000 have been restated to reflect the value of all
services which were compensated through the issuance of our common stock at the
quoted market price of the shares issued on the date of issuance.
Research and development costs were $665,435, $1,493,628, and $496,501, for
2002, 2001 and 2000, respectively. Of the research and development costs
incurred, $400,201, $1,069,671, and $409,823 related to subcontractor costs for
the years 2002, 2001 and 2000,respectively. General and administrative costs
were $3,581,706, $3,632,769, and $1,381,047 for 2002, 2001 and 2000,
respectively.
19
In 2002, actual cash paid to our President, Mr. Bernstein, totaled
$110,018. We also accrued an additional $9,982 in additional compensation to Mr.
Bernstein. In addition, we issued Mr. Bernstein 13,000,000 shares of common
stock for past services having a market value of $260,000. These shares were
issued subject to forfeiture in the event that Mr. Bernstein is no longer
employed by the Company. Legal fees in 2002 amounted to $1,922,861 of which
$1,599,200 relates to the settlement of the litigation that was pending with
Stephen Beck. Of the $1,599,200, $1,481,895 is evidenced by a promissory note,
$112,193 was paid through the issuance of 2,027,639 shares of our common stock,
and $5,112 paid in cash. We also incurred $314,729 in the filing of our
registration statement on Form SB-2, of which $297,500 was paid through the
issuance of 7,750,000 shares and $17,229 was paid in cash. Other expenses in
2002 included consulting services of $940,160, of which $662,098 was paid
through the issuance of 10,881,118 shares of our common stock, office salaries
of $36,968, telephone expense of $23,284, travel expenses of $57,797, accounting
and auditing fees of $71,317 and rent of $28,176.
In 2001, actual cash compensation paid to our President totaled $90,000. We
also accrued $30,000 in additional compensation due to Mr. Bernstein. We charged
to operations $1,500,000 due to a reduction in the balance of the non-recourse
promissory note due to us by Mr. Bernstein and another Director, Joel Freedman,
in connection with their purchases of our common stock. Initially, we agreed to
issue 4,650,000 and 350,000 shares of our class "A" common stock to Messrs.
Bernstein and Freedman, respectively, in exchange for their issuance to us of
non-recourse promissory notes in the amount of $1,855,350 by Mr. Bernstein and
$139,650 by Mr. Freedman. At the time of their purchase of our shares, the
market price of our common stock was approximately $.60 per share. Both
promissory notes mature on May 25, 2005 and accrue interest at 8% per annum. On
June 18, 2001, we authorized the $1,500,000 reduction of the combined principal
amount of these notes since the market value of our common stock declined to
approximately $.10 per share. This reduction and charge to operations was deemed
to be fair and reasonable under the circumstances.
We issued 6,000,000 shares of restricted common stock to Mr. Bernstein
during 2001, valued at $1,128,000, for past compensation due to him. Previously,
the financial statements have reflected the value of the shares at $420,000, the
fair market value of the services rendered. We revalued the shares issued to Mr.
Bernstein as a result in the policies adopted by the U.S. Securities and
Exchange Commission indicating that all shares issued in exchange for services
should be valued at the quoted market price of the shares issued on the date of
issuance. These 6,000,000 shares have been issued subject to certain
restrictions limiting the President's ability to sell or transfer the shares.
Other expenses in 2001 included consulting fees of $477,671, of which
$281,635 was paid through the issuance of 2,275,000 shares of our common stock,
legal fees of $256,736, of which $138,750 was paid through the issuance of
915,000 shares of our common stock, accounting fees of $51,120, travel expenses
of $42,092, office salaries of $36,225, office expense of $34,880, rent of
$29,468, telephone expense of $13,838 and a write off of our $33,000 investment
in Antaeus Research, LLC.
20
The major costs in 2000 were officers' salaries of $127,183, consulting
fees of $856,202, legal fees of $206,198, accounting and auditing fees of
$23,063 and travel costs of $26,443.
Interest charged to operations for 2002, 2001 and 2000, amounted to
$118,460, $70,468 and $60,634, respectively. Of the $118,460 incurred in 2002,
$76,078 was accrued on our promissory note due to the University of Pennsylvania
and $37,271 was accrued on the promissory note due for legal fees on the
settlement with Stephen Beck. Of the $70,468 incurred in 2001, $64,472 was
accrued on the promissory note due to the University of Pennsylvania. Of the
$60,634 incurred in 2000, $54,638 was accrued on the promissory note due to the
University of Pennsylvania.
Liquidity and capital resources
In 2002, we raised $892,261 net of offering costs through the issuance of
28,046,766 shares of our common stock through a Regulation S offering and
through the offer and sale of 143,250 shares of our preferred stock. We also
received $175,646 during 2002 from our subcontracts with the Air Force. Of the
$1,067,907 we received, we used $927,439 in our operations, we advanced $33,547
to our President and paid $29,608 for equipment
In 2001, we raised a net $286,567 through the issuance of 4,932,358 shares
of its common stock through our Regulation S offering. Also in 2001, we entered
into an agreement with Allied Boston International for a Straight Documentary
Credit for $12,500.000.The funding under this instrument is not guaranteed and
to date, we have not received any funding under this letter of credit
arrangement. If the $12,500,000 under the letter of credit is received, we
believe the amount should be sufficient to fund the completion of our research
projects and bring our products to market. Although Mr. Bernstein intends to
continue to loan us working capital as required while we seeks additional
financing, he is under no obligation to do so. We do not expect to receive any
additional material financing from other long time investors, although we
continue to undertake a variety of efforts to locate suitable debt or equity
financing.
During 2000, the Company received $746,732 from our research and
development contract, $22,490 from the sale of our common stock, and $251,798
from the sale of DCH Technologies, Inc., shares. Our President advanced $8,000
and received $39,500 back from the Company. In 2000, we spent $1,035,470 in our
operations and $15,000 was invested in Antaeus Research, LLC.
Critical accounting issues
The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. In consultation with its
Board of Directors, the Company has identified three accounting policies that it
believes are key to an understanding of its financial statements. These are
important accounting policies that require management's most difficult,
subjective judgments.
21
The first critical accounting policy relates to revenue recognition. Income
from the Company's subcontracts with the Air Force is recognized at the time
services are rendered and billed for.
The second critical accounting policy relates to research and development
expense. Costs incurred in the development of the Company's fatigue fuse and the
electrochemical sensor are expensed as incurred.
The third critical accounting policy relates to the valuation of non-
monetary consideration issued for services rendered. The Company values all
services rendered in exchange for its common stock at the quoted price of the
shares issued at date of issuance. All other services provided in exchange for
other non-monetary consideration is valued at either the fair value of the
services received or the fair value of the consideration relinquished, whichever
is more readably determinable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS
Attached hereto and incorporated herein by reference are audited financial
statements of the Registrant as of December 31, 2002, 2001, and 2000, prepared
in accordance with Regulation S-X (17 CFR Sec.210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, office, and principal occupation of the executive officers
and directors of Matech and certain information relating to their business
experiences are set forth below:
NAME AGE POSITION
Robert M. Bernstein 68 President/Chief Executive and Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 43 Secretary/Director
Dr. John Goodman 68 Chief Engineer/Director
William I. Berks 72 Vice President
The Term of the directors and officers of Matech is until the next annual
meeting or until their successors are elected.
ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.
Robert M. Bernstein is 68 years of age. He received a Bachelor of Science
degree from the Wharton School of the University of Pennsylvania in 1956. From
August 1959 until his certification expired in August 1972, he was a Certified
Public Accountant licensed in Pennsylvania. From 1961 to 1981, he was a
consultant specializing in mergers, acquisitions, and financing. From 1981 to
1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay
Enterprises, Inc. of Philadelphia, PA, an oil and gas exploration company. In
December 1985, he formed a research and development partnership for Tensiodyne,
funding approximately $750,000 for research on the Fatigue Fuse. In October
1988 he became Chairman of the Board, President, Chief Financial Officer, and
CEO of Matech 1 and retained these positions with the Company after the spin off
from Matech 1 on July 31, 1997.
22
JOEL R. FREEDMAN, SECRETARY/DIRECTOR. Joel R. Freedman is 43 years of age. From
October 1989 until the present, Mr. Freedmen holds the position of Secretary and
a Director of the company. Mr. Freedman attends board meetings and provides
advice to the Company as needed. Since 1983, he has been president of Genesis
Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania. Since
January 1, 2000, he has been a Senior Vice President of PMG Capital Corp., a
securities brokerage and investment advisory firm in West Conshohocken,
Pennsylvania. His duties there are a full-time commitment. Accordingly, he
does not take part in Matech's daily activities. He is not a director of any
other company.
DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR. Dr. John W. Goodman is 68 years
of age. He is retired from TRW Space and Electronics and was formerly Chairman
of the Aerospace Division of the American Society of Mechanical Engineers. He
holds a Doctorate of Philosophy in Materials Science that was awarded with
distinction by the University of California at Los Angeles in 1970. In 1957, he
received a Masters of Science degree in Engineering Mechanics from Penn State
University and in 1955 he received a Bachelor of Science degree in Mechanical
Engineering from Rutgers University. From 1972 to 1987, Dr. Goodman was with
the U. S. Air Force as lead Structural Engineer for the B-1 aircraft; Chief of
the Fracture and Durability Branch, and Materials Group Leader, Structures
Department, Aeronautical Systems Center, Wright-Patterson Air Force Base. From
1987 to December 1993, he was on the Senior Staff, Materials Engineering
Department of TRW Space and Electronics. He has been Chief Engineer for
Development of Matech's products since May 1993. Over the last four years he
has consulted part time for the Company.
William Berks- Vice-President of Government Projects. He managed the previous
Matech contracts for the development of EFS at the University of Pennsylvania,
Southwest Research Institute, and Optim, Inc. Mr. Berks has a B. Aero. E and MS
in Applied Mechanics from Polytechnic Institute of New York and MS in Industrial
Eng., Stevens Institute of Technology . With Matech since 1997. He has over 30
years experience in spacecraft mechanical systems engineering. He retired from
TRW in November 1992 where he was employed for 26 years in a variety of
management positions: Manager of the Mechanical Design Laboratory, the
engineering design skill center for the design and development of spacecraft
mechanical systems, which had as many as 350 individuals: Manager of the
Advanced Systems Design Department, which was responsible for mechanical systems
design for all spacecraft project: Assistant Project Manager for Mechanical
Subsystems for a major spacecraft program, which included preparation of plans,
specifications and drawings, supervision of two major subcontracts, and
responsibility for flight hardware fabrication and testing. He holds six
patents.
Our advisory board
Since 1987, the Company and its predecessors have had an Advisory Board
consisting of very senior experienced businessmen and technologists, most of
whom are nationally prominent. These individuals consult with the Company on an
as needed basis. Members of the Advisory Board serve at will. The Advisory
Board advises Matech's Management on technical, financial, and business matters
and may in the future be additionally compensated for these services. A brief
biographical description of the members of the advisory board is as follows:
23
ADM. ROBERT P. COOGAN, USN (Ret.). Robert P. Coogan, age 75, retired from a
distinguished naval career spanning 40 years during which he held numerous posts
including: Commander U.S. Third Fleet, Commander Naval Air Force - U.S. Pacific
Fleet, Commandant of Midshipmen - U.S. Naval Academy, and Chief of Staff -
Commander Naval Air Force - U.S. Atlantic Fleet. From 1980 to 1991 he was with
Aerojet General Company and served as Executive Vice President of Aerojet
Electrosystems Co. from 1982-1991. He has his BS in Engineering from the US
Naval Academy and MA in International Affairs from George Washington University.
ROBERT F. CUSHMAN, ESQ. Mr. Cushman is a partner in the Philadelphia office of
Pepper Hamilton LLP, is also the permanent chairman of the Andrews Conference
Group Construction Super Conference, and is the organizing chairman of the
Forbes Magazine Conferences on Worldwide Infrastructure Partnerships, Rebuilding
America's Infrastructure Conference, Alternative Dispute Resolution, the Forbes/
Council of the Americas Latin American Marketing Conference and the Forbes
Environmental Super Conference.
CAMPBELL LAIRD. Campbell Laird, age 63, received his Ph.D. in 1963 from the
University of Cambridge. His Ph.D. thesis title was "Studies of High Strain
Fatigue." He is presently Professor and graduate group Chairman in the
Department of Materials, Science & Engineering at the University of
Pennsylvania. His research has focused on the strength, structure, and fatigue
of materials, in which areas he published in excess of 250 papers. He is
co-inventor of the EFS.
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.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 50, is presently President of Sam
Schwartz Co., consulting engineers, primarily in the bridge industry. Mr.
Schwartz received his BS in Physics from Brooklyn College in 1969, and his
Masters in Civil Engineering from the University of Pennsylvania in 1970. From
February 1986 to March 1990, was the Chief Engineer/First Deputy Commissioner,
New York City Department of Transportation and from April 1990 to the present
acted as a director of the Infrastructure Institute at the Cooper Union College,
New York City, New York. From April 1990 to 1994 he was a Senior Vice President
of Hayden Wegman Consulting Engineers, and is a columnist for the New York Daily
News.
24
NICK SIMIONESCU. Mr. Simionescu joined HNTB in 1974, one of the largest
consulting engineering companies in the world, and is currently Vice President,
Director of Business Development in the New York City Office. He has over 37
years of management, construction, design, inspection and detailing experience.
Mr. Simionescu is very familiar with the New York City infrastructure. For
nearly 28 years he has been working in New York City, primarily on projects with
the New York City Department of Transportation and New York State Department of
Transportation Regions 10 and 11. His projects have included management of the
inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro
bridges. Additionally, he has been the Project Manager of Bridge Inspection for
many other arterial and local bridges throughout New York. Mr. Simionescu's
responsibilities with HNTB have involved a variety of National and International
projects. He has been the Senior Structural Designer and Manager of bridges in
South Carolina (800 Ft. span), Rhode Island (366 ft. span), Malaysia (740 ft.),
and Florida (1300 ft.).
LIEUTENANT GENERAL JOE N. BALLARD. General Ballard is retired from the United
States Army and has served as President and Chief Executive Officer of The
Ravens Group, Inc., a business development, consulting, and executive level
leadership service company, since March 2001. He received his MS in Engineering
Management from the University of Missouri, BS in Electrical Engineering from
Southern University, and he is a registered professional engineer. He served as
Commanding General, US Army Corps of Engineers from 1996 until 2000, Chief of
Staff US Army Training and Doctrine Command from 1995 until 1996, Commander of
the US Army Engineer Center in Missouri from 1993 until 1995, Director of the
Total Army Basing Study at the Pentagon from 1991 until 1993, and he was
Commander of the 18th Engineering Brigade in Germany from 1988 until 1990. He
has received many honors including the Deans of Historical Black Colleges and
Minority Institutions Black Engineer of the Year in 1998, Honorary Doctorate of
Engineering from the University of Missouri in 1999, Honorary Doctorate of Law
L.L.D. from Lincoln University in 1998, Honorary Doctorate of Engineering from
Southern University in 1999, and Fellow of the Society of American Military
Engineers in 1999.
HENRYKA MANES. Ms. Manes is the Founder and President of H. Manes & Associates,
a consulting firm that enables environmental and high technology companies to
export their products worldwide. She has a wide-range of experience with
projects in more than 20 countries in Asia, Africa, Eastern Europe and South
America. Prior to founding HMA, Ms. Manes was Director of Operations for the
American Jewish Joint Distribution Committee's International Development Program
and has worked with the World Bank, United States Agency for International
Development, and the United Nations Development Program. Ms. Manes received her
B.A. from Macalester College in St. Paul, MN, and did her graduate work at the
University of Minnesota, Minneapolis, MN.
Dr. A.EMIN AKTAN. Dr. Aktan is the John Roebling Professor of Infrastructure
Studies at Drexel University Department of Civil Engineering and Architecture.
He is the director of Drexel Intelligent Infrastructure & Transportation Safety
Institute. His research interest is system identification and health monitoring
for management of civil infrastructure systems (CIS) while generating
fundamental knowledge regarding the actual behavior and loading environments of
constructed facilities. Dr. Aktan received a Ph.D. in Earthquake Structural
Engineering from the University of Illinois at Urbana-Champaign in 1973 and
served as a Post-Doctorate associate at University of California at Berkeley for
five years. Dr. Aktan has held faculty positions at Middle East Technical
University, Louisiana State University and University of Cincinnati before
joining Drexel University.
25
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On March 27, 2001, Mr. Robert Bernstein, Chief Executive Officer and
Chairman filed a Form 5 relating to several transactions of stock issued to him
in 2000 and a Form 4 for a January 2001 transaction. Mr. Bernstein was late in
reporting these transactions.
On March 27, 2001, Dr. John Goodman, Director filed a Form 4 for a
transaction in January 2001. Dr. Goodman's Form 4 was not timely filed.
The Company is unaware of any other late filings or any other failures to file
any Forms 3, 4, or 5.
ITEM 11. EXECUTIVE COMPENSATION
________________________________________________________________________________
Other
Name and Annual Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) (SARs (#) Payout($) sation ($)
Robert M. Bernstein
CEO 2000 $120,000 $ - $ - $ 4,183(1) - $ - $ -
2001 $120,000 $ - $ - $1,128,000(2) - $ - $ -
$1,395,000(3) - $ - $ -
2002 $120,000 $ - $ - $ 200(4) - $ - $ -
$ 260,000(5)
John W. Goodman 2000 $ 26,614 $ - $ - $ - - $ - $ -
Director and 2001 $ 23,076 $ - $ - $ 147,600(6) - $ - $ -
Engineer 2002 $ 17,945 $ - $ - $ 40,000(7) - $ - $ -
William Berks 2000 $ - $ - $39,235 $ - - $ - $ -
Vice-President 2001 $ 55,388 $ - $ - $ 147,600(6) - $ - $ -
2002 $ 70,301 $ - $ - $ 40,000(7) - $ - $ -
________________________________________________________________________________
________________________________________________________________________________
(1) In 2000, the Corporation issued to Mr. Bernstein as escrow holder 4,183,675
shares of its common stock, in part, for future compensation and subject to
severe restrictions. The Company included the par value of the shares
issued in Mr. Bernstein's 2000 compensation amounting to $4,183.
(2) In 2001, the Corporation issued Mr. Bernstein 6,000,000 shares for past
compensation (see item 5). The Company valued these shares at $1,128,000.
(3) In 2001, the Company reduced the obligation from Mr. Bernstein to the
Company on a non-recourse promissory note relating to the issuance of
4,650,000 shares of its common stock from $1,855,350 to $460,350.
(4) In 2002, the Company issued 200,000 shares of its Class B Common stock to
its president in relinquishment of his interest in the Company's patents.
The shares were valued at par.
(5) In 2002, the Company issued 13,000,000 shares of its common stock to Mr.
Bernstein for past compensation. The shares had a market value of $260,000
and are subject to forfeiture in the event Mr. Bernstein is no longer
employed by the Company.
26
(6) In 2001, the Corporation issued each to Mr. Goodman and Mr. Berks 900,000
shares of restricted common stock. These shares were valued at $147,500.
(7) In 2002, the Corporation issued each to Mr. Goodman and to Mr. Berks
1,000,000 shares of restricted common stock. These shares were valued at
$40,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
2002
Security Ownership of Certain Beneficial Owners
The Company does not know of any non-affiliated person or "group" as that
term is used in section 13(d)(3) of the Exchange Act that owns more than five
percent of any class of the Company's voting securities.
Security Ownership of Management
CLASS OF STOCK NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
Common Stock Robert M. Bernstein, CEO 27,800,966 Shares 25.45%(1)
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Joel R. Freedman, Director 626,471 Shares .57%
1 Bala Plaza
Bala Cynwyd, PA 19004
John Goodman, Director 2,000,000 Shares 1.83%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
William Berks, Vice President
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049 2,000,000 Shares 1.83%
Directors and executive 32,427,437 Shares 29.68%
officers as a group
(3 persons)
Class B Robert M. Bernstein 300,000 Shares 100.00%(2)
Common Stock Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
_________________________________________
27
(1) Of these 26,544,847 shares, Mr. Bernstein has full rights to approximately
25,339,291 shares. The remaining 2,461,675 shares held are in escrow. On
October 27, 2000, the Company issued 4,183,675 shares to Mr. Bernstein
pursuant to a Stock Escrow/Grant Agreement. Under the terms of the
agreement, the President is required to hold these shares in escrow. While
in escrow, the President cannot vote the shares but has full rights as to
cash and non-cash dividends, stock splits or other change in shares. Any
additional shares issued to the President by reason of the ownership of the
4,183,675 shares will also be escrowed under the same terms of the
agreement. Upon the exercise by certain holders of Company options or
warrants or upon the need by the Company, in the sole discretion of the
Board, to issue common stock to certain individuals or entities, the number
of shares required for issuance to these holders will be returned from
escrow by Mr. Bernstein thereby reducing the number of shares he holds. The
shares held in escrow are non-transferable and will be granted to Mr.
Bernstein only upon the exercise or expiration of all of the options and
warrants, the direction of the Board, in its sole discretion, or the mutual
agreement of Mr. Bernstein and the Board of Directors to terminate the
agreement. The Company valued these shares at par. Upon the actual grant
of the remaining shares to Mr. Bernstein, the shares issued will be valued
at market value when issued and charged to operations as compensation. As
of the date of this filing, 1,722,000 of these 4,183,675 shares had been
transferred to satisfy a stock agreement. Accordingly, 2,461,675 of these
escrowed shares are included in the total of 27,800,966 shares beneficially
owned by Mr. Bernstein. (See, Note 11 to Financial Statements.)
(2) Each of Mr. Bernstein's Class B Common Shares has 1,000 votes per share on
any matter on which the common stockholders vote. Accordingly, the Class B
common stock held by Mr. Bernstein equal 100 million shares of voting
control. These votes give Mr. Bernstein voting control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(SEE NOTE 11 TO FINANCIAL STATEMENTS.)
In August, 1997, the Company's Board of Directors signed a resolution
recognizing the Company's extreme dependence on the experience, contacts, and
efforts of Mr. Bernstein and authorized to pay him a salary of $150,000 a year
since 1991. In February 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its Common Stock to the Company's President for
$420,000 of past compensation due to Mr. Bernstein under this resolution. 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, the Company issued its President 4,650,000 shares its
common stock in exchange for $4,650 and a $1,855,350 non-recourse promissory
note bearing interest at an annual rate of 8%. Approximately 1,500,000 of these
shares are subject to an option to purchase by a third party. On the same day,
the Company issued 350,000 shares its common stock to a Director Joel Freedman,
in exchange for $350 and a $139,650 non-recourse promissory note bearing
interest at an annual rate of 8%. Both notes mature on May 25, 2005, when the
principal and accrued interest becomes fully due and payable.
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.
28
On January 9, 2001, the Company's Board of Directors authorizes the
issuance of 100,000 shares of its common stock to William Berks, a part-time
employee, for engineering and other services rendered to the Company.
On January 8, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to Dr. Campbell Laird, an
advisory board member, for services to the Company.
On January 9, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to John Goodman, a director and
part-time employee, for engineering and other services rendered to the Company.
On January 9, 2001, the Company's Board of Directors authorized the
issuance of 100,000 shares of its common stock to William Berks, a part-time
employee, for engineering and other services rendered to the Company.
On February 19, 2001, the Company's Board of Directors authorized the
issuance of 6,000,000 shares of its common stock to the Company's President for
past compensation due as discussed above.
On May 3, 2001, the Company's Board of Directors authorized the issuance of
100,000 shares of its common stock to Mr. William Berks for services rendered
to the Company.
On June 12, 2001, the Company's Board of Directors authorized the issuance
of 25,000 shares of its common stock to the company's executive assistant, for
services rendered to the Company.
On October 8, 2001, the Company's Board of Directors authorized the
issuance of 300,000 shares of its common stock each to Mr. William Berks and Mr.
John Goodman for services rendered to the Company.
On October 18, 2001, the Company's Board of Directors authorized the
issuance of 20,000 shares of its common stock to the company's executive
assistant, for services rendered to the Company.
On November 21, 2001, the Company's Board of Directors authorized the
issuance of 400,000 shares of its common stock each to Mr. William Berks and Mr.
John Goodman for services rendered to the Company.
Also on February 28, 2002, the Company issued its executive assistant
25,000 shares of its common stock for services rendered.
On March 20, 2002, the Company issued 25,000 shares of its common stock to
the Company's executive assistant.
29
On August 5, 2002, the Company's Board of Directors authorized the issuance
of 1,000,000 shares of its common stock each to Dr. John Goodman and Mr. William
Berks for services rendered to the Company.
On October 7, 2002, the Company issued its executive assistant 50,000
shares of its common stock.
On December 6, 2002, the Company issued 200,000 shares of its Class B
common stock to its President in consideration for the relinquishment of his
security interest in the Company's patents, which served as collateral for our
repayment to our President of the amounts that we accrued for his compensation
and advances.
On December 18, 2002, the Company issued 13,000,000 shares of its
restricted common stock to its President in consideration for past services. The
total market value of these shares when issued was $260,000, however, we valued
these shares at $420,000 due to the fact that Mr. Bernstein relinquished that
amount of past due compensation. These shares are subject to forfeiture in the
event that Mr. Bernstein is no longer employed by the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS IN FORM 8-K
a. Exhibits.
EXHIBIT NO. DESCRIPTION PAGE NO.
3(i) Certificate of Incorporation of Material Technologies, Inc.(1)
Certificate of Amendment, February 16, 2000(2)
Certificate of Amendment, July 12, 2000(2)
Certificate of Amendment, July 19, 2000(2)
Certificate of Amendment, July 31, 2000(2)
Certificate of Amendment, October 16, 2001(2)
Certificate of Amendment, dated December 2, 2002 (3)
Certificate of Amendment, dated January 7, 2003 (3)
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)
5.0 Opinion of Legal Counsel (Exhibit 23.0 Included)(3)
30
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(2)
10.8 Amendment to Agreement Between Material Technologies, Inc. and
Tensiodyne 1985-1 R&D Partnership(2)
10.9 Agreement Between Advanced Technology Center of Southeastern
Pennsylvania and Material Technology, Inc.(2)
10.10 Addendum to Agreement Between Advanced Technology Center of
Southeastern Pennsylvania and Material Technologies, Inc.(2)
10.11 Agreement Between Allied Boston International, Inc. and Material
Technologies, Inc.(2)
10.12 Securities Subscription Agreement dated June 27, 2002 between the
Registrant and Gregory Bartko, Esq.(4)
10.13 Specimen Subscription Agreement Used By Registrant in Recent Sales
Of Common Stock By Private Placement(3)
10.14 Registrant's Stock Issuance/ Stock Option Plan For 2002 (3)
10.15 Settlement Agreement and Mutual Release Between Stephen F.
Beck and Registrant (3)
10.16 Business Consulting Agreement Between Circle Group
Internet, Inc. and Registrant (3)
10.17 Securities Subscription Agreement dated August 12, 2002 between
the Registrant and Gregory Bartko, Esq.(3)
10.18 Securities Subscription Agreement dated August 29, 2002 between
the Registrant and Gregory Bartko, Esq.(3)
31
10.19 Amended and Restated Stock Option Agreement Between the Registrant
and E. G. Bud Shuster Dated November 1, 2002(3)
10.20 License Agreement Between Integrated Technologies, Inc. and
Austin Tech, LLC Dated January 3, 2003 (3)
10.21 Non-Statutory Stock Option Agreement between the Registrant and
Peter Jegou dated October 15, 2002. (3)
10.22 Non-Statutory Stock Option Agreement between the Registrant and
Richard Margulies dated October 15, 2002. (3)
10.23 Amended and Superceding Securities Subscription Agreement
between the Registrant and Gregory Bartko dated December 17,
2002. (3)
10.24 License Agreement Between the Registrant and Integrated
Technologies, Inc. Dated January 3, 2003 (3)
10.25 Security Agreement (To Pay For Past Legal Services), dated August
1, 2002 among Robert A. Brunette, Hassel Hill, Jr. and the
Registrant (3)
23.0 Consent of Jonathan P. Reuben, Certified Public Accountant (4)
99.0 Certification Pursuant to Section 302 (a) of the Sarbanes-Oxley
Act of 2002 - Robert M. Bernstein, Chief Executive Officer(4)
99.1 Certification Pursuant to Section 302 (a) of the Sarbanes-Oxley
Act of 2002 - Robert M. Bernstein, Chief Financial Officer(4)
1. Incorporated by reference to the Registrant's S-1 registration statement
filed March 9, 1997, bearing File Number 333-23617, and as subsequently
amended at date of effectiveness on July 28, 1997.
2. Incorporated by reference to the Registrant's SB-2 registration statement
filed November 30, 2001, bearing File Number 333-74202 and as subsequently
amended at date of effectiveness on February 7, 2002.
3. Incorporated by reference to the Registrant's SB-2 registration statement
filed August 8, 2002, bearing File Number 333-97833 and as subsequently
amended.
4. Filed herewith.
b. Reports on Form 8-K - none.
c. Financial Statements - attached.
32
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MATERIAL TECHNOLOGIES, INC.
By: /s/ Robert M. Bernstein
Robert M. Bernstein, Chief
Executive Officer, President
and Chairman of the Board
Dated: March 28, 2003
Pursuant to the requirements of the Securities Exchanges Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert M. Bernstein
Robert M. Bernstein,
President, Director, Chief Executive
Officer, and Chief
Financial Officer (Principal Executive
Officer, Principal
Financial Officer, and Principal
Accounting Officer)
By: /s/ Joel Freedman
Joel Freedman, Secretary and Director
By: /s/ John Goodman
John Goodman, Director
Dated: March 28, 2003
33
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
Contents
Page
Independent Auditors' Report F-1
Balance Sheets F-2
Statements of Operations F-3
Statement of Stockholders' Equity (Deficit) F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-20
Independent Auditors' Report
Board of Directors
Material Technologies, Inc.
Los Angeles, California
I have audited the accompanying balance sheets of Material Technologies, Inc.,
(A Development Stage Company) as of December 31, 2001 and 2002, and the related
statements of operations, stockholders' equity (deficit), and cash flows, for
the years ended December 31, 2000, 2001, 2002, and for the period from the
Company's inception (October 21, 1983) through December 31, 2002. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with auditing standards generally accepted
in the United States. These standards require that I plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Material Technologies, Inc. as of
December 31, 2001 and 2002, and the results of its operations, and its cash
flows for the years ended December 31, 2000, 2001, 2002, and for the period from
the Company's inception (October 21, 1983) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discuss in Note 16 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency, which raises substantial doubt about the its ability to
continue as a going concern. Management's plans regarding those matters also are
also described in Note 16. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
March 7, 2003
F-1
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
________________________________________________________________________________
December 31, December 31,
2001 2002
_____________ _____________
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 174,469 $ 251,782
Receivable due on research contract 285,677 -
Receivable from officer 35,880 76,109
Employee receivable - 1,433
Prepaid expense - 1,179
_____________ _____________
TOTAL CURRENT ASSETS 496,026 330,503
_____________ _____________
FIXED ASSETS
Property and equipment, net
of accumulated depreciation 2,708 27,649
_____________ _____________
OTHER ASSETS
Intangible assets:
Patents and other, subject to amortization 15,200 12,120
Refundable deposit 2,348 2,348
_____________ _____________
TOTAL OTHER ASSETS 17,548 14,468
_____________ _____________
TOTAL ASSETS $ 516,282 $ 372,620
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Legal fees payable $ 282,950 $ 216,783
Fees payable to R&D subcontractor 196,043 -
Accounting fees payable 42,417 22,443
Other accounts payable 14,326 15,736
Accrued expenses 43,213 33,880
Accrued officer wages 70,000 75,482
Notes payable - current portion 25,688 25,688
Payable on research and
development sponsorship 422,653 498,731
Loans payable - others 57,406 59,028
_____________ _____________
TOTAL CURRENT LIABILITIES 1,154,696 947,771
LONG-TERM DEBT - 1,519,166
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Common Stock, $.001 par value,
authorized 399,700,000 shares, issued and
outstanding 42,433,378 at December 31, 2001
and 109,228,185 shares at December 31, 2002,
Shares held in reserve 60,000,000 at December
31, 2001 and 101,602,800 at December 31, 2002 42,433 109,228
Class B Common Stock, $.001 par value,
authorized 300,000 Shares, issued and
outstanding 100, 000 shares at December 31,
2001, and 300,000 at December 31, 2002 100 300
Preferred stock, $.001 par value, authorized
50,000,000 Shares, issued and outstanding 337,471
shares at December 31, 2001, and 480,721 shares
issued and outstanding at December 31, 2002 337 480
Additional paid in capital 8,851,436 11,223,453
Less notes receivable - common stock (731,549) (774,311)
Deficit accumulated during the development
stage (8,801,171) (12,653,467)
_____________ _____________
TOTAL STOCKHOLDERS' (DEFICIT) (638,414) (2,094,317)
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 516,282 $ 372,620
============= =============
F-1
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
________________________________________________________________________________
From Inception
(October 21, 1983)
For the Year Ended December 31, Through
2000 2001 2002 December 31, 2002
__________ __________ __________ __________
(Restated) (Restated)
REVENUES
Sale of fatigue fuses $ - $ - $ - $ 64,505
Sale of royalty interests - - - 198,750
Research and development revenue 635,868 1,579,823 461,323 5,024,812
Test services - - - 10,870
__________ __________ __________ __________
TOTAL REVENUES 635,868 1,579,823 461,323 5,298,937
__________ __________ __________ __________
COSTS AND EXPENSES
Research and development 496,501 1,493,628 665,435 5,030,763
General and administrative 1,381,047 3,632,769 3,581,706 12,453,854
__________ __________ __________ __________
TOTAL COSTS AND EXPENSES 1,877,548 5,126,397 4,247,141 17,484,617
__________ __________ __________ __________
INCOME (LOSS) FROM OPERATIONS (1,241,680) (3,546,574) (3,785,818) (12,185,680)
__________ __________ __________ __________
OTHER INCOME (EXPENSE)
Interest income 103,419 102,283 52,782 300,600
Interest expense (60,634) (70,468) (118,460) (434,447)
Loss on abandonment of interest in
joint venture - (33,000) - (33,000)
__________ __________ __________ __________
TOTAL OTHER INCOME 42,785 (1,185) (65,678) (166,847)
__________ __________ __________ __________
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (1,198,895) (3,547,759) (3,851,496) (12,352,527)
PROVISION FOR INCOME TAXES (800) (800) (800) (11,000)
__________ __________ __________ __________
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (1,199,695) (3,548,559) (3,852,296) (12,363,527)
EXTRAORDINARY ITEMS
Forgiveness of indebtness - - - (289,940)
__________ __________ __________ __________
NET INCOME (LOSS) $(1,199,695) $(3,548,559) $(3,852,296) $(12,653,467)
__________ __________ __________ __________
__________ __________ __________ __________
PER SHARE DATA
Basic income (loss) before
extraordinary item $ (0.06) $ (0.11) $ (0.06)
Basic extraordinary items - - -
__________ __________ __________
BASIC NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.11) $ (0.06)
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 18,900,019 33,640,393 63,073,970
========== ========== ==========
F-2
Material Technologies, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
________________________________________________________________________________
Deficit
Accumulated
Class A Common Class B Common Preferred Stock
________________________ _______________________ _______________________ 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)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance, January 1, 1986 38,282 38 - - - - 255,211 (278,184)
Net (Loss), Year Ended
December 31, 1986 - - - - - - - (10,365)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance, January 1, 1987 38,282 38 - - - - 255,211 (288,549)
Issuance of Common Stock upon
Exercise of Warrants 216 - - - - - 27,082 -
Net (Loss), Year Ended
December 31, 1987 - - - - - - - (45,389)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance, January 1, 1988 38,498 38 - - - - 282,293 (333,938)
Issuance of Common Stock
Sale of Stock 2,544 3 - - - - 101,749 -
Services Rendered 3,179 3 - - - - 70,597 -
Net (Loss), Year Ended
December 31, 1988 - - - - - - - (142,335)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance, January 1, 1989 44,221 44 - - - - 454,639 (476,273)
Issuance of Common Stock
Sale of Stock 4,000 4 - - - - 1,996 -
Services Rendered 36,000 36 - - - - 17,964 -
Net (Loss), Year Ended
December 31, 1989 - - - - - - - (31,945)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance, January 1, 1990 84,221 84 - - - - 474,599 (508,218)
Issuance of Common Stock
Sale of Stock 2,370 2 - - - - 59,248 -
Services Rendered 6,480 7 - - - - 32,393 -
Net Income, Year Ended
December 31, 1990 - - - - - - - 133,894
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1991 93,071 93 - - - - 566,240 (374,324)
Issuance of Common Stock
Sale of Stock 647 1 - - 350,000 350 273,335 -
Services Rendered 4,371 4 - - - - 64,880 -
Conversion of Warrants 30 - -
Conversion of Stock (6,000) (6) 60,000 60 - - - -
Net (Loss), Year Ended
December 31, 1991 - - - - - - - (346,316)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1992 92,119 92 60,000 60 350,000 350 904,455 (720,640)
Issuance of Common Stock
Sale of Stock 20,000 20 - - - - 15,980 -
Services Rendered 5,400 5 - - - - 15,515 -
Conversion of Warrants 6,000 6 - - - - 14,994 -
Sale of Class B Stock - - 60,000 60 - - 14,940 -
Issuance of Stock to
Unconsolidated Subsidiary 4,751 5 - - - - 71,659 -
Conversion of Stock 6,000 6 (60,000) (60) - - - -
Cancellation of Shares (6,650) (7) - - - - 7 -
Net (Loss), Year Ended
December 31, 1992 - - - - - - - (154,986)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1993 127,620 127 60,000 60 350,000 350 1,037,550 (875,626)
Issuance of Common Stock
Licensing Agreement 12,500 13 - - - - 6,237 -
Services Rendered 67,030 67 - - - - 13,846 -
Warrant Conversion 56,000 56 - - - - 304,943 -
Cancellation of Shares (31,700) (32) - - - - (7,537) -
Net (Loss) for Year Ended
December 31, 1993 - - - - - - - (929,900)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1994 231,449 231 60,000 60 350,000 350 1,355,039 (1,805,526)
Adjustment to Give Effect
to Recapitalization on
February 1, 1994 30,818 31 - - - - 385,393 -
Issuance of Shares for
Services Rendered 223,000 223 - - - - - -
Sale of Stock 1,486,112 1,486 - - - - 23,300 -
Issuance of Shares for
the Modification of Agreements 34,000 34 - - - - (34) -
Net (Loss) for the Year
Ended December 31, 1994 - - - - - - - (377,063)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1995 2,005,380 2,005 60,000 60 350,000 350 1,763,698 (2,182,589)
Issuance of Common Stock
in Consideration for
Modification of Agreement 152,500 153 - - - - - -
Net (Loss) for the Year
Ended December 31, 1995 - - - - - - - - (197,546)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1996 2,157,880 2,157 60,000 60 350,000 350 1,763,698 (2,380,135)
Issuance of Shares for
Services Rendered 164,666 165 - - - - 16,301 -
Sale of Stock 70,000 70 - - - - 173,970 -
Issuance of Shares for
the Modification of
Agreements 250,000 250 - - - - (250) -
Cancellation of Shares Held
in Treasury (62,000) (62) - - - - (154,538) -
Net (Loss) for the Year
Ended December 31, 1996 - - - - - - - (450,734)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance January 1, 1997 2,580,546 2,580 60,000 60 350,000 350 1,799,181 (2,830,869)
Sale of Stock 100,000 100 - - - - 99,900 -
Conversion of Indebtedness 800,000 800 - - - - 165,200 -
Class A Common Stock Issued
in Cancellation of $372,000
Accrued Wages Due Officer 1,499,454 1,500 - - - - 370,500 -
Issuance of Shares for
Services Rendered 247,000 247 - - - - 2,224 -
Adjustment to Give Effect
to Recapitalization on
9-Mar-97 560,000 560 - - - - (560) -
Net (Loss) for the Year
Ended December 31, 1997 - - - - - - - (133,578)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
5,787,000 5,787 60,000 60 350,000 350 2,436,445 (2,964,447)
Shares Issued in Cancellation
of Indebtedness 2,430,000 2,430 - - - - 167,570 -
Conversion of Options 500,000 500 - - - - 124,500 -
Issuance of Shares for
Services Rendered 1,121,617 1,122 - - - - 111,040 -
Shares Issued in Cancellation
of Redeemable Preferred Stock 50,000 50 - - - - 149,950 -
Shares Returned to Treasury
and Cancelled (560,000) (560) - - - - 560 -
Modification of Royalty
Agreement 733,280 733 - - - - 6,599 -
Issuance of Warrants to Officer - - - - - - 27,567 -
Net (Loss) for the Year
Ended December 31, 1998 - - - - - - - (549,187)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
10,061,897 $ 10,062 60,000 $ 60 350,000 $ 350 3,024,231 $(3,513,634)
Shares Issued in Cancellation
of Indebtedness 2,175,000 2,175 - - - - 164,492 -
Issuance of Shares for
Services Rendered 1,255,000 1,255 - - - - 93,844 -
Shares Issued in Modification
of Licensing Agreement 672,205 672 - - - - (672) -
Sale of Stock 433,333 433 - - - - 173,107 -
Net (Loss) for the Year
Ended December 31, 1999 - - - - - - - (539,283)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
14,597,435 $ 14,597 60,000 $ 60 350,000 $ 350 3,455,002 $(4,052,917)
Issuance of Shares for
Services Rendered - as
restated 699,500 699 - - - - 823,817 -
Shares Issued to Investors
Pursuant to Settlement
Agreement 65,028 65 - - - - (65) -
Shares Issued for Cash
and Non-Recourse
Promissory Notes 5,000,000 5,000 - - - - 1,990,000 -
Shares Issued for Cash 400,000 400 - - - - 281,294 -
Shares Issued in Cancellation
of Indebtedness 100,000 100 - - - - 99,900 -
Shares Issued as Compensation
Pursuant to Escrow
Agreement 4,183,675 4,184 - - - - - -
Shares Returned from
Escrow (400,000) (400) - - - - 400 -
Common Shares Converted
into Class B Common (40,000) (40) 40,000 40 - - - -
Preferred Shares Converted
into Common 12,529 13 - - (12,529) (13)
Net (Loss) for the Year - -
Ended December 31, 2000
- restated - - - - - - - (1,199,695)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance December 31,
2000 - restated 24,618,167 $ 24,618 100,000 $ 100 337,471 $ 337 6,650,348 $(5,252,612)
Issuance of Shares for
Services Rendered -
restated 6,185,000 6,185 - - - - 798,151 -
Shares Issued for Cash 4,932,358 4,932 - - - - 281,635 -
Shares Issued in Connection
with Private Offering 697,853 698 - - - - (698) -
Shares Issued to Officer 6,000,000 6,000 - - - - 1,122,000 -
Net (Loss) for the Year
Ended December 31, 2001 -
restated - - - - - - - (3,548,559)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
42,433,378 $ 42,433 100,000 $ 100 337,471 $ 337 8,851,436 $(8,801,171)
Issuance of Shares for
Services Rendered 21,835,018 21,835 - - - - 1,163,796 -
Issuance of Shares to
University of
Pennsylvania 1,096,476 1,096 (1,096)
Shares issued in settlement
of lawsuit 1,397,200 1,398 - - - - 38,602
Shares Issued for Cash 28,046,766 28,047 - - 143,250 143 1,125,546 -
Offering costs - - - - (200,412)
Shares issued in canellation of
President's interest in
patents - - 200,000 200 - - -
Cancellation of shares in
stock grant (1,322,000) (1,322) 1,322
Shares issued to Company's
president for past
compensation 13,000,000 13,000 247,000
Shares Issued in
Connection with Private
Offering 2,741,347 2,741 - - - - (2,741) -
Net (Loss) for the Year
Ended December 31, 2002 - - - - - - - (3,852,296)
___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
Balance -
December 31, 2002 109,228,185 $ 109,228 300,000 $ 300 480,721 $ 480 11,223,453 $(12,653,467)
=========== =========== =========== =========== =========== =========== =========== ===========
F-3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
________________________________________________________________________________
From Inception
For the Year Ended December 31, (October 21, 1983)
________________________________________ Through
2000 2001 2002 December 31, 2002
____________ ____________ ____________ ____________
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,199,695) $ (3,548,559) $ (3,852,296) $(12,653,467)
____________ ____________ ____________ ____________
Adjustments to reconcile net income
(loss) to net cash provided
(used) in operating activities
Depreciation and amortization 2,948 3,755 7,747 185,612
Accrued interest income (98,557) (98,298) (49,444) (247,731)
Gain on sale of securities - - - (196,596)
Charge off of investment in joint venture - 33,000 - 33,000
Officers' and directors compensation on stock
subscription modification - 1,500,000 - 1,500,000
Issuance of common stock to officer for past servicea 260,000 260,000
Charge off of deferred offering costs - - - 36,480
Charge off of long-lived assets due to impairment - - - 92,919
Modification of royalty agreement - - - 7,332
Gain on foreclosure - - - (18,697)
(Increase) decrease in accounts receivable 112,364 (255,073) 285,677 (50,328)
(Increase) decrease in employee advances - - (1,433) (1,433)
(Increase) decrease in prepaid expense - (212) (1,179) (1,338)
Loss on sale of equipment - - 12,780
Issuance of common stock for services 828,699 1,932,336 1,286,894 4,581,656
Issuance of stock for agreement modification - - - 152
Forgiveness of Indebtedness - - - 215,000
Increase (decrease) in accounts
payable and accrued expenses 8,441 267,742 (284,625) 902,989
Increase in legal fees secured by note payable - - 1,481,895 1,481,895
Interest accrued on note payables 57,062 67,718 114,971 387,726
Increase in research and development
sponsorship payable - - 218,000
(Increase) in note for litigation settlement - - (25,753)
(Increase) in Deposits - - (2,189)
____________ ____________ ____________ ____________
TOTAL ADJUSTMENTS
910,957 3,450,968 3,100,503 9,371,476
____________ ____________ ____________ ____________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (288,738) (97,591) (751,793) (3,281,991)
____________ ____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From sale of equipment - - 10,250
Purchase of property and equipment - (5,961) (29,608) (266,472)
Proceeds from sale of securities - - - 283,596
Purchase of securities - - - (90,000)
Proceeds from foreclosure - - - 44,450
Investment in joint ventures (15,000) - - (102,069)
Payment for license agreement - - - (6,250)
____________ ____________ ____________ ____________
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (15,000) (5,961) (29,608) (126,495)
____________ ____________ ____________ ____________
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
________________________________________________________________________________
From Inception
(October 21, 1983) (October 21, 1983)
For the Year Ended December 31, Through
2000 2001 2002 December 31, 2002
___________ ___________ ___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES
$
Issuance of common stock net of offering costs $ 274,288 $ 366,126 $ 1,747,733 $ 2,901,468
Costs incurred in offerings - (79,559) (261,474) (372,513)
Sale of common stock warrants - - - 18,250
Sale of preferred stock - - - 258,500
Sale of redeemable preferred stock - - - 150,000
Capital contributions - - - 301,068
Payment on proposed reorganization - - - (5,000)
Loans From officer 8,000 42,800 - 778,805
Officer advances and repayments (39,500) (53,300) (33,547) (542,379)
Increase in loan payable-others - - - 172,069
___________ ___________ ___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES: 242,788 276,067 858,714 3,660,268
___________ ___________ ___________ ___________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (60,950) 172,515 77,313 251,782
BEGINNING BALANCE CASH AND
CASH EQUIVALENTS 62,904 1,954 174,469 -
___________ ___________ ___________ ___________
ENDING BALANCE CASH AND CASH
EQUIVALENTS $ 1,954 $ 174,469 $ 251,782 $ 251,782
=========== =========== =========== ===========
F-5
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization
Material Technologies, Inc. (the "Company") was organized on March 4, 1997,
under the laws of the state of Delaware.
The Company is in the development stage, as defined in FASB Statement 7, with
its principal activity being research and development in the area of metal
fatigue technology with the intent of future commercial application. The Company
has not paid any dividends and dividends that may be paid in the future will
depend on the financial requirements of the Company and other relevant factors.
Note 2 - Summary of Significant Accounting Policies
a Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances less any
allowance for doubtful accounts. Interest is not accrued on overdue accounts
receivable.
b. Allowance for Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged to income
in amounts sufficient to maintain the allowance for uncollectible accounts at a
level management believes is adequate to cover any probable losses. Management
determines the adequacy of the allowance based on historical write-off
percentages and information collected from individual customers. Accounts
receivable are charged off against the allowance when collectibility is
determined to be permanently impaired (bankruptcy, lack of contact, account
balance over one year old, etc.).
c. Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are expensed. At
the time property and equipment are retired or otherwise disposed of, the asset
and related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
income.
Material Technologies, Inc. depreciates its property and equipment as follows:
F-6
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Financial statement reporting - straight line method as follows:
Machinery 5 years
Computer equipment 3-5 years
Office equipment 5 years
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the historical cost-carrying value of an
asset may no longer be appropriate. The Company assesses recoverability of the
carrying value of an asset by estimating the future net cash flows expected to
result from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value.
b. Net Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS") that established
standards for the computation, presentation and disclosure of earnings per
share, replacing the presentation of Primary EPS with a presentation of Basic
EPS.
c. Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
d. Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at their
current carrying amounts.
e. Stock Based Compensation
For 1998 and subsequent years, the Company has adopted FASB Statement 123 which
establishes a fair value method of accounting for its stock-based compensation
plans. Prior to 1998, the Company used APB Opinion 25.
f. Revenue Recognition
During 2002, Significantly all of the Company's revenue was derived from the
Company's sub-contract with the United States Air Force relating to the further
development of the Electrochemical Fatigue Fuse. Revenue on the sub-contract is
recognized at the time services are rendered. . The Company bills monthly for
services pursuant to this sub-contract at which time revenue is recognized for
the period that the respective invoice relates. The objective of the contract
with the US Air Force is to further develop and validate a prototype
Electrochemical Fatigue Sensor (EFS) to inspect turbine engine blades and
components in the disassembled condition as well as without the need to
disassemble the engine. The project builds on work performed through previous
contracts with the Air Force. As required under the contract and previous
contracts with the Air Force, the technical data and /or commercial computer
software developed under the contracts will be delivered to the Government with
"Other Than Unlimited Rights". Under the contracts, Material Technologies, Inc.
has always maintained a proprietary interest in the development of the data and
software for commercial use. The sub-contract expired in 2002.
F-7
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
All other income is reported in the period that the income was earned.
g. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash and cash
equivalents to include all stable, highly liquid investments with maturities of
three months or less.
h. Income Taxes
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards 109 ("SFAS 109"). The method of accounting for
income taxes under SFAS 109 is an asset and liability method. The asset and
liability method requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between tax
bases and financial reporting bases of other assets and liabilities.
i. Recent Accounting Pronouncements
The FASB recently issued the following statements:
FASB 144 - Accounting for the Impairment or Disposal of Long-Lived Assets
FASB 145 - Rescission of FASB Statements 4, 44 and 64 and Amendment of FASB 13
FASB 146 - Accounting for Costs Associated with Exit or Disposal Activities
FASB 147 - Acquisitions of Certain Financial Institutions
FASB 148 - Accounting for Stock-Based Compensation
These FASB statements did not have, or are not expected to have, a material
impact on the Company's financial position and results of operations.
Note 3 - Accounts Receivable
Accounts receivable consists entirely of amounts due under the Company's
research and development sub-contract and consists of the following:
December 31,
2001 2002
_________ _________
Accounts Receivable $ 285,677 $ 8,362
Less allowance for doubtful accounts - (8,362)
_________ _________
$ 285,677 $ -
========= =========
F-8
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Intangibles
Intangible assets consist of the following:
Period of December 31,
Amortization 2001 2002
_________ _________
Patent Costs 17 Years $ 28,494 $ 28,494
License Agreement 17 Years 6,250 6,250
(See Note 4)
Website 5 Years 5,200 5,200
_________ _________
39,944 39,944
Less Accumulated Amortization (24,744) (27,824)
_________ _________
$ 15,200 $ 12,120
_________ _________
_________ _________
Amortization charged to operations for 2000, 2001, and 2002 were $1,989, and
$2,249, and 3,080 respectively.
Estimated amortization expense for the remaining life of the contract is as
follows:
2003 $2,116
2004 $2,116
2005 $2,116
2006 $1,856
2007 $ 1076
Note 5 - License Agreement
The Company has entered into a license agreement with the University of
Pennsylvania regarding the development and marketing of the EFS. The EFS is
designed to measure electrochemically the state of fatigue damage in a metal
structural member. The Company is in the initial stage of developing the EFS.
Under the terms of the agreement the Company issued to the University 12,500
shares of its common stock, and a 5% royalty on sales of the product. The
Company valued the licensing agreement at $6,250. The license terminates upon
the expiration of the underlying patents, unless sooner terminated as provided
in the agreement. The Company is amortizing the license over 17 years.
In addition to entering into the licensing agreement, the Company also agreed to
sponsor the development of the EFS. Under the Sponsorship agreement, the Company
agreed to reimburse the University development costs totaling approximately
$200,000 that was to be paid in 18 monthly installments of $11,112.
Under the agreement, the Company reimbursed the University $10,000 in 1996 for
the cost it incurred in the prosecution and maintenance of its patents relating
to the EFS.
The Company and the University agreed to modify the terms of the licensing
agreement and related obligation. The modified agreements increase the
University's royalty to 7% of the sale of related products, the issuance of
additional shares of the Company's Common Stock to equal 5% of the outstanding
stock of the Company as of the effective date of the modified agreements, and to
pay to the University 30% of any amounts raised by the Company in excess of
$150,000 (excluding amounts received on government grants or contracts) up to
the amount owing to the University.
The parties agreed that the balance owed on the Sponsorship Agreement was
$200,000 and commencing June 30, 1997, the balance due will accrue interest at a
rate of 1.5% per month until the loan matures on December 16, 2001, when the
loan balance and accrued interest become fully due and payable. In addition,
under the agreement, Mr. Bernstein agreed to limit his compensation from the
Company to $150,000 per year until the loan and accrued interest is fully paid.
Interest charged to operations for 2000, 2001, and 2002, relating to this
obligation was $54,638, $64,472, and $76,078, respectively. The balance of the
note at December 31, 2001, and 2002, was $422.653 and $498,731, respectively,
As of December 31, 2001, the Company was required to issue an additional
1,404,464 shares to the University pursuant to the revised agreement. The
Company is currently in discussions with the University regarding the issuance
of the shares and other related matters. As indicated, the Note matured on
December 16, 2001 and the Company has not made any payments and under the terms
of the agreement is in default.
F-9
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Property and Equipment
The following is a summary of property and equipment:
December 31,
2001 2002
________ _________
Office and computer equipment $ 24,142 $ 24,142
Manufacturing equipment 100,067 129,675
________ _________
124,209 153,817
Less: Accumulated
Depreciation (121,501) (126,168)
________ _________
$ 2,708 $ 27,649
======== =========
Depreciation charged to operations was $959, and $1,044, and $4,667, in 2000,
2001, and 2002, respectively. The Company's equipment has been pledged as
collateral on the agreement with Advanced Technology Center (See Note 8(b)).
Note 7 - Notes Payable
On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a current
shareholder. The loan is evidenced by a promissory note that is assessed
interest at major bank prime rate. The note matures on May 31, 2002, when
principal and accrued interest become fully due and payable. The Company has
pledged its patents as collateral against this loan. The loan has not been paid
and is now in default.
As additional consideration for the loan, the Company granted to Mr. Baker, a 1%
royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the
Electrochemical Fatigue Sensor. The Company has not placed a value on the
royalty interest granted. The balance due on this loan as of December 31, 2001,
and 2002, was $57,237, and $58,859, respectively. Interest charged to operations
for 2000, 2001 and 2002 was $3,245, $3,246, and $1,622, respectively.
In October 1996, the Company borrowed $25,000 from an unrelated third party. The
loan was assessed interest at an annual rate of 11% and matured on October 15,
2000. In addition the Company issued warrants to the lender for the purchase of
2,500 shares of the Company's common stock at a price of $1.00 per share. The
loan balance as of December 31, 2000 and 2001 was $25,527 and $25,527,
respectively. Interest charged to operations on this loan in 2000, 2001, and
2002, were $2,750, $2,750, and $2,750, respectively.
The Company did not pay any amounts due on this note when it matured on October
15, 2000, and the note is in default.
Note 8 - Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes pursuant to the provisions of Statement of Financial Accounting
Standards No. 109 ("FASB 109").
FASB 109 uses the asset and liability method to account for income taxes. That
requires recognizing deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between tax basis and financial
reporting basis of assets and liabilities.
An allowance has been provided for by the Company which reduced the tax benefits
accrued by the Company for its net operating losses to zero, as it cannot be
determined when, or if, the tax benefits derived from these operating losses
will materialize. The allowance for 2000, 2001 and 2002 was $1,199,695,
$3,548,559, and $3,590,712, respectively. As of December 31, 2002, the Company
has unused operating loss carryforwards, which may provide future tax benefits
in the amount of $12,391,883 which expire in various years through 2022.
The Company's use of its net operating losses may be restricted in future years
due to the limitations pursuant to IRC Section 382 on changes in ownership.
Note 9 - Commitments and Contingencies
The Company's commitments and contingencies are as follows:
a. On December 24, 1985, to provide funding for research and development related
to the Fatigue Fuse, the Company entered into various agreements with the
Tensiodyne 1985-I R & D Partnership. These agreements were amended on October
9, 1989, and under the revised terms, obligated the Company to pay the
Partnership a royalty of 10% of future gross sales. The Company's obligation
to the Partnership is limited to the capital contributed to it by its
partners in the amount of approximately $912,500 and accrued interest.
F-10
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
b. On August 30, 1986, the Company entered into a funding agreement with the
Advanced Technology Center ("ATC"), whereby ATC paid $45,000 to the Company
for the purchase of a royalty of 3% of future gross sales and 6% of
sublicensing revenue. The royalty is limited to the $45,000 plus an 11%
annual rate of return. At December 31, 2001, and 2002, the future royalty
commitment was limited to $227,149 and $249,864, 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, 2001, and 2002, the total future royalty commitments, including
the accumulated 26% annual rate of return, were limited to approximately
$1,725,234, and $2,173,795, respectively. If the Company defaults on the
agreement, then the obligation relating to this agreement becomes secured by the
Company's patents, products, and accounts receivable, which may be related to
technology developed with the funding.
d. In 1994, the Company issued to Variety Investments, Ltd. of Vancouver,
Canada ("Variety"), a 22.5% royalty interest on the Fatigue Fuse in
consideration for the cash advances made to the Company by Variety.
In December 1996, in exchange for the Company issuing 250,000 shares of its
Common Stock to Variety, Variety reduced its royalty interest to 20%. In 1998,
in exchange for the Company issuing 733,280 shares of its Common Stock to
Variety, Variety reduced its royalty interest to 5%.
e. As discussed in Note 6, the Company granted a 1% royalty interest in the
Company's Fatigue Fuse and a .5% royalty interest in its Electrochemical
Fatigue Sensor to Mr. Sherman Baker as part consideration on a $25,000 loan
made by Mr. Baker to the Company.
A summary of royalty interests that the Company has granted and are outstanding
as of December 31, 2001, follows:
Fatigue Fatigue
Fuse Sensor
_______ _______
Tensiodyne 1985-1 R&D Partnership -* -
Advanced Technology Center
Future Gross Sales 6.00%* -
Sublicensing Fees -** -
Variety Investments, Ltd 5.00% -
University of Pennsylvania
Net Sales of Licensed Products - 7.00%
Net Sales of Services - 2.50%
Sherman Baker 1.00% 0.50%
_______ _______
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.
h. Operating Leases
The Company leases its existing office under a non-cancelable lease, which
expires on June 30, 2003. The lease has a provision allowing the Company to
extend the lease period an additional six months, which the Company intends to
do, making the extended lease term to end on December 31, 2003.
Rental expense charged to operations for the years ended December 31, 2000,
2001, and 2002 was approximately $23,129, $29,468, and $28,176 which consisted
solely of minimum rental payments.
In addition to rent, the Company is obligated to pay property taxes, insurance,
and other related costs associated with the leased office.
F-11
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Minimum rental commitments under the noncancelable leases expire as follows:
Year Ended 2003 $ 11,740
i. Straight Documentary Credit
On October 10, 2001, the Company entered into an arrangement whereby Allied
Boston Group will provide the Company with a Straight Documentary Credit (a
letter of credit) for $12,500,000. Under the terms of the commitment, the
Company will pledge sufficient shares of its common stock to equal 125% of the
Straight Documentary Credit. Under the initial terms, the shares were valued at
$.27 per share. If the Company's stock price goes lower, then additional shares
will be pledged. If the stock price goes to a $1.00 per share, then Allied
Boston is required to liquidate a sufficient number of shares to pay off the
amount funded through this Straight Documentary Credit. After the amount is paid
off, Allied Boston will retain 25 million shares of the Company's common stock.
Any remaining shares will be returned to the Company;
Upon funding through the Straight Documentary Credit, the Company is required to
pay a Success Fee to Allied Boston in the amount of 8% of the amount funded of
which 50% will be paid in cash and the remainder of the fee will be paid through
the issuance of the Company's common stock to be valued at market value at the
time of issuance. As long as the Documentary Credit is in force, Allied Boston
will have 2 voting seats on the Company's Board. All out-of-pocket expenses
pertaining to the issuance of the instrument will be borne by the Company.
In October 2001, the Company issued 60,000,000 shares of its common stock as
collateral to Allied Boston pursuant to the terms of the agreement, and in
January 2002, the Company issued 40,000,000 shares as additional collateral. As
indicated the selling of these shares are contingent upon the occurrence of
future events. Further, this shares can not be voted on by Allied Boston until
such time as the credit has been funded. Therefore as these shares can not be
sold or voted, the Company treats the shares issued, held in reserve, and not
outstanding.
As of the balance sheet date, the Credit has not been funded, however the
Company is in discussions with funding sources.
j) Litigation
In July 2002, the Company settled its pending lawsuit with Mr. Beck. Under the
terms of the settlement, Mr. Beck received 1,000,000 shares of the Company
common stock. The shares to be issued are non-dilutive for a period of five
years.. The Company valued the shares issued to Mr. Beck at $40,000, the quoted
price of the shares on date of issuance was charged to operations, accordingly.
In addition, pursuant to the agreement that the Company had with the attorneys
who represented it in this matter, a contingent fee of $1,481,895 became due
them upon the settlement of the case. This fee, however, is payable out of the
Company's earnings derived before interest, taxes, depreciation and amortization
(EBIDA), limited each year to 25% of EBIDA. Unpaid amounts owed towards the fee
accrue interest at a rate of 6% per annum until paid in full. The balance of
this obligation at December 31 2002 including accrued interest is $1,519,166.
Interest charged to operations for 2002 totaled $37,271.
As the amounts due the attorneys are paid out of profits and amounts paid
annually are limited as indicated, management does not believe that the
liability to the attorneys will have any impact on the Company's ability to
continue operating. However, payments made to the attorneys will obviously have
a impact on the Company's future cash flow that could limit the amounts spent on
future projects or expansion.
Note 10 - Investments
a) The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
Corporation. At December 31, 2002, there was no market for these shares and
the Company valued its interest at $0.
d) During 2001, the Company abandoned its 5% interest in Antaeus Research, LLC.
and charged its total investment of $33,000 to operations. Prior to its
abandonment, the Company accounts for this investment under the Cost Method.
F-12
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Stockholders' Equity
a. Common Stock
The holders of the Company's Common Stock are entitled to one vote per share of
common stock held.
b. Class B Common Stock
The holders of the Company's Class B Common Stock are not entitled to dividends,
nor are they entitled to participate in any proceeds in the event of a
liquidation of the Company. However the holders are entitled to 1,000 votes for
each share of Class B Common held.
c. Class A Preferred Stock
During 1991, the Company sold to a group of 15 individuals, 2,585 shares of $100
par value preferred stock and warrants to purchase 2,000 shares of common stock
for a total consideration of $258,500.
In the Company's 1994 spin off, these shares were exchanged for 350,000 shares
of the Company's Class A Convertible Preferred Stock and 300,000 shares of its
Common Stock. The holders of these shares have a liquidation preference to
receive out of assets of the Company, an amount equal to $.72 per one share of
Class A Preferred Stock. Such amounts shall be paid upon all outstanding shares
before any payment shall be made or any assets distributed to the holders of the
common stock or any other stock of any other series or class ranking junior to
the Shares as to dividends or assets.
These shares are convertible to shares of the Company's common stock at a
conversion price of $.72 ("initial conversion price") per share of Class A
Preferred Stock that will be adjusted depending upon the occurrence of certain
events. The holders of these preferred shares shall have the right to vote and
cast that number of votes which the holder would have been entitled to cast had
such holder converted the shares immediately prior to the record date for such
vote.
The holders of these shares shall participate in all dividends declared and paid
with respect to the Common Stock to the same extent had such holder converted
the shares immediately prior to the record date for such dividend.
In 2000, a holder of 12,259 shares of preferred stock exchanged these shares for
12,259 shares of the Company's common. The 12,259 shares of preferred were
subsequently cancelled.
d. Class C Preferred Stock
During 2002, the Company sold to its legal counsel 143,250 shares of its Class B
preferred stock for $141,250. These shares are convertible to shares of the
Company's common stock at a conversion price of $.50 per share. The shares
accrue interest at 8% payable out of earnings before income tax, depreciation,
and amortization. The accrued interest is cumulative. Dividends accrued but not
actually payable at December 31, 2002 totaled $4,022.
F-13
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
e. Issuances Involving Non-cash Consideration
All issuances of the Company's stock for non-cash consideration have been
assigned a dollar amount equaling the quoted market price of the shares at date
of issuance.
On January 31, 2000, the Company issued 50,000 shares of common stock to a
member of its advisory board. These shares were valued at $59,375. On February
8, 2000, the Company issued 10,000 shares of common stock to a consultant who
assisted in developing the Company's web site. The Company valued these shares
at $26,563. On February 28, 2000, the Company issued 200,000 of common stock to
a consultant for financial services. These shares were valued at $381,250. Also
on February 28, 2000, the Company issued 4,500 of common stock to a public
relations consultant. These shares were valued at $8,578. On March 9, 2000, the
Company issued 100,000 of common stock to a consultant in cancellation of
$100,000 due. On March 13, 2000, the Company issued two consultants a total of
75,000 shares of common stock for services relating to the development of the
fatigue fuse. . These shares were valued at $140,625. On March 21, 2000, the
Company's President returned to the Company 40,000 shares of Common stock in
exchange for receiving 40,000 shares of Class B common stock. On March 29, 2000,
the Company issued 50,000 shares of common stock to a consultant for financial
services. These shares were valued at $81,250. On April 11, 2000, the Company
issued 15,000 shares of common stock to consultant relating to the operations of
the Company joint venture. These shares were valued at $15,469. On April 11,
2000, the Company issued 25,000 shares of common stock for advisory services.
These shares were valued at $25,781. On April 28, 2000, the Company issued
30,000 shares of common stock for advisory services. These shares were valued at
$26,250. On May 4, 2000, the Company issued 12,529 shares of its common stock in
exchange for 12,529 shares of its preferred stock. The preferred shares were
subsequently cancelled. On May 25, 2000, the Company issued its President
4,650,000 shares its common stock in exchange for $4,650 and a $1,855,350
non-recourse promissory note bearing interest at an annual rate of 8%. On the
same day, the Company issued 350,000 shares its common stock to a Director in
exchange for $350 and a $139,650 non-recourse promissory note bearing interest
at an annual rate of 8%. Both notes mature on May 25, 2005, when the principal
and accrued interest becomes fully due and payable. On July 13, 2000, the
Company issued 40,000 shares of its common stock for legal services. These
shares were valued at $21,875. On October 27, 2000, the Company issued 4,183,675
to its President for futures services to be rendered pursuant to a stock grant
and escrow agreement. As discussed further in Note 11, these shares are held in
escrow, subject to substantial restrictions and the actual shares that may vest
to the President could be substantially less then the number of shares placed in
escrow. These shares were valued at par. On November 14, 2000, pursuant to the
stock grant and escrow agreement, the President returned 400,000 shares of
common stock to the Company that were subsequently cancelled. On the same day,
400,000 shares were issued in exchange for $22,490. On December 19, 2000, the
Company issued 200,000 shares of its common stock to a consultant. These shares
were valued at $37,500. During January and February 2000, the Company issued
65,028 shares of its common stock to investors who were defrauded by a former
consultant of the Company. These shares were valued at par. In February 2000,
the Company received $251,798 from the proceeds from the sale of shares of DCH
Technologies, Inc. These shares were placed in a brokerage account in 1998 by a
shareholder of the Company on the Company's behalf. The Company had no access to
the account. Due to the restrictive covenants of the brokerage account, the
Company did not reflect the transaction on its financial statements prior to
2000, when the shares were sold. The Company credited the proceeds to additional
paid-in capital.
F-14
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
On January 9, 2001, the Company issued 100,000 shares of its common stock to a
member of the Company's advisory board for consulting services. These shares
were valued at $18,800. Also on January 9, 2001, the Company issued 50,000
shares of its common stock to a consultant for services rendered. These shares
were valued at $9,400. On January 10, 2001, the Company issued 100,000 shares
each to two employees pertaining to services rendered on the Company's research
project. These shares were valued at $31,200. On January 11, 2001, the Company
issued 100,000 shares of its common stock to an attorney for legal services.
These shares were valued at $12,500. On March 6, 2001, the Company issued its
President 6,000,000 shares of common stock for services rendered. These shares
were valued at $1,128,000. On April 6, 2001, the Company issued a consultant
200,000 shares of its common stock for services rendered. These shares were
valued at $21,800. On April 17, 2001, the Company issued a consultant 250,000
shares of its common stock for services rendered. These shares were valued at
$22,500. On April 20, 2001, the Company issued to two consultant 50,000 shares
each of its common stock for marketing services rendered. These shares were
valued at $9,000. On May 3, 2001, the Company issued to one of its employee's
100,000 shares of its common stock for services rendered on the Company's
research project. These shares were valued at $9,000. Also May 3, 2001, the
Company issued a consultant 100,000 shares of its common stock for services
rendered. These shares were valued at $9,000. On June 8, 2001, the Company
issued a consultant 1,000,000 shares of its common stock for past marketing
services rendered. These shares were valued at $50,000. The balance due for the
services. On June 12, 2001, the Company issued its executive assistant 25,000
shares of its common stock for services rendered. These shares were valued at
$2,750. On July 5, 2001, the Company issued an attorney 50,000 shares of its
common stock for legal services rendered. These shares were valued at $5,000. On
July 26, 2001, the Company issued a consultant 200,000 shares of its common
stock for services rendered. These shares were valued at $26,000. On August 6,
2001, the Company issued a consultant 125,000 shares of its common stock for
services rendered. These shares were valued at $16,250. On August 9, 2001, the
Company issued an attorney 265,000 shares of its common stock for services
rendered. These shares were valued at $39,750. On August 29, 2001, the Company
issued 50,000 shares of its common stock to one consultant and 300,000 shares of
its common stock to another consultant for services rendered. These shares were
valued at $42,000. On September 6, 2001, the Company issued a consultant 37,500
shares of its common stock for services rendered. These shares were valued at
$3,750. On September 14, 2001, the Company issued a consultant 50,000 shares of
its common stock for services rendered. These shares were valued at $5,000. On
September 19, 2001, the Company issued a consultant 125,000 shares of its common
stock for services rendered. These shares were valued at $11,250. On October 8,
2001, the Company issued to two of its employees 300,000 shares of its common
stock each for services rendered in connection with the Company research
project. These shares were valued at $102,000. On October 16, 2001, the Company
issued a consultant 50,000 shares of its common stock for services rendered.
These shares were valued at $4,560. On October 18, 2001, the Company issued its
executive assistant 20,000 shares of its common stock for services rendered.
These shares were valued at $4,000. On October 23, 2001, the Company issued an
attorney 150,000 shares of its common stock for services rendered. These shares
were valued at $33,000. On October 25, 2001, the Company issued 697,853 as
additional fees pertaining to its Regulation S offering.. These shares were
valued at $118,635. On November 6, 2001, the Company issued an attorney 350,000
shares of its common stock for legal services rendered. These shares were valued
at $56,000. On November 14, 2001, the Company issued a consultant 150,000 shares
of its common stock for services rendered. These shares were valued at $33,000.
On November 17, 2001, the Company issued to the same consultant 107,500 shares
of its common stock for services rendered. These shares were valued at $16,125.
On December 20, 2001, the Company issued to three consultants a total of 530,000
shares of its common stock for services rendered. These shares were valued at
$90,325.
F-15
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The value assigned to shares issued for services were charged to operations.
Additional shares issued to the University of Pennsylvania were issued pursuant
to a non-dilution provision of the agreement between the Company and the
University and were valued at par and charged against paid-in capital. Shares
issued in cancellation of indebtedness were charged against the balance of the
debt owed, and shares issued relating to the Regulation S offering were charged
against the related proceeds received.
On January 11, 2002, the Company issued a consultant 20,000 shares of its common
stock for services rendered. These shares were valued at $3,200. On January 30,
2002, the Company issued a consultant 15,000 shares of its common stock for
services rendered. These shares were valued at $2,850. On February 13, 2002, the
Company issued 4,000 shares its common stock for clerical services rendered.
These shares were valued at $760. On February 14, 2002, the Company issued a
consultant 300,000 shares of its common stock for services rendered. These
shares were valued at $72,000. On March 4, 2002, the Company issued its
executive assistant 25,000 shares of its common stock. These shares were valued
at $6,750. Also on March 4, 2002, the Company issued to six individuals a total
of 650,000 shares of its common stock for consulting services rendered. These
shares were valued at $175,500. On March 15, 2002, the Company issued 150,000
shares of its common stock for consulting services rendered. These shares were
valued at $37,500. On March 18, 2002, the Company issued 150,000 shares of its
common stock for consulting services rendered. These shares were valued at
$22,500. On March 19, 2002, the Company issued to 125,000 shares of its common
stock for legal services rendered. These shares were valued at $20,000. On April
2, 2002, the Company issued to two members of its advisory board a total of
469,918 shares of its common stock for consulting services rendered. These
shares were valued at $65,789. On April 2, 2002, the Company issued its
executive assistant 25,000 shares of its common stock. These shares were valued
at $3,500. On April 4, 2002, the Company issued to 120,000 shares of its common
stock for legal services rendered. These shares were valued at $16,800. On April
4, 2002, the Company issued 4,000 shares its common stock for clerical services
rendered. These shares were valued at $560. On April 10, 2002, the Company
issued to 42,100 shares of its common stock for legal services rendered. These
shares were valued at $5,473. On April 12, 2002, the Company issued to 105,000
shares of its common stock for legal services rendered. These shares were valued
at $14,000. On April 25, 2002, the Company issued 550,000 shares of its common
stock for consulting services rendered. These shares were valued at $49,500. On
May 10, 2002, the Company issued 215,000 shares of its common stock for legal
services rendered. These shares were valued at $32,250. On May 10, 2002, the
Company issued 115,000 shares of its common stock for legal services rendered.
These shares were valued at $17,250. On May 21, 2002, the Company issued 400,000
shares of its common stock for consulting services rendered. These shares were
valued at $36,000. On May 22, 2002, the Company issued 1,000,000 shares of its
common stock for legal services rendered. These shares were valued at $90,000.
On June 5, 2002, the Company issued 150,000 shares of its common stock for
consulting services rendered. These shares were valued at $9,000. On June 5,
2002, the Company issued 50,000 shares of its common stock for legal services
rendered. These shares were valued at $3,000. On June 6, 2002, the Company
issued 50,000 shares of its common stock for consulting services rendered. These
shares were valued at $3,000. On July 3, 2002, the Company issued 1,000,000
shares of its common stock for legal services rendered. These shares were valued
at $50,000. On July 3, 2002, the Company issued 250,000 shares of its common
stock for consulting services rendered. These shares were valued at $12,500. On
July 8, 2002, the Company issued 200,000 shares of its common stock for legal
services rendered. These shares were valued at $8,000. On July 8, 2002, the
Company issued 200,000 shares of its common stock for consulting services
rendered. These shares were valued at $8,000. On July 26, 2002, the Company
issued 1,000,000 shares of its common stock for consulting services rendered.
F-16
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
These shares were valued at 40,000. On August 5, 2002, the Company issued
1,000,000 shares of its common stock to an employee for services rendered in
connection for the development of the fatigue fuse. These shares were valued at
$40,000. On August 5, 2002, the Company issued 1,230,000 shares of its common
stock for legal services. These shares were valued at $49,200. On August 14,
2002, the Company issued 1,000,000 shares of its common stock for legal
services. These shares were valued at $40,000. On August 29, 2002, the Company
issued 1,000,000 shares of its common stock for legal services. These shares
were valued at $30,000. On September 5, 2002, the Company issued 300,000 shares
of its common stock for consulting services rendered. These shares were valued
at $6,000. On September 5, 2002, the Company issued 75,000 shares of its common
stock for legal services. These shares were valued at $1,500. On September 10,
2002, the Company issued 2,000,000 shares of its common stock for consulting
services. These shares were valued at $60,000. On September 11, 2002, the
Company issued 1,000,000 shares of its common stock for legal services. These
shares were valued at $20,000. On September 12, 2002, the Company issued
2,500,000 shares of its common stock for legal services. These shares were
valued at $50,000. On October 7, 2002, the Company issued 2,500,000 shares of
its common stock for consulting services. These shares were valued at $75,000.
On October 9, 2002, the Company issued its executive assistant 50,000 shares of
its common stock. These shares were valued at $1,500. On October 29, 2002, the
Company issued 250,000 shares of its common stock for consulting services. These
shares were valued at $5,000. On December 6, 2002, the Company issued 650,000
shares of its common stock for consulting services. These shares were valued at
$19,500. On December 6, 2002, the Company issued 250,000 shares of its common
stock for legal services. These shares were valued at $7,500.. On December 16,
2002, the Company issued 1,000,000 shares of its common stock to a member of the
Company's advisory board. These shares were valued at $30,000. On December 17,
2002, the Company issued 1,000,000 shares of its common stock for legal
services. These shares were valued at $30,000. On December 18, 2002, the Company
issued 13,000,000 shares of its common stock to its president for past
compensation due to him. These shares were valued at $260,000.
The value assigned to shares issued for services were charged to operations.
Shares issued for legal services included services rendered in connection with
the Beck matter as discussed and preparation of the Company's registration
statement. During 2002, the Company issued 2,042,080 shares of Class A Common
Stock as additional consideration in connection with the Companys Regulation S
offering. In addition, the Company issued 200,000 shares of the Company's Class
B common shares to its President in consideration for the relinquishment of his
total interest in the Company's patents. In addition, during 2002, the Company
cancelled 450,000 shares of its common stock previously issued to consultants.
The value assigned to these cancelled shares was $48,250 was credited against
operations. The Company also issued 1,397,500 shares of its Class A Common Stock
to Mr. Stephen Beck pursuant to the anti-dilution provisions of the settlement
agreement (see note 9(j)). During 2002, the Company cancelled 1,322,000 shares
of originally issued to Mr. Bernstein pursuant to the Stock Escrow/Grant
Agreement.
F-17
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 12 - Transactions with Management
a. During 1993, Mr. Bernstein exercised warrants to purchase 6,000 shares of
the Company's common stock. Pursuant to the resolution on April 12, 1993,
adjusting the per share amount from $10.00 to $2.50, Mr. Bernstein paid $60
and executed a five year non-interest bearing note to the Company for
$14,940. The Note is non-recourse and the only security pledged for the
obligation is the stock purchased. The promissory note was extended to the
year 2003.
b. During 2000, the President advanced the Company $8,000 and received $39,500
from the Company. The outstanding amount due from the President as of
December 31, 2000 is $22,052. The amount of interest credited to operations
for 2000 totaled $822.
As of December 31, 2000, the Company accrued $40,000 of unpaid compensation
owed its President.
c. On May 25, 2000, the Company issued its President 4,650,000 shares its
common stock in exchange for $4,650 and a $1,855,350 non-recourse
promissory note bearing interest at an annual rate of 8%. On the same day,
the Company issued 350,000 shares its common stock to a Director in exchange
for $350 and a $139,650 non-recourse promissory note bearing interest at an
annual rate of 8%. Both notes mature on May 25, 2005, when the principal and
accrued interest becomes fully due and payable. At the date of issuance, the
shares were valued by the Company at $.40 per share.
d. On October 27, 2000, the Company issued 4,183,675 shares to its President
for future compensation pursuant to a Stock Escrow/Grant Agreement. Under
the terms of the agreement, the President is required to hold these shares
in escrow. While in escrow, the President cannot vote the shares but has
full rights as to cash and non-cash dividends, stock splits or other change
in shares. Any additional shares issued to the President by reason of the
ownership of the 4,183,675 shares will also be escrowed under the same terms
of the agreement.
Upon the exercise by certain holders of Company options or warrants or upon
the need by the Company, in the sole discretion of the Board, to issue
common stock to certain individuals or entities, the number of shares
required for issuance to these holders will be returned from escrow by the
President thereby reducing the number of shares he holds. The shares held in
escrow are non-transferable and will be granted to the Company's President
only upon the exercise or expiration of all of the options and warrants, the
direction of the Board, in its sole discretion, or the mutual agreement by
the President and the Board of Directors to terminate the agreement. The
Company valued these shares at par. Upon the actual grant of the remaining
shares to the President, the shares issued will be valued their market value
when issued and charged to operations as compensation. As of December 31,
2002, 1,150,000 of these shares were issued to an unrelated third party.
The original issuance of these shares had no impact on the financial
condition of the Company. As shares are issued out of escrow, the Company
will value the shares at their fair market value or the value of the
consideration received for the shares, whichever is more readably
determinable. Currently, any shares issued to the President are contingent
as discussed above.
e. On February 19, 2001, the Company issued its President 6,000,000 shares of
common stock for services rendered. These shares were valued at $1,128,000.
f. In June 2001, the Company's Board of Directors authorized the reduction in
the amount owed by the President and a Director on non-recourse promissory
notes referred to in footnote (d) above to $460,350 and $34,650,
respectively. The reduction was due to the substantial reduction in the
market value of the Company's stock. The $1,500,000 reduction was charged to
general and administrative expenses as compensation to the President.
g. During 2001, the President advanced the Company $42,000 and received $53,300
from the Company. The outstanding amount due from the President as of
December 31, 2001 is $35,880. The amount of interest credited to operations
for 2001 totaled $3,327.
For 2001, the Company accrued $30,000 of unpaid compensation owed its
President.
F-18
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
h. During 2002, the Company issued 200,000 shares of its Class B common stock
in exchange for the Company's President relinquishing all of the interest
that he had in the Company's patents.
i. On December 18, 2002, the Company issued 13,000,000 shares of its common
stock to its president for past compensation due hom. These shares had a
total market value of $260,000, but the Company valued these shares at
$420,000, the amount of past due compensation relinquished by Mr. Bernstein
in exchange for the shares.
j. During 2002, the Company cancelled 1,322,000 shares of originally issued to
Mr. Bernstein pursuant to the Stock Escrow/Grant Agreement.
k. During 2002, the Company made advances to its President amounting to
$34,826. The outstanding amount due from the President as of December 31,
2001 and 2002, is $35,880 and $76,109. The amount of interest credited to
operations for 2001 and 20002 was $3,327 and $6,682, respectively.
Note 13 - Stock-Based Compensation Plans
a. In 1996, the Company adopted the 1996 Stock Option Plan and 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. The
remaining outstanding options under this plan expired in 2002.
In February 2002, the Company adopted the 2002 Stock Issuance/Stock Plan,
and reserved 20,000,000 shares of its common stock for distribution under
the Plan. Eligible Plan participants include employees, advisors,
consultants, and officers who provide services to the Company. On March 4,
2003, the Company amended the 2002 Stock Issuance/Stock Option Plan to
authorize the issuance of an additional 20,000,000 shares of common stock
under the plan. The option price shall be 100% of the fair market value of a
share of common stock at either, a) date of grant or such other day as the
as the Board may determine.
F-19
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The following is a summary of the various plans' activities :
In determining the fair value of the options granted during the respective
years, the Black Scholes Option Pricing Model was used with the following
assumptions determined:
2000 2001 2002
_______ _______ _______
Risk free interest rate: 5% n/a 4%
Expected life: 3 years n/a 1.5 years
Expected volatility 80% n/a 34%
Note 14 - Adjustments to Prior Periods
For the years 2000 and 2001, the Company changed its method in determining the
value of the shares of stock it issued for non-monetary consideration to the
quoted market price of the shares on date of issue. In addition, in 2001, the
Company changed the life of its license for amortization purposes to 17 years.
The following is a reconciliation of net loss as restated for the 2000 and 2001
two years.
2000 2001
___________ ___________
Net loss as originally reported $ (459,129) $(2,432,638)
Increase in operating loss due to
changes in valuation of non-monetary
consideration and amortization (740,566) (1,158,074)
___________ ___________
Net loss as adjusted $(1,199,695) $(3,590,712)
___________ ___________
___________ ___________
Loss Per Share - as originally reported $ (.02) $ (.07)
Change due to adjustment (.04) (.04)
Loss per share as adjusted $ (.06) $ (.11)
___________ ___________
___________ ___________
Note 15 - Management's Discussion on Future Operations
Since its inception, the Company has had recurring losses totaling $12,391,883.
The Company has enough cash resources to meet its obligation for the next
six-months. The Company is attempting to raise additional funding through the
offering of its convertible preferred stock in a private placement. Management
is also attempting to seek additional funding through debt offerings.
F-20