UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K/A
----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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 n/a
Securities Registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
None n/a
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 is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2004 was $173,198,740 based on the average of the bid
and asked prices of $3.40 as reported by the Over The Counter Electronic
Bulletin Board.
As of March 21 2005, there were 87,660,090 shares of common stock, $.001 par
value issued and outstanding.
As of March 21, 2005, there were 600,000 shares of Class B Common Stock, $.001
par value issued and outstanding.
1
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.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
----------------------------------------------------------------------
Securities Litigation Reform Act of 1995
----------------------------------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere herein. Statements in this Form 10-K that reflect projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations,
including those contained in "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Quantitative and
Qualitative Disclosure about Market Risk," or relating to the Company's outlook
for fiscal year 2005, overall volume and pricing trends or strategies and their
anticipated results, are "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as "expects,"
"anticipates," "approximates," "believes," "estimates," "intends," and "hopes"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. No assurance can be given that actual results
or events will not differ materially from those projected, estimated, assumed or
anticipated in any such forward-looking statements. Important factors that could
result in such differences, in addition to the other factors noted with such
forward-looking statements, include (but are not limited to): general economic
conditions in the Company's market, including inflation, recession, interest
rates and other economic factors; casualty to or other disruption of the
Company's facilities and equipment; and other factors that generally affect the
transportation and infrastructure industries.
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 several
monitoring devices for metal fatigue detection and 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 in the last stages of its development. The first is a small,
extremely simple device that continuously integrates the effect of fatigue
2
loading in a structural member, called a Fatigue Fuse. The second is an
instrument that detects very small cracks in metals, 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
crack detection technology, as acknowledged by the United States Air Force and
confirmed by Rockwell Scientific Corporation. We hold the patents on the Fatigue
Fuse and license the technology on the Electrochemical Fatigue Sensor from the
University of Pennsylvania.
Another product currently under development is the Company's "Matech NDT
Probe(TM)" ("Videoscope"), which provides visual access and simultaneously,
certain non-destructive test sensors to remote locations. It comprises a video
detecting element 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 detecting element provides very clear video resolution; images are displayed
on a monitor, and can be recorded. The Videoscope is derived from similar
devices in wide use in medicine. Its uniqueness is its small diameter and its
capability for applying multiple sensors. Developed to inspect internal
components of fully assembled jet turbine engines using the existing inspection
holes in assembled engine outer surfaces, it can be used to access remote areas
of bridges and other structures to monitor fatigue and other cracks, permitting
good visual access to otherwise inaccessible areas.
We were formed as a Delaware corporation on March 4, 1997. It is the successor
to the business of Material Technology, Inc., a Delaware corporation, also doing
business as Tensiodyne Scientific, Inc. Material Technology, Inc. was the
successor to the business of Tensiodyne Corporation that began developing the
Fatigue Fuse in 1983. Our two predecessors, Tensiodyne Corporation and Material
Technology, Inc. were engaged in developing and testing the Fatigue Fuse and,
beginning in 1993, developing the Electrochemical Fatigue Sensor.
On January 1, 2003 the Company formed Integrated Metal Technologies, Inc., a
Delaware corporation ("IMT"). The Company owns 51% of the outstanding shares of
IMT and the remaining 49% of the outstanding shares are owned by Austin Tech,
LLC, a Texas limited liability company. The original purpose of the joint
venture of utilizing each joint venturer's technologies was abandoned in 2004.
At the present time there is no activity in IMT, IMT has no assets or
liabilities and the Company does not anticipate nor reasonably foresee any
business activity in IMT in the near future.
As of December 31, 2004, our investments in our subsidiary companies represented
less than 10% of our total assets. We have controlling interests in each of our
subsidiary companies and members of our management also serve as officers and
directors of each subsidiary. The following is a list of our subsidiary
companies as of December 31, 2004, with a brief description of their business:
3
Matech International, Inc.
--------------------------
On January 22, 2003 the Company formed Matech International, Inc.
("International"), a Nevada corporation. International was formed as a wholly
owned subsidiary of the Company to advertise, market and sell the Company's
videoscope technology which is presently utilized in the inspection of stress
and crack points in turbine engines on the wings of airplanes. The Company
granted International an exclusive, royalty free license to use the Company's
technologies in the countries of Mexico, Brazil, United States of America,
Lebanon, Saudi Arabia, Argentina, United Arab Emirates, Jordan, Qatar, Kuwait,
Egypt, Canada, Norway, Sweden, Finland, Denmark and Iceland. The license expires
on January 1, 2005.
The license is further restricted to only those applications in which the
technology can be used in combination with, simultaneously or as an integral
part of certain technologies developed or provided by Austin Tech, LLC, a Texas
limited liability company. Additionally, the license further restricts use of
the technology in only the following markets: a) bridges, b) tunnels, c) tank
farms, and d) railroads.
At the present time there is no activity in International and the Company does
not anticipate nor reasonably foresee any business activity in International in
the near future.
Matech Aerospace, Inc.
----------------------
On March 13, 2003 the Company formed Matech Aerospace, Inc., a Nevada
corporation ("Aerospace") with a capital contribution of $5,000. Aerospace was
formed as a wholly owned subsidiary of the Company to advertise, market and sell
all manufacturing and marketing rights to the Company's products and
technologies in all commercial markets within the United States. The Company
granted Aerospace an exclusive license to advertise, market and sell all
manufacturing and marketing rights to the Company's Videoscope in all commercial
markets within the United States in exchange for a seven percent (7%) royalty on
all gross sales generated by Aerospace.
THE COMPANY'S TECHNOLOGIES
--------------------------
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 an application-specific notch near the base. By applying the
4
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 strain and wear history as the member.
Methods are available for remote indication of Fuse fracturing.
We believe that the Fatigue Fuse is of value in monitoring aircraft, ships,
bridges, conveyor systems, mining equipment, cranes, etc. No special training is
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 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 implement our ability to
produce and market the Fatigue Fuse, we need substantial additional capital and
no assurance can be given that this 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 has the potential 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
technology, 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 characterize and indicate
fatigue damage i.e., fatigue cracks.
5
MATECH NDT PROBE(TM) (VIDEOSCOPE)
---------------------------------
Critical stress points are very often located in difficult-to-get-at places.
Therefore, it has become desirable to miniaturize the process and develop a
means for delivery of test sensors to inaccessible areas. The Videoscope
comprises a video detecting element 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 12 mm (0.472 inches) and length of 1.5m (60 inches).
Contained within this diameter is a working channel of 2.8 mm (0.11 inches)
diameter, through which proprietary eddy current or ultrasonic sensors may be
passed and used to examine areas of interest.
The Videoscope's uniqueness is its small diameter and its capability for
applying multiple non-destructive test sensors. Developed to inspect internal
components of fully assembled jet turbine engines using the existing inspection
holes in assembled engine outer surfaces, it can be used to access remote areas
of bridges and other structures to monitor fatigue and other cracks, permitting
good visual access to otherwise inaccessible areas.
DEVELOPMENT OF OUR TECHNOLOGIES
-------------------------------
Currently, the Company's primary focus is on the development and
commercialization of the EFS and Videoscope. Due to the Company's limited
resources, efforts in the development and testing of the Fatigue Fuse have been
delayed.
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, encompasses empirical tailoring of Fatigue Fuse parameters to fit
the actual spectrum loading expected in specific applications, and needs to be
done. The tests associated with further development of the Fatigue Fuse include
full-scale structural tests with attached Fatigue 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
Fatigue 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 Fatigue Fuse, it is the Company's belief that it will take from
six to 12 months and cost approximately $600,000, including technical and beta
6
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 completing development of the Fatigue Fuse.
However, we cannot estimate the amount of revenue that may be realized from
sales of the Fuse, if any.
To date, certain organizations have included our Fatigue Fuse in test programs.
We have already completed the tests for welded steel civil bridge members
conducted at the University of Rhode Island. In 1996, Westland Helicopter, a
British firm, tested the Fatigue Fuse on Helicopters. That test was successful
with the legs of the Fatigue Fuses failing in sequence as predicted.
The Fatigue Fuse has been at this stage for the past several years as the
Company has not had the necessary financial resources to finalize its
development and commence marketing. At the present time the Company has elected
to defer future development of the Fatigue Fuse and apply its resources to
pursue the EFS technology.
Status of the EFS
-----------------
The existence 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 on a titanium alloy and confirmed by evaluations at Rockwell
Scientific Corporation on bridge grade steel. 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. Within the past 12 months, the
Company has successfully evaluated EFS on 6 highway bridges. These are
considered Beta Tests verifying the procedure in the real world. We are now
preparing to begin the marketing of the EFS for bridges. In October 2003 we were
awarded a $215,000 contract from Northrop/Grumman Corporation to apply EFS in an
experimental program to evaluate long term sensing of fatigue damage in military
vehicles and aircraft on which we invoiced approximately $28,000 in 2003 and
$46,000 in 2004.
COMMERCIAL MARKETS FOR OUR PRODUCTS AND TECHNOLOGIES
----------------------------------------------------
No commercial application of our products has been arranged to date, but 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.
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
7
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 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 expired on May 27, 2003. It is titled
"Device for Monitoring Fatigue Life" and bears United States Patent Office
Number 4,590,804. The second 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 third 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 fourth 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. Effective as
of December 31, 2003, the Company was assigned all rights under the patent
application relating to the Videoscope.
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, 2004,
the future royalty commitment was limited to $310,657. The payment of future
royalties is secured by equipment we use in the development of technology as
specified in the funding agreement, however, no lien against our equipment or
our patents in favor of ATC vests until we generate royalties from product
sales.
On May 4, 1987, we entered into a funding agreement with ATC whereby ATC
provided $63,775 to us for the purchase of a royalty of 3% of future gross sales
and 6% of sublicensing revenue. The agreement was amended August 28, 1987, and
as amended, the royalty cannot exceed the lesser of (1) the amount of the
advance plus a 26% annual rate of return or, (2) total royalties earned for a
term of 17 years. As with our first agreement with ATC, no lien or encumbrance
against our assets, including our patents, vests in favor of ATC until we
generate royalties from product sales. If we were to default on these payments
to ATC, our obligations relating to these agreements then become secured by our
patents, products and accounts receivable. At December 31, 2004, the total
8
future royalty commitments, including the accumulated 26% annual rate of return,
were limited to approximately $4,875,012.
On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our
shareholders. We gave Mr. Baker 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 December 31, 2004, we owe Mr. Baker approximately $52,000 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
EMPLOYEES
---------
The Company has four employees, Robert M. Bernstein, President and Chief
Executive Officer, a Secretary, and two part time engineers. In addition, the
Company retains consultants for specialized work.
ITEM 2. PROPERTIES
-------------------
The Company leases an office at 11661 San Vicente Blvd., Suite 707, Los Angeles,
California, 90049. The space consists of 830 square feet and will be adequate
for the Company's current and foreseeable needs. The total rent is payable at
$2,348 per month on a month-to-month basis. Either party may cancel the lease on
30 days notice.
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"). Its symbol is MTNA.
From January 2003 through December 31, 2004 Matech's common stock was quoted
between a low bid of $.003 per share and a high bid of $2.70 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 major reason for the severe difference between the low
and high bid prices during the year was the Company's 1,000:1 reverse stock
split which came into effect on September 23, 2003. The following chart shows
the high and low bid prices per share per calendar quarter from January 2003 to
December 2004.
High Bid Price Low Bid Price
-------------- -------------
First Quarter 2003 $.024 * $ .006 *
Second Quarter 2003 $.016 * $ .008 *
Third Quarter 2003 $1.90 ** $ .003 **
10
Fourth Quarter 2003 $2.70 ** $1.80 **
First Quarter 2004 $3.15 ** $2.70 **
Second Quarter 2004 $3.55 ** $3.15 **
Third Quarter 2004 $3.45 ** $3.02 **
Fourth Quarter 2004 $3.05 ** $1.75 **
* Price prior to September 23, 2003 1000:1 reverse stock split.
** Price after September 23, 2003 1000:1 reverse stock split.
On March 21, 2005, there were 1,319 holders of record of the Company's common
stock and one holder of its Class B common stock. Our Class B common stock is
not quoted on the Bulletin Board.
No dividends on any of the Company's shares were declared or paid during the
years 2004, 2003 or 2002, nor are any dividends contemplated in the foreseeable
future.
At various times during the years 2003 and 2004, 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
----------------------
The number of shares issued by the Company as discussed below have been restated
to reflect the Company's September 23, 2003, 1,000:1 reverse stock split as if
the stock split took place at the beginning of each period presented.
2004
----
On January 7, 2004, the Company issued 25,000 Class A common shares to the
Company's executive secretary. The shares are subject to a three-year lock up
agreement.
On February 11, 2004, the Company issued 250,000 Class A common shares of its
common stock through the conversion of 250,000 shares of Class D Preferred
stock.
On February 12, 2004, the Company issued 500,000 Class A common shares to a
consultant for services rendered in connection with Matech Aerospace and for the
overseeing the design, utilization, and marketing of the Videoscope. The shares
are subject to a three-year lock up agreement.
11
On February 12, 2004, the Company issued 50,000 Class A common shares to a
consultant for services rendered in connection with Matech Aerospace and the
design and utilization of the Videoscope. The shares are subject to a three-year
lock up agreement.
On February 12, 2004, the Company issued 25,000 Class A common shares to a
consultant for services rendered in connection with accounting assistance. The
shares are subject to a three-year lock up agreement.
On March 8, 2004, the Company issued 200,000 Class A common shares of its common
stock through the conversion of 200,000 shares of Class D Preferred stock.
On March 16, 2004, the Company issued 25,000 shares of its Class A common stock
to a consultant for services rendered in connection with the development of the
Electrochemical Fatigue Sensor for use on bridges. The shares are subject to a
three-year lock up agreement.
On March 26, 2004, the Company issued to a consultant 25,000 shares of its Class
A common stock for services rendered. These shares are subject to a three-year
lockup agreement.
On April 1, 2004, certain shareholders exercised 3,300 warrants to purchase
6,200 shares of the Company's Class A common stock for $4,550.
On April 23, 2004, the Company cancelled 250,000 shares of its Class D Preferred
in exchange for issuing 250,000 shares of its common stock.
On May 12, 2004, the Company issued 25,000 shares of its common stock to a note
holder as additional consideration for its delay in paying off the principal
balance owed. These shares are subject to a three-year lockup agreement.
On May 13, 2004, the Company cancelled 250,000 shares of its Class D Preferred
in exchange for issuing 250,000 shares of its common stock.
On May 25, 2004, the Company issued to a consultant 10,000 shares of its common
stock for services rendered. These shares are subject to a three-year lockup
agreement.
On June 8, 2004, the Company issued 1,900 shares of its Class A common stock for
$3,600.
On June 1, 2004, the Company cancelled 2,700 shares of its Class C Preferred in
exchange for issuing 2,700 shares of its common stock
On June 16, 2004, the Company purchased 260 shares of its Class A common stock
from S. Beck for $974, which were subsequently cancelled.
On June 18, 2004, the Company issued to a consultant 120,000 shares of its Class
A common stock for services rendered. These shares are subject to a three-year
lockup agreement.
12
On June 25, 2004, the Company issued 11,875 shares of its common stock for
$8,906.
On June 30, 2004, the Company issued an attorney 50,000 shares of its Class A
common stock as payment on past due invoices. The shares issued are subject to a
three-year lockup agreement and were valued of the indebtedness cancelled
totaling $39,467.
On June 30, 2004, the Company issued to a consultant 3,000 shares of its Class A
common stock for services rendered.
On July 16, 2004, the Company issued 1,047,000 of its Class A common stock for
$123,500.
On July 27, 2004, the Company issued 1,000,000 of its Class A common stock to
Mr. William Berks, the Company's Vice-President, for services rendered. These
shares are subject to a three-year lockup agreement.
On July 27, 2004, the Company issued to a consultant 300 shares of its Class A
common stock for services rendered.
On August 9, 2004, the Company issued to a consultant 1,800 shares of its Class
A common stock for services rendered.
On August 16, 2004, the Company issued 1,000 shares of its Class A common in
connection with its Regulation S offering.
On August 16, 2004, the Company issued three consultants a total of 599,000
shares of its Class A common stock for services rendered. These shares are
subject to a three-year lockup agreement.
On August 24, 2004, the Company issued to two consultants a total of 5,600
shares of its Class A common stock for services rendered.
On September 2, 2004, the Company issued 7,500 of its Class A common stock to
Mr. William Berks, the Company's vice-president, for services rendered.
On September 13, 2004, the Company issued 14,760 shares of its Class A common
stock for $14,500.
On September 14, 2004, the Company purchased 1,066 shares of its common stock
for $3,194. These shares were subsequently cancelled.
On September 28, 2004, the Company issued its outside accountant 1,000 shares of
its common stock for services rendered.
On October 1, 2004, the Company issued 8,666,666 shares of its common stock in
exchange for 7,158,590 shares of Langley Park Investments PLC.
13
On October 1, 2004, the Company issued to a consultant 36,923 shares of its
Class A common stock for services rendered. These shares are subject to a
three-year lockup agreement.
On October 1, 2004, the Company issued to a consultant 1,000 shares of its Class
A common stock for services rendered
On October 6, 2004, the Company issued to a consultant 200,000 shares of its
common stock for services rendered. These shares are subject to a three-year
lockup agreement.
On October 13, 2004, the Company cancelled 2,570,000 shares of its Class D
Preferred in exchange for issuing 2,570,000 shares of its Class A common stock.
On October 14, 2004, the Company issued 130,000 shares of its Class A common
stock for $10,000.
On October 15, 2004, the Company issued Joel Freedman, a Director and Corporate
officer, 2,260,000 shares of its Class A common stock for services rendered.
These shares are subject to a two-year lockup agreement.
On October 15, 2004, the Company issued John Goodman, a Director and Corporate
officer, 1,500,000 shares of its Class A common stock for services rendered.
These shares are subject to a three-year lockup agreement.
On October 25, 2004, the Company issued 100,000 shares of its common stock to
its outside accountant for services rendered. These shares are subject to a
two-year lockup agreement.
On November 22, 2004, the Company issued its administrative assistant 25,000
shares of its Class A common stock for services rendered. These shares are
subject to a three-year lockup agreement.
On November 29, 2004, the Company issued an additional 24,800 shares of its
Class A common stock to certain shareholders in connection with its Regulation S
Offering for no additional consideration than what these shareholders previously
paid for the original shares issued.
On December 17, 2004, the Company issued to two of its advisory board members a
total of 175,000 shares of its Class A common stock for services rendered. These
shares are subject to a two-year lockup agreement.
2003
----
On January 6, 2003, the Company issued 500 shares of its Class A common stock
for financial consulting services including searching on behalf of the Company
for additional equity capital.
On January 8, 2003, the Company issued 3,000 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
14
On January 24, 2003, the Company issued 313 shares of its Class A common stock
for consulting services in connection with Company public relations.
On February 4, 2003, the Company issued 787 shares of its Class A common stock
through its Regulation S offering.
On February 12, 2003, the Company issued 2,550 shares of its Class A common
stock for services rendered in connection with its Regulation S offering.
On March 4, 2003, the Company issued 1,500 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
On March 10, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On March 11, 2003, the Company issued 260 shares of its Class A common stock to
Mr. Stephen Beck pursuant to the anti-dilution provisions of his settlement
agreement.
On March 11, 2003, the Company issued 1,500 shares of its Class A common stock
for legal services in connection with its aborted SB-2 registration statement.
On March 11, 2003, the Company issued 300 shares of its Class A common stock for
financial consulting services in connection with seeking potential funding for
the Company.
On March 26, 2003, the Company issued 250 shares of its Class A common stock for
consulting services in connection with the Company's research and development
efforts.
On March 28, 2003, the Company issued 8,261 shares of its Class A common stock
through its Regulation S offering.
On April 11, 2003, the Company issued 4,242 shares if its Class A common stock
to the University of Pennsylvania pursuant to the anti-dilution provision in its
license agreement.
On April 15, 2003, the Company issued 250 shares of its Class A common stock for
marketing services relating to the EFS.
On April 15, 2003, the Company issued 1,000 shares of its Class A common stock
each to Messrs. Goodman and Berks for consulting services in connection with the
Company's research and development efforts.
On April 21, 2003, the Company issued 500 shares of its Class A common stock to
one of its advisory board members for services rendered in connection with
proposed marketing of the Videoscope in overseas markets.
On April 21, 2003, the Company issued 171 shares of its Class A common stock for
consulting services rendered in connection with its research and development
efforts.
15
On April 21, 2003, the Company issued 1,180 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
On April 29, 2003, the Company issued 3,000 shares of its Class A common stock
through its Regulation S offering.
On May 8, 2003, the Company issued 250 shares of its Class A common stock
through its Regulation S offering.
On May 20, 2003, the Company issued 150 shares of its Class A common stock for
advising the Company as to potential sources of government research and
development contracts and/or grants in regards to Company's technologies.
On May 27, 2003, the Company issued 2,000 shares of its Class A common stock for
consulting services relating to research and development on the EFS.
On May 30, 2003, the Company issued 500 shares of its Class A common stock to an
advisory member for consulting services in connection with seeking potential
bridge projects.
On June 10, 2003, the Company issued 1,650 shares of its Class A common stock
for legal services in connection with general corporate matters.
On June 12, 2003, the Company issued 1,000 shares of its Class A common stock to
an attorney firm for amounts due them.
On June 20, 2003, the Company issued 2,000 shares of its Class A common stock to
Mr. William Berks for consulting services in connection with the Company's
research and development efforts.
On July 11, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On July 31, 2003, the Company issued 1,250 shares of its Class A common stock
through its Regulation S offering.
On August 18, 2003, the Company issued 31 shares of its Class A common stock and
12,500 shares of Matech Aerospace common stock through its for Regulation S
offering.
On August 18, 2003, the Company issued 625 shares of its Class A common stock
through its Regulation S offering.
On August 20, 2003, the Company issued 500 shares of its Class A common stock
through its Regulation S offering.
On August 27, 2003, the Company issued 2,257 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
16
On September 4, 2003, the Company issued 100 shares of its Class A common stock
through its Regulation S offering.
On September 16, 2003, the Company issued 62 shares of its Class A common stock
and 25,000 shares of Matech Aerospace common stock through its for Regulation S
offering.
On September 22, 2003, the Company issued 492 shares of its Class A common stock
for services rendered in connection with its Regulation S offering.
On September 23, 2003, the Company issued 22,000,000 shares of Class A common
stock in consideration for the assumption of the obligation due by the Company
to two attorneys in the amount of $1,583,128.
On September 23, 2003, the Company issued its president 32,000,000 shares of its
Class A Common Stock and 300,000 shares of Class B Common Stock for past
services rendered pursuant to an Accord, Satisfaction and Mutual Release in
which Mr. Bernstein released all claims he had against the Company that arose
prior to September 24, 2003, including past services rendered in excess of
compensation paid.
On September 23, 2003, the Company issued 5,000,000 shares of its Class A common
stock to its president in consideration for a promissory note totaling $50,000.
On September 23, 2003, the Company issued 7,000,000 shares of its Class A common
stock for services rendered in connection with its Regulation S offering.
On September 26, 2003, the Company issued 16,000 shares of its Class A common
stock and 6,250 shares of Matech Aerospace common stock through its Regulation S
offering.
On September 26, 2003, the Company issued 2,000,000 shares of its Class A common
stock for services rendered in connection with seeking funding for the Company.
On September 29, 2003, the Company issued 5,760,000 shares of its Class A common
stock for services rendered pursuant to a consulting agreement.
On November 12, 2003, the Company issued 30 shares of its Class A common stock
and 12,000 shares of Matech Aerospace common stock through its Regulation S
offering.
On December 11, 2003, the Company issued 80 shares of its Class A common stock
and 32,000 shares of Matech Aerospace common stock through its Regulation S
offering.
On December 17, 2003, the Company issued 3,750 shares of its Class A common
stock for services rendered in connection with the development of the
Electrochemical Fatigue Sensor.
17
On September 24, 2003, the Company adopted the 2003 Stock Option, SAR and Stock
Bonus Consultant Plan and reserved 10,000,000 shares of its common stock for
distribution under the plan. Eligible Plan participants include independent
consultants. The option price per share is determined by Committee and will be
no less than 85% of the fair market value of a share of common stock at date of
grant. Options granted under the plan are not exercisable within 6 months from
date of grant and expire five years from date of grant. The plan terminates on
September 24, 2006. During 2003, there were no options issued under the plan.
In February 2002, the Company adopted the 2002 Stock Issuance/Stock Plan and
reserved 20,000,000 shares of its common stock for grant under the plan.
Eligible plan participants include employees, advisors, consultants, and
officers who provide services to the Company. The option price is 100% of the
fair market value of a share of common stock at either the date of grant or such
other day as the Board may determine. During 2002, the Company granted options
to acquire 13,475,000 shares of the Company's common stock that expired in 2003.
There were no options granted under the 2002 Plan in 2004 or 2003. The 2002 Plan
expires upon the earlier of all reserved shares being awarded or December 31,
2007.
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.
Inception
Fiscal Year Ended December 31, December 31,
---------------------------------------------------------------------------------------- to
2000 2001 2002 2003 2004 2004
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net Sales $ -- $ -- $ -- $ -- $ -- $ --
Income from Research
Development Contract $ 635,868 $ 1,579,823 $ 461,323 $ 41,549 $ 146,932 $ 5,213,293
Loss from
Continuing Operations $ (1,199,695) $ (3,548,559) $ (3,852,296) $ (1,885,728) $ (25,495,291) $ (40,034,486)
Loss from
Continuing Operations
Per Common Share $ (63.48) $ (105.49) $ (61.08) $ (.09) $ (.35)
Basic Weighted
Average - Common
Shares Outstanding 18,900 33,640 63,074 20,042,583 72,472,662
Total Assets $ 108,776 $ 516,282 $ 372,620 $ 198,276 $ 2,167,089
Total Liabilities $ 870,586 $ 819,236 $ 2,466,936 $ 1,590,637 $ 1,617,037
Minority Interest in
Consolidated Subsidiary $ -- $ -- $ -- $ 825 $ 825
18
Total Stockholders'
Equity (Deficit) $ (710,459) $ (680,414) $ (2,094,316) $ (1,393,186) $ 549,227
Dividends $ -- $ -- $ -- $ -- $ --
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, 2004, 2003 and 2002.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
----------------------------------------------------------------------
In 2004 we continued our contract with Northrop Grumann and generated revenues
of $46,932 during the year. In addition, the Company entered into a research
contract with URS Corporation and generated revenues of $100,000 from this
contract in 2004. In 2003, we entered into a research contract with Northrop
Grumann in connection with the application of the Company's Electrochemical
Fatigue Sensor in detecting metal fatigue stress on military vehicles. Revenue
generated on this contract in 2003 amounted to $28,004. Also during 2003, the
Company invoiced and received its final payments under its contracts with the
United States Air Force totaling $13,545. From these two contracts the Company
generated total revenue from research contracts in 2003 amounting to $41,549. In
2002, we generated $461,323 from our contracts with the United States Air Force.
In 2004, interest income totaled $12,497 of which $37 was earned from
investments. Of the remaining $12,460, $8,460 was accrued on loans due from the
Company's president and $4,000 was accrued on stock subscriptions also due from
the Company's president. In addition, the Company recognized a gain from the
relief of indebtedness on obligations due from the Company totaling $45,150 on
which the respective creditors were barred by statute to collect.
In 2003, interest income totaled $41,641 of which $2,203 was earned from
investments. Of the remaining $39,438, $7,831 was accrued on loans due from the
Company's president, and $31,607 was accrued on stock subscriptions due from the
Company's president, secretary and third party.
In 2002, interest income totaled $52,782 of which $729 was earned from
investments and the remaining $52,053 was accrued on loans due the Company from
its president, and from stock subscriptions due from the president, a director,
and third party.
In 2003, subscription receivables and related accrued interest amounting
$770,033 due from the Company's officers were cancelled in exchange for the
officers returning the associated 5,006 shares of common stock back to the
Company, which were subsequently cancelled. The $35,000 subscription receivable
19
due the Company from a third party was cancelled in exchange for services
rendered by the party.
COSTS AND EXPENSES
------------------
Research and development costs were $7,605,747, $229,317, and $665,435, for
2004, 2003, and 2002, respectively. Of the $7,605,747 incurred in 2004,
$7,174,203 was paid through the issuance of 3,422,075 shares of the Company's
common stock, of which 2,507,500 shares were issued to Messrs. Goodman and
Berks, officers of the Company who are responsible for project development. The
shares issued to Messrs. Goodman and Berks are subject to lockup agreements and
valued at $5,164,000, the market value of the shares on date of issuance
discounted for the restriction on sale due to the lockup agreement. Of the R&D
costs incurred in 2003 and 2002, $15,000 and $400,201, related to subcontractor
costs associated with the research contracts. General and administrative costs
were $8,010,423, $1,532,025, and $3,581,706, for 2004, 2003, and 2002,
respectively.
In 2004, we charged $196,000 to operations as compensation to our President
(actual cash compensation paid Mr. Bernstein in 2004 totaled $316,000 which
included the payment of prior years' accrued compensation - see item 11.
Executive Compensation). Legal and professional fees in 2004 totaled $398,492,
of which $210,000 was paid through the issuance of 100,000 shares of our common
stock to our outside accountant. The 100,000 shares issued to him are subject to
a 3year lock up agreement and were valued at $210,000. Consulting fees for 2004
amounted to $7,149,240 of which $6,842,477 was paid through the issuance of
3,159,923 shares of common stock. Of the $6,842,477, $4,969,740, was paid to
Joel Freedman, a Board Member and Company's Secretary through the issuance of
2,260,000 shares subject to a 2 year lock-up agreement. Other expenses in 2004
included telephone of $20,295, travel of $49,456, rent of $28,171, and office
expense of $35,608.
In 2003, cash compensation paid to our president, Mr. Bernstein, totaled
$71,000. We also accrued an additional $66,963 in additional compensation
pursuant to Mr. Bernstein's employment agreement. In addition, the Company
issued Mr. Bernstein 32,000,000 shares of its common stock for past services
valued at $320,000 and charged him with additional compensation of $19,617 as
consideration for the release of the remaining 1,962 shares of common stock held
in escrow when it was cancelled (See Item 11. Executive Compensation). Legal
fees in 2003 amounted to $271,186 of which $111,500 was paid through the
issuance of 7,650 shares of our common stock. Other expenses in 2003 included
consulting services of $498,871 of which $317,836 was paid through the issuance
of 7,768,434 shares of our common stock, public and shareholder relations costs
of $22,427, office expense of $29,757, office salaries of $44,002, telephone
expense of $13,410, travel expenses of $23,529, accounting and auditing fees of
$51,906, and rent of $28,176.
In 2002, cash compensation paid to our president, Mr. Bernstein, totaled
$110,018. We also accrued an additional $9,982 in additional compensation. In
addition, the Company issued Mr. Bernstein 13,000 shares of its common stock for
past services valued at $260,000. Legal fees in 2002 amounted to $1,922,861 of
which $1,599,200 relates to the settlement of the Beck matter. Of the
$1,599,200, $1,481,895 is evidenced by a promissory note, $112,193 was paid
through the issuance of 2,028 shares of our common stock and $5,112 paid in
20
cash. We also incurred $314,729 in the filing of our registration statement on
SB-2 of which $297,500 was paid through the issuance of 7,750 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 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.
Interest charged to operations for 2004, 2003, and 2002, amounted to $605,980,
$206,776 and $118,460, respectively. Of the $605,980 incurred in 2004, $122,827
was accrued on the note due the University of Pennsylvania, $93,119 was accrued
on the actual outstanding principal balance of the convertible debenture,
$326,161 pertains to the amortized portion of the discount attributed to the
conversion feature of the debenture and $59,500 was paid to the holder of a past
due note as additional consideration. The $59,500 was paid through the issuance
of 25,000 shares of the Company's common stock that are subject to a three-year
lockup agreement. Of the $206,776 incurred in 2003, $139,272 was accrued on the
note due to the University of Pennsylvania and $63,964 was accrued on the note
due for legal fees on the Beck matter. Of the $118,460 incurred in 2002, $76,078
was accrued on the note due to the University of Pennsylvania and $37,271 was
accrued on the note due for legal fees on the Beck matter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In 2004, we raised $212,025 through the issuance of 1,210,835 shares of our
common stock, received $785,000 in advances from our convertible debenture,
received $1,205,612 through the sale of 2,579,295 shares of Langley Park
Investments, PLC, which we held as an investment and through the redemption of
mutual fund shares, and received $97,450 on a payment against the loan due us
from our president. Of the $2,300,087 received in 2004, $1,321,389 was used in
operations, $676 was used to purchase computer equipment, $900,006 was invested
in marketable securities, $7,000 was advanced to our president, $13,713 was used
as costs in our private offerings and $4,167 was used to repurchase 1,325 shares
of our common stock for cancellation.
In 2003, we raised $191,645 net of offering costs through the issuance of 34,030
shares of our common stock through Regulation S offerings, 4,074 shares of our
preferred stock and 87,750 shares of common stock in our subsidiary, Matech
Aerospace, Inc. We also received $13,545 during 2003 from our contracts with the
Air Force, $2,203 in interest income, $340,000 from advances on our Class A
Senior Convertible Debenture, and $10,000 on a loan from a third party. We used
$737,079 in our operations and paid $24,432 for the purchase of 1,296 shares of
our common stock from various shareholders for cancellation.
In 2002, we raised $892,261 net of offering costs through the issuance of
28,046,766 shares of our common stock through a Regulation S offering, and
143,250 shares of our preferred stock. We also received $175,646 during 2002
from our subcontracts with the Air Force. Of the $1,067,907 we received, we used
$927,439 in our operations, we advanced $33,547 to our president and paid
$29,608 for equipment.
As of December 31, 2004, the Company's liquid assets totaled $1,089,790
consisting of cash on hand and resources readily convertible to cash, that
consists of a mutual fund and Langley shares which can be immediately sold. The
Company has entered into a Senior Class A Convertible debenture for a total
21
amount of $1,500,000 of which $1,125,000 was advanced to the Company in 2003 and
2004. Management does not expect to receive the remaining $375,000. The
Company's only source of continuing revenue for 2005 comes from its research
contract with Northrop Grumann, which expires in September 2005. At the
Company's current level of operating overhead, the funds derived from the
contract and current liquid assets should allow the Company to continue
operating through the remaining nine months of 2005. Although the Company hopes
to have revenue from the utilization of its products in late 2005 or early 2006,
and will continue in its attempt to raise capital, no assurance can be made that
funds will be raised or sales will develop in order to finance future periods'
operations. The Company's independent auditors' issued a going concern opinion
on its report relating to the Company's financial statements for the year ended
December 31, 2004.
SIGNIFICANT CONTRACTS AND AGREEMENTS
------------------------------------
1) The Company is in breach of its research sponsorship agreement with
the University of Pennsylvania. Under this 1997 agreement, the Company
was to pay to the University on or before December 16, 2001, $200,000
plus accrued interest assessed a rate of 18% per annum. Further under
this agreement, the Company's President agreed to limit his
compensation from the Company to $150,000 per year until the loan and
accrued interest is fully paid. The Company is currently in breach of
both of these provisions. Since October 2003, the Company has been in
negotiations with the University to settle the Company's obligation
under this agreement.
2) In addition to modifying its research agreement with the University of
Pennsylvania, the Company also modified its licensing agreement with
the University. Under the modified licensing agreement, the Company
agreed to increase the University's royalty to 7% on Company sales of
related products, and the issuance of additional shares of the
Company's Class A common stock equaling 5% of the total shares
outstanding.
3) In July 2002, the Company settled its pending lawsuit with Mr. Beck.
Under the terms of the settlement, Mr. Beck received 1,000 shares of
the Company's common stock. The shares to be issued are subject to
anti-dilution provisions 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.
During 2002 and 2003, the Company issued Mr. Beck an additional 657
shares of common stock pursuant to the anti-dilutive provision of the
settlement agreement.
Mr. Beck has recently contacted the Company concerning an alleged
breach of the above settlement. The Company believes that it has a
counter claim against Mr. Beck for a breach of a consulting agreement.
Currently negotiations regarding these matters are ongoing.
4) In October 2003, the Company entered into a contract to provide
research services to Northrop Grumman in connection with the
application of the Company's Electrochemical Fatigue Sensor to detect
stress on military vehicles. The Contract expires in September 2005
and has an approved budget of $215,281. This gross amount includes
out-of pocket expenses relating to third party engineering and other
related costs.
CRITICAL ACCOUNTING POLICIES
----------------------------
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
22
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.
The first critical accounting policy relates to revenue recognition. Income from
the Company's research 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 Electrochemical
Fatigue Sensor and Videoscope 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 or at the fair value of the services rendered,
whichever is more readily determinable. In certain issuances, the Company may
discount the value assigned to issued shares for illiquidity and restrictions on
resale. All other services provided in exchange for other non-monetary
consideration are valued at either the fair value of the services received or
the fair value of the consideration relinquished, whichever is more readily
determinable.
The fourth critical accounting policy is the Company's accounting for the
beneficial conversion feature ("BCF") of its convertible debenture. The Company
accounts for its BCF pursuant to EITF 98-5 and EITF 00-27, whereas the
beneficial conversion feature is calculated at its intrinsic value at the
commitment date (that is, the difference between the conversion price and the
fair value of the common stock into which the debt is convertible, multiplied by
the number of shares into which the debt is convertible). A portion of the
proceeds from issuance of the convertible debt, equal to the intrinsic value, is
then allocated to additional paid-in capital. The Company amortizes the debt
discount to interest expense over the term of the debenture.
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 for the years ended December 31, 2004, 2003, and
2002, prepared in accordance with Regulation S-X (17 CFR Sec.210)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
--------------------------------------------------------------------------------
DISCLOSURE
----------
The Company had no disagreements with its accountants; however in 2004, the
Company made the following changes:
23
1) Gumbiner, Savett, Finkel, Fingleson & Rose, Inc., Certified Public
Accountants (hereinafter "Gumbiner") was dismissed by the Company as its
principal independent accountant, effective June 3, 2004. Gumbiner's report
on the financial statements for the year ended December 31, 2003, contained
a modification as to the uncertainity of the Company continuing as a going
concern.
2) The Company engaged Farber & Hass, LLP as the principal accountant to audit
the Company's financial statements effective as of June 3, 2004. Farber &
Hass, LLP (hereinafter "Farber") was dismissed by the Company as its
principal independent accountant, effective January 20, 2005. Farber did
not issue a report in either of the last two years, as they were engaged
only to perform reviews of the Company's interim financial statements for
each of the three quarters in the period ended September 30, 2004. The
decision to change accountants was recommended and approved by the Board of
Directors. There were no disagreements with Farber on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure from the time of their appointment as the
Company's certifying accountant through January 20, 2005.
3) The Company has engaged Corbin & Company, LLP (hereinafter "Corbin") as the
principal accountants to audit the Company's financial statements effective
as of January 21, 2005. The Company, during its most recent fiscal year and
any subsequent interim period to the date hereof, did not have discussions
nor has it consulted with Corbin regarding the following: (i) the
application of accounting principles to a specified transaction, either
completed or proposed or the type of audit opinion to be rendered on the
Company's financial statements, and neither a written report was provided
to the Company nor oral advice was provided that Corbin concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matters that
were the subject of a "disagreement", as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event.
ITEM 9A. Controls and Procedures.
----------------------------------
As of December 31, 2004, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to December 31, 2004.
(a) Evaluation of Disclosure Controls and Procedures. The Company carried
out an evaluation under the supervision and with the participation of
the Company's management, including the Company's Chief Executive
Officer ("CEO") of the effectiveness of the Company's disclosure
controls and procedures. Based upon that evaluation, the CEO concluded
that as of December 31, 2004 our disclosure controls and procedures
were effective in timely alerting them to the material information
24
relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the
SEC, subject to the various limitations on effectiveness set forth
below under the heading, "LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL
CONTROLS," such that the information relating to the Company, required
to be disclosed in SEC reports (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms,
and (ii) is accumulated and communicated to the Company's management,
including our CEO, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in internal control over financial reporting. There has been
no change in the Company's internal control over financial reporting
that occurred during the fiscal quarter ended December 31, 2004 that
has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
-----------------------------------------------------
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material error. An internal control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
internal control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, control may become inadequate
because of changes in conditions, and/or the degree of compliance with the
policies or procedures may deteriorate.
Item 9B. Other information
---------------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
The name, age, office, and principal occupation of the executive officers and
25
directors of Matech and certain information relating to their business
experience are set forth below:
NAME AGE POSITION
---- --- --------
Robert M. Bernstein 70 President/Chief Executive and Chief Financial
Officer, Chairman of the Board
Joel R. Freedman 44 Secretary/Director
Dr. John Goodman 70 Chief Engineer/Director
William I. Berks 74 Vice President/Director
The Term of the directors and officers of Matech is until the next annual
meeting or until their successors are elected.
ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.
Robert M. Bernstein is 70 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.
JOEL R. FREEDMAN, SECRETARY/DIRECTOR.
Joel R. Freedman is 44 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.
From 1983 through 1999, he was president of Genesis Advisors, Inc., an
investment advisory firm in Bala Cynwyd, Pennsylvania. From January 1, 2000
through December 2002, he was a Senior Vice President of PMG Capital Corp., a
securities brokerage and investment advisory firm in West Conshohocken,
Pennsylvania. From December 2002 to present, he is a senior vice-president of
Wachovia Securities LLC, a securities brokerage and investment advisory firm in
Conshohocken, Pennsylvania. His duties there are a full-time commitment.
26
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 70 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.
DR. WILLIAM BERKS, VICE-PRESIDENT/DIRECTOR
William Berks- Vice-President/Director, age 74. He managed the previous Matech
contracts for the development of EFS at the University of Pennsylvania,
Southwest Research Institute, and Optim, Inc. Mr. Berks has a B. Aero. E and MS
in Applied Mechanics from Polytechnic Institute of New York and MS in Industrial
Eng., Stevens Institute of Technology. With Matech since 1997 he has over 30
years' experience in spacecraft mechanical systems engineering. He retired from
TRW in November 1992 where he was employed for 26 years in a variety of
management positions: Manager of the Mechanical Design Laboratory, the
engineering design skill center for the design and development of spacecraft
mechanical systems, which had as many as 350 individuals: Manager of the
Advanced Systems Design Department, which was responsible for mechanical systems
design for all spacecraft project: Assistant Project Manager for Mechanical
Subsystems for a major spacecraft program, which included preparation of plans,
specifications and drawings, supervision of two major subcontracts, and
responsibility for flight hardware fabrication and testing. He holds six
patents.
ADVISORY BOARD
--------------
Since 1987, the Company and its predecessors have had an Advisory Board
consisting of very senior experienced businessmen and technologists, most of
whom are nationally prominent. These individuals consult with the Company on an
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:
27
ROBERT F. CUSHMAN, ESQ. Mr. Cushman is 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.
In 2004, we issued Mr. Cushman 200,000 shares of our common stock subject to a
three-year lockup agreement. The shares were valued at $425,600.
In 2003, the Company cancelled a promissory note due from Mr. Cushman for
$35,000 issued to the Company in 1999 in exchange for the issuance of 100 shares
of the Company's common stock. The note was cancelled in exchange for services
rendered to the Company by Mr. Cushman.
Also in 2003, the Company issued Mr. Cushman 250 shares of its common stock for
services rendered in connection with the marketing services relating to the EFS.
The shares were valued at $2,500.
CAMPBELL LAIRD. Campbell Laird, age 64, 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.
In 2004, we issued Dr. Laird 100,000 shares of our common stock subject to a
two-year lockup agreement and valued at $180,000. Also in 2004 we issued Dr.
Laird 260,000 shares subject to a three-year lockup agreement which were valued
at $582,400.
During 2002, we issued Dr. Laird 235 shares of our common stock that were valued
at $32,894 for services rendered in connection with the development of our EFS.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 50, is presently President of Sam
Schwartz Co., consulting engineers, primarily in the bridge industry. Mr.
Schwartz received his BS in Physics from Brooklyn College in 1969, and his
Masters in Civil Engineering from the University of Pennsylvania in 1970. From
February 1986 to March 1990, was the Chief Engineer/First Deputy Commissioner,
New York City Department of Transportation and from April 1990 to the present
acted as a director of the Infrastructure Institute at the Cooper Union College,
New York City, New York. From April 1990 to 1994 he was a Senior Vice President
of Hayden Wegman Consulting Engineers, and is a columnist for the New York Daily
News.
During 2002, we issued Mr. Schwartz 1,000 shares of our common stock which were
valued at $30,000 for consulting services rendered in connection with our
technology for bridges
NICK SIMIONESCU. Mr. Simionescu joined HNTB in 1974, one of the largest
consulting engineering companies in the world, and is currently Vice President,
28
Director of Business Development in the New York City Office. He has over 37
years of management, construction, design, inspection and detailing experience.
Mr. Simionescu is very familiar with the New York City infrastructure. For
nearly 28 years he has been working in New York City, primarily on projects with
the New York City Department of Transportation and New York State Department of
Transportation Regions 10 and 11. His projects have included management of the
inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro
bridges. Additionally, he has been the Project Manager of Bridge Inspection for
many other arterial and local bridges throughout New York. Mr. Simionescu's
responsibilities with HNTB have involved a variety of National and International
projects. He has been the Senior Structural Designer and Manager of bridges in
South Carolina (800 Ft. span), Rhode Island (366 ft. span), Malaysia (740 ft.),
and Florida (1300 ft.).
During 2003, the Company issued Mr. Simionescu 500 shares of its common stock
for services in connection with seeking potential bridge projects. The shares
were valued at $5,000.
During 2002, we issued Mr.Simionescu 250 shares of our common stock which were
valued at $67,500 for consulting services rendered in connection with our
technology for bridges
HENRYKA MANES. Ms. Manes is the Founder and President of H. Manes & Associates,
a consulting firm that enables environmental and high technology companies to
export their products worldwide. She has a wide-range of experience with
projects in more than 20 countries in Asia, Africa, Eastern Europe and South
America. Prior to founding HMA, Ms. Manes was Director of Operations for the
American Jewish Joint Distribution Committee's International Development Program
and has worked with the World Bank, United States Agency for International
Development, and the United Nations Development Program. Ms. Manes received her
B.A. from Macalester College in St. Paul, MN, and did her graduate work at the
University of Minnesota, Minneapolis, MN.
During 2003, we issued Ms. Manes 500 shares of our common stock, which were
valued at $5,000 for consulting services rendered in connection with the
development of foreign markets for our products, when developed for commercial
application.
During 2002, we issued Ms. Manes 500 shares of our common stock which were
valued at $17,500 for consulting services rendered in connection with the
development of foreign markets for our products, when developed for commercial
application.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
The Company is unaware of any other late filings or any other failures to file
any Form 3, 4, or 5 for the calendar year ended December 31, 2004.
29
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
============================================================================================================================
Other
Name and Annual Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) (SARs (#) Payout($) sation ($)
----------------------------------------------------------------------------------------------------------------------------
Robert M. Bernstein
CEO 2002 $ 120,000 $ -- $ -- $ 200 (1) -- $ -- $ --
$ 260,000 (2)
2003 $ 138,000 $ -- $ 19,617(3) $ 320,000 (4) -- $ -- $ --
2004 $ 192,000 (5) -- -- -- -- -- --
John W. Goodman
Director and
Engineer 2002 $ 17,945 $ -- $ -- $ 40,000 (6) -- $ -- $ --
2003 $ 18,943 $ -- $ -- $ 10,000 (7) -- $ -- $ --
2004 $ 35,250 $ -- $ -- $ 2,760,000 (8)
William Berks
Vice-President
of Government 2002 $ 70,301 $ -- $ -- $ 40,000 (6) -- $ -- $ --
Projects and 2003 $ 71,374 $ -- $ -- $ 30,000 (9) -- $ -- $ --
Director 2004 $ 79,500 $ -- $ -- $ 2,404,000 (10) -- $ -- $ --
Joel Freedman
Secretary and
Director 2004 $ -- $ -- $ -- $ 4,972,000 (11) -- $ -- $ --
============================================================================================================================
(1) 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.
(2) In 2002, the Company issued 13,000 shares of its common stock to Mr.
Bernstein for past compensation. The shares were valued at $260,000.
(3) In 2003, the restrictions placed on Mr. Bernstein as escrow holder
were lifted and Mr. Bernstein received immediate vesting in the
remaining 1,962 shares of common stock held in escrow. Mr. Bernstein
recognized $19,617 in additional compensation for this transaction.
Compensation was valued on the fair value of the shares on the date
the restrictions lifted.
(4) In 2003, as part of the agreement in obtaining the Class A Senior
Secured Convertible Debenture, Mr. Bernstein received 32,000,000
shares of Class A common stock and 300,000 shares of Class B of common
stock in consideration for past services. The Class A shares were
valued at the agreed upon amount of $320,000. The Class A shares are
subject to a three-year lock up agreement.
(5) Cash compensation actually paid to Mr. Bernstein in 2004 amounted to
$316,000 of which $120,000 relates to 2004 with the remaining amount
of $196,000 pertained to the payment of prior years accrued
30
compensation. Mr. Bernstein used the net pay received from the cashing
of the accrued compensation to reduce the loan balance he owed the
Company by $97,450.
(6) In 2002, the Corporation issued each to Mr. Goodman and to Mr. Berks
1,000 shares of restricted common stock. Each issuance was valued at
$40,000.
(7) In 2003, the Corporation issued to Mr. Goodman 1,000 shares of
restricted common stock. The shares were valued at $10,000, the fair
value of the shares on date of issuance.
(8) In 2004, the Corporation issued Mr. Goodman 1,500,000 shares its
common stock subject to a two-year lockup agreement. The shares were
valued at $2,760,000, which represents 80% of the market price on date
of issuance.
(9) In 2003, the Corporation issued Mr. Berks 3,000 shares of restricted
common stock. The shares were valued at $30,000, the fair of value of
the shares on date of issuance.
(10) In 2004, the Corporation issued Mr. Berks 1,000,000 shares its common
stock subject to a three-year lockup agreement. The shares were valued
at $2,380,000, which represents 70% of the market price on date of
issuance. In addition, in 2004, the Company issued Mr. Berks an
additional 7,500 shares of its common stock which was valued at
$24,000, the fair value of the shares on date of issuance.
(11) During 2004, the Company issued 2,260,000 shares of its common stock
to Mr. Freedman a member of the Board and Company Secretary, that were
valued at $4,972,000. The shares are subject to a two-year lockup
agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AS OF DECEMBER 31,
--------------------------------------------------------------------------------
2003
----
Securities authorized for issuance under equity compensation plans.
-------------------------------------------------------------------
Plan category Number of securities Weighted-average Number of securities
To be issued upon exercise price remaining for
exercise of of outstanding available for future
outstanding options, options, warrants issuance under
warrants and rights and rights equity compensation
plans (excluding
securities reflected
in column a))
(a) (b) (c)
Equity
Compensation
plans approved
by shareholders n/a n/a n/a
Equity
Compensation
plans not approved
by shareholders 30,800,000 n/a 30,800,000
31
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
List a 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.
Percent
of
Shares Outstanding
Name of Non-Affiliate Held Shares
------------------------------------- ------------ -------------
Palisades Capital, LLC and affilates 20,285,000 (2) 23.14%
Langley Park Investments, PLC 8,666,666 9.89%
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 21,994,350 Shares 25.09%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
Joel R. Freedman, Director 2,120,768 Shares 2.42%
1 Bala Plaza
Bala Cynwyd, PA 19004
John Goodman, Director 2,430,000 Shares 2.77%
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
William Berks, Vice President
Government Projects
Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049 1,507,500 Shares 1.72%
Directors and executive 28,052,618 Shares 32.00%
officers as a group
(4 persons)
Class B Robert M. Bernstein 600,000 Shares 100.00%(1)
Common Stock Suite 707
11661 San Vicente Blvd.
Los Angeles, CA 90049
32
(1) Each of Mr. Bernstein's Class B Common Shares has 2,000 votes per share on
any matter on which the common stockholders vote. Accordingly, the Class B
common stock held by Mr. Bernstein equal 1.2 billion shares of voting control.
These votes give Mr. Bernstein voting control of the Company.
(2) Following the Reverse Split the Company also entered into a Class A Senior
Secured Convertible Debenture (the "Debenture") with Palisades Capital, LLC or
its registered assigns ("Palisades"), pursuant to which Palisades has agreed to
loan to the Company up to $1,500,000, which is $1,150,000 has been received
through 2004. Under the Debenture Palisades has the option, after March 30,
2004, to convert the principal amount of all moneys loaned under the Debenture,
together with accrued interest, into common stock of the Company at the lesser
of (i) 50% of the averaged ten closing prices for the Company's common stock for
the ten (10) trading days immediately preceding the Conversion Date or (ii)
$0.10 (the lesser of the two being referred to as the "Conversion Price"). In
the event Palisades loans the full $1,500,000 face amount of the Debenture to
the Company and subsequently elects to exercise its right to convert the
Debenture into Company common stock at a time when the Conversion Price is less
than four cents per share Palisades would receive at least fifty million
(50,000,000) shares of common stock resulting in a change in control of the
common stock of the Company, however, Mr. Bernstein would still retain voting
control as a result of his holding of one hundred percent (100%) of the Class B
common stock.
In addition to the shares issued to Mr. Bernstein under the Release as described
above, following the Reverse Split, the Company also liquidated approximately
$1,500,000 of its currently outstanding debt. In full payment and settlement of
such debt, the Company issued 20,000,000 shares of common stock and warrants
(the "Warrants") to acquire an additional 30,000,000 shares of common stock for
$0.10 per share to seven investors who were the holders of such debt (the "Debt
Holders"). Palisades required, as a condition to its agreement to enter in to
the Debenture described above, that the Company first enter into the settlement
with the Debt Holders and thereby reduce the amount of debt on the Company's
balance sheet by approximately $1,500,000. The Warrants contain a provision
limiting the exercise of the warrants to a number of shares that do not exceed
an amount that would cause the holder of each such Warrant to beneficially own
4.99% of the outstanding common stock of the Company, and, in addition, the
Warrants vest only in proportion to the amount ultimately funded under the
Debenture as a percentage of the $1,500,000 face value.
Finally, Mr. Bernstein entered into a voting agreement and irrevocable proxy,
which provides that until September 23, 2006, if an Event of Default, as defined
in the Debenture in favor of Palisades continues for a period of not less than
30 days, all Class B Common Stock which Mr. Bernstein owns of record, or becomes
the owner of record in the future will be voted in accordance with the
directions of Mr. Monty Freedman, an associate of Palisades, or his designated
successor. This loss of voting rights would affect a change in the voting
control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (SEE NOTE 11 TO
------------------------------------------------------------------------
FINANCIAL STATEMENTS.)
----------------------
On May 25, 2000, the Company issued its President 4,650 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 Joel Freedman, in exchange for $350 and a
$139,650 non-recourse promissory note bearing interest at an annual rate of 8%.
In June 2001, the Company's Board of Directors authorized the reduction in the
amount owed by the President and a Director on these non-recourse promissory
notes to $460,350 and $34,650, respectively. In 2003, the 5,000 shares were
returned to the Company in exchange for the cancellation of the non-recourse
promissory note and related accrued interest totaling $755,093. The returned
shares were subsequently cancelled by the Company.
33
On October 27, 2000, the Company issued 4,184 shares to its President for future
compensation pursuant to a Stock Escrow/Grant Agreement. Under the terms of the
agreement, the President was required to hold these shares in escrow. While in
escrow, the President could not vote the shares but had full rights as to cash
and non-cash dividends, stock splits or other change in shares. 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 was returned from escrow by the President thereby reducing the
number of shares he held. The shares held in escrow were non-transferable and
will be granted to the Company's President only upon the exercise or expiration
of all of the options and warrants, the direction of the Board, in its sole
discretion, or the mutual agreement by the President and the Board of Directors
to terminate the agreement. Due to the restrictions imposed on these shares, the
Company valued these shares at par and charged the $4,183 to operations in 2000.
The escrow terminated in 2003, and the President became immediately vested in
the remaining 1,962 shares held in escrow. In consideration for full vesting in
these shares, the President recognized additional compensation of $19,617 in
2003.
On February 28, 2002, the Company issued its Executive Assistant 25 shares of
its common stock for services rendered.
On March 20, 2002, the Company issued 25 shares of its common stock to the
Company's executive assistant.
On August 5, 2002, the Company's Board of Directors authorized the issuance of
1,000 shares of its common stock each to Mr. John Goodman and Mr. William Berks
for services rendered to the Company.
On October 7, 2002, the Company issued its executive assistant 50 shares of its
common stock.
On December 6, 2002, the Company issued 200 shares of its Class B common stock
to its president in consideration for the relinquishment of his interest in the
Company's patents.
On December 18, 2002, the Company issued 13,000 shares of its common stock to
its president in consideration for past services. The shares were issued under a
1997 Board resolution in which Mr. Bernstein's compensation was increased to
$150,000 a year with $120,000 being paid presently with the remaining $30,000 a
year being paid only when the Company was financially able to make such
payments. As the Company's financial position has not improved, Mr. Bernstein
agreed to take the accrued compensation in stock. The 13 million shares issued
have been valued at $260,000. The sale and transferability of the shares are
restricted for a three-year period in which Mr. Bernstein must remain working
for the Company. If he terminates his employment during this three-year period,
then the 13 million shares will be returned to the Company.
On April 15, 2003 the Company issued 1,000 shares of its common stock each to
Mr. John Goodman and Mr. William Berks for services rendered to the Company.
34
On June 20, 2003, the Company issued 2,000 shares of its common stock to Mr.
William Berks for services rendered to the Company.
On September 23, 2003, the Company issued 32,000,000 shares of its Class A
common stock and 300,000 shares of Class B common stock to its president
pursuant to an Accord, Satisfaction and Mutual Release in which Mr. Bernstein
released all claims he had against the Company that arose prior to September 24,
2003, including past services rendered in excess of compensation paid. The
shares are subject to a three-year lock up agreement and value assigned to these
shares was discounted for illiquidity and restrictions on resale at $320,000.
The Class A Common Shares were issued pursuant to a three-year lock up
agreement.
Also on September 23, 2003, the Company issued 5,000,000 shares of its Class A
common stock to its president in consideration for a promissory note totaling
$50,000 that is assessed interest at an annual rate of 6%. The note matures on
September 26, 2006, when the $50,000 and accrued interest becomes s fully due.
The shares were issued pursuant to a three-year lock up agreement and the value
assigned to the shares and related note was discounted for illiquidity and
restrictions on resale.
During 2004, the Company paid its president $196,000 of the accrued compensation
the Company owed him. Mr. Bernstein paid down the loan balance he owed the
Company by $91,450. The remaining balance due from him at December 31, 2004 was
$1,950. Interest credited to operations on this loan for 2004 amounted to
$8,460.
The balance on the stock subscription due from the Company's president at
December 31, 2004 totaled $55,096. Interest credited to operations on this
receivable for 2004 amounted to $4,000.
During 2004, the Company issued 1,500,000 shares of its common stock to Mr.
Goodman, a member of the board and Company employee that were valued at
$2,760,000. The shares are subject to a two-year lockup agreement.
During 2004, the Company issued 2,260,000 shares of its common stock to Mr.
Freedman a member of the Board and Company Secretary, that were valued at
$4,972,000. The shares are subject to a two-year lockup agreement.
During 2004, the Company issued 1,000,000 shares of its common stock to Mr.
Berks, Vice-President and Director, that were valued at $2,380,000. The shares
are subject to a three-year lockup agreement. In addition, the Company in 2004
issued Mr. Berks 7,500 shares of its common stock that were valued at $24,000.
Item 14. Principal Accountant Fees and Services
------------------------------------------------
Audit Tax All
Audit Related Related Other
Fees Fees Fees Fees
--------- -------- -------- --------
2003 $ 42,567 $ -- $ 740 $ --
2004 $ 42,740 $ -- $ -- $ --
35
PART IV
-------
ITEM 15. EXHIBITS
------------------
a. Exhibits.
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
3(i) Certificate of Incorporation of Material Previously Filed
Technologies, Inc. in connection with
S-1 Registration
Statement that
became effective
on July 31, 1997.
Certificate of Amendment, February 16, 2000 1
Certificate of Amendment, July 12, 2000 3
Certificate of Amendment, July 31, 2000 4
Amended and Restated Certificate of
Incorporation, September 12, 2003 5
3(ii) Bylaws of Material Technologies, Inc. Previously filed
with July 31, 1997
S-1
4.1 Class A Convertible Preferred Stock Previously filed
Certificate of Designations with July 31, 1997
S-1
4.2 Class B Convertible Preferred Stock Previously filed
Certificate of Designations with July 31, 1997
S-1
4.3 Material Technologies, Inc. Stock Escrow/
Grant 6
10.1 License Agreement Between Tensiodyne Previously filed
Corporation and the Trustees of the with July 31, 1997
S-1
University of Pennsylvania
10.2 Sponsored Research Agreement between Previously filed
Tensiodyne Corporation and the Trustees with July 31, 1997
of the University of Pennsylvania S-1
36
10.3 Amendment 1 to License Agreement Between Previously filed
Tensiodyne Scientific Corporation and the with July 31, 1997
Trustees of the University of Pennsylvania S-1
10.4 Repayment Agreement Between Tensiodyne Previously filed
Scientific Corporation and the Trustees of with July 31, 1997
the University of Pennsylvania S-1
10.5 Teaming Agreement Between Tensiodyne Previously filed
Scientific Corporation and Southwest with July 31, 1997
Research Institute S-1
10.6 Letter Agreement between Tensiodyne Previously filed
Scientific Corporation, Robert M. Bernstein, with July 31, 1997
and Stephen Forrest Beck and Handwritten S-1
modification.
10.7 Agreement Between Tensiodyne Corporation Previously filed
and Tensiodyne 1985-1 R&D Partnership is
incorporated by reference from Exhibit 10.3
of Material Technology, Inc.'s S-1 Registra-
tion Statement, File No. 33-83526, which
became effective on January 19, 1996.
10.8 Amendment to Agreement Between Material Previously filed
Technology, Inc. and Tensiodyne 1985-1 R&D
Partnership is incorporated by reference
from Exhibit 10.6 of Material Technology,
Inc.'s S-1 Registration Statement, File
No. 33-83526 which became effective on
January 19, 1996.
10.9 Agreement Between Advanced Technology Center Previously filed
of Southeastern Pennsylvania and Material
Technology, Inc. is incorporated by
reference from Exhibit 10.4 of Material
Technology, Inc.'s S-1 Registration State-
ment, File No. 33-83526 which became
effective on January 19, 1996.
10.10 Addendum to Agreement Between Advanced Previously filed
Technology Center of Southeastern
Pennsylvania and Material Technology, Inc.
is incorporated by reference from Exhibit
10.5 of Material Technology, Inc.'s S-1
Registration Statement, File No. 33-83526.
10.11 Class A senior preferred convertible
debenture between Materials Technologies,
Inc. and Palisades Capital, LLC
37
10.12 Voting agreements and irrevocable proxy
between Robert M. Bernstein, Monty Freedman,
Material Technologies Inc. and Palisades
Capital, LLC.
c. Financial Statements - attached.
SIGNATURES
----------
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MATERIAL TECHNOLOGY, INC.
-------------------------
By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein, President
Date: September 27, 2005
Pursuant to the requirements of the Securities Exchanges Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert M. Bernstein
-------------------------------
Robert M. Bernstein,
President, Director, Chief Executive Officer, and Chief
Financial Officer (Principal Executive Officer, Principal
Financial Officer, and Principal Accounting Officer)
Date: September 27, 2005
By: /s/ Joel Freedman
-------------------------------
Joel Freedman, Secretary and Director
Date: September 27, 2005
By: /s/ John Goodman
-------------------------------
John Goodman, Director
Date: September 27, 2005
38
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
with
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
================================================================================
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
================================================================================
Reports of Independent Registered Public Accounting Firms.................F-1
Financial Statements
Consolidated Balance Sheets............................................F-4
Consolidated Statements of Operations..................................F-6
Consolidated Statements of Comprehensive Loss..........................F-7
Consolidated Statements of Stockholders' Equity (Deficit)..............F-8
Consolidated Statements of Cash Flows.................................F-14
Notes to Consolidated Financial Statements............................F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
Material Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Material
Technologies, Inc. (a development stage company) (the "Company") as of December
31, 2004, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity (deficit) and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the cumulative data from October 21, 1983
(inception) to December 31, 2003 in the consolidated statements of operations,
comprehensive loss and cash flows, which were audited by other auditors whose
reports dated March 7, 2003 and March 16, 2004, which expressed unqualified
opinions (the March 16, 2004 report was modified related to the uncertainty of
the Company's ability to continue as a going concern), have been furnished to
us. Our opinion, insofar as it relates to the amounts included for the
cumulative period from October 21, 1983 (inception) to December 31, 2003, is
based solely on the reports of the other auditors.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Material Technologies,
Inc. (a development stage company) as of December 31, 2004, and the results of
its operations, and its cash flows for the year then ended and for the
cumulative period from October 21, 1983 (inception) to December 31, 2004 in
conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses and has yet to
be successful in establishing profitable operations. These factors, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
CORBIN & COMPANY, LLP
Irvine, California
March 18, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Material Technologies, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Material
Technologies, Inc., (a development stage company) (the "Company") as of December
31, 2003 and the related consolidated statements of operations, stockholders'
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audit. We did
not audit the cumulative data from October 21, 1983 (inception) to December 31,
2002 in the statements of operations and cash flows, which were audited by
another auditor whose report, dated March 7, 2003, which expressed an
unqualified opinion, has been furnished to us. Our opinion, insofar as it
relates to the amounts included for the cumulative period from October 21, 1983
(inception) to December 31, 2002, is based solely on the report of the other
auditor.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Material Technologies,
Inc. (a development stage company) as of December 31, 2003, and the results of
its operations, and its cash flows for the year then ended and for the
cumulative period from October 21, 1983 (inception) to December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
GUMBINER SAVETT INC.
SANTA MONICA, CA
March 16, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
--------------------------------------------------
Board of Directors
Material Technologies, Inc.
Los Angeles, California
I have audited the statements of operations, stockholders' equity (deficit) and
cash flows for Material Technologies, Inc. (a development stage company) (the
"Company") for the year ended December 31, 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 the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit 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 results of operations and cash flows of Material
Technologies, Inc. for the year ended December 31, 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 of
America.
/s/ Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
Torrance, California
March 7, 2003
F-3
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
=======================================================================================================================
December 31,
------------------------------------
ASSETS 2004 2003
---------------- ----------------
Current assets:
Cash and cash equivalents $ 100,800 $ 47,664
Investments in marketable securities held for trading 988,990 -
Receivable due on research contract 15,895 28,004
Receivable from officer 1,950 83,940
Prepaid expenses and other current assets - 5,690
---------------- ----------------
Total current assets 1,107,635 165,298
Investments in marketable securities available for sale 1,034,380 -
Property and equipment, net 14,838 20,626
Intangible assets, net 7,888 10,004
Deposit 2,348 2,348
---------------- ----------------
$ 2,167,089 $ 198,276
================ ================
-----------------------------------------------------------------------------------------------------------------------
Continued...
F-4
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS - CONTINUED
=======================================================================================================================
December 31,
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2004 2003
---------------- ----------------
Current liabilities:
Accounts payable $ 319,486 $ 360,809
Research and development sponsorship payable 760,831 638,003
Accrued expenses 6,770 17,920
Accrued officer compensation 18,446 142,446
Notes payable 86,892 86,126
---------------- ----------------
Total current liabilities 1,192,425 1,245,304
Convertible debentures, net of discount of $798,839 and $0, respectively 424,612 345,333
---------------- ----------------
Total liabilities 1,617,037 1,590,637
---------------- ----------------
Minority interest in consolidated subsidiary 825 825
---------------- ----------------
Commitments and contingencies
Stockholders' equity (deficit):
Class A preferred stock - $.001 par value; liquidation preference of $720
per share; 350,000 shares authorized; 337 shares issued
and outstanding at December 31, 2004 and 2003 - -
Class B preferred stock - $.001 par value; liquidation preference of
$10,000 per share; 15 shares authorized; 0 shares issued and
outstanding at December 31, 2004 and 2003 - -
Class C preferred stock - $.001 par value; liquidation preference of
$0.001 per share; 25,000,000 shares authorized; 1,517 and 4,217 shares
issued and outstanding at December 31, 2004 and 2003, respectively 1 4
Class D preferred stock - $.001 par value; liquidation preference of
$0.001 per share; 20,000,000 shares authorized; 1,920,000 and
5,440,000 shares issued and outstanding at December 31, 2004
and 2003, respectively 1,920 5,440
Class A common stock - $.001 par value; 1,699,400,000 shares authorized;
107,517,617 and 66,489,818 shares issued, 86,684,774 and 66,488,975
shares outstanding at December 31, 2004 and 2003, respectively 86,685 66,488
Class B common stock - $.001 par value; 600,000 shares authorized, issued
and outstanding at December 31, 2004 and 2003 600 600
Additional paid-in capital 41,717,219 13,124,573
Deficit accumulated during the development stage (40,034,486) (14,539,195)
Notes receivable - common stock (55,096) (51,096)
Accumulated other comprehensive loss (1,167,616) -
---------------- ----------------
Total stockholders' equity (deficit) 549,227 (1,393,186)
---------------- ----------------
$ 2,167,089 $ 198,276
================ ================
-----------------------------------------------------------------------------------------------------------------------
See reports of independent registered public accounting firms
and accompanying notes to consolidated financial statements
F-5
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================================================================
From Inception
(October 21, 1983)
For The Years Ended December 31, Through
------------------------------------------------------ December 31,
2004 2003 2002 2004
---------------- ---------------- ---------------- ----------------
Revenues:
Research and development $ 146,932 $ 41,549 $ 461,323 $ 5,213,293
Other - - - 274,125
---------------- ---------------- ---------------- ----------------
Total revenues 146,932 41,549 461,323 5,487,418
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Research and development 7,605,747 229,317 665,435 12,865,827
General and administrative 8,010,423 1,532,025 3,581,706 21,996,302
---------------- ---------------- ---------------- ----------------
Total costs and expenses 15,616,170 1,761,342 4,247,141 34,862,129
---------------- ---------------- ---------------- ----------------
Loss from operations (15,469,238) (1,719,793) (3,785,818) (29,374,711)
---------------- ---------------- ---------------- ----------------
Other income (expense):
Other-than-temporary write-down of marketable
securities available for sale (4,284,760) - - (4,284,760)
Realized loss on sale of marketable securities (3,668,850) - - (3,668,850)
Unrealized loss on decrease in market value of
securities held for trading (1,523,310) - - (1,523,310)
Interest expense (605,980) (206,776) (118,460) (1,247,203)
Interest income 12,497 41,641 52,782 354,738
Gain (loss) on settlement of indebtedness 45,150 - - (244,790)
Loss on abandonment of interest in joint
venture - - - (33,000)
---------------- ---------------- ---------------- ----------------
Other expense, net (10,025,253) (165,135) (65,678) (10,647,175)
---------------- ---------------- ---------------- ----------------
Loss before provision for income taxes (25,494,491) (1,884,928) (3,851,496) (40,021,886)
Provision for income taxes (800) (800) (800) (12,600)
---------------- ---------------- ---------------- ----------------
Net loss $ (25,495,291) $ (1,885,728) $ (3,852,296) $ (40,034,486)
================ ================ ================ ================
Per share data:
Basic and diluted net loss per share $ (0.35) $ (0.09) $ (61.08)
================ ================ ================
Weighted average Class A common shares
outstanding (basic and diluted) 72,472,662 20,042,583 63,074
================ ================ ================
--------------------------------------------------------------------------------------------------------------------------------
See reports of independent registered public accounting firms
and accompanying notes to consolidated financial statements
F-6
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
========================================================================================================================
From Inception
(October 21, 1983)
For The Years Ended December 31, Through
------------------------------------------------------ December 31,
2004 2003 2002 2004
---------------- ---------------- ---------------- ----------------
Net loss $ (25,495,291) $ (1,885,728) $ (3,852,296) $ (40,034,486)
Other comprehensive loss:
Decrease in market value of securities
available for sale (1,167,616) - - (1,167,616)
---------------- ---------------- ---------------- ----------------
Net comprehensive loss $ (26,662,907) $ (1,885,728) $ (3,852,296) $ (41,202,102)
================ ================ ================ ================
------------------------------------------------------------------------------------------------------------------------
See reports of independent registered public accounting firms
and accompanying notes to consolidated financial statements
F-7
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Initial issuance of common stock
October 21, 1983 2 $ - - $ - - $ -
Adjustment to give effect to
recapitalization on December 15,
1986 - cancellation of shares (2) - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, October 21, 1983 - - - - - -
Shares issued by Tensiodyne
Corporation in connection with
pooling of interests 42 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1983 42 - - - - -
Capital contribution - - - - - -
Shares issued for cash 5 - - - - -
Offering costs - - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1984 47 - - - - -
Capital contribution - - - - - -
Sale of 12,166 warrants at $1.50
per warrant - - - - - -
Cancellation of shares (9) - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1985 38 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1986 38 - - - - -
Issuance of common stock upon
exercise of warrants - - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1987 38 - - - - -
Shares issued for cash 3 - - - - -
Shares issued as compensation 3 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1988 44 - - - - -
Shares issued for cash 4 - - - - -
Shares issued as compensation 36 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Initial issuance of common stock
October 21, 1983 - $ - - $ - - $ - $ 2,500
Adjustment to give effect to
recapitalization on December 15,
1986 - cancellation of shares - - - - - - (4)
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, October 21, 1983 - - - - - - 2,496
Shares issued by Tensiodyne
Corporation in connection with
pooling of interests - - - - - - 4,342
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1983 - - - - - - 6,838
Capital contribution - - - - - - 21,755
Shares issued for cash - - - - - - 10,700
Offering costs - - - - - - (2,849)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1984 - - - - - - 36,444
Capital contribution - - - - - - 200,555
Sale of 12,166 warrants at $1.50
per warrant - - - - - - 18,250
Cancellation of shares - - - - - - -
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1985 - - - - - - 255,249
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1986 - - - - - - 255,249
Issuance of common stock upon
exercise of warrants - - - - - - 27,082
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1987 - - - - - - 282,331
Shares issued for cash - - - - - - 101,752
Shares issued as compensation - - - - - - 70,600
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1988 - - - - - - 454,683
Shares issued for cash - - - - - - 2,000
Shares issued as compensation - - - - - - 18,000
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Initial issuance of common stock
October 21, 1983 $ - $ - $ - $ 2,500
Adjustment to give effect to
recapitalization on December 15,
1986 - cancellation of shares - - - (4)
-------------- -------------- -------------- --------------
Balance, October 21, 1983 - - - 2,496
Shares issued by Tensiodyne
Corporation in connection with
pooling of interests - - - 4,342
Net loss (4,317) - - (4,317)
-------------- -------------- -------------- --------------
Balance, December 31, 1983 (4,317) - - 2,521
Capital contribution - - - 21,755
Shares issued for cash - - - 10,700
Offering costs - - - (2,849)
Net loss (21,797) - - (21,797)
-------------- -------------- -------------- --------------
Balance, December 31, 1984 (26,114) - - 10,330
Capital contribution -- - 200,555
Sale of 12,166 warrants at $1.50
per warrant - - - 18,250
Cancellation of shares - - - -
Net loss (252,070) - - (252,070)
-------------- -------------- -------------- --------------
Balance, December 31, 1985 (278,184) - - (22,935)
Net loss (10,365) - - (10,365)
-------------- -------------- -------------- --------------
Balance, December 31, 1986 (288,549) - - (33,300)
Issuance of common stock upon
exercise of warrants - - - 27,082
Net loss (45,389) - - (45,389)
-------------- -------------- -------------- --------------
Balance, December 31, 1987 (333,938) - - (51,607)
Shares issued for cash - - - 101,752
Shares issued as compensation - - - 70,600
Net loss (142,335) - - (142,335)
-------------- -------------- -------------- --------------
Balance, December 31, 1988 (476,273) - - (21,590)
Shares issued for cash - - - 2,000
Shares issued as compensation - - - 18,000
Net loss (31,945) - - (31,945)
-------------- -------------- -------------- --------------
---------------------------------------------------------------------------------------------------
Continued ...
F-8
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1989 84 - - - - -
Shares issued for cash 2 - - - - -
Shares issued as compensation 6 - - - - -
Net income - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1990 92 - - - - -
Shares issued for cash 1 - - - 350 -
Shares issued as compensation 4 - - - - -
Conversion of warrants - - - - - -
Conversion of stock (6) - 60,000 60 - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1991 91 - 60,000 60 350 -
Shares issued for cash 20 - - - - -
Shares issued as compensation 5 - - - - -
Conversion of warrants 6 - - - - -
Sale of Class B stock - - 60,000 60 - -
Issuance of stock to
unconsolidated subsidiary 5 - - - - -
Conversion of stock 6 - (60,000) (60) - -
Cancellation of shares (7) - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1992 126 - 60,000 60 350 -
Shares issued for cash
Shares issued for license
agreement 13 - - - - -
Shares issued as compensation 67 - - - - -
Warrant conversion 56 - - - - -
Cancellation of shares (32) - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1993 230 - 60,000 60 350 -
Adjustment to give effect to
recapitalization on February 1,
1994 31 - - - - -
Shares issued for cash 1,486 2 - - - -
Shares issued as compensation 223 - - - - -
Issuance of shares for the
modification of agreements 34 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1994 2,004 2 60,000 60 350 -
Issuance of shares for the
modification of agreement 153 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1989 - - - - - - 474,683
Shares issued for cash - - - - - - 59,250
Shares issued as compensation - - - - - - 32,400
Net income - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1990 - - - - - - 566,333
Shares issued for cash - - - - - - 273,686
Shares issued as compensation - - - - - - 64,884
Conversion of warrants - - - - - - -
Conversion of stock - - - - - - (6)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1991 - - - - - - 904,897
Shares issued for cash - - - - - - 16,000
Shares issued as compensation - - - - - - 15,520
Conversion of warrants - - - - - - 15,000
Sale of Class B stock - - - - - - 14,940
Issuance of stock to
unconsolidated subsidiary - - - - - - 71,664
Conversion of stock - - - - - - 6
Cancellation of shares - - - - - - -
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1992 - - - - - - 1,038,027
Shares issued for cash
Shares issued for license
agreement - - - - - - 6,250
Shares issued as compensation - - - - - - 13,913
Warrant conversion - - - - - - 304,999
Cancellation of shares - - - - - - (7,569)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1993 - - - - - - 1,355,620
Adjustment to give effect to
recapitalization on February 1,
1994 - - - - - - 385,424
Shares issued for cash - - - - - - 24,784
Shares issued as compensation - - - - - - 223
Issuance of shares for the
modification of agreements - - - - - - -
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1994 - - - - - - 1,766,051
Issuance of shares for the
modification of agreement - - - - - - 153
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Balance, December 31, 1989 (508,218) - - (33,535)
Shares issued for cash - - - 59,250
Shares issued as compensation - - - 32,400
Net income 133,894 - - 133,894
-------------- -------------- -------------- --------------
Balance, December 31, 1990 (374,324) - - 192,009
Shares issued for cash - - - 273,686
Shares issued as compensation - - - 64,884
Conversion of warrants - - - -
Conversion of stock - - - 54
Net loss (346,316) - - (346,316)
-------------- -------------- -------------- --------------
Balance, December 31, 1991 (720,640) - - 184,317
Shares issued for cash - - - 16,000
Shares issued as compensation - - - 15,520
Conversion of warrants - - - 15,000
Sale of Class B stock - - - 15,000
Issuance of stock to
unconsolidated subsidiary - - - 71,664
Conversion of stock - - - (54)
Cancellation of shares - - - -
Net loss (154,986) - - (154,986)
-------------- -------------- -------------- --------------
Balance, December 31, 1992 (875,626) - - 162,461
Shares issued for cash
Shares issued for license
agreement - - - 6,250
Shares issued as compensation - - - 13,913
Warrant conversion - - - 304,999
Cancellation of shares - - - (7,569)
Net loss (929,900) - - (929,900)
-------------- -------------- -------------- --------------
Balance, December 31, 1993 (1,805,526) - - (449,846)
Adjustment to give effect to
recapitalization on February 1,
1994 - - - 385,424
Shares issued for cash - - - 24,786
Shares issued as compensation - - - 223
Issuance of shares for the
modification of agreements - - - -
Net loss (377,063) - - (377,063)
-------------- -------------- -------------- --------------
Balance, December 31, 1994 (2,182,589) - - (416,476)
Issuance of shares for the
modification of agreement - - - 153
Net loss (197,546) - - (197,546)
-------------- -------------- -------------- --------------
---------------------------------------------------------------------------------------------------
Continued ...
F-9
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1995 2,157 2 60,000 60 350 -
Shares issued as compensation 165 - - - - -
Shares issued for cash 70 - - - - -
Issuance of shares for the
modification of agreements 250 - - - - -
Cancellation of shares held in
treasury (62) - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1996 2,580 2 60,000 60 350 -
Shares issued for cash 100 - - - - -
Conversion of indebtedness 800 1 - - - -
Class A common stock issued in
cancellation of $372,000
accrued wages due officer 1,500 2 - - - -
Shares issued as compensation 247 - - - - -
Adjustment to give effect to
recapitalization on March 9,
1997 560 1 - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1997 5,787 6 60,000 60 350 -
Shares issued in cancellation of
indebtedness 2,430 2 - - - -
Conversion of options 500 1 - - - -
Shares issued as compensation 1,122 1 - - - -
Shares issued in cancellation of
redeemable preferred stock 50 - - - - -
Shares returned to treasury and
cancelled (560) (1) - - - -
Modification of royalty agreement 733 1 - - - -
Issuance of warrants to officer - - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1998 10,062 10 60,000 60 350 -
Shares issued in cancellation of
indebtedness 2,175 2 - - - -
Shares issued as compensation 1,255 1 - - - -
Shares issued in modification of
licensing agreement 672 1 - - - -
Shares issued for cash 433 - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1995 - - - - - - 1,766,204
Shares issued as compensation - - - - - - 16,466
Shares issued for cash - - - - - - 174,040
Issuance of shares for the
modification of agreements - - - - - - -
Cancellation of shares held in
treasury - - - - - - (154,600)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1996 - - - - - - 1,802,110
Shares issued for cash - - - - - - 100,000
Conversion of indebtedness - - - - - - 165,999
Class A common stock issued in
cancellation of $372,000
accrued wages due officer - - - - - - 371,998
Shares issued as compensation - - - - - - 2,471
Adjustment to give effect to
recapitalization on March 9,
1997 - - - - - - (1)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1997 - - - - - - 2,442,577
Shares issued in cancellation of
indebtedness - - - - - - 169,998
Conversion of options - - - - - - 124,999
Shares issued as compensation - - - - - - 112,161
Shares issued in cancellation of
redeemable preferred stock - - - - - - 150,000
Shares returned to treasury and
cancelled - - - - - - 1
Modification of royalty agreement - - - - - 7,331
Issuance of warrants to officer - - - - - - 27,567
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1998 - - - - - - 3,034,634
Shares issued in cancellation of
indebtedness - - - - - - 166,665
Shares issued as compensation - - - - - - 95,098
Shares issued in modification of
licensing agreement - - - - - - (1)
Shares issued for cash - - - - - - 173,540
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Balance, December 31, 1995 (2,380,135) - - (613,869)
Shares issued as compensation - - - 16,466
Shares issued for cash - - - 174,040
Issuance of shares for the
modification of agreements - - - -
Cancellation of shares held in
treasury - - - (154,600)
Net loss (450,734) - - (450,734)
-------------- -------------- -------------- --------------
Balance, December 31, 1996 (2,830,869) - - (1,028,697)
Shares issued for cash - - - 100,000
Conversion of indebtedness - - - 166,000
Class A common stock issued in
cancellation of $372,000
accrued wages due officer - - - 372,000
Shares issued as compensation - - - 2,471
Adjustment to give effect to
recapitalization on March 9,
1997 - - - -
Net loss (133,578) - - (133,578)
-------------- -------------- -------------- --------------
Balance, December 31, 1997 (2,964,447) - - (521,804)
Shares issued in cancellation of
indebtedness - - - 170,000
Conversion of options - - - 125,000
Shares issued as compensation - - - 112,162
Shares issued in cancellation of
redeemable preferred stock - - - 150,000
Shares returned to treasury and
cancelled - - - -
Modification of royalty agreement - - - 7,332
Issuance of warrants to officer - - - 27,567
Net loss (549,187) - - (549,187)
-------------- -------------- -------------- --------------
Balance, December 31, 1998 (3,513,634) - - (478,930)
Shares issued in cancellation of
indebtedness - - - 166,667
Shares issued as compensation - - - 95,099
Shares issued in modification of
licensing agreement - - - -
Shares issued for cash - - - 173,540
Net loss (539,283) - - (539,283)
-------------- -------------- -------------- --------------
---------------------------------------------------------------------------------------------------
Continued ...
F-10
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 1999 14,597 14 60,000 60 350 -
Shares issued as compensation -
as restated 700 1 - - - -
Shares issued to investors
pursuant to settlement
agreement 65 1 - - - -
Shares issued for cash and non-
recourse promissory note 5,000 5 - - - -
Shares issued for cash 400 - - - - -
Shares issued in cancellation of
indebtedness 100 - - - - -
Shares issued as compensation
pursuant to escrow agreement 4,184 4 - - - -
Shares returned from escrow (400) - - - - -
Common shares converted into
Class B common shares (40) - 40,000 40 - -
Preferred shares converted into
common shares 12 - - - (13) -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 2000 24,618 25 100,000 100 337 -
Shares issued as compensation 6,185 6 - - - -
Shares issued for cash 4,932 5 - - - -
Shares issued in connection with
private offering 698 - - - - -
Shares issued to officer 6,000 6 - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 2001 42,433 42 100,000 100 337 -
Shares issued as compensation 21,835 22 - - - -
Issuance of shares to University
of Pennsylvania 1,096 1 - - - -
Shares issued in settlement of
lawsuit 1,397 1 - - - -
Shares issued for cash 28,048 28 - - - -
Offering costs - - - - - -
Shares issued in cancellation of
president's interest in patents - - 200,000 200 - -
Cancellation of shares (1,322) (1) - - - -
Shares issued to Company's
president as past compensation 13,000 13 - - - -
Shares issued in connection with
private offering 2,741 3 - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 1999 - - - - - - 3,469,936
Shares issued as compensation -
as restated - - - - - - 824,515
Shares issued to investors
pursuant to settlement
agreement - - - - - - (1)
Shares issued for cash and non-
recourse promissory note - - - - - - 1,994,995
Shares issued for cash - - - - - - 281,694
Shares issued in cancellation of
indebtedness - - - - - - 100,000
Shares issued as compensation
pursuant to escrow agreement - - - - - - 4,180
Shares returned from escrow - - - - - - -
Common shares converted into
Class B common shares - - - - - - (40)
Preferred shares converted into
common shares - - - - - - -
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 2000 - - - - - - 6,675,279
Shares issued as compensation - - - - - - 804,330
Shares issued for cash - - - - - - 286,562
Shares issued in connection with
private offering - - - - - - -
Shares issued to officer - - - - - - 1,127,994
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 2001 - - - - - - 8,894,165
Shares issued as compensation - - - - - - 1,185,609
Issuance of shares to University
of Pennsylvania - - - - - - (1)
Shares issued in settlement of
lawsuit - - - - - - 39,999
Shares issued for cash - - 143 - - - 1,153,708
Offering costs - - - - - - (200,412)
Shares issued in cancellation of
president's interest in patents - - - - - - -
Cancellation of shares - - - - - - 1
Shares issued to Company's
president as past compensation - - - - - - 259,987
Shares issued in connection with
private offering - - - - - - (3)
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Balance, December 31, 1999 (4,052,917) - - (582,907)
Shares issued as compensation -
as restated - - - 824,516
Shares issued to investors
pursuant to settlement
agreement - - - -
Shares issued for cash and non-
recourse promissory note - - - 1,995,000
Shares issued for cash - - - 281,694
Shares issued in cancellation of
indebtedness - - - 100,000
Shares issued as compensation
pursuant to escrow agreement - - - 4,184
Shares returned from escrow - - - -
Common shares converted into
Class B common shares - - - -
Preferred shares converted into
common shares - - - -
Net loss (1,199,695) - - (1,199,695)
-------------- -------------- -------------- --------------
Balance, December 31, 2000 (5,252,612) - - 1,422,792
Shares issued as compensation - - - 804,336
Shares issued for cash - - - 286,567
Shares issued in connection with
private offering - -
Shares issued to officer - - - 1,128,000
Net loss (3,548,559) - - (3,548,559)
-------------- -------------- -------------- --------------
Balance, December 31, 2001 (8,801,171) - - 93,136
Shares issued as compensation - - - 1,185,631
Issuance of shares to University
of Pennsylvania - - - -
Shares issued in settlement of
lawsuit - - - 40,000
Shares issued for cash - - - 1,153,736
Offering costs - - - (200,412)
Shares issued in cancellation of
president's interest in patents - - - 200
Cancellation of shares - - - -
Shares issued to Company's
president as past compensation - - - 260,000
Shares issued in connection with
private offering - - - -
Net loss (3,852,296) - - (3,852,296)
-------------- -------------- -------------- --------------
---------------------------------------------------------------------------------------------------
Continued ...
F-11
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 2002 109,228 109 300,000 300 - -
Shares issued as compensation 7,780,333 7,780 - - - -
Issuance of shares to University
of Pennsylvania 4,242 4 - - - -
Shares purchased for cancellation (1,296) (1) - - - -
Shares issued in settlement of
lawsuit 260 - - - - -
Shares issued for cash 34,030 33 - - - -
Offering costs - - - - - -
Shares issued in cancellation of
legal fee note payable 22,000,000 22,000 - - - -
Shares issued to Company's
president for past compensation 32,000,000 32,000 - - - -
Shares issued to Company's
president in consideration of
note payable 5,000,000 5,000 - - - -
Officer's compensation relating
to cancellation of October 27,
2000 escrow agreement - - - - - -
Shares issued in cancellation of
indebtedness due on legal fees 1,000 1 - - - -
Shares returned to treasury by
Company officers in consider-
ation for the cancellation of
notes due the Company by them
on past stock purchases (5,001) (5) - - - -
Exchange of Class A common
stock for Class B common stock (300) - 300,000 300 - -
Exchange of Class A common
stock for Class D preferred stock (7,440,000) (7,440) - - - -
Shares issued in connection with
private offering 7,006,479 7,007 - - - -
Accrued interest on officer loan - - - - - -
Capital contribution by subsidiary - - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 2003 66,488,975 66,488 600,000 600 337 -
Shares issued for cash 1,207,535 1,208 - - - -
Shares issued for settlement of
legal and accounting fees
payable 75,000 75 - - - -
Exercise of warrants 3,300 3 - - - -
Conversion of Class C preferred
shares to Class A common shares 2,700 3 - - - -
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 2002 - - 143 - - - 11,333,053
Shares issued as compensation - - - - - - 476,554
Issuance of shares to University
of Pennsylvania - - - - - - (4)
Shares purchased for cancellation - - - - - - (24,431)
Shares issued in settlement of
lawsuit - - - - - - -
Shares issued for cash - - 4,074 4 - - 235,161
Offering costs - - - - - - (81,975)
Shares issued in cancellation of
legal fee note payable - - - - - - 1,561,127
Shares issued to Company's
president for past compensation - - - - - - 288,000
Shares issued to Company's
president in consideration of
note payable - - - - - - 45,000
Officer's compensation relating
to cancellation of October 27,
2000 escrow agreement - - - - - - 19,617
Shares issued in cancellation of
indebtedness due on legal fees - - - - - - 9,999
Shares returned to treasury by
Company officers in consider-
ation for the cancellation of
notes due the Company by them
on past stock purchases - - - - - - (769,818)
Exchange of Class A common
stock for Class B common stock - - - - - - (300)
Exchange of Class A common
stock for Class D preferred stock - - - - 5,440,000 5,440 2,000
Shares issued in connection with
private offering - - - - - - (7,007)
Accrued interest on officer loan - - - - - - -
Capital contribution by subsidiary - - - - - - 37,597
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 2003 - - 4,217 4 5,440,000 5,440 13,124,573
Shares issued for cash - - - - - - 206,267
Shares issued for settlement of
legal and accounting fees
payable - - - - - - 64,392
Exercise of warrants - - - - - - 4,547
Conversion of Class C preferred
shares to Class A common shares - - (2,700) (3) - - -
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Balance, December 31, 2002 (12,653,467) - - (1,320,005)
Shares issued as compensation - - - 484,334
Issuance of shares to University
of Pennsylvania - - - -
Shares purchased for cancellation - - - (24,432)
Shares issued in settlement of
lawsuit - - - -
Shares issued for cash - - - 235,198
Offering costs - - - (81,975)
Shares issued in cancellation of
legal fee note payable - - - 1,583,127
Shares issued to Company's
president for past compensation - - - 320,000
Shares issued to Company's
president in consideration of
note payable - (50,000) - -
Officer's compensation relating
to cancellation of October 27,
2000 escrow agreement - - - 19,617
Shares issued in cancellation of
indebtedness due on legal fees - - - 10,000
Shares returned to treasury by
Company officers in consider-
ation for the cancellation of
notes due the Company by them
on past stock purchases - - - (769,823)
Exchange of Class A common
stock for Class B common stock - - - -
Exchange of Class A common
stock for Class D preferred stock - - - -
Shares issued in connection with
private offering - - - -
Accrued interest on officer loan - (1,096) - (1,096)
Capital contribution by subsidiary - - - 37,597
Net loss (1,885,728) - - (1,885,728)
-------------- -------------- -------------- --------------
Balance, December 31, 2003 (14,539,195) (51,096) - (1,393,186)
Shares issued for cash - - - 207,475
Shares issued for settlement of
legal and accounting fees
payable - - - 64,467
Exercise of warrants - - - 4,550
Conversion of Class C preferred
shares to Class A common shares - - - -
---------------------------------------------------------------------------------------------------
Continued ...
F-12
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 2004, 2003 and 2002
and the Period from October 21, 1983 (Inception)
================================================================================
Class A Class B Class A
Common Stock Common Stock Preferred Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ---------- ------------- ---------- ------------- ----------
Conversion of Class D preferred
shares to Class A common shares 3,520,000 3,520 - - - -
Shares issued as compensation
to consultants 6,721,923 6,722 - - - -
Shares issued in exchange for
shares of Langley Investments,
PLC 8,666,666 8,667 - - - -
Beneficial conversion feature
of convertible debentures - - - - - -
Repurchase of common stock (1,325) (1) - - - -
Offering costs - - - - - -
Interest income on notes
receivable - common stock - - - - - -
Decrease in market value of
securities available for sale - - - - - -
Net loss - - - - - -
------------- ---------- ------------- ---------- ------------- ----------
Balance, December 31, 2004 86,684,774 $ 86,685 600,000 $ 600 337 $ -
============= ========== ============= ========== ============= ==========
con't
Class B Class C Class D
Preferred Stock Preferred Stock Preferred Stock Additional
------------------------- ------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------- ---------- --------------
Conversion of Class D preferred
shares to Class A common shares - - - - (3,520,000) (3,520) -
Shares issued as compensation
to consultants - - - - - - 14,245,473
Shares issued in exchange for
shares of Langley Investments,
PLC - - - - - - 12,964,846
Beneficial conversion feature
of convertible debentures - - - - - - 1,125,000
Repurchase of common stock - - - - - - (4,166)
Offering costs - - - - - - (13,713)
Interest income on notes
receivable - common stock - - - - - - -
Decrease in market value of
securities available for sale - - - - - - -
Net loss - - - - - - -
------------- ---------- ------------- ---------- ------------- ---------- --------------
Balance, December 31, 2004 - $ - 1,517 $ 1 1,920,000 $ 1,920 $ 41,717,219
============= ========== ============= ========== ============= ========== ==============
con't
Deficit
Accumulated Notes Accumulated Total
During the Receivable - Other Stockholders'
Development Common Comprehensive Equity
Stage Stock Loss (Deficit)
-------------- -------------- -------------- --------------
Conversion of Class D preferred
shares to Class A common shares - - - -
Shares issued as compensation
to consultants - - - 14,252,195
Shares issued in exchange for
shares of Langley Investments,
PLC - - - 12,973,513
Beneficial conversion feature
of convertible debentures - - - 1,125,000
Repurchase of common stock - - - (4,167)
Offering costs - - - (13,713)
Interest income on notes
receivable - common stock - (4,000) - (4,000)
Decrease in market value of
securities available for sale - - (1,167,616) (1,167,616)
Net loss (25,495,291) - - (25,495,291)
-------------- -------------- -------------- --------------
Balance, December 31, 2004 $ (40,034,486) $ (55,096) $ (1,167,616) $ 549,227
============== ============== ============== ==============
---------------------------------------------------------------------------------------------------
See reports of independent registered public accounting firms
and accompanying notes to consolidated financial statements
F-13
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
==================================================================================================================================
From Inception
(October 21, 1983)
For The Years Ended December 31, Through
------------------------------------------------------ December 31,
2004 2003 2002 2004
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
Net loss $ (25,495,291) $ (1,885,728) $ (3,852,296) $ (40,034,486)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 14,252,195 858,953 1,546,894 21,452,956
Other-than-temporary write-down of marketable
securities available for sale 4,284,760 - - 4,284,760
Realized loss on sale of marketable securities 3,668,850 - - 3,668,850
Unrealized loss on marketable securities 1,523,310 - - 1,523,310
Legal fees incurred for note payable - - 1,481,895 1,456,142
Accrued interest expense added to principal 216,713 199,977 114,971 804,416
Amortization of discount on convertible
debentures 326,161 - - 326,161
Accrued interest income added to principal (12,460) (39,438) (49,444) (299,629)
(Gain) loss on settlement of indebtedness (45,150) - - 244,790
Depreciation and amortization 8,580 9,139 7,747 203,331
Other non-cash adjustments - - - (107,722)
Decrease (increase) in receivable due on
research contract 12,109 (28,004) 285,677 (66,223)
Decrease (increase) in prepaid expenses and
other current assets 5,690 (3,078) (2,612) -
Increase in deposits - - - (2,348)
(Decrease) increase in accounts payable and
accrued expenses (66,856) 166,848 (284,625) 1,220,981
---------------- ---------------- ---------------- ----------------
Net cash used in operating activities (1,321,389) (721,331) (751,793) (5,324,711)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of securities 1,205,612 - - 1,489,208
Purchase of securities (900,006) - - (990,006)
Payment received on officer loans 97,450 - - 876,255
Funds advanced to officers (7,000) - (33,547) (549,379)
Purchase of property and equipment (676) - (29,608) (267,148)
Investment in joint ventures - - - (102,069)
Proceeds from foreclosure - - - 44,450
Proceeds from sale of equipment - - - 10,250
Payment for license agreement - - - (6,250)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) investing activities 395,380 - (63,155) 505,311
---------------- ---------------- ---------------- ----------------
----------------------------------------------------------------------------------------------------------------------------------
Continued ...
F-14
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
==================================================================================================================================
From Inception
(October 21, 1983)
For The Years Ended December 31, Through
------------------------------------------------------ December 31,
2004 2003 2002 2004
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from sale of common stock 212,025 209,115 1,153,735 3,340,858
Proceeds from convertible debentures and other
notes payable 785,000 350,000 - 1,307,069
Proceeds from sale of preferred stock - 64,505 - 473,005
Costs incurred in offerings (13,713) (81,975) (261,474) (468,201)
Capital contributions - - - 301,068
Repurchase of common stock for
cancellation (4,167) (24,432) - (28,599)
Payment on proposed reorganization - - - (5,000)
---------------- ---------------- ---------------- ----------------
Net cash flows provided by financing activities 979,145 517,213 892,261 4,920,200
---------------- ---------------- ---------------- ----------------
Net change in cash and cash equivalents 53,136 (204,118) 77,313 100,800
Cash and cash equivalents, beginning of period 47,664 251,782 174,469 -
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 100,800 $ 47,664 $ 251,782 $ 100,800
================ ================ ================ ================
Supplemental disclosure of cash flow information:
Interest paid during the period $ 2,750 $ 2,750 $ 2,750
================ ================ ================
Income taxes paid during the period $ 800 $ 800 $ 800
================ ================ ================
Supplemental disclosure of non-cash investing and financing activities:
2004
----
The Company issued 3,522,700 shares of its common stock in consideration
for the cancellation of 2,700 shares of Class C preferred stock and
3,520,000 shares of Class D preferred stock.
The Company issued 8,666,666 shares of its common stock in exchange for
receiving 7,158,590 shares of Langley Park Investments, PLC common stock.
The Company issued 6,721,923 shares of its common stock as compensation
valued at $14,252,195.
The Company issued 75,000 shares of its common stock in settlement of legal
and accounting fees payable of $64,467.
The Company recorded a discount of $1,125,000 on its convertible
debentures.
See accompanying notes to the consolidated financial statements for
additional non-cash investing and financing activities.
----------------------------------------------------------------------------------------------------------------------------------
Continued ...
F-15
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
==================================================================================================================================
2003
----
The Company abandoned its search of funding through its Straight
Documentary Credit and cancelled the 100,000 shares that were held in
reserve.
The Company issued 4,242 shares to the University of Pennsylvania pursuant
to the anti-dilutive provision in its license agreement with the
University.
The Company issued 22,000,000 shares of its common stock as consideration
for the assumption by certain third parties of the legal obligation due by
the Company to two attorneys amounting to $1,583,127.
The Company issued 5,000,000 shares of its common stock to its president as
consideration for a $50,000 non-recourse promissory note.
The Company issued 260 shares of its common stock as additional
consideration pursuant to its anti-dilution provision in its settlement
agreement with Mr. Stephen Beck.
The Company's president and secretary returned 5,001 shares of common stock
in consideration for the cancellation of notes due the Company by them for
past purchases of the common stock totaling $769,823.
The Company issued 7,006,479 shares of its common stock in connection with
its Regulation S offering.
Of the 22,000,000 common shares issued in consideration of the assumption
of the above-indicated indebtedness, 7,440,000 shares were cancelled for
the issuance of 2,500,000 shares of Class D preferred stock.
The Company paid the full amount due an attorney firm through the issuance
of 1,000 shares of common stock.
2002
----
The Company issued an additional 40,000 shares that were held in reserve in
connection with its Straight Documentary Credit.
The Company issued 1,096 shares to the University of Pennsylvania pursuant
to the anti-dilutive provision in its licensing agreement with the
University.
The Company's president cancelled 1,322 shares of common stock that he held
in escrow pursuant to the escrow agreement that he has with the Company.
The Company issued 2,741 shares of its common stock in connection with its
Regulation S offering.
The Company issued 397 shares of its common stock as additional
consideration pursuant to its anti-dilution provision in its settlement
agreement with Mr. Stephen Beck.
----------------------------------------------------------------------------------------------------------------------------------
See report of independent registered accounting firm and
accompanying notes to consolidated financial statements
F-16
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
-----------------------------------------------
Organization
------------
Material Technologies, Inc. (the "Company") was organized on October 21, 1983,
under the laws of the state of Delaware.
The Company is in the development stage, as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises," 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.
On January 22, 2003, the Company formed Matech International, Inc., a Nevada
corporation ("International"). International was formed as a wholly owned
subsidiary of the Company to advertise, market and sell the Company's videoscope
technology which is presently utilized in the inspection of stress and crack
points in turbine engines on the wings of airplanes. At the present time there
is no activity in International and the Company does not anticipate nor
reasonably foresee any business activity in International in the near future.
On March 13, 2003 the Company formed Matech Aerospace, Inc., a Nevada
corporation ("Aerospace"). Aerospace was formed as a wholly owned subsidiary of
the Company to advertise, market and sell all manufacturing and marketing rights
to the Company's products and technologies in all commercial markets within the
United States. During 2003, Aerospace sold shares of its common stock to
investors. As of December 31, 2004 and 2003, the Company holds a 99% interest in
Aerospace.
On September 23, 2003, the Company's Board of Directors affected a 1,000 for 1
reverse stock split of its Class A common stock and all classes of its preferred
stock. The financial statements presented herein have been restated to reflect
the reverse stock split as if it had occurred at the beginning of each period
presented. Unless otherwise noted, common stock refers to Class A common stock.
Basis of Presentation
---------------------
The Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America and have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The Company has sustained operating losses
since its inception (October 21, 1983). In addition, the Company has used
substantial amounts of working capital in its operations. Further, at December
31, 2004, current liabilities exceed current assets by approximately $85,000 and
the deficit accumulated during the development stage amounted to approximately
$40,000,000.
--------------------------------------------------------------------------------
F-17
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, continued
----------------------------------------------------------
In view of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its future operations. The
Company has entered into a $215,000 contract to provide research services over a
two-year period, of which approximately $140,000 is still available to be
collected. During 2004, the Company netted approximately $1,200,000 from sale of
marketable securities and subsequent to December 31, 2004, the Company sold its
remaining trading securities for proceeds of $285,516. Management believes that
these sources of funds and current liquid assets will allow the Company to
continue as a going concern through the end of 2005. Management of the Company
will need to raise additional debt and/or equity capital to finance future
activities beyond 2005. However, no assurances can be made that current or
anticipated future sources of funds will enable the Company to finance future
periods' operations. These financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or
liabilities that might be necessary should the Company be unable to continue as
a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Principles of Consolidation
---------------------------
The accompanying financial statements include the accounts and transactions of
Material Technologies, Inc. and its subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation. The minority owners' interests
in a subsidiary have been reflected as minority interest in the accompanying
consolidated balance sheets.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the fair value of marketable
securities and the recoverability of long-lived assets. Accordingly, actual
results could differ from those estimates.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers cash
equivalents to include highly liquid investments with original maturities of
three months or less.
--------------------------------------------------------------------------------
F-18
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Marketable Securities
---------------------
Marketable securities purchased with the intent of selling them in the near term
are classified as trading securities. Trading securities are initially recorded
at cost and are adjusted to their fair value, with the change in fair value
during the period included in earnings as unrealized gains or losses. Realized
gains or losses on dispositions are based upon the net proceeds and the adjusted
book value of the securities sold, using the specific identification method, and
are recorded as realized gains or losses in the income statement. Securities
that are not classified as trading securities are classified as
available-for-sale securities. Available-for-sale securities are initially
recorded at cost and adjusted to their fair value. Any change in fair value
during the period is excluded from earnings and recorded, net of tax, as a
component of accumulated other comprehensive income (loss). Any decline in value
of available-for-sale securities below cost that is considered to be "other than
temporary" is recorded as a reduction of the cost basis of the security and is
included in the statement of operations as a write down of the market value.
During the year ended December 31, 2004, the Company recognized an "other than
temporary" loss on its available for sale investments totaling $4,284,760.
Receivable Due on Research Contract
-----------------------------------
Accounts receivable are reported at the customers' outstanding balances less any
allowance for doubtful accounts. The Company does not accrue interest on overdue
accounts receivable.
The allowance for doubtful accounts 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. As of December 31, 2004 and
2003, management believes all accounts receivable are collectible. Accordingly,
no allowance for doubtful accounts is included in the accompanying consolidated
balance sheets.
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 that
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.
The Company depreciates its property and equipment using the straight-line
method over the following estimated useful lives:
Machinery 5 years
Computer equipment 3-5 years
Office equipment 5 years
--------------------------------------------------------------------------------
F-19
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Long-Lived Assets
-----------------
The Company accounts for its long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
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 or disposable value. As of December 31, 2004 and 2003, the Company does
not believe there has been any impairment of its long-lived assets.
Intangible Assets
-----------------
Intangible assets consist of patents, license agreements and website design
costs and are recorded at cost. Patents and license agreements are amortized
over 17 years and website design costs are amortized over 5 years. In accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," the carrying values
of intangible assets are evaluated for impairment annually or whenever events or
changes in circumstances indicate that the historical cost carrying value may no
longer be appropriate. As of December 31, 2004 and 2003, the Company does not
believe there has been any impairment of its intangible assets.
Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not be
realized through future operations.
Convertible Debentures
----------------------
The Company's convertible debentures are recorded net of deferred financing
costs. The Company records deferred financing costs in proportion to principal
advances and amortizes them to interest expense over the life of the debentures
on a straight-line basis, which approximates the effective interest method.
--------------------------------------------------------------------------------
F-20
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Beneficial Conversion Feature
-----------------------------
The convertible feature of the Debenture (see Note 9) provides for a rate of
conversion that is below market value. This feature is normally characterized as
a beneficial conversion feature ("BCF"), which is recorded by the Company
pursuant to the Emerging Issues Task Forces ("EITF") Issue No. 98-5 ("EITF
98-05"), "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingency Adjustable Conversion Ratio," and EITF Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments."
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, accounts receivable, receivable from officer, accounts
payable, accrued expenses, notes payable and convertible debentures. Pursuant to
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," the
Company is required to estimate the fair value of all financial instruments at
the balance sheet date. The Company cannot determine the estimated fair value of
receivable from officer as the transaction originated with a related party and
instruments similar to the convertible debentures could not be found. Other than
these items, the Company considers the carrying values of its financial
instruments in the financial statements to approximate their fair values.
Revenue Recognition
-------------------
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," as revised by
SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of
an arrangement exists, title transfer has occurred, the price is fixed or
readily determinable and collectibility is probable. Sales are recorded net of
sales discounts.
Substantially all of the Company's revenue is derived from the Company's
contracts relating to the further development of the Electrochemical Fatigue
Sensor ("EFS"). Revenue on the contracts is recognized at the time services are
rendered. The Company bills monthly for services pursuant to these contracts at
which time revenue is recognized for the period that the respective invoice
relates. In October 2003, the Company entered into a contract to provide
research services to a third party in connection with the application of the
Company's EFS to detect stress on military vehicles. The contract expires in
September 2005 and has an approved budget of $215,281. As of December 31, 2004,
$74,936 has been billed on this contract. This gross amount includes out-of
pocket expenses relating to third party engineering and other related costs.
All other revenue is reported in the period that the income is earned.
--------------------------------------------------------------------------------
F-21
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
In the past, the Company has received research and development funding from
various agencies of the U.S. government. U.S. government contracts are subject
to government audits. Such audits could lead to inquiries from the government
regarding the allowability of costs under U.S. government regulations and
potential adjustments of contract revenues. To date, the Company has not been
involved in any such audits.
Research and Development
------------------------
The Company expenses research and development costs as incurred.
Net Loss per Share
------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings or losses of the entity. For the
years ended December 31, 2004, 2003 and 2002, basic and diluted loss per share
are the same. Since the calculation of diluted per share amounts would result in
an anti-dilutive calculation that is not permitted and therefore not included.
If such shares were included in diluted EPS, they would have resulted in
weighted-average common shares of 144,246,012, 103,824,713 and 13,538,217 in
2004, 2003 and 2002, respectively. Such amounts include shares potentially
issuable pursuant to shares held in escrow (see Note 12), convertible debentures
(see Note 9), and outstanding options and warrants (see Note 14) and convertible
preferred stock.
Issuance of Stock for Non-Cash Consideration
--------------------------------------------
All issuances of the Company's stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of the non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the dates issued. In certain instances, the Company has
discounted the values assigned to the issued shares for illiquidity and/or
restrictions on resale (see Note 12).
--------------------------------------------------------------------------------
F-22
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--An amendment to SFAS No.
123." These standards define a fair value based method of accounting for
stock-based compensation. In accordance with SFAS Nos. 123 and 148, the cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and is recognized over the vesting period. The value of the
stock-based award is determined using the Black-Scholes option-pricing model,
whereby compensation cost is the excess of the fair value of the award as
determined by the pricing model at the grant date or other measurement date over
the amount an employee must pay to acquire the stock. The resulting amount is
charged to expense on the straight-line basis over the period in which the
Company expects to receive the benefit, which is generally the vesting period.
During the years ended December 31, 2004, 2003 and 2002, the Company recognized
no compensation expense under SFAS No. 123 for options issued to employees.
Concentrations of Credit Risk
-----------------------------
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
From time-to-time, the Company's cash balances exceed the amount insured by the
FDIC. Management believes the risk of loss of cash balances in excess of the
insured limit to be low.
The Company's 2004 and 2003 revenues were generated from two customers and its
2002 revenues were generated from one customer.
Reclassifications
-----------------
Certain amounts in December 31, 2003 and 2002 financial statements have been
reclassified to conform with the December 31, 2004 presentation. Such
reclassification had no effect on net loss as previously reported.
Recent Accounting Pronouncements
--------------------------------
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities."
This statement requires that the assets, liabilities and results of the
activities of variable interest entities be consolidated into the financial
statements of the company that has a controlling financial interest. It also
provides the framework for determining whether an entity should be consolidated
based on voting interest or significant financial support provided to it. In
general, for all entities that were previously considered special purpose
entities, FIN 46R should be applied in periods ending after December 15, 2003.
Otherwise, FIN 46R is applicable to all public entities for periods ending after
March 15, 2004. The adoption of FIN 46R did not have a material impact on the
Company's financial condition or results of operations.
--------------------------------------------------------------------------------
F-23
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets, an amendment of APB Opinion 29, Accounting for Non-Monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted and companies must apply the standard
prospectively. The Company adopted this statement on January 1, 2005. The
adoption of the statement should not cause a significant change in the current
manner in which the Company accounts for its exchanges of non-monetary assets.
The FASB has issued SFAS No. 123R, "Share-Based Payment." The new rule requires
that the compensation cost relating to share-based payment transactions be
recognized in the financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. This statement
precludes the recognition of compensation expense under APB Opinion No. 25's
intrinsic value method. Public entities will be required to apply Statement 123R
in the first interim or annual reporting period that begins after June 15, 2005.
Since the Company has been accounting for its share-based compensation under
SFAS No. 123, management believes SFAS No. 123R should not have a significant
impact on the way it accounts for its stock-based compensation.
NOTE 3 - INVESTMENTS
--------------------
Non-Marketable Securities
-------------------------
The Company owns 65,750 shares of Class A Common Stock of Tensiodyne
Corporation. At December 31, 2004 and 2003, there was no market for these shares
and the Company valued its interest at $0.
On January 1, 2003 the Company formed Integrated Metal Technologies, Inc., a
Delaware corporation ("IMT"). The Company owns 51% of the outstanding shares of
IMT and the remaining 49% of the outstanding shares are owned by Austin Tech,
LLC, a Texas limited liability company. At the present time there is no activity
in IMT, IMT has no assets or liabilities and the Company does not anticipate nor
reasonably foresee any business activity in IMT in the near future. Accordingly,
the Company has recorded its interest in IMT at $0.
--------------------------------------------------------------------------------
F-24
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 3 - INVESTMENTS, continued
-------------------------------
Marketable Securities
---------------------
On October 1, 2004, the Company consummated a Stock Purchase Agreement (the
"Agreement") with Langley Park Investments, PLC ("Langley"), a corporation
organized under the laws of England and Wales. The Langley shares are traded on
the London Stock Exchange ("LSE"). Pursuant to the Agreement, the Company issued
8,666,666 shares of its common stock in exchange for 7,158,590 shares of Langley
common stock. The number of Langley shares issued was based on the Company's
shares having a value of $1.50 per share and the Langley shares having a value
of one British Pound Sterling and the conversion rate of the British Pound
Sterling to the U.S. Dollar in effect as of the close of business on the day
preceding the closing date. The Company initially recorded the Langley shares at
$12,973,513. This amount was determined by multiplying the number of Langley
shares issued by the market value of the Langley shares of one British Pound
Sterling and the applicable exchange rate. The Agreement further provides that
of the Langley shares purchased, one half of the shares (3,579,295) are
immediately saleable and the remaining half, to which the Company has legal
title, will be held in an escrow account for a period of two years. If, at the
end of the two-year period, the shares of the Company do not have a market price
of at least $1.50 per share, the Company will be required to sell back some or
all of the Langley shares held in escrow, based on a formula as defined in the
Agreement. However, if at the end of the two-year period, the market value of
the Company's common stock exceeds $1.50 per share, the Langley shares will be
released from escrow. At December 31, 2004, the Company's common stock closing
price was in excess of $1.50 per share. For financial reporting purposes, the
Company considers the 1,000,000 remaining saleable shares as shares held for
trading and the 3,579,295 shares owned by the Company but held in escrow as
shares available for sale.
During 2004, the Company sold 2,579,295 of its Langley trading shares for net
proceeds of $1,005,606 and recognized a loss on these sales of $3,668,850, which
was charged to operations. The Company has also determined that $4,284,760 of
the decline in the value of available for sale investments is other than
temporary and therefore, included the decline in operations as a write-down.
As of December 31, 2004, the Company's investment in an open-end mutual fund
approximated its cost of $700,000. The Company considers its investment in this
account as being held for trading.
Investments in marketable securities as of December 31, 2004 are as follows:
Trading securities:
Cost $ 2,512,300
Unrealized loss (1,523,310)
----------------
Fair value $ 988,990
================
--------------------------------------------------------------------------------
F-25
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 3 - INVESTMENTS, continued
-------------------------------
Available-for-sale securities:
Adjusted cost $ 2,201,996
Unrealized loss (1,167,616)
----------------
Fair value $ 1,034,380
================
NOTE 4 - RECEIVABLE DUE ON RESEARCH CONTRACT
--------------------------------------------
Accounts receivable consist of amounts due under the Company's research and
development contracts and consist of the following at December 31:
2004 2003
---------------- ----------------
Accounts receivable $ 15,895 $ 28,004
Less allowance for doubtful accounts - -
---------------- ----------------
$ 15,895 $ 28,004
================ ================
NOTE 5 - PROPERTY AND EQUIPMENT
-------------------------------
The following is a summary of property and equipment at December 31:
2004 2003
---------------- ----------------
Office and computer equipment $ 24,818 $ 24,142
Manufacturing equipment 129,675 129,675
---------------- ----------------
154,493 153,817
Less accumulated depreciation (139,655) (133,191)
---------------- ----------------
$ 14,838 $ 20,626
================ ================
Depreciation charged to operations was $6,464, $7,023 and $4,667 for 2004, 2003
and 2002, respectively. The Company's equipment has been pledged as collateral
on the agreement with Advanced Technology Center (see Note 11).
--------------------------------------------------------------------------------
F-26
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 6 - INTANGIBLE ASSETS
--------------------------
Intangible assets consist of the following at December 31:
Period of
Amortization 2004 2003
---------------- ---------------- ----------------
Patent costs 17 years $ 28,494 $ 28,494
License agreement (see Note 7) 17 years 6,250 6,250
Website 5 years 5,200 5,200
---------------- ----------------
39,944 39,944
Less accumulated amortization (32,056) (29,940)
---------------- ----------------
$ 7,888 $ 10,004
================ ================
Amortization charged to operations for 2004, 2003 and 2002 was $2,116, $2,116
and $3,080, respectively.
Estimated amortization expense for the next five years is as follows:
2005 $ 2,116
2006 1,856
2007 1,076
2008 1,076
2009 1,076
NOTE 7 - LICENSE AGREEMENT
--------------------------
The Company has entered into a license agreement with the University of
Pennsylvania ("the University") for the development and marketing of EFS. EFS is
designed to measure electrochemically the state of fatigue damage in a metal
structural member. The Company is in the final stage of developing EFS.
Under the terms of the agreement, the Company issued to the University 13 shares
of its common stock and a 5% royalty on sales of the product. The Company valued
the license 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 the license agreement, the Company also agreed to sponsor the
development of EFS. Under the sponsorship agreement, the Company agreed to
reimburse the University development costs totaling approximately $200,000, 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
procurement and maintenance of its patents on EFS.
--------------------------------------------------------------------------------
F-27
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 7 - LICENSE AGREEMENT, continued
-------------------------------------
The Company and the University agreed to modify the terms of the license and
sponsorship agreements and related obligation. The modification of the license
agreement increased the University's royalty to 7% of the sale of related
products and provided for 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 modification, subject to anti-dilution adjustments. The
modification of the sponsorship agreement included paying 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 will accrue compound interest
at a rate of 1.5% per month (19.6% effective annual rate) until maturity on
December 16, 2001, when the loan balance and accrued interest became fully due
and payable. In addition, the Company's president agreed to limit his
compensation from the Company to $150,000 per year until the loan and accrued
interest was fully paid. The obligation is currently in default. The Company
continues to accrue interest under the terms of the agreement. Interest charged
to operations for 2004, 2003 and 2002 relating to this obligation was $122,828,
$139,272 and $76,078, respectively. The balance of the obligation (including
accrued interest) at December 31, 2004 and 2003 was $760,831 and $638,003,
respectively, and is reflected in Research and Development Sponsorship Payable
in the accompanying consolidated balance sheets.
Pursuant to the anti-dilution provision of the sponsorship agreement, the
Company was required to issue an additional 5,338 shares to the University
through December 31, 2003. The Company has made no additional issuance of shares
in 2004. The Company is currently in negotiations with the University regarding
the default and other related matters.
NOTE 8 - NOTES PAYABLE
----------------------
On May 27, 1994, the Company borrowed $25,000 from a shareholder. The loan is
evidenced by a promissory note bearing interest at major bank prime rate. The
note is secured by the Company's patents and matured on May 31, 2002. The loan
has not been paid and is now in default. As additional consideration for the
loan, the Company granted to the shareholder a 1% royalty interest in the
Fatigue Fuse and a 0.5% royalty interest in EFS (see Note 11). The balance due
on this loan as of December 31, 2004 and 2003 was $51,892 and $50,438,
respectively. Interest charged to operations for 2004, 2003 and 2002 was $1,623,
$1,622 and $1,622, respectively. At the end of 2003, it was discovered that the
Company had over accrued interest on the loan by $10,213, which was credited
against interest in that year.
--------------------------------------------------------------------------------
F-28
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 8 - NOTES PAYABLE, continued
---------------------------------
In October 1996, the Company borrowed $25,000 from an unrelated third party. The
loan bears interest at an annual rate of 11% and matured on October 15, 2000.
The Company issued warrants to the lender for the purchase of 25 shares of the
Company's common stock at a price of $1.00 per share. The loan balance as of
December 31, 2004 and 2003 was $25,000 and $25,688, respectively. Interest
charged to operations on this loan was $2,750 in 2004, 2003 and 2002. The
Company did not pay any principal amounts due on this note when it matured on
October 15, 2000 and the note is in default. In 2004, the Company issued the
note holder 25,000 shares of its common stock as additional compensation for the
failure to payoff the indebtedness. The shares are subject to a three-year
lockup agreement and were valued at $59,500 and charged to interest expense (see
Note 12).
On April 28, 2003, the Company borrowed $10,000 from an unrelated third party.
The loan is unsecured, non-interest bearing and due on demand.
NOTE 9 - CONVERTIBLE DEBENTURES
-------------------------------
On September 23, 2003, the Company entered into a Class A Senior Secured
Convertible Debenture (the "Debenture") with Palisades Capital, LLC or its
registered assigns ("Palisades"), pursuant to which Palisades has agreed to loan
the Company up to $1,500,000. Under the Debenture, Palisades has the option,
after March 30, 2004, to convert the principal amount of all monies loaned under
the Debenture, together with accrued interest, into common stock of the Company
at the lesser of (i) 50% of the average ten closing prices for the Company's
common stock for the ten (10) trading days immediately preceding the conversion
date or (ii) $0.10 (the lesser of the two being referred to as the "Conversion
Price"). In the event Palisades loans the full $1,500,000 face amount of the
debenture to the Company and subsequently elects to exercise its right to
convert the debenture into the Company's common stock at a time when the
conversion price is less than four cents per share, Palisades would receive at
least fifty million (50,000,000) shares of common stock, resulting in a change
in control of the Company. However, Mr. Bernstein, the Company's president,
would still retain voting control as a result of his holding one hundred percent
(100%) of the Class B common stock.
Since the Debenture allows Palisades to convert the outstanding principal amount
into shares of the Company's common stock at a discount to fair value, the
Company has recorded a BCF in the amount of $1,125,000 during 2004. The amount
was recorded as a debt discount and is being amortized as interest expense over
the life of the Debenture. Total interest expense related to the amortization of
the discount was $326,161 and $0 for the years ended December 31, 2004 and 2003,
respectively.
The Company's president entered into a voting agreement and irrevocable proxy,
which provides that as of September 23, 2006, if an event of default (as defined
in the Debenture) in favor of Palisades continues for a period of not less than
30 days, all Class B common stock which Mr. Bernstein owns of record, or becomes
the owner of record in the future will be voted in accordance with the direction
of Mr. Monty Freedman (affiliated with Palisades), or his designated successor.
This loss of Mr. Bernstein's voting rights would affect a change in the voting
control of the Company.
--------------------------------------------------------------------------------
F-29
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 9 - CONVERTIBLE DEBENTURES, continued
------------------------------------------
The Debenture bears interest at an annual rate of 10%, is secured by
substantially all assets of the Company and matures on December 31, 2006, when
all principal and accrued interest becomes payable. Advances to the Company
totaled $785,000 and $340,000 during 2004 and 2003, respectively. The balance of
the Debenture, including accrued interest, at December 31, 2004 and 2003 was
$424,612 and $345,333 (net of unamortized discount of $798,839 and $0),
respectively. Interest expense on the Debenture, excluding amortization of the
discount, was $93,119 and $5,333 during 2004 and 2003, respectively.
NOTE 10 - INCOME TAXES
----------------------
The provision for income taxes consists of the following as of December 31:
2004 2003 2002
---------------- ---------------- ----------------
Current:
Federal $ - $ - $ -
State 800 800 800
---------------- ---------------- ----------------
800 800 800
---------------- ---------------- ----------------
Deferred:
Federal 7,944,332 580,174 1,197,679
State 2,253,784 166,628 340,472
---------------- ---------------- ----------------
Less change in valuation allowance (10,198,116) (746,802) (1,538,151)
---------------- ---------------- ----------------
- - -
---------------- ---------------- ----------------
$ 800 $ 800 $ 800
================ ================ ================
The components of the net deferred tax assets as of December 31 are as follows:
2004 2003
---------------- ----------------
Deferred tax asset $ 15,948,822 $ 5,750,706
Less valuation allowance (15,948,822) (5,750,706)
---------------- ----------------
$ - $ -
================ ================
Deferred income taxes are provided for the tax effects of temporary differences
in the reporting of income for financial statement and income tax reporting
purposes and arise principally from net operating loss carryforwards and
unrealized and "other than temporary" losses on marketable securities.
--------------------------------------------------------------------------------
F-30
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 10 - INCOME TAXES, continued
---------------------------------
The Company's effective tax rate differs from the federal and state statutory
rates due to the valuation allowance recorded for the deferred tax asset due to
unused net operating loss carryforwards. An allowance has been provided for by
the Company which reduced the tax benefits accrued by the Company for its net
operating losses to zero, as it cannot be determined when, or if, the tax
benefits derived from these operating losses will materialize.
As of December 31, 2004, the Company has available net operating loss
carryforwards of approximately $34,000,000 for federal and state purposes which
expire in various years through 2024 and 2018 for federal and California
purposes, respectively. 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 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
Royalties
---------
On December 24, 1985, to provide funding for research and development of the
Fatigue Fuse, the Company entered into various agreements with the Tensiodyne
1985-I R & D Partnership (the "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 of
approximately $912,500 plus accrued interest.
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 sublicense
revenue. The royalty is limited to the $45,000 plus an 11% annual rate of
return. At December 31, 2004, the future royalty commitment is approximately
$310,000. The payment of future royalties is secured by equipment used by the
Company in the development of technology as specified in the funding agreement.
On May 4, 1987, the Company entered into another 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 sublicense 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, 2004, the total future royalty
commitments, including the accumulated 26% annual rate of return, were
approximately $4,875,000. 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 that are related to the technology developed
with the funding.
--------------------------------------------------------------------------------
F-31
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued
--------------------------------------------------
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 shares of its common stock to Variety, Variety
reduced its royalty interest to 20%. In 1998, in exchange for the Company
issuing 733 shares of its common stock to Variety, Variety reduced its royalty
interest to 5%.
As discussed in Note 8, the Company granted a 1% royalty interest in the
Company's Fatigue Fuse and a 0.5% royalty interest in EFS to a shareholder as
partial consideration on a $25,000 loan made by the shareholder to the Company.
A summary of royalty interests that the Company has granted and are outstanding
as of December 31, 2004 follows:
Fatigue Fuse EFS
-------------- -----------
Tensiodyne 1985-1 R&D Partnership 10.00% * -
Advanced Technology Center:
Future gross sales 6.00% * -
Sublicensing fees 12.00% ** -
Variety Investments, Ltd. 5.00% -
University of Pennsylvania (see Note 7)
Net sales of licensed products - 7.00%
Net sales of services - 2.50%
Shareholder 1.00% 0.50%
* Royalties limited to specific rates of return as discussed above.
** The Company granted 12% royalties on sales from sublicense. These royalties
are also limited to specific rates of return as discussed above.
Through December 31, 2004, the Company owes no royalties under any agreements as
sales of the products have not yet begun.
Operating Leases
----------------
The Company leases its existing office on a month-to-month basis. Rental expense
charged to operations for the years ended December 31, 2004, 2003 and 2002 was
$28,171, $28,176 and $28,176, which consisted solely of minimum rental payments.
--------------------------------------------------------------------------------
F-32
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued
--------------------------------------------------
Straight Documentary Credit
---------------------------
On October 10, 2001, the Company entered into an arrangement to obtain a
Straight Documentary Credit for $12,500,000. Under the terms of the commitment,
the Company issued 100,000 shares of its common stock as collateral. The Company
reflected the 100,000 shares as held in reserve. In 2003, the Company abandoned
its efforts to find financing using the Straight Documentary Credit and the
100,000 shares were returned to the Company and subsequently cancelled.
Litigation
----------
In July 2002, the Company settled its pending lawsuit related to a contract
dispute with Mr. Stephen Beck. Under the terms of the settlement, Mr. Beck
received 1,000 shares of the Company's common stock. The shares to be issued are
subject to anti-dilution provisions 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 and charged the cost to operations. During 2002 and 2003,
the Company issued Mr. Beck an additional 657 shares of common stock pursuant to
the anti-dilutive provision of the settlement agreement. No additional shares
were issued in 2004.
Mr. Beck has recently contacted the Company concerning an alleged breach of the
above settlement. The Company believes that it has a counter claim against Mr.
Beck for a breach of a consulting agreement. Currently negotiations regarding
these matters are ongoing.
In addition, pursuant to an agreement with the attorneys who represented the
Company in this matter, a contingent fee of $1,481,895 became due upon the
settlement of the case. The balance of this obligation at September 23, 2003
(including accrued interest) was $1,583,128, and was assumed by seven investors
in 2003 for 22,000,000 shares of the Company's common stock (see Note 12) and
warrants to purchase an additional 30,000,000 shares at $0.10 (see Note 14).
Interest charged to operations on this indebtedness was $63,962 and $37,271 in
2003 and 2002, respectively.
Stock Purchase Agreement
------------------------
In August 2004, the Company entered into a Stock Purchase Agreement with Seaside
Investments, PLC ("Seaside"). Once the agreement is closed, the Company will
issue and sell 10,332,000 shares of its common stock to Seaside for a purchase
price of $0.55 per share. The purchase price for the shares will be the issuance
to the Company of 4,920,000 shares of Seaside, net of a 9.1% finder's fee. The
agreement provides that 1,623,600 shares will be held in an escrow account and
the balance of 3,296,400 shares will be saleable on the LSE. The shares of the
Company will be restricted stock for a period of one year from the date of
issuance. If the shares of the Company do not have a market price of at least
$0.55 per share at the end of the restricted period, the Company will be
required to return some or all of the Seaside shares based on a formula as
defined in the agreement.
--------------------------------------------------------------------------------
F-33
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued
--------------------------------------------------
The agreement is subject to a number of material conditions precedent before the
obligation of any of the parties under the agreement matures. As of December 31,
2004, none of the conditions precedent were satisfied. As a result, the shares
in escrow are reflected as issued but not outstanding at December 31, 2004 (see
Note 12).
NOTE 12 - STOCKHOLDERS' EQUITY
------------------------------
Class A Common Stock
--------------------
The holders of the Company's Class A common stock are entitled to one vote per
share of common stock held.
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 2,000 votes for
each share of Class B common stock held.
Class A Preferred Stock
-----------------------
The holders of the Class A convertible preferred stock have a liquidation
preference of $720 per share. Such amounts shall be paid on all outstanding
Class A preferred 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 Class A common stock at
a conversion price of $0.72 ("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.
Class B Preferred Stock
-----------------------
The Company has designated 15 shares of Class B preferred stock, of which no
shares have been issued. Holders of class B preferred shares are entitled to a
liquidation preference of $10,000 per share. Such amounts shall be paid on all
outstanding Class B preferred shares before any payment shall be made or any
assets distributed to the holders of common stock or of any other stock of any
series or class junior to the shares as to dividends or assets, but junior to
Class A preferred shareholders. Holders of Class B preferred shares are not
entitled to any liquidation distributions in excess of $10,000 per share.
--------------------------------------------------------------------------------
F-34
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
The shares are redeemable by the holder or the Company at $10,000 per share. The
holders of these shares shall have the right to vote at one vote per Class B
preferred share and shall participate in all common stock dividends declared and
paid according to a formula as defined in the series designation.
Class C Preferred Stock
-----------------------
The Class C preferred stock was offered as a unit. Each unit consisted of one
share of the Company's Class C preferred stock, one Class A warrant and one
Class B warrant. Each warrant entitles the holder to purchase one share of the
Company's Class A common stock. Class A warrants expired one year after issuance
and entitled the warrant holder the right to purchase one share of the Company's
Class A common stock at a price set forth in the respective warrant, which was
dependent on the date on which the unit was purchased. Exercise prices for the
Class A common stock warrants ranged from $0.05 per share to the greater of
$0.35 or 1.5 times the average bid price. Class B warrants expire two years
after issuance and entitle the warrant holder the right to purchase one share of
the Company's Class A common stock at a price set forth in the respective
warrant, which is dependent on the date on which the unit was purchased.
Exercise prices for the Class B common stock warrants range from $0.10 per share
to the greater of $0.35 per share or 1.5 times the average bid price.
Each shareholder of Class C preferred stock is entitled to receive a cumulative
dividend of 8% per annum for a period of two years. Dividends do not accrue or
are payable except out of Earnings before Interest, Taxes, Depreciation and
Amortization ("EBITDA"). At December 31, 2004, no dividends are payable to Class
C preferred shareholders. Holders of the Class C preferred stock are junior to
holders of the Company's Class A and B preferred stock, but hold a higher
position than common and Class D preferred shareholders in terms of liquidation
rights. Holders of Class C preferred stock have no voting rights. Holders of
Class C preferred stock have the right to convert their shares to Class A common
stock on a one-to-one basis.
The Company requires an approval of at least two-thirds of the holders of Class
C preferred shareholders to alter or change their rights or privileges by way of
a reverse stock split, reclassification, merger, consolidation or otherwise, so
as to adversely affect the manner by which the shares of Class C preferred stock
are converted into common shares.
During 2004, 2,700 shares of Class C preferred stock were converted into 2,700
shares of Class A common stock.
--------------------------------------------------------------------------------
F-35
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
Class D Preferred Stock
-----------------------
On December 29, 2003, certain shareholders exchanged 7,440,000 shares of common
stock for 5,440,000 shares of Class D preferred stock. Holders of Class D
preferred stock have a $0.001 liquidation preference, no voting rights and are
junior to holders of all classes of preferred stock but senior to common
shareholders in terms of liquidation rights. Class D preferred stockholders are
entitled to dividends as declared by the Company's Board of Directors, which
have not been declared as of December 31, 2004. Each share of Class D preferred
stock is convertible at the holder's option into one share of the Company's
Class A common stock.
During 2004, 3,520,000 shares of Class D preferred stock were converted into
3,520,000 shares of the Company's common stock.
Issued and Outstanding Common Shares
------------------------------------
From time to time, the Company issues its Class A common shares and holds the
shares in escrow on behalf of another party until consummation of certain
transactions. The following is a reconciliation of shares issued and outstanding
as of December 31:
2004 2003
-------------- --------------
Issued shares 107,517,617 66,489,818
Less shares held in escrow:
Shares held for Seaside stock purchase agreement
(see Note 11) (9,840,000) -
Shares held as finders' fee for Seaside stock
purchase agreement (see Note 11) (492,000) -
Shares held as consideration for contemplated
debt financing (6,300,000) -
Shares held as collateral for contemplated debt
financing (4,200,000) -
Other (843) (843)
-------------- --------------
(20,832,843) (843)
-------------- --------------
Outstanding shares 86,684,774 66,488,975
============== ===============
--------------------------------------------------------------------------------
F-36
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
Class A Common Stock Issuances Involving Non-cash Consideration
---------------------------------------------------------------
2002
----
On January 11, 2002, the Company issued to a consultant 20 shares of its common
stock for services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $3,200. On January 30, 2002, the Company
issued to a consultant 15 shares of its common stock for services rendered.
These shares were valued at their quoted market price at date of issuance
amounting to $2,850. On February 13, 2002, the Company issued 4 shares of its
common stock for clerical services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $760. On February 14, 2002,
the Company issued to a consultant 400 shares of its common stock for services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $72,000. On March 4, 2002, the Company issued its
executive assistant 25 shares of its common stock. These shares were valued at
their quoted market price at date of issuance amounting to $6,750. Also on March
4, 2002, the Company issued to six individuals a total of 650 shares of its
common stock for consulting services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $175,500. On March 15,
2002, the Company issued 150 shares of its common stock for consulting services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $37,500. On March 18, 2002, the Company issued 150 shares
of its common stock for consulting services rendered. These shares were valued
at their quoted market price at date of issuance amounting to $22,500. On March
19, 2002, the Company issued 125 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $20,000. On April 2, 2002, the Company issued to two
members of its advisory board a total of 470 shares of its common stock for
consulting services rendered. These shares were valued at their quoted market
price at date of issuance amounting to $65,789. On April 2, 2002, the Company
issued its executive assistant 25 shares of its common stock. These shares were
valued at their quoted market price at date of issuance amounting to $3,500. On
April 4, 2002, the Company issued 120 shares of its common stock for legal
services rendered. These shares were valued at their quoted market price at date
of issuance amounting to $16,800. On April 4, 2002, the Company issued 4 shares
its common stock for clerical services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $560. On April 10,
2002, the Company issued 42 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $5,473. On April 12, 2002, the Company issued 105 shares
of its common stock for legal services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $14,000. On April 25,
2002, the Company issued 550 shares of its common stock for consulting services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $49,500. On May 10, 2002, the Company issued 215 shares of
its common stock for legal services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $32,250. On May 10, 2002,
the Company issued 115 shares of its common stock for legal services rendered.
These shares were valued at their quoted market price at date of issuance
amounting to $17,250. On May 21, 2002, the Company issued 400 shares of its
common stock for consulting services rendered. These shares were valued at their
quoted market price at date of issuance amounting to $36,000.
--------------------------------------------------------------------------------
F-37
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
On May 22, 2002, the Company issued 1,000 shares of its common stock for legal
services rendered. These shares were valued at their quoted market price at date
of issuance amounting to $90,000. On June 5, 2002, the Company issued 150 shares
of its common stock for consulting services rendered. These shares were valued
at their quoted market price at date of issuance amounting to $9,000. On June 5,
2002, the Company issued 50 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $3,000. On June 6, 2002, the Company issued 50 shares of
its common stock for consulting services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $3,000. On July 3,
2002, the Company issued 1,000 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $50,000. On July 3, 2002, the Company issued 250 shares of
its common stock for consulting services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $12,500. On July 8,
2002, the Company issued 200 shares of its common stock for legal services
rendered. These shares were valued at their quoted market price at date of
issuance amounting to $8,000. On July 8, 2002, the Company issued 200 shares of
its common stock for consulting services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $8,000. On July 26,
2002, the Company issued 1,000 shares of its common stock to Stephen Beck in
settlement of the lawsuit he filed against the Company for alleged compensation
due him. These shares were valued at their quoted market price at date of
issuance amounting to $40,000. On August 5, 2002, the Company issued 1,000
shares of its common stock to an employee for services rendered in connection
with the development of the fatigue fuse. These shares were valued at their
quoted market price at date of issuance amounting to $40,000. On August 5, 2002,
the Company issued 1,230 shares of its common stock for legal services. These
shares were valued at their quoted market price at date of issuance amounting to
$49,200. On August 14, 2002, the Company issued 1,000 shares of its common stock
for legal services. These shares were valued at their quoted market price at
date of issuance amounting to $40,000. On August 29, 2002, the Company issued
1,000 shares of its common stock for legal services. These shares were valued at
their quoted market price at date of issuance amounting to $30,000. On September
5, 2002, the Company issued 300 shares of its common stock for consulting
services rendered. These shares were valued at their quoted market price at date
of issuance amounting to $6,000. On September 5, 2002, the Company issued 75
shares of its common stock for legal services. These shares were valued at their
quoted market price at date of issuance amounting to $1,500. On September 10,
2002, the Company issued 2,000 shares of its common stock for consulting
services. These shares were valued at their quoted market price at date of
issuance amounting to $60,000. On September 11, 2002, the Company issued 1,000
shares of its common stock for legal services. These shares were valued at their
quoted market price at date of issuance amounting to $20,000. On September 12,
2002, the Company issued 2,500 shares of its common stock for legal services.
These shares were valued at their quoted market price at date of issuance
amounting to $50,000. On October 7, 2002, the Company issued 2,500 shares of its
common stock for consulting services. These shares were valued at their quoted
market price at date of issuance amounting to $75,000. On October 9, 2002, the
Company issued to its executive assistant 50 shares of its common stock. These
shares were valued at their quoted market price at date of issuance amounting to
$1,500. On October 29, 2002, the Company issued 250 shares of its common stock
for consulting services. These shares were valued at their quoted market price
--------------------------------------------------------------------------------
F-38
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
at date of issuance amounting to $5,000. On December 6, 2002, the Company issued
650 shares of its common stock for consulting services. These shares were valued
at their quoted market price at date of issuance amounting to $19,500. On
December 6, 2002, the Company issued 250 shares of its common stock for legal
services. These shares were valued at their quoted market price at date of
issuance amounting to $7,500. On December 16, 2002, the Company issued 1,000
shares of its common stock to a member of the Company's advisory board. These
shares were valued at their quoted market price at date of issuance amounting to
$30,000. On December 17, 2002, the Company issued 1,000 shares of its common
stock for legal services. These shares were valued at their quoted market price
at date of issuance amounting to $30,000. On December 18, 2002, the Company
issued 13,000 shares of its common stock to its president for past compensation
due him. These shares were valued at their quoted market price at date of
issuance amounting to $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 shares of its common stock as
additional consideration in connection with the Company's Regulation S offering.
In addition, the Company issued 200,000 shares of the Company's Class B common
stock to it president in consideration for the relinquishment of his total
interest in the Company's patents. The value assigned to those cancelled shares
was $48,250 and was credited against operations. The Company also issued 1,397
shares of its Class A common stock to Mr. Stephen Beck pursuant to the
anti-dilution provisions of the settlement agreement. During 2002, the Company
cancelled 1,322 shares originally issued to Mr. Bernstein pursuant to the Stock
Escrow/Grant Agreement.
2003
----
On January 6, 2003, the Company issued 500 shares of its common stock for
consulting services. The shares were valued at their quoted market price at date
of issuance amounting to $10,000. On January 8, 2003, the Company issued 3,000
shares of its common stock for legal services in connection with its aborted S-B
registration statement. The shares were valued at their quoted market price at
date of issuance amounting to $60,000. On January 24, 2003, the Company issued
313 shares of its common stock for consulting services. The shares were valued
at their quoted market price at date of issuance amounting to $6,250. On March
4, 2003, the Company issued 1,500 shares of its common stock for legal services
in connection with its aborted S-B registration statement. The shares were
valued at their quoted market price at date of issuance amounting to $15,000. On
March 11, 2003, the Company issued 1,500 shares of its common stock for legal
services in connection with its aborted S-B registration statement. The shares
were valued at their quoted market price at date of issuance amounting to
$30,000. On March 11, 2003, the Company issued 300 shares of its common stock
for consulting services. The shares were valued at their quoted market price at
date of issuance amounting to $6,000. On March 26, 2003, the Company issued 250
shares of its common stock for consulting services in connection with the
Company's research and development efforts. The shares were valued at their
quoted market price at date of issuance amounting to $5,000. On April 15, 2003,
the Company issued 250 shares of its common stock for consulting services. The
shares were valued at their quoted market price at date of issuance amounting to
--------------------------------------------------------------------------------
F-39
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
$2,500. On April 15, 2003, the Company issued 1,000 shares of its common stock
each to Messrs. Goodman and Berks for consulting services in connection with the
Company's research and development efforts. The shares were valued at their
quoted market price at date of issuance amounting to $20,000. On April 21, 2003,
the Company issued 500 shares of its common stock to one of its advisory board
members for services rendered. The shares were valued their quoted market price
at date of issuance amounting to $5,000. On April 21, 2003, the Company issued
171 shares of its common stock for consulting services. The shares were valued
at their quoted market price at date of issuance amounting to $1,711. On May 20,
2003, the Company issued 150 shares of its common stock for consulting services.
The shares were valued at their quoted market price at date of issuance
amounting to $1,500. On May 27, 2003, the Company issued 2,000 shares of its
common stock for consulting services. The shares were valued at their quoted
market price at date of issuance amounting to $20,000. On May 30, 2003, the
Company issued 500 shares of its common stock for consulting services. The
shares were valued at their quoted market price at date of issuance amounting to
$5,000. On June 10, 2003, the Company issued 1,650 shares for legal services.
The shares were valued at their quoted market price at date of issuance
amounting to $16,500. On June 12, 2003, the Company issued 1,000 shares to an
attorney firm as settlement for all amounts due. The shares were valued at their
quoted market price at date of issuance amounting to $10,000. On June 20, 2003,
the Company issued 2,000 shares of its common stock to Mr. William Berks for
consulting services in connection with the Company's research and development
efforts. The shares were valued at their quoted market price at date of issuance
amounting to $20,000. On September 23, 2003, the Company issued to its president
32,000,000 shares of its common stock pursuant to an Accord, Satisfaction and
Mutual Release in which Mr. Bernstein released all claims against the Company
that arose prior to September 24, 2003, including past services rendered in
excess of compensation paid. The shares are subject to a three-year lock up
agreement and were valued at $320,000, per the terms of the agreement. In
addition, the Company issued its president 5,000,000 shares of common stock in
exchange for a $50,000 promissory note. The shares are subject to a three-year
lock up agreement and were valued in accordance with the price determined in the
Accord, Satisfaction and Mutual Release. On September 26, 2003, the Company
issued 2,000,000 shares of its common stock for services rendered. The shares
were discounted for illiquidity and restrictions on resale, subject to a
three-year lock up agreement, and were valued at the amount invoiced for the
services rendered amounting to $10,500. On September 23, 2003, the Company
issued 22,000,000 shares of common stock in consideration for the assumption of
the obligation due by the Company to two attorneys in the amount of $1,583,128.
On September 29, 2003, the Company issued 5,760,000 shares of its common stock
for services rendered. The shares are subject to a three-year lock-up agreement
and were valued at the amount invoiced for the services rendered of $240,000. On
December 17, 2003, the Company issued 3,750 shares of its common stock for
services rendered. The shares were valued at their quoted market price at date
of issuance amounting to $9,375.
--------------------------------------------------------------------------------
F-40
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
Also during 2003, the Company issued 7,006,479 shares in connection with its
Regulation S offering. The shares were discounted for illiquidity and
restrictions on resale and were valued at $131,695, which was netted against the
proceeds received from the related offerings. Also during the year, the Company
issued 260 shares of its common stock to Mr. Beck and 4,242 shares to the
University of Pennsylvania. On December 29, 2003, certain shareholders cancelled
7,440,000 shares of common stock in exchange for receiving 5,440,000 shares of
Class D preferred stock.
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 relating to the Regulation S offering were charged against the related
proceeds received.
2004
----
On January 7, 2004, the Company issued its administrative assistant 25,000
shares of its common stock for services rendered. These shares are subject to a
three-year lockup agreement and were valued at 70% of their quoted market price
at date of issuance amounting to $48,125. On February 11, 2004, the Company
cancelled 250,000 shares of its Class D preferred stock in exchange for issuing
250,000 shares of its common stock. On February 12, 2004, the Company issued to
two consultants a total of 550,000 shares of its common stock for services
rendered. These shares are subject to a three-year lockup agreement and were
valued at 70% of their quoted market price at date of issuance amounting to
$1,135,750. On February 12, 2004, the Company issued to a consultant 25,000
shares of its common stock as payment on past due invoices. These shares
are subject to a three-year lockup agreement and were valued at the amount of
indebtedness cancelled of $25,000. On March 8, 2004, the Company cancelled
200,000 shares of its Class D preferred stock in exchange for 200,000 shares of
its common stock. On March 16, 2004, the Company issued to a consultant 25,000
shares of its common stock for services rendered. These shares are subject to a
three-year lockup agreement and were valued at 70% of their quoted market price
at date of issuance amounting to $53,550. On March 26, 2004, the Company issued
to a consultant 25,000 shares of its common stock for services rendered. These
shares are subject to a three-year lockup agreement and were valued at 70% of
their quoted market price at date of issuance amounting to $55,125. On April 23,
2004, the Company cancelled 250,000 shares of its Class D preferred stock in
exchange for 250,000 shares of its common stock. On May 12, 2004, the Company
issued 25,000 shares of its common stock to a note holder as additional
consideration for its delay in paying off the principal balance owed (see Note
8). These shares are subject to a three-year lockup agreement and were valued at
70% of their quoted market price at date of issuance amounting to $59,500. On
May 13, 2004, the Company cancelled 250,000 shares of its Class D preferred
stock in exchange for 250,000 shares of its common stock. On May 25, 2004, the
Company issued to a consultant 10,000 shares of its common stock for services
rendered. These shares are subject to a three-year lockup agreement and were
valued at 70% of their quoted market price at date of issuance amounting to
$24,150. On June 1, 2004, the Company cancelled 2,700 shares of its Class C
preferred stock in exchange for 2,700 shares of its common stock. On June 18,
2004, the Company issued to a consultant 120,000 shares of its common stock for
services rendered. These shares are subject to a three-year lockup agreement and
--------------------------------------------------------------------------------
F-41
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
were valued at 70% of their quoted market price at date of issuance amounting to
$285,600. On June 30, 2004, the Company issued an attorney 50,000 shares of its
common stock as payment on past due invoices. The shares issued are subject to a
three-year lockup agreement and were valued at the indebtedness cancelled of
$39,467. On June 30, 2004, the Company issued to a consultant 3,000 shares of
its common stock for services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $10,200. On July 27, 2004, the
Company issued 1,000,000 of its common stock to Mr. William Berks, the Company's
vice-president, for services rendered. These shares are subject to a three-year
lockup agreement and were valued at 70% of their quoted market price at date of
issuance amounting to $2,380,000. On July 27, 2004, the Company issued to a
consultant 300 shares of its common stock for services rendered. These shares
were valued at their quoted market price at date of issuance amounting to
$1,020. On August 9, 2004, the Company issued to a consultant 1,800 shares of
its common stock for services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $6,120. On August 16, 2004, the
Company issued 1,000 shares of its common stock in connection with its
Regulation S offering. These shares were valued at their quoted market price at
date of issuance amounting to $3,400. On August 16, 2004, the Company issued
three consultants a total of 599,000 shares of its common stock for services
rendered. These shares are subject to a three-year lockup agreement and were
valued at 70% of their quoted market price at date of issuance amounting to
$1,341,760. On August 24, 2004, the Company issued to two consultants a total of
5,600 shares of its common stock for services rendered. These shares were valued
at their quoted market price at date of issuance amounting to $18,200. On
September 2, 2004, the Company issued 7,500 shares of its common stock to Mr.
William Berks, the Company's vice-president, for services rendered. These shares
were valued at their quoted market price at date of issuance amounting to
$24,000. On September 28, 2004, the Company issued its outside accountant 1,000
shares of its common stock for services rendered. These shares were valued at
their quoted market price at date of issuance amounting to $3,020. On October 1,
2004, the Company issued 8,666,666 shares of its common stock in exchange for
7,158,590 shares of Langley Park Investments, PLC. The shares issued were valued
at the market price of the shares received of $12,973,513. On October 1, 2004,
the Company issued to a consultant 36,923 shares of its common stock for
services rendered. These shares are subject to a three-year lockup agreement and
were valued at 70% of their quoted market price at date of issuance amounting to
$78,572. On October 1, 2004, the Company issued to a consultant 1,000 shares of
its common stock for services rendered. These shares were valued at their quoted
market price at date of issuance amounting to $2,128. On October 6, 2004, the
Company issued to a consultant 200,000 shares of its common stock for services
rendered. These shares are subject to a three-year lockup agreement and were
valued at 70% of their quoted market price at date of issuance amounting to
$425,600. On October 13, 2004, the Company cancelled 2,570,000 shares of its
Class D preferred stock for 2,570,000 shares of its common stock. On October 15,
2004, the Company issued Joel Freedman, a director and corporate officer,
2,260,000 shares of its common stock for services rendered. These shares are
subject to a two-year lockup agreement and were valued at 80% of their quoted
market price at date of issuance amounting to $4,972,000. On October 15, 2004,
the Company issued John Goodman, a director and corporate officer, 1,500,000
shares of its common stock for services rendered. These shares are subject to a
two-year lockup agreement and were valued at 80% of their quoted market price at
date of issuance amounting to $2,760,000. On October 25, 2004, the Company
--------------------------------------------------------------------------------
F-42
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 12 - STOCKHOLDERS' EQUITY, continued
-----------------------------------------
issued 100,000 shares of its common stock to its outside accountant for services
rendered. These shares are subject to a three-year lockup agreement and were
valued at 70% of their quoted market price at date of issuance amounting to
$210,000. On November 22, 2004, the Company issued its administrative assistant
25,000 shares of its common stock for services rendered. These shares are
subject to a three-year lockup agreement and were valued at 70% of their quoted
market price at date of issuance amounting to $39,375. On November 29, 2004, the
Company issued an additional 24,800 shares of its common stock to certain
shareholders in connection with its Regulation S Offering at no additional
consideration than what these shareholders previously paid for the original
shares issued. On December 17, 2004, the Company issued to two consultants a
total of 175,000 shares of its common stock for services rendered. These shares
are subject to a two-year lockup agreement and were valued at 80% of their
quoted market price at date of issuance amounting to $315,000.
The value assigned to shares issued for services were charged to operations.
NOTE 13 - RELATED PARTY TRANSACTIONS
------------------------------------
During 1993, Mr. Bernstein, the Company's president, exercised warrants to
purchase six 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 secured only by the shares
purchased. The promissory note was extended to 2003. In December 2003, Mr.
Bernstein returned the six shares to the Company in exchange for the
cancellation of the note.
On May 25, 2000, the Company issued its president 4,650 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 shares
its common stock to its secretary 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 Company valued the shares at
$0.40 per share.
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 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 expense as
compensation to the president. In December 2003, the president and secretary
returned the 5,000 shares of common stock to the Company in exchange for the
cancellation of the notes and accrued interest due totaling $755,093.
--------------------------------------------------------------------------------
F-43
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 13 - RELATED PARTY TRANSACTIONS, continued
-----------------------------------------------
On October 27, 2000, the Company issued 4,184 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 4,184 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 at their market value when issued and charged to
operations as compensation. As of August 31, 2003, 2,222 of these shares were
issued to an unrelated third party at which time the Company's Board of
Directors eliminated the escrow that granted full rights and interest to the
Company's president of the remaining 1,962 shares. The Company treated the
vesting of the shares as additional compensation to Mr. Bernstein and valued the
shares released from escrow at the market value of the shares on the date the
escrow terminated of $19,617.
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.
On December 18, 2002, the Company issued 13,000 shares of its common stock to
its president for past compensation due him. These shares were valued their
quoted market price at date of issuance amounting to $260,000. During 2002, the
Company cancelled 1,322 shares of originally issued to Mr. Bernstein pursuant to
the Stock Escrow/Grant Agreement.
During 2002, the Company made advances to its president amounting to $34,826.
The outstanding amount due from the president as of December 31, 2002 is
$76,109. The amount of interest credited to operations in 2002 was $6,682.
During 2003, the Company issued 32,000,000 shares of its common stock and
300,000 shares of Class B common stock to its president for past services
rendered and full release of all claims against the Company. The common shares
issued are subject to a three-year lock up agreement and the value assigned to
the shares issued were discounted for illiquidity and restrictions on resale at
date of issuance amounting to $320,000, per the Accord, Satisfaction and Mutual
Release.
--------------------------------------------------------------------------------
F-44
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 13 - RELATED PARTY TRANSACTIONS, continued
-----------------------------------------------
During 2003, the Company issued 5,000,000 shares of its common stock in
consideration for a promissory note. The value assigned to shares and the
related promissory note was discounted for illiquidity and restrictions on
resale amounting to $50,000. The note bears interest at an annual rate of 6% and
matures on September 26, 2006, when the $50,000 plus accrued interest becomes
fully due. The balance of the note as of December 31, 2003 amounted to $51,096.
Interest of $1,096 was credited to operations during 2003.
The outstanding amount due from the president as of December 31, 2003 was
$83,940. The amount of interest credited to operations for 2003 totaled $7,831.
During 2004, the Company paid its president $196,000 of the accrued compensation
the Company owed him. Mr. Bernstein paid down the loan balance he owed the
Company by $97,450. The remaining balance due from him at December 31, 2004 was
$1,950. Interest credited to operations on this loan for 2004 amounted to
$8,460.
The balance on the stock subscription due from the Company's president at
December 31, 2004 totaled $55,096. Interest credited to operations on this
receivable for 2004 amounted to $4,000.
During 2004, the Company issued 4,767,500 shares of its common stock to three
directors as compensation for services. The Company valued the shares at the
quoted market price at date of issuance less discounts due to limitations on the
transferability of the shares. The aggregate value was $10,136,000.
NOTE 14 - STOCK-BASED COMPENSATION PLANS
----------------------------------------
Stock Options
-------------
The Company has three stock option plans: The 1998 Stock Plan ("the 1998 Plan"),
the 2002 Stock Issuance/Stock Plan ("the 2002 Plan") and the 2003 Stock Option,
SAR and Stock Bonus Consultant Plan ("the 2003 Plan").
In September 1998, the Company adopted the 1998 Plan and reserved 800,000 shares
of its common stock for grant under the plan. Eligible participants include
employees, advisors, consultants, and officers who provide services to the
Company. The option price is 100% of the fair market value of a share of common
stock at either the date of grant or such other day as the as the Board may
determine. During 2004, 2003 and 2002, there were no options granted under the
1998 Plan. The 1998 Plan expires upon the earlier of all reserved shares being
granted or September 10, 2008.
--------------------------------------------------------------------------------
F-45
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 14 - STOCK-BASED COMPENSATION PLANS, continued
---------------------------------------------------
In February 2002, the Company adopted the 2002 Plan and reserved 20,000,000
shares of its common stock for grant under the plan. Eligible plan participants
include employees, advisors, consultants, and officers who provide services to
the Company. The option price is 100% of the fair market value of a share of
common stock at either the date of grant or such other day as the Board may
determine. During 2002, the Company granted options to acquire 13,475,000 shares
of the Company's common stock that expired in 2003. There were no options
granted under the 2002 Plan in 2004 or 2003. The 2002 Plan expires upon the
earlier of all reserved shares being awarded or December 31, 2007.
In September 2003, the Company adopted the 2003 Plan and reserved and 10,000,000
shares of its common stock for grant. Eligible plan participants include
independent consultants. The option price shall be no less than 85% of the fair
market value of a share of common stock at date of grant. During 2004 and 2003,
there were no options granted under the 2003 Plan. The 2003 Plan expires upon
the earlier of all reserved shares being granted or September 23, 2006.
The Company also has agreements with two consultants whereby the Company will
grant options to purchase shares of its common stock upon the Company increasing
its annual revenue by $5 million in any fiscal year over its revenues in 2002.
The collective number of shares to be issued will give the two consultants a
fifteen percent interest in the outstanding shares of the Company's common
stock. No grants have been made pursuant to these agreements as the Company has
not achieved the required revenues. The agreements expire in March 2008.
--------------------------------------------------------------------------------
F-46
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 14 - STOCK-BASED COMPENSATION PLANS, continued
---------------------------------------------------
The following is a summary of the various plans' activities:
1998 Stock Plan 2002 Stock Plan 2003 Stock Plan
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------------ ---------- ------------ ---------- ------------ ----------
Outstanding January 1, 2002 275,000 $ 0.60 - $ - - $ -
Granted - - 13,475,000 0.06 - -
Exercised - - - - - -
Forfeited (275,000) 0.60 - - - -
Cancelled - - - - - -
------------ ---------- ------------ ---------- ------------ ----------
Outstanding December 31, 2002 - - 13,475,000 0.06 - -
Granted - - - - - -
Exercised - - - - - -
Forfeited - - (13,475,000) (0.06) - -
Cancelled - - - - - -
------------ ---------- ------------ ---------- ------------ ----------
Outstanding December 31, 2003 - - - - - -
Granted - - - - - -
Exercised - - - - - -
Forfeited - - - - - -
Cancelled - - - - - -
------------ ---------- ------------ ---------- ------------ ----------
Outstanding December 31, 2004 - $ - - $ - - $ -
============ ========== ============ ========== ============ ===========
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:
2004 2003 2002
---- ---- ----
Risk free interest rate n/a n/a 4%
Expected life n/a n/a 1.5 years
Expected volatility n/a n/a 34%
Stock Warrants
--------------
As a condition to enter into the Debenture (see Note 9), Palisades required the
Company to settle its legal obligation of $1,583,128 to two attorneys. In 2003,
the Company issued 22,000,000 shares of common stock and warrants to acquire up
to 30,000,000 shares of common stock for $0.10 per share to seven investors in
settlement of the $1,583,128 obligation (see Note 11). The warrants contain a
provision limiting the exercise of the warrants to a number of shares that do
not exceed an amount that would cause the holder of each such warrant to
beneficially own 4.99% of the outstanding common stock of the Company. In
addition, the warrants are granted only in proportion to the amount ultimately
funded under the Debenture as a percentage of the $1,500,000 face value and
expire December 31, 2010. At December 31, 2004, 22,500,000 of these warrants
have been granted and are exercisable.
--------------------------------------------------------------------------------
F-47
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 14 - STOCK-BASED COMPENSATION PLANS, continued
---------------------------------------------------
A schedule of warrants outstanding as of December 31 is as follows:
Weighted Average
Weighted Average Remaining
Number of Warrants Exercise Price Contractual Life
------------------ ---------------- ----------------
Outstanding January 1, 2002 - $ -
Granted - -
Exercised - -
Expired - -
------------------ ----------------
Outstanding, December 31, 2002 - -
Granted 22,532,075 0.10
Exercised (12,850) (0.50)
Expired (9,200) (0.50)
------------------ ----------------
Outstanding, December 31, 2003 22,510,025 0.10 7 years
Granted - -
Exercised (3,300) (0.50)
Cancelled - -
------------------ ----------------
Outstanding, December 31, 2004 22,506,725 $ 0.10 6 years
================== ================
NOTE 15 - SUBSEQUENT EVENTS
---------------------------
On January 11, 2005, the Company issued 500,000 shares of its common stock to a
consultant as compensation for services. The shares were valued at their quoted
market price at date of issuance amounting to $1,125,000.
On January 31, 2005, the Company issued 400,000 shares of its common stock to
two consultants as compensation for services, subject to a thirty-month lock-up.
The shares were valued at 75% of their quoted market price at date of issuance
amounting to $495,000.
On February 17, 2005, the Company issued 750 shares to an individual as
reimbursement for fraudulent shares he purchased from an unrelated third party.
The shares were valued at their quoted market price at date of issuance
amounting to $1,388.
On March 3, 2005, the Company issued 2,000 shares upon exercise of a warrant at
$0.50 per share.
On March 10, 2005, the Company issued 75,000 shares to a consultant as
compensation for services, subject to a two-year lockup. The shares were valued
at 80% of their quoted market price at date of issuance amounting to $90,000.
--------------------------------------------------------------------------------
F-48
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 2004, 2003 and 2002
================================================================================
NOTE 15 - SUBSEQUENT EVENTS, continued
--------------------------------------
On March 10, 2005, the Company sold its remaining saleable 1,000,000 shares of
Langley common stock for proceeds of $285,516.
--------------------------------------------------------------------------------
F-49