-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OH+zwbEOoJtupfz6yOa6KSP48C4HdrQLliUkj8wzHGbV6Cte/qMOEKhWXahDcAiU EeHuTFakx7ugWWtAW1uGmw== 0000912057-97-014664.txt : 19970501 0000912057-97-014664.hdr.sgml : 19970501 ACCESSION NUMBER: 0000912057-97-014664 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATERIAL TECHNOLOGIES INC /CA/ CENTRAL INDEX KEY: 0001036668 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 954622822 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23617 FILM NUMBER: 97590590 BUSINESS ADDRESS: STREET 1: 11835 OLYMPIC BLVD STREET 2: SUITE 705 EAST TOWER CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3102085589 MAIL ADDRESS: STREET 1: 11835 OLYMPIC BLVD STREET 2: SUITE 705 EAST TOWER CITY: LOS ANGELES STATE: CA ZIP: 90064 S-1/A 1 S-1/A File No. 333-23617 SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 1 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1993 (File No. 33-23617) MATERIAL TECHNOLOGIES, INC. --------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE -------- (State or other jurisdiction of incorporation or organization) 1057 ---- (Primary Standard Industrial Classification Code Number) 95-4622822 (I.R.S. Employer Identification No.) Suite 705, East Tower 11835 West Olympic Blvd. Los Angeles, California 90064 (310) 208-5589 (Address, including zip code, and telephone number, including area code of registrant's principal executive offices) C. Timothy Smoot, Esq. Law Offices of C. Timothy Smoot 23505 Crenshaw Boulevard, Suite 174 Torrance, California 90505-5221 (310) 530-3366 (Name, address, telephone number of agent for service) Approximate date of commencement of proposed distribution to the public: The date this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1993 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine. CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------ Title of each class of securities to Amount to be Par Value Per Aggregate Amount of be registered registered Share (1) Par Value registration fee - ------------------------------------------------------------------------------------------------------------------------------ Class A Common Stock of Material Technologies, Inc., held 369,172 (1)(2) $.001 $369.17 $11.19 by the Company for distribution to its public shareholders - ------------------------------------------------------------------------------------------------------------------------------ Registration Fee Paid $11.19 - ------------------------------------------------------------------------------------------------------------------------------
(1) No current market exists for these securities, and registrant is unable to determine the price, if any, at which these shares will trade. (2) Registrant will receive no proceeds from the distribution of Material Technologies, Inc.'s Class A Common Stock to Registrant's shareholders. MATERIAL TECHNOLOGIES, INC. CROSS REFERENCE SHEET BETWEEN ITEMS IN PART I OF FORM S-1 AND PROSPECTUS Exhibit Index at Page II 3 Item Number and Caption Location in Prospectus 1. Forepart of the Registration Outside Front Cover of Prospectus Statement and Outside Front Cover Page of Prospectus. 2. Inside Front and Outside Back Inside Front and Outside Back Cover Cover Pages of Prospectus 3. Summary Information and Risk Prospectus Summary and Risk Factors Factors, Ratio of Earnings to Fixed Charges - not applicable 4. Use of Proceeds Not Applicable 5. Determination of Offering Price Not Applicable 6. Dilution Dilution 7. Selling Security Holders Not Applicable 8. Plan of Distribution The Distribution 9. Description of Securities to be The Distribution Registered 10. Interests of Named Experts and Not Applicable Counsel 11. Information with Respect to Business, The Distribution, Registrant Description of Capital Stock, Description of Shares, Financial Statements, Selected Financial Information, Management s Discussion and Analysis, Management, Executive Compensation, Principle Stockholders, Certain Relationships and Related Transactions 12. Disclosure of Commission Position Indemnification of Directors and on Indemnification for Securities Act Officers Liabilities PROSPECTUS MATERIAL TECHNOLOGIES, INC. 369,172 Shares of Class A Common Stock Material Technologies, Inc., ( "Matech 2" or the "Company") is distributing 369,172 shares of its Class A Common Stock (the "Shares") to 405 shareholders of Material Technology, Inc. ("Matech 1") of record on May __ , 1997, pro rata, one Share of Matech 2 for each share of Matech 1 held by each shareholder. The distribution to Matech 1's shareholders is being made in accordance with a February 17, 1997 Stock Purchase Agreement among Matech 1, Montpelier Holdings, Inc., SecurFone America, Inc., ("SecurFone") and Robert M. Bernstein, the Chief Executive Officer and controlling shareholder of both Matech 1 and Matech 2. Under that agreement, immediately after the distribution, the parties intend to effect a reverse merger of SecurFone into Matech 1. The purpose of the distribution is to spin-off Matech 2 from Matech 1 allowing Matech 1's shareholders to retain an interest in Matech 1's business, while keeping that business separate from SecurFone's new business. No one will receive any proceeds from distribution of the Shares. Material Technologies, Inc., is a development stage company requiring approximately $5,000,000 to fund operations and complete development and marketing of its two products. As the result of the Company's recurring losses from operations, there is substantial doubt about its ability to continue as a going concern. As of March 31, 1997, the Company has an accumulated deficit of $2,912,828 and $2,783 in cash. It has a net loss of $140,378 in 1996 and $81,959 for the three months ending March 31, 1997. Moreover, Robert M. Bernstein will retain overwhelming voting control of the Company with 83.4% of the votes entitled to be cast by stockholders. The stockholders receiving this distribution will have approximately 2% of the votes entitled to be cast, Matech 1 will have 3%, and insiders and affiliates other than Mr. Bernstein will control the remaining votes. As the result of a teaming agreement with Southwest Research Institute to provide services relating to a government research contract, the Company expects to receive sufficient funds to operate until August 1998. Absent additional funds within the next 18 months, however, the Company may go out of business. If the Company fails, investors will lose their entire investment. The Company has no products currently available for commercial sale and is unlikely to have any such products for six to twelve months from the date it receives additional capital, if that occurs. The Company is seeking the required funding through (1) additional government grants, (2) private financing, and (3) public financing. There can be no assurance of obtaining the needed funds. THE SECURITIES BEING DISTRIBUTED ARE HIGHLY SPECULATIVE AND ENTAIL A VERY HIGH DEGREE OF RISK. -- SEE "VERY HIGH RISK FACTORS" BEGINNING ON PAGE 3. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is May __ , 1997 The Company intends to furnish its stockholders annual reports containing audited financial statements examined and reported upon by a certified public accounting firm and quarterly reports for each of the first three quarters of each fiscal year containing unaudited financial statements. Prior to this distribution, there was no public market for any of the Company's securities including the Class A Common Stock (the "Shares"). No assurance can be given that any trading market for the Shares will develop or that if such a market develops that such a market will continue. In the absence of the Company obtaining the necessary funds to conduct its operations beyond the next 18 months, the Company does not expect that any trading market will be meaningful. The Company may be reached at its principal executive offices as follows: Material Technologies, Inc. East Tower, Suite 705 11835 W. Olympic Blvd. Los Angeles, CA 90064 (310) 208-5589 MATERIAL TECHNOLOGIES, INC. TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 VERY HIGH RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . .1 THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 THE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 COMMON STOCK OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . .2 WARRANTS OUTSTANDING:. . . . . . . . . . . . . . . . . . . . . . . . . .3 VERY HIGH RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . .3 CESSATION OF THE COMPANY AS A GOING CONCERN. . . . . . . . . . . . . . .3 NO OPERATING HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . .3 NO ASSURANCE OF PRODUCT DEVELOPMENT; NEED FOR ADDITIONAL RESEARCH AND DEVELOPMENT; MARKET UNCERTAINTY. . . . . . . . . . . . . . . . . . . . .3 LIMITED CURRENT ABILITY TO MARKET PRODUCTS . . . . . . . . . . . . . . .3 DEPENDENCE ON MANAGEMENT CONSULTANTS AND ADVISORS. . . . . . . . . . . .3 COMPETITION FROM OTHER TECHNOLOGIES. . . . . . . . . . . . . . . . . . .3 PATENT PROTECTION MAY BE INADEQUATE. . . . . . . . . . . . . . . . . . .4 POSSIBLE LOSS OF PATENTS TO SECURED LENDERS. . . . . . . . . . . . . . .4 NEED FOR ADDITIONAL FINANCING; LIKELY NEGATIVE CASH FLOW . . . . . . . .4 VERY SUBSTANTIAL DILUTION. . . . . . . . . . . . . . . . . . . . . . . .4 NO PUBLIC MARKET FOR SHARES; SALES OF COMMON STOCK . . . . . . . . . . .4 IMPEDIMENTS TO OBTAINING ADDITIONAL FINANCING. . . . . . . . . . . . . .5 SALARY BENEFIT TO MR. BERNSTEIN FROM FUTURE FINANCING. . . . . . . . . .5 SUBSTANTIAL ROYALTY OBLIGATIONS. . . . . . . . . . . . . . . . . . . . .5 NO DIVIDENDS LIKELY. . . . . . . . . . . . . . . . . . . . . . . . . . .5 RISK OF NEW PRODUCT AND TECHNOLOGY . . . . . . . . . . . . . . . . . . .5 ROBERT M. BERNSTEIN'S CONTINUING CONTROL OF THE COMPANY. . . . . . . . .6 ROBERT M. BERNSTEIN'S CONFLICTS OF INTEREST. . . . . . . . . . . . . . .6 IMPEDIMENTS TO RESALE FROM PENNY STOCK REGULATIONS . . . . . . . . . . .6 POSSIBLE TAX LIABILITY OF THE DISTRIBUTION . . . . . . . . . . . . . . .6 RIGHTS OF TENSIODYNE CORPORATION AS CLASS B PREFERRED STOCKHOLDER. . . .6 CAPITALIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Results of Operation for the Fiscal Years Ended December 31, 1994, 1995, and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . .9 Liquidity and Capital Resources . . . . . . . . . . . . . . . . . .9 MARKET INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Stock Purchase Agreement . . . . . . . . . . . . . . . . . . . . . 11 Agreements and Royalty Obligations . . . . . . . . . . . . . . . . . . 12 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Development of Technologies. . . . . . . . . . . . . . . . . . . . . . 15 Description of Technologies. . . . . . . . . . . . . . . . . . . . . . 16 Patents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Distribution Methods of Product. . . . . . . . . . . . . . . . . . . . 18 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Sources of Basic Material. . . . . . . . . . . . . . . . . . . . . . . 19 Dependence Upon One or More Major Customers. . . . . . . . . . . . . . 19 Total Number of Employees. . . . . . . . . . . . . . . . . . . . . . . 19 Plan of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Description of Property. . . . . . . . . . . . . . . . . . . . . . . . 19 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ADVISORY BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . 22 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 22 PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 23 DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . 25 WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . . . . . 27 EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 FINANCIAL STATEMENTS - INDEX . . . . . . . . . . . . . . . . . . . . . . . .1 ii PROSPECTUS SUMMARY THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PERSON RECEIVING THE SHARES IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. INTRODUCTION Material Technologies, Inc. ("Matech 2" or the "Company") is in the business of (1) developing for commercial exploitation the Fatigue Fuse, a patented device designed to give early warning of metal fatigue in bridges, aerospace, shipping, transportation, and other applications where such information is of significance and (2) researching and developing the Electrochemical Fatigue Sensor, a device which, if successfully developed, will indicate the fatigue status of a metal structure at any time in its life without knowing the structure's past history. The Company requires $5,000,000 to complete development of these two products, pay overhead and debts, and market the products. No funds, however, will be raised in connection with this distribution. The Company has no specific plans to raise the necessary $5,000,000. It has provided information to various investment bankers and venture capitalists but no viable plan for raising the funds has been initiated as of the date of this Prospectus. Prior to this offering, there has been no public market for any of Matech 2's securities and no assurance can be given that such a market will develop for its Class A Common Stock. VERY HIGH RISK FACTORS The securities being distributed involve a very high degree of risk. The very high risk factors include, among others: Matech 2's (1) need for an additional $5 million to complete development of its products and market them, (2) absence of operating history, and (3) dependence on management. In addition, technological changes could destroy the potential usefulness of the Company's products, and there is substantial uncertainty regarding market acceptance of its products. SEE, Very High Risk Factors, p. 3. THE COMPANY The Company is a development stage company which intends to complete testing and developing the Fatigue Fuse, a patented device owned by the Company, and the Electrochemical Fatigue Sensor ("EFS"), a device invented at the University of Pennsylvania. The Company holds an exclusive worldwide license to develop and exploit the EFS. The Company was incorporated in the State of Delaware on March 4, 1997. Its principal offices are located at 11835 West Olympic Boulevard, East Tower, Suite 705, Los Angeles, California 90064. Matech 2 was formed as a subsidiary of Matech 1 to receive the assets and liabilities of Matech 1 in connection with a February 17, 1997 Stock Purchase Agreement among Matech 1, Montpelier Holdings, Inc., SecurFone America, Inc., ("SecurFone") and Robert M. Bernstein, the Chief Executive Officer and controlling shareholder of both Matech 1 and Matech 2. Under that agreement, the parties intend to effect a reverse merger of SecurFone into Matech 1 immediately after 1 this distribution. In March 1997, in accordance with the Stock Purchase Agreement, Matech 1's Board of Directors authorized assignment of all of its assets and liabilities to the Company. The $172,418 in assets included four patents and liabilities totaling $493,146 as of March 31, 1997. In exchange for Matech 1's business, on March 9, 1997, the Company authorized issuance of 5,560,000 shares its Class A Common Stock to Matech 1 who is distributing 5,000,000 shares to its shareholders of record as of the date of this Prospectus. The distribution keeps Matech 1's former business, now the Company's business described in this Prospectus, separate from SecurFone's business that Matech 1 will enter into on closing the reverse merger. Accordingly, 405 public shareholders of record of Matech 1 as of the date of this Prospectus are receiving 369,172 shares of the Company's Class A Common stock, approximately 6.6%. Control persons and affiliates will own 4,630,828 shares, approximately 83.3%, with Robert M. Bernstein, President and Chief Executive Officer of the Company receiving 2,936,130 of these shares, approximately 52.8%. Matech 1 will retain 560,000 shares, approximately 10.1% of the outstanding shares. THE BUSINESS On May __, 1997, Matech 1 assigned all of its assets and liabilities to the Company including four patents, together with all related know-how, on a device known as the Fatigue Fuse and its license agreement with the University of Pennsylvania to exploit the Electrochemical Fatigue Sensor ("EFS"). Although the Company believes the Fatigue Fuse is in its final stage of testing and development, no commercial application has been arranged to date and no assurance can be given that the Company will successfully market it. The Company requires $5,000,000 to complete development and marketing of its products including paying overhead and accrued debts. It requires approximately $2,000,000 to finish testing and developing the Fatigue Fuse and to commercially produce and market it. The Company estimates that approximately $2,875,000 will be required to complete research and development of the EFS. SEE, Plan of Operations. The Company has a teaming agreement with Southwest Research Institute ("SWRI") and the University of Pennsylvania (collectively the "Team"). On February 25, 1997, the United States Air Force awarded the Team a $2.5 million Phase I contract to "determine the feasibility of [the Company's EFS] to improve the United State Air Force capability to perform durability assessments of military aircraft, including both air frames and engines through the application of EFS to specific military aircraft alloys." The Company is a subcontractor to SWRI and its share of this award is approximately $550,000 for which the Company will perform certain technical tasks in accordance with its expertise. The Company is seeking additional funding through (1) additional government grants, (2) private financing, and (3) public financing to finish development of its Fatigue Fuse and the EFS. If all required funds were received today, the Company estimates that six to twelve months would be required to bring the Fatigue Fuse to market and two years would be required to bring the EFS to market. The Company will expend monies it receives from any financing as they are received. 2 Therefore, the time necessary to bring each of these products to market will be lengthened as the Company is required to stretch out and complete work depending on the availability of funds. No assurance can be given that all or part of these funds will be raised. Assuming the products are successfully tested and developed, however, competition or other significant risks may prevent the Company from successfully marketing one or both of these products. THE DISTRIBUTION SECURITIES DISTRIBUTED: 369,172 shares of Class A Common Stock. As of the date of this Prospectus, one share of Matech 2's Class A Common Stock will be distributed for each share of Matech 1 Class A Common Stock owned on the record date which will be the date of this Prospectus. Within two weeks after the date of this Prospectus, which will be the effective date of the spin-off of Matech 2 from Matech 1, stock certificates in Matech 2 will be mailed to shareholders. No shareholder action is required. After the distribution, Matech 1 will reverse split its 5,000,000 outstanding shares, 1 for 10, leaving approximately 500,000 shares outstanding. Fractional shares will be rounded up. Thus, stockholders owning less than ten Matech 1 shares will still receive one share of Matech 1 in the reverse split. It is management's understanding that the distribution will be a taxable dividend to Matech 1's shareholders. Matech 1 shareholders will be required to include in their taxable ordinary income for the taxable year in which the distribution is received, the fair market value of the Company's Stock distributed to them. The Company's Board of Directors has determined that the value of its Common Stock is $.001 per share. This value was determined due to the lack of marketability of the Company's stock, as well as the Company's negative net worth and its predecessors' history of accumulated losses. There can be no assurance that the Internal Revenue Service (the "Service") or other taxing agency will not assert a higher value, resulting in greater tax liability to Matech 1's shareholders as a result of this distribution. COMMON STOCK OUTSTANDING Before and After This Distribution: 5,560,000 shares of Class A Common Stock and 60,000 shares of Class B Common Stock. WARRANTS OUTSTANDING: BEFORE AND AFTER THIS DISTRIBUTION: 1,700,000 Warrants each to purchase one share of Class A Common Stock for $.50 per share until August 22, 1999. (Note 12 a to Financial Statements.) VERY HIGH RISK FACTORS THE SHARES BEING DISTRIBUTED HEREBY ARE HIGHLY SPECULATIVE AND ARE SUBJECT TO MANY SIGNIFICANT RISKS. CESSATION OF THE COMPANY AS A GOING CONCERN 3 The Company's independent auditor has issued an opinion that the recurring losses from operations raise substantial doubt about the Company's ability to continue as a going concern. The Company may have to cease operations and go out of business if it does not raise sufficient additional capital. The business of the Company sustained operating losses on a consolidated basis totaling $2,832,869 from inception through December 31, 1996, and $2,912,828 through March 31, 1997. The Company has no current product to market and must rely on loans and investment capital to meet its current obligations and continue its operations. If necessary funds are not raised, Management will be forced to discontinue operating and liquidate the Company. NO OPERATING HISTORY The Company has no established history of business operations, has not generated any sales revenue, and is in the early stage of development. NO ASSURANCE OF PRODUCT DEVELOPMENT; NEED FOR ADDITIONAL RESEARCH AND DEVELOPMENT; MARKET UNCERTAINTY The Company's products are in the research, development, and testing stage. Unexpected problems, technological or specifications changes (1) may make the technologies obsolete, (2) may affect the products' overall feasibility, or (3) may delay completion and increase costs of research, development, and testing. The time required to bring one or both products to market is uncertain. Market acceptance cannot be determined until product development is complete. LIMITED CURRENT ABILITY TO MARKET PRODUCTS The Company's operating results will depend on its ability to market its products. Its present marketing capability is limited to contacts of its officers, directors, and consultants and is unproved. It has yet to establish a direct sales force or distribution network. Failure to put into place an experienced and skillful marketing infra-structure, in a timely manner, could have a materially adverse impact upon its ability to bring its products to market and continue operating. DEPENDENCE ON MANAGEMENT CONSULTANTS AND ADVISORS The Company's success largely depends on the performance of its President and Chief Executive Officer, Robert M. Bernstein, its consultants, and advisors. Failure to attract and retain key consultants, advisors, and employees with necessary skills could have a materially adverse impact on the Company's ability to bring its products to market and continue operating. The Company has an Advisory Board, the members of which serve without compensation. The Company intends to issue these members 18,000 shares of Class A Common Stock each, if and when the Company obtains substantial funding but has no obligation to do so. SEE, "Advisory Board", INFRA. COMPETITION FROM OTHER TECHNOLOGIES 4 The metal fatigue measuring industry has significant competition. Other technologies exist which can indicate the presence of metal fatigue damage. Single cracks larger than a certain minimum size can be found by nondestructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics. Tracking of load and strain history, for subsequent estimation of fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers. These methods have been in use for up to 40 years and also offer the advantage that they have been accepted in the marketplace, whereas the Company's products will remain largely unproved for some currently indeterminable period of time. Other companies with greater financial and technical resources and larger marketing organizations than the Company pose a potential threat if they commence an effort to compete in the Company's market segment. SEE, "Competition". PATENT PROTECTION MAY BE INADEQUATE The Company relies on patents to protect its interests in its products. In the event of a patent infringement, the costs to the Company to enforce its rights may be substantial whether or not enforcement is successful. Moreover, there can be no assurance that the Company will have sufficient funds to attempt to protect its patents from infringement. POSSIBLE LOSS OF PATENTS TO SECURED LENDERS The Company's patents are encumbered by certain liabilities as described under the heading, "Description of Technologies" and "Business". If the Company fails to discharge its obligations under those liabilities, it may lose its interests in the patents or certain rights to exploit the technology to certain lenders including Robert M. Bernstein, a principal shareholder, Director and Chief Executive Officer. See "Management - Certain Transactions." NEED FOR ADDITIONAL FINANCING; LIKELY NEGATIVE CASH FLOW If the Company fails to raise additional funds necessary for the research, development, and testing from either government grants, the sale of securities, borrowings, or other sources, it will not have a product for a potential market and stockholders will have no possibility of any financial return or economic benefit from their ownership of shares. Even if the necessary $5,000,000 is raised and research, development, and testing is completed, no assurance can be given that the results will establish that the products will be marketable. Moreover, no assurance can be given that the products can be produced at a cost which will make it possible to market them at a commercially feasible price. The Company is likely to have negative cash flow through at least March 31, 1998. Over the next 24 months, $5,000,000 is required to complete research and development of both products and market them. If the Company does not successfully raise these funds, it may be compelled to halt all operations resulting in complete loss of share value. VERY SUBSTANTIAL DILUTION 5 If the Company raises funds through a securities offering, the shares being distributed may be subject to very substantial dilution of voting control and percentage ownership of the Company. NO PUBLIC MARKET FOR SHARES; SALES OF COMMON STOCK The failure to develop a public market for the shares of the Company could have a significant adverse impact on the Company's ability to obtain financing in the future. The 369,172 shares of common stock being distributed to Matech 1 shareholders may be resold by those shareholders. The fact that these shares are eligible for sale could adversely affect the Company's ability to sell Shares in future financings by means of a public offering of shares, since any potential underwriter would have to be concerned about shareholders offering shares of the Company's stock for sale at prices lower than that at which an underwriter might offer such stock. These shares may be immediately sold if a public market develops and the effect of having these shares eligible for sale in any market cannot be determined, but may be depressive. The Company intends to encourage trading of the Shares on the National Association of Securities Dealer's Bulletin Board. The Company cannot predict the prices at which the Shares may trade, if at all. Over the last year, Matech 1's Class A Common Stock has been quoted and traded at prices ranging from $2.50 per share to $5.37 per share with 4 market makers. It is likely that any substantial selling into the market would cause a substantial decrease in the quoted price of these shares because of the thin trading market. Matech 1's trading volume ranged from 2,800 shares in all of October 1996 to 90,300 shares in December 1996 after Matech 1 announced the signing a Letter of Intent with SecurFone America, Inc. for the reverse merger. At that time, the price increased from $2.50 per share to $4.73 per share on January 6, 1997. As this January 6, 1997 price reflected the market's view of the reverse merger as well as supply and demand, the Shares being distributed are likely to trade, if at all, substantially below that price. IMPEDIMENTS TO OBTAINING ADDITIONAL FINANCING Under modified agreements with the University of Pennsylvania and an agreement with an unrelated third party, Stephen Forrest Beck, a Los Angeles investment banker, the Company must pay to them a percentage of amounts raised from financing other than from government contracts. The Company must pay the University 30% of any such financing up to $200,000 and pay Mr. Beck 12.5% of the first $1,000,000 raised and 15% of any amount over $1,000,000 until $375,000 is paid. In addition, the Company is obligated to pay royalties totaling 37% on revenues received from the sale of the Fatigue Fuse and 10% of revenues received from the sale of the EFS. These commitments are likely to increase the difficulty in finding third party financing. Underwriters and other financing sources are less likely to agree to finance the Company's research and development of its technologies if these amounts must be paid out rather than used for additional research and development. SEE, Notes 6, 10 f, and 10 g to the Financial Statements and "Agreements and Royalty Obligations". SALARY BENEFIT TO MR. BERNSTEIN FROM FUTURE FINANCING 6 As of March 31, 1997, the Company was indebted to Robert M. Bernstein in the amount of $45,000 for accrued salary. If the Company raises additional funds, it will retire all or part of this debt to Mr. Bernstein. Subject to approval by the Board of Directors, the Company intends to enter into an employment agreement with Mr. Bernstein, commencing the first full month after it raises at least $500,000 at the rate of $200,000 per year. As a result, Mr. Bernstein is likely to derive a substantial PERSONAL benefit if the Company obtains additional financing. SUBSTANTIAL ROYALTY OBLIGATIONS Over the years, to finance development of the Fatigue Fuse and Electrochemical Sensor, the Company's predecessors sold substantial royalty rights to others. As of the date of this Prospectus, the Company was obligated to pay royalties to others totaling 37% of revenues from sales of its Fatigue Fuse and 10% of revenues from sales of its EFS. If these products are manufactured and sold, these royalty obligations will substantially lower the funds available to the Company from revenues. See, Note 10g to the Financial Statements. NO DIVIDENDS LIKELY The Company has never paid any dividends and will not pay dividends for the foreseeable future. RISK OF NEW PRODUCT AND TECHNOLOGY The manufacturing and marketing of the Company's products which incorporate new technology, has inherent risk. It is uncertain how each product will operate over time and under various conditions of use. Even if one or both products are successfully developed, manufactured, and marketed, warranty or product liability, or lack of market acceptance due to product failure or failure to meet expectations, could prevent the Company from becoming profitable. Developing new technologies for manufacture is frequently subject to unforeseen expenses, difficulties, and complications and, in some cases, such development cannot be accomplished. ROBERT M. BERNSTEIN'S CONTINUING CONTROL OF THE COMPANY Mr. Bernstein owns 60,000 shares of Class B stock, each of which has 200 votes per share and also owns 2,936,130 shares of the Company's Class A common stock representing 52.8% of such shares. Thus, in any shareholder vote, Mr. Bernstein has 14,936,130 votes out of a possible 17,910,015 votes equal to 83.4% voting control of the Company. Mr. Bernstein overwhelmingly controls the Company's direction and management. The Company's Bylaws do provide for cumulative voting. Nevertheless, a minority shareholder will have no control over management and probably will be unable to elect any directors. ROBERT M. BERNSTEIN'S CONFLICTS OF INTEREST Mr. Bernstein controls the Company as its majority stockholder, its President, Chief Financial Officer, and its Chairman of the Board. He has conflicts of interest as follows: (1) he received 7 2,936,130 shares of the Company's Class A Common Stock as a result of (a) converting a convertible note into 580,000 shares and (b) Matech 1 deciding to issue him an additional 1,499,454 shares in satisfaction of his accrued salary as of December 31, 1996, totaling $372,000. These shares increased his percentage of the business from 36.5% to 52.8%; (2) the Company owes him $12,846 plus accrued salary of $45,000 through March 31, 1997. If sufficient funds are raised, he will be paid these amounts; (3) he may receive a future salary of $200,000 per year; and (4) he has a lien on the Company's patents giving him the right to foreclose on them if loans that he made to the Company are not repaid. Mr. Bernstein's right to foreclose means that, if the Company fails, he could potentially profit by gaining personal control of the Company's technology. On the other hand, as a director, officer, and controlling shareholder, Mr. Bernstein owes a fiduciary duty to the Company and its shareholders to act in the Company's and shareholders best interests. IMPEDIMENTS TO RESALE FROM PENNY STOCK REGULATIONS The Securities and Exchange Commission (the "SEC") has adopted regulations which generally define "Penny Stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For transactions covered by these rules, the broker dealer must make a delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market. The broker dealer also must disclose the commissions payable to both the broker dealer and the registered representative, current quotations for the securities, and, if the broker dealer is the sole market maker, the broker dealer must disclose this fact and the broker dealer's presumed control over the market. Finally, monthly statements must be sent out disclosing recent price information for the penny stock held in the customer's account and information on a limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker dealers to sell the Company's securities and may affect the ability of purchasers in the offering to sell the Company's securities in the secondary market. POSSIBLE TAX LIABILITY OF THE DISTRIBUTION It is management's understanding that the distribution will be a taxable dividend to Matech 1's shareholders. Matech 1 shareholders will be required to include in their taxable ordinary income for the taxable year in which the distribution is received, the fair market value of the Company's Stock distributed to them. The Company's Board of Directors has determined that the value of its Common Stock is $.001 per share. This value was determined due to the lack of marketability of the Company's stock, as well as the Company's negative net worth and its predecessors' history of accumulated losses. There can be no assurance that the Internal Revenue Service (the "Service") or other taxing agency will not assert a higher value, resulting in greater tax liability to Matech 1's shareholders as a result of this distribution. RIGHTS OF TENSIODYNE CORPORATION AS CLASS B PREFERRED STOCKHOLDER 8 Fifteen (15) shares of Class B Preferred Stock have been issued to Tensiodyne Corporation in exchange for canceling its 15 Class B Preferred shares in Matech 1. In the event of liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, Tensiodyne as holder of Class B Preferred Stock will be entitled to receive $10,000 per share as a liquidation preference or a total of $150,000. This liquidation preference is senior to liquidation rights of all other classes of stock except the Class A Preferred's liquidation rights. This provision may have the effect of delaying, deferring or preventing a change in control. In addition, after January 31, 2002, Tensiodyne will have the option to redeem its shares at any time for $150,000. In addition, Tensiodyne as a holder of Class B Preferred Stock, has the right to receive cash dividends, which are determined pursuant to a formula in the Certificate of Designation. That formula reads as follows: "Each time a cash dividend is paid on the Common Stock there shall also be paid with respect to each outstanding share of Class B Preferred Stock an amount determined by multiplying the aggregate amount of the dividend paid with respect to the Common Stock by a fraction (i) the numerator of which is 3,214,480 and (ii) the denominator of which is the number of shares of Common Stock on which the dividend was paid, and (x) multiplying the resulting product by thirty percent (30%) and then (y) dividing the resulting product by five hundred and ten (510)." CAPITALIZATION The following sets forth the Company's pro forma capitalization as of March 31, 1997, as if the transfer of assets and liabilities from Matech 1 to the Company had taken place on that date. - -------------------------------------------------------------------------------- Short Term Debt $468,146 - -------------------------------------------------------------------------------- Long Term Debt $25,000 - -------------------------------------------------------------------------------- TOTAL LIABILITIES $493,146 - -------------------------------------------------------------------------------- REDEEMABLE CLASS B PREFERRED STOCK $150,000 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT) Class A Common Stock, $.001 Par Value, Authorized 10,000,000 Shares, Outstanding 5,560,000 shares. $5,560 - -------------------------------------------------------------------------------- Class B. Common Stock, $.001 Par Value, Authorized 300,000 Shares, Outstanding 60,000 Shares $60 - -------------------------------------------------------------------------------- Class A Preferred Stock, $.001 Par Value, Authorized 9,999,490 Shares, Outstanding 350,000 Shares $350 - -------------------------------------------------------------------------------- Additional Paid in Capital $2,458,794 - -------------------------------------------------------------------------------- Less Notes and Subscriptions Receivable - Common Stock ($36,464) - -------------------------------------------------------------------------------- Deficit Accumulated During the Development Stage ($2,912,828) - -------------------------------------------------------------------------------- TOTAL STOCKHOLDERS EQUITY (DEFICIT) ($470,728) - -------------------------------------------------------------------------------- DIVIDEND POLICY The Company and its predecessors have never paid cash dividends. Management does not intend to pay dividends in the near future and any dividends paid will depend on the Company's future 9 earnings and working capital requirements. Currently, there are no contractual restrictions placed on the Company in terms of declaring and paying dividends. DILUTION There will be no dilution of stockholder equity as a result of this distribution. There was, however, a substantial dilution of stockholder's percentage interest in the Company's business as a result of Matech 1 issuing stock in relation to the Stock Purchase Agreement. See, "Stock Purchase Agreement" for a schedule of shares issued. Prior to Matech 1 entering into the Stock Purchase Agreement on February 17, 1997, there were 2,580,546 shares of Matech 1's Class A Common Stock outstanding with 327,911 shares in the hands of public shareholders representing 12.7% of the outstanding shares. As a result of the issuance of shares in connection with this transaction, the Company now has 5,560,000 shares outstanding. Accordingly, the percentage interest of Matech 1's public shareholders in the Company's business after this distribution will decrease from 12.7% to 5.9% resulting in a 46.5% reduction in each shareholders percentage interest in the Company's business. On the other hand, each shareholder will also have a small percentage interest in the business of SecurFone America, Inc. SELECTED FINANCIAL INFORMATION On March 9, 1997, the Company authorized issuance of 5,560,000 shares of its Class A Common Stock to Matech 1, 60,000 shares of its Class B Common Stock to Robert M. Bernstein, 350,000 shares of its Class A Convertible Preferred Shares to Matech 1's Convertible Preferred Shareholders in exchange for their Matech 1 Convertible Preferred, and 15 shares of its Class B Convertible Preferred Shares to Matech 1's Class B Convertible Preferred Shareholder, Tensiodyne Corporation. In consideration for assuming all of Matech 1's liabilities and obligations, the Company will receive all of the assets of Matech 1 as of the effective date of the exchange, twenty-one days after an information statement is mailed to shareholders of Matech 1. The Company is presenting in its financial statements the activity of Matech 1, as the Company continues substantially in the same line of the business including all of its assets and liabilities. The selected financial data of the Company are derived from the consolidated financial statements of Matech 1. The selected financial data should be read in conjunction with the Company's financial statements included elsewhere in this prospectus.
- ------------------------------------------------------------------------------------------------------------------------------- Fiscal Year Ending December 31 Three Months Ending Inception to March 31 March 31 - ------------------------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1996 1997 1997 (Unaudited) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------- Net Sales 0 0 0 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From $(51,180) ($714,605) $(377,063) $(197,546) $(483,186) $(150,541) $(87,649) $(2,912,828) Continued Operations - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From $(.17) $(.016) Continued Operations Per Common Share - ------------------------------------------------------------------------------------------------------------------------------- Common Shares 2,580,546 5,560,000 Outstanding - ------------------------------------------------------------------------------------------------------------------------------- 10 - ------------------------------------------------------------------------------------------------------------------------------- Total Assets $178,944 $167,858 $184,579 $150,692 $208,299 $165,481 $172,418 $172,418 - ------------------------------------------------------------------------------------------------------------------------------- Total Liabilities $46,481 $401,600 $620,375 $783,882 $832,926 $914,049 $493,146 $493,146 - ------------------------------------------------------------------------------------------------------------------------------- Redeemable Preferred 0 0 $150,000 $150,000 $150,000 $150,000 $150,000 $150,000 Stock - ------------------------------------------------------------------------------------------------------------------------------- Total Stockholders $132,463 $(619,166) $(585,796) $(783,190) $(988,218) $(898,568) $(470,728) $(470,728) Equity (Deficit) - ------------------------------------------------------------------------------------------------------------------------------- Dividends 0 0 0 0 0 0 0 0 - -------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data" and the Company's financial statements and notes thereto contained elsewhere in this Prospectus. BACKGROUND The Company's predecessors were engaged in developing and testing the Fatigue Fuse and developing the EFS. The majority of funds used in operations, development and testing were raised through sales of future royalty interests in the Company's products and private offerings of common and preferred stock. The Company was formed on March 4, 1997, as a subsidiary of Matech 1, a Delaware corporation. On March 9, 1997, in accordance with a February 17, 1997 Stock Purchase Agreement among Matech 1, Montpilier Holdings, Inc., SecurFone America, Inc., ("SecurFone") and Robert M. Bernstein, (the "Stock Purchase Agreement") Matech 1 agreed to assign all its assets and liabilities to the Company including all Patents and know-how relating to the Fatigue Fuse and the Electrochemical Fatigue Sensor in exchange for 5,560,000 shares of the Company's Class A Common Stock. Matech 1 also agreed to distribute 5 million of these 5,560,000 shares to its shareholders thereby spinning off the Company. Upon completing this distribution, Matech 1 will own 560,000 shares of the Company's Class A common stock. From its inception through 1993, Tensiodyne Corporation developed the Fatigue Fuse. In August 1993, Tensiodyne licensed the rights to develop and exploit the EFS from the University of Pennsylvania. In February 1994, Matech 1 acquired all of the assets and liabilities of Tensiodyne in a reorganization that resulted in Matech 1 distributing shares to Tensiodyne' shareholders in January 1996 as part of transactions similar to the transactions contemplated by the Stock Purchase Agreement. The following discussion of results of operations, capital resources, and liquidity pertains to the Company's consolidated activity for the three years ended December 31, 1994, 1995, and 1996. RESULTS OF OPERATION FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 Revenues 11 The Company's predecessors did not generate any significant revenues in 1994, 1995, or 1996. In 1996, Matech 1 received $12,275 in expense reimbursements, $2,427 as interest income, and $17,750 from the sale of 50,000 shares of Tensiodyne Corporation stock. In 1995, Matech 1 generated interest income of $1,928 and $4,375 of miscellaneous income. In 1994 Matech 1 generated interest income of $1,785. Costs and Expenses In 1996, research and development costs were $10,700 compared to $15,104 in 1995, $83,360 in 1994, and $330,112 in 1993. In 1993, funds were available for development. Since that time, substantial funds have not been available. In 1996, $10,000 was paid to the University of Pennsylvania to reimburse it for costs related to maintaining patents for the EFS. The remaining $700 was for testing the Fatigue Fuse. In 1995, the Company spent $12,359 for testing the Fatigue Fuse and spent the remainder for consulting fees of $2,745 related to that testing. In 1994, the majority of research and development costs was the salary of Matech 1's in-house engineer totaling $71,096 and testing costs of $7,263. In 1993, research and development costs included $188,495, which is the present value of the Company's obligation to sponsor the development of the EFS with the University of Pennsylvania. Also included in research and development for 1993 is the salary of the Company's engineer totaling $53,288 and testing costs of $76,843. General and administrative costs were $466,286, $188,745, and $295,488 for 1996, 1995, and 1994, respectively. In 1996, the major costs were $200,000 of accrued salary to the Company's President, Robert M. Bernstein, and $86,633 in legal fees to (a) represent the Company in contract negotiations with SWRI which resulted in a teaming agreement and subcontract with SWRI relating to a government research contract from the U. S. Air Force, (b) complete Matech 1's January 1996 S-1 registration statement, (c) negotiate the Stock Purchase Agreement, and (d) preserve the Company's patents. In addition, in the Company's ongoing effort to raise funds, it incurred costs of $34,632 for various consultants, $21,902 for travel and entertainment, $21,766 for telephone, $17,526 for accounting, $29,017 for office rent and $14,454 for office expenses. The major costs incurred in 1995 were $56,170 related to attempts to find funding for research and development including $28,298 for travel and entertainment expenses, $15,362 in professional fees, and $12,510 in professional services. In addition, $31,480 was incurred for costs related to the S-1 Registration statement filed on January 19, 1996, 28,514 for office rent, $20,696 for accounting fees, $19,751 for telephone and $10,871 for interest. In 1994, the major costs were the President's salary of $72,000, which was accrued and not paid, professional fees of $55,824, office related expense of $32,206, travel costs of $36,991, rent of $16,169, and utilities of $23,023. The professional fees were for negotiating and consummating the spin off of Matech 1 and the audit of the 1993 financial statements. LIQUIDITY AND CAPITAL RESOURCES As reflected in the numbers below, over the past three years, to continue seeking capital and to maintain its patents, the Company's predecessor was totally dependent on the willingness of the 12 Company's President, Mr. Bernstein, and long time investors in the Company to loan the Company money or purchase additional securities from the Company. Over the next 18 months, the Company expects to receive approximately $550,000 from a subcontract with SWRI relating to its research contract that the United States Air Force awarded to SWRI on February 25, 1997. These funds, however, are not guaranteed but rather the Company's best estimate based on SWRI's contract with the Air Force and the Company's subcontract with SWRI. Moreover, these funds are only a beginning, the Company estimates an additional $5,000,000 will have to be raised to complete research and development and bring its products to market. Although, Mr. Bernstein intends to continue to loan the Company funds as required to seek additional financing, he is under no obligation to do so. The Company does not expect to receive any additional material financing from its other long time investors. Although the Company has provided information to various investment bankers and venture capitalists in an effort to obtain financing, no specific plans are under consideration. Any prediction of the likelihood or timing of obtaining the required funding would be highly speculative. The Company's ability to obtain such financing may depend on the results of the research contract with SWRI which will not be evident for a year or more. The Company expects to receive $120,000 from SecurFone America, Inc. under the Stock Purchase Agreement which will provide the Company additional working capital. The Company expects that its subcontract with SWRI to conduct research on the EFS will provide operating funds until approximately August of 1998. As of December 31, 1996, cash and cash equivalents were 0. During 1996, the Company received $242,290 including $170,040 for the issuance of Class A common stock under the Company's 1996 Stock Option Plan, a $43,250 loan from the President, and a $25,000 loan from an unrelated third party. Of the $242,290 received, $64,676 repaid loans from the President, $5,000 paid legal fees in connection with the S-1 Registration Statement, and the remaining $172,614 was used in operations. Cash and cash equivalents as of December 31, 1995, was $1,226. During 1995, the Company received $158,874 including $100,874 as a loan from the President and $58,000 as a loan from a third party. Of the $158,874, $16,000 repaid loans from the President and the remaining $142,874 was used in operations. Cash and cash equivalents as of December 31, 1994, was 0. During 1994,, the Company received $24,787 from its officers on the sale of its Class A Common Stock, $140,000 from the sale of its redeemable Class B Preferred Stock, $135,050 from officer loans, and $78,495 from third party loans. Of the $346,852 received during 1994, $275,441 was used in operations and $31,480 was paid in fees relating to the preparation and filing of the S-1 registration statement and $78,446 was repaid to the Company's officer. MARKET INFORMATION Currently there is no established public trading market for any of the Company's securities. 13 As of the date of this Prospectus the Company has issued 5,560,000 shares of its Class A Common Stock to Matech 1 in exchange for all of Matech 1's assets and the Company has assumed all of Matech 1's liabilities. As of the date of this Prospectus, Matech 1 is distributing 5,000,000 shares of the Company's Class A Common Stock to its shareholders of record, approximately 405 shareholders on a pro rata basis, one share of the Company's Class A Common for each share of Matech 1 Class A Common held of record as of the date of this Prospectus. Only 369,172 shares, however, are registered with the Securities and Exchange Commission. The remaining 4,630,828 shares are being distributed as restricted stock to affiliates of the Company and 560,000 shares are being retained by Matech 1. As of the date of this Prospectus, the Company has issued 60,000 shares of its Class B Common Stock to one shareholder, Robert M. Bernstein. BUSINESS THE COMPANY Material Technologies, Inc., a development stage company, was incorporated in the State of Delaware on March 4, 1997. The Company's principal offices are located at 11835 West Olympic Boulevard, East Tower, Suite 705, Los Angeles, California 90064. BACKGROUND Prior to February 1994, Matech 1 was a majority-owned subsidiary of Tensiodyne Corporation, a Delaware corporation ("Tensiodyne") and was named Tensiodyne Scientific Corporation. Although in 1994 Tensiodyne Scientific Corporation changed its name to Material Technology, Inc., to provide continuity especially in its attempts to obtain government funding, the corporation continued to do business as Tensiodyne Scientific Corporation. The Company also does business under this name. From approximately October 1983 until February 1994, Tensiodyne was engaged in the development for commercial exploitation of a device generally known as the Fatigue Fuse, a device designed to give early warning of metal fatigue, where such information is of significance. See "Description of Technologies." On August 26, 1993, Tensiodyne entered into a license agreement with the University of Pennsylvania whereby the University licensed to Tensiodyne the right to develop and exploit the Electrochemical Fatigue Sensor ("EFS"). On December 20, 1993, Tensiodyne agreed to assign to Matech 1 all of Tensiodyne's assets, including but not limited to the four patents pertaining to the Fatigue Fuse and the license agreement with the University of Pennsylvania, in exchange for the assumption of all of Tensiodyne's liabilities. As a result of that agreement and reorganization, after February, 1994, Matech 1 succeeded to all of the operations and liabilities of Tensiodyne relating to the Fatigue Fuse and the EFS. On January 22, 1994, Tensiodyne's board of directors resolved to transfer its assets and liabilities to Matech 1 and distribute, to Tensiodyne's holders of record at the close of business on February 1, 1994, one share of the Matech 1's Class A Common Stock for each share of Tensiodyne Class A 14 Common Stock. That distribution was subsequently made pursuant to an S-1 registration statement filed with the Securities and Exchange Commission effective on January 19, 1996. From February 1994 to February 1997, Matech 1's primary activity was to obtain financing to complete development of the Fatigue Fuse and to fund research and development of the EFS. That effort resulted in a February 25, 1997, $2.5 million research contract between the United States Air Force and Southwest Research Institute ("SWRI"). SWRI is subcontracting part of the research to the Company under an August 23, 1996 Teaming Agreement between SWRI, Matech 1, and the University of Pennsylvania. The subcontract with SWRI will provide the Company with operating funds to approximately August 1998. See, "Development of Technologies", INFRA. THE STOCK PURCHASE AGREEMENT As of February 17, 1997, Matech 1 entered into a Stock Purchase Agreement with Montpelier Holdings, Inc., ("MHI") SecurFone America, Inc., ("SecurFone") and Robert M. Bernstein, the Chief Executive Officer and controlling shareholder of both Matech 1 and Matech 2. Under that agreement, the parties intend to effect a reverse merger of SecurFone into Matech 1 immediately after this distribution. Upon closing, SecurFone's shareholders will acquire 90% of Matech 1's outstanding capital stock in exchange for 100% of SecurFone's outstanding capital stock. Matech 1 also issued 2,319,454 shares of its Class A Common Stock so that the total number of shares outstanding was increased from 2,680,546 shares to 5,000,000 shares as follows:
- ---------------------------------------------------------------------------------------- Description Number of Shares Issued Number of Shares Issued to all Shareholders to Robert M. Bernstein - ---------------------------------------------------------------------------------------- Outstanding as of March 9, 1997 2,680,546 916,676 - ---------------------------------------------------------------------------------------- Issued to Robert M. Bernstein in 1,499,454 1,499,454 lieu of $372,000 in accrued salary - ---------------------------------------------------------------------------------------- Issued to Robert M. Bernstein for 520,000 520,000 $108,000 Note - ---------------------------------------------------------------------------------------- Issued to the Baker Group for 280,000 0 $58,000 Note - ---------------------------------------------------------------------------------------- Issued to Matech 1's Counsel for 20,000 0 Services in 1995 and 1996 - ---------------------------------------------------------------------------------------- TOTAL ISSUED 2,319,454 - ---------------------------------------------------------------------------------------- TOTAL OUTSTANDING 5,000,000 2,936,130 - ----------------------------------------------------------------------------------------
After the issuance of these shares, Robert M. Bernstein owned 58.7% of Matech 1's outstanding Class A Common Stock and the Baker Group, a group of 15 long time investors in the business, owned 883,768 shares representing 17.7% of Matech 1's outstanding Class A Common Stock. The Company was incorporated on March 4, 1997, for this transaction. On March 9, the Company's Board authorized the issuance of 5,560,000 shares of its Class A Common Stock to Matech 1 in exchange for all of Matech 1's assets and liabilities. It also issued (a) 60,000 shares 15 of its Class B Common Stock to Robert M. Bernstein in exchange for cancellation of his 60,000 shares of Class B Common Stock in Matech 1, (b) 350,000 shares of its Class A Convertible Preferred Stock to the Baker Group in exchange for cancellation of that group's 350,000 shares of preferred stock in Matech 1, (c) 15 shares of the Company's Class B Preferred Stock to Tensiodyne Corporation in exchange for cancellation of its preferred stock in Matech 1, and (d) 1,700,000 warrants to purchase 1,700,000 shares of the Company's Class A Common Stock for $.50 per share in exchange for cancellation of like warrants to purchase Matech 1's common stock. The rights, privileges, and designations of the Company's Class B Common Stock, warrants, and its preferred stock are the same as the corresponding Matech 1 securities except that the redemption date of the Company's Class B Preferred Stock was changed from January 31, 2004 to January 1, 2002. On March 9, 1997, Matech 1's Board authorized the exchange of its assets and liabilities for 5,560,000 shares of the Company's Class A Common Stock. That transaction was approved by the majority of Matech 1's shareholders and an information statement was mailed to Matech 1's shareholders who did not vote on the transaction. The transaction took effect 21 days after that mailing. Matech 1 also agreed to distribute 5 million shares of the Company's Class A Common Stock to Matech 1's shareholders in a ratio of one for one. This public distribution is part of that distribution. Matech 1 retains 560,000 shares of the Company's Class A Common Stock equal to 10.1% of the outstanding shares. After the distribution, Matech 1 will reverse split its 5,000,000 outstanding shares, 1 for 10, leaving approximately 500,000 shares outstanding. Fractional shares will be rounded up. Thus, stockholders owning less than ten Matech 1 shares will still receive one share in the reverse split. Matech 1 will then issue 4,500,000 new shares to SecurFone shareholders in exchange for all of SecurFone's outstanding shares leaving Matech 1's present shareholders with a 10% interest in SecurFone. SecurFone will pay the Company $120,000 to cover expenses. Matech 1 will then change its name to SecurFone. Accordingly, Matech 1's shareholders will retain approximately 90% of their interest in the Company's metal fatigue technologies business and own 10% of SecurFone's prepaid cellular and calling card business as well. SecurFone is a start-up company providing prepaid cellular and telephone line calling cards. SecurFone utilizes an advanced switching platform to provide prepaid debit products to telephone customers. SecurFone's principal offices are in San Diego, California and its primary network facilities are in Miami, Fl. The purpose of the distribution is to spin-off Matech 2 from Matech 1 allowing Matech 1's shareholders to retain an interest in Matech 1's business, while keeping that business separate from SecurFone's new business. The transfer of assets and liabilities to the Company and the distribution of its shares is designed to provide Matech 1's shareholders with an interest in SecurFone's business while separating the two businesses which have distinct missions and distinct financial, investment, and operating characteristics, as well as different management teams. Maintaining the separation allows the Company to adopt strategies and pursue objectives appropriate to its specific business to be valued independently from SecurFone. The distribution enables the Company's management to 16 concentrate its attention and resources on developing its Fatigue Fuse and Electrochemical Fatigue Sensor without regard to the corporate and financial objectives and policies of SecurFone. The distribution allows investors to evaluate better, in accordance with their objectives and views, the different merits and outlooks of the Company and SecurFone. AGREEMENTS AND ROYALTY OBLIGATIONS There are certain outstanding agreements pursuant to which the Company's predecessors agreed to pay royalties or remuneration based upon revenues derived from the commercial exploitation of the Fatigue Fuse and the EFS. The Company has assumed these obligations. On December 24, 1985, Tensiodyne entered into agreements with Tensiodyne 1985-I R&D Partnership to provide funding to research and develop the Fatigue Fuse. These agreements were amended on October 9, 1989. Under these agreements, the Company is obligated to pay the Partnership a 10% royalty on future gross sales of the Fatigue Fuse limited to a return of the Partnership's original investment of $912,500 plus interest at 6% per annum. In the event that the Company ceases to be engaged in business, the Partnership will have all rights to the Fatigue Fuse, and will pay a 15% royalty to the Company. SEE, Note 10 a to the Financial Statements. In addition, the Company's predecessors entered into an agreement with Advanced Technology Center ("ATC") pursuant to which, for a grant of $45,000, the Company must return an amount equal to the grant by means of a royalty based on sales and sub license agreements. Ben Franklin Technology Center of South Eastern Pennsylvania succeeded to this interest. The royalty obligation is limited to the original advance and a return of 11% per annum. As of December 31, 1996, this future royalty commitment was $119,336 compared to $107,510 as of December 31, 1995. Payment of this obligation will be made solely from Company sales and is secured by a security interest in and to equipment used by the Company in developing its technology. SEE, Note 10 b to the Financial Statements. A similar agreement with the same entity was entered into May 4, 1987, under which, in consideration for an additional grant of $63,775, ATC purchased a royalty of 3% of future gross sales and 6% of sub licensing revenues. The agreement was amended on August 2, 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, 1995, and 1996, the total future royalty commitments, including the accumulated 26% annual rate of 17 return, was limited to approximately $440,265 and $555,734, respectively. Payment of future royalties will be made solely from Company's sales of the Fatigue Fuse and are secured by the Company's patents, products, and accounts receivable related to the Fatigue Fuse only, the technology developed with the funding. SEE, Note 10 c to the Financial Statements. On June 27, 1991, Tensiodyne issued to Variety Investments, Ltd., and Countryman Investments, Ltd. (hereinafter the "Issuees"), both of Vancouver, British Columbia, a royalty in an amount equal to 20% of gross sales of a joint venture named Tensiodyne Marketing, Inc., consisting of Tensiodyne, Variety and Countryman. Variety and Countryman were to advance $400,000 to Tensiodyne and additionally purchase a 2.5% royalty for $100,000. The $100,000 was paid, however, the Issuees advanced only $360,017 and the agreement was modified. Pursuant to the modified agreement, the $360,017 was to be repaid solely from funds derived from the sale of equity received by December 31, 1994, and the royalty was to be modified upon the issuance of 100,000 shares of the common stock of Tensiodyne. The obligation to Variety and Countryman bears interest at the rate of 4.5% per annum. No portion of this sum was repaid by December 31, 1994 as required; consequently, the Issuees will receive, in the aggregate, a royalty interest in the amount of 16.2%. SEE, Note 10 d to the Financial Statements. Under the February, 2, 1994 reorganization agreement, Tensiodyne was obligated to provide $5,100,000 in financing to Matech 1. During 1994, Matech 1 received $150,000 under this agreement in exchange for 7,560 shares of its Class A Common Stock and 15 shares of redeemable Class B Preferred Stock. The Class B Preferred stockholders had the right to redeem their stock at $10,000 per share on January 31, 2004. In connection with the Stock Purchase Agreement, Tensiodyne agreed to exchange its 15 Class B Preferred shares in Matech 1 for $5,000 and 15 Class B preferred shares in the Company with the same redemption rights except that Tensiodyne may redeem its shares two years earlier on January 31, 2002. Tensiodyne provided no further funding under its agreement to provide $5,100,000 in financing to Matech 1. As a result, Matech 1 sued Tensiodyne. On March 28, 1995, a settlement of that action was reached and Tensiodyne issued a total of 6,375,000 shares of its common stock to Matech 1. The proceeds from the sale of these shares are applied to reduce Tensiodyne's obligation under the February 2, 1994 agreement. The balance owed is $4,950,000 plus accrued interest at 7% per year. Matech 1 also received an additional 250,000 shares of Tensiodyne upon signing the settlement agreement. These Tensiodyne shares were transferred to the Company with all of Matech 1's other assets but have little or no value. Management believes that Tensiodyne has insufficient capital to pay any of the amount owed and the Company's Tensiodyne shares are restricted and subject to Rule 144 under the Securities and Exchange Act. It thus appears highly unlikely that the Company will receive any significant funds from this source. SEE, Note 10 e to the Financial Statements. On August 4, 1995, Matech 1 entered into an agreement with an unrelated third party, Stephen Forrest Beck, to compensate him for providing the idea of pursuing a government contract to fund the development of the EFS. As amended on February 7, 1997, the agreement requires the Company to issue him 2.5% of the Company's outstanding Class A common stock 18 as of the date the Company signs a subcontract with SWRI, appoint him to the Company's Board of Directors, and issue him a promissory note equal to 15% of the amount of SWRI's contract with the government. The funds due on the note are to be paid only when such funds are available to the Company from financing or revenues other than from a government contract. Under this Agreement the Company must execute a promissory note to pay this third party $375,000 plus interest at major bank prime rate when such funds are available to the Company. Interest accrues nine months after the government contract is executed, and is payable quarterly. The Company is obligated to pay 12.5% of the first $1,000,000 earned or raised through financing, other than a government contract, and 15% of any amount over $1,000,000 until the note and accrued interest are paid. SEE, Note 10 f to the Financial Statements. On August 26, 1993, Tensiodyne entered into a license agreement with the University of Pennsylvania whereby the University licensed to Tensiodyne the right to develop and exploit the Electrochemical Fatigue Sensor. Under this agreement, Tensiodyne issued 12,500 shares of its common stock to the University and granted the University a 5% royalty interest on revenues from sales of the EFS. The license was assigned to the Company and terminates upon the expiration of the underlying patents. Also on August 26, 1993, Tensiodyne entered into a Sponsored Research Agreement with the University of Pennsylvania under which Tensiodyne agreed to sponsor development of the EFS including paying the University $200,000 in 18 monthly installments. These payments were not made for lack of funds. This agreement also assigned to the Company. On May __ , 1997, the Company entered into a modification of its agreements with the University of Pennsylvania. Under the modification agreements, the University's royalty on the EFS was increased from 5% to 7%; the Company will issue the University and certain affiliates of the University (the "University Group") sufficient additional shares of Class A Common Stock so that the University Group's percentage ownership equals 5% of the outstanding Class A Common Stock; and the Company will pay the University 30% of any amounts the Company raises from financing (excluding government contracts) in excess of $150,000 until the $200,000 owed to the University is paid. SEE, Note 6 to the Financial Statements. The following summarizes the Company's royalty obligations on the Fatigue Fuse and the EFS: - --------------------------------------------------------------------- Fatigue Fuse EFS - --------------------------------------------------------------------- Tensiodyne 1985-1 R&D Partnership 10.0%(1) 0 - --------------------------------------------------------------------- Advanced Technology Center 0 Future Gross Sales 6.0%(2) Sublicensing Fees 12%(3) - --------------------------------------------------------------------- Variety Investments, Ltd. 20.0% 0 - --------------------------------------------------------------------- University of Pennsylvania Net Sales of EFS 0 7.0% Net Sales of Services 0 2.5% - --------------------------------------------------------------------- 19 - --------------------------------------------------------------------- Sherman Baker 1.0% 0.5% - --------------------------------------------------------------------- Totals 49.0% 10.0% - --------------------------------------------------------------------- (1) The R&D Partnership's 10% royalty is limited to capital contributed plus accrued interest. (2) Advanced Technology Center's 6% royalty is limited to $45,000 plus 11% per year return which equaled $119,336 as of December 31, 1996. (3) Advanced Technology Center's 12% royalty on sales from sublicensing the Fatigue Fuse is limited to $63,775 plus a 26% annual return which equaled $554,734 as of December 31, 1996. There are no prior affiliations, including stock ownership, among or between the Company and the other persons described above to whom the Company has royalty obligations. BUSINESS The Company (also "Matech 2"), a development stage company, owns that certain device known as the Fatigue Fuse, which requires additional testing to more precisely identify commercial uses prior to manufacturing and marketing. Matech 2 is also the exclusive licensee of the Electrochemical Fatigue Sensor ("EFS"), which requires substantial additional development. These technologies are intended to indicate the level of fatigue of certain metal structures including aircraft, bridges, cranes, ships, and other structures. No commercial application of Matech 2's products has been arranged to date. The Company intends to develop a market for the Fatigue Fuse once testing is completed and for the EFS once it has been fully developed. The Fatigue Fuse is in its final testing and development stages which will last from 6 to 12 months and cost approximately $2,000,000, including technical testing and final development. If testing, development, and marketing are successful, management estimates the Company should begin receiving revenue from Fatigue Fuse sales a year of receiving the $2,000,000. At this time, management cannot estimate the amount of revenue that may be realized. Management estimates the EFS will require two years and approximately $2,875,000 for development and marketing. If successful, Matech 2's two products will complement each other and be used together in systems to detect and measure metal fatigue. On the other hand, neither may be successful for the many reasons listed above. SEE, Very High Risks, p.3. At first, management intends to market the Fatigue Fuse separately. If the EFS is successfully developed, the two products will complement on another. Several manufacturers are capable of producing the Fatigue Fuse at a reasonable cost. It is uncertain, however, that these products (a) will be successfully developed, (b) can be commercially produced, (c) will perform to expectations, or (d) that commercial markets will be successfully developed. Moreover, there is and will be significant competition for the Fatigue Fuse if and when it is marketed. DEVELOPMENT OF TECHNOLOGIES The development and application sequence for the Fatigue Fuse and EFS consists of Basic Research, Advanced Development, Prototype Evaluation, Application 20 Demonstration, and Commercial Sales and Service. The Fatigue Fuse came first and is furthest along in the sequence. The Basic Research was by the inventor, Professor Maurice Brull of the University of Pennsylvania. Tensiodyne conducted the Advanced Development, including variations of the adhesive bonding process, and fabrication of a laboratory grade recorder (i.e., a fatigue recorder capable of high precision and reliability, but not designed for use outside a laboratory) for the separation events which constitute proper functioning of the Fatigue Fuse. The next step, Prototype Applications, is on hold pending the receipt of funding, including empirical tailoring of Fuse parameters (i.e., parameters to match the measured structure's material and the Fuse's exact geometric design to the structure's material and use) to fit actual spectrum loading (i.e., random stress loads over a specific range of loads) expected in specific applications. Associated tests include coupon specimens (i.e., small blocks of metal which can be conveniently loaded in a test laboratory) and full scale structural tests (i.e., the object being tested is a large assembly constituting a section of the structure, e.g., an airplane wing) with attached Fuses. A prototype of a flight qualifiable operational (i.e., it can be modified to function when attached to a flying airplane) separation event recorder (i.e., a device which detects, stores, and displays the information that the metal strips in the Fuse have separated at specific times) was designed, fabricated, and successfully demonstrated. The next tasks will be to prepare a mathematical analysis for more efficient selection of Fuse parameters and to conduct a comprehensive test program to prove the ability of the Fatigue Fuse to accurately indicate fatigue damage when subjected to realistically large variations in spectrum loading. The final tasks prior to marketing will be an even larger group of demonstration tests, e.g. on bridges, helicopters, tankers, or windmills. To date, certain organizations have included Matech's Fatigue Fuse in test programs. Already completed are tests for welded steel civil bridge members. Tests are ongoing on a full scale trainer aircraft and a large mining machine. Matech 1 has also received commercial inquiries on the availability of Fatigue Fuses for windmills, marine cranes, and refinery pressure vessels. Basic Research for the EFS was conducted at the University of Pennsylvania. It defined the unique physical effect on which the EFS is based, and the materials, configuration, instrumentation and procedures to be employed. The next phase will be Advanced Development with more complex load cycles, additional alloys, fabrication of a movable Electrochemical Fatigue Sensor device, and production of another body of reproducible test data. Prototype Applications will then include fabrication of a truly portable near-operational device. And again the final steps are multiple demonstration tests followed by routine sales. The Company has a teaming agreement with Southwest Research Institute ("SWRI") and the University of Pennsylvania (collectively the "Team"). On February 25, 1997, the United States Air Force awarded the Team a $2.5 million Phase I contract to "determine the feasibility of [the Company's Electrochemical Fatigue Sensor] to improve the United States Air Force capability to perform durability assessments of military aircraft, including both air frames and engines through the application of EFS to specific military aircraft alloys." The Company is a subcontractor to SWRI and its share of this award is approximately $550,000 for which the Company will perform certain technical tasks in accordance with its expertise. This research will substantially assist the Company in determining the feasibility of the EFS. 21 DESCRIPTION OF TECHNOLOGIES The Company is developing these technologies because the existing methods of detecting metal fatigue have certain disadvantages which may be avoided by the Fatigue Fuse and/or EFS. The Fatigue Fuse, like other competing technologies, must remain attached to the structure to respond to the structure's complete loading history. Its advantages over the other technologies are (a) it costs less and (b) it can be simply interpreted without a complex computer analysis system. If the EFS is developed successfully, it will have a unique advantage over all competing metal fatigue detection systems in that it will be able to determine the degree of fatigue damage after a few days of temporary installation. It will not require continuous input and will be able to assess structures which have never before been tested for fatigue damage. Moreover, there is a possibility that these two systems will work well together. If the EFS can measure the status of the metal fatigue of a structure, then the Fatigue Fuse may be calibrated to that level of fatigue and installed on the structure to accurately measure metal fatigue as it occurs in the structure from that date forward. THE FATIGUE FUSE The Fatigue Fuse, developed by Tensiodyne and now owned by the Company, was designed to be affixed to a structure and to give a number of warnings as preselected portions of the fatigue life have been used up (i.e., how far to failure the object has progressed). It will give warnings against a condition of widespread generalized cracking due to fatigue. The Fatigue Fuse is a thin piece of metal similar to the material being monitored. It consists of a series of parallel metal strips connected to a common base, much as fingers are attached to a hand. Each "finger" has a different geometric pattern called "notches" defining its boundaries. By applying the laws of physics in determining the geometric contour of each of the notches, the fatigue life of each finger should be finite and predictable. When the fatigue life for a given finger (or fuse) is reached, the fuse breaks. By implementing different geometry for each finger in the array, different increments of fatigue life become observable. Typically, notches will be designed to facilitate observation of increments of fatigue life of 10% to 20%. By mechanically attaching or bonding these devices to different areas of the structural member of concern, the Fuses undergo the same fatigue history as the structural member. Therefore, breakage of a fuse will indicate that an increment of fatigue life has been reached for the structural member. Fatigue results from a metal object being subjected to repeated cyclic strain. In a commercial context this strain and concomitant stress result from a large number of cycles of loading and unloading. Sudden fracture can result. Fatigue damage and the resulting compromise of the stability and integrity of the member experiencing fatigue presents the potential for structural failure and extreme danger. Objects such as bridges and wings of airplanes are subject to fatigue. It is obvious that sudden fracture of such objects could have disastrous results. It is presently impossible, under any generally acceptable theory of fatigue phenomena, to predict by analysis alone 22 when the limit is reached and when a fracture may take place. Further, in normal usage, the damage occurs cumulatively, at microscopic levels and can only be detected, in the early stages at a time when dire results can be avoided by examination of the microscopic structure. This difficulty has caused designers of objects and structures subject to fatigue to be extremely conservative. They have attempted to design structures to maintain the stresses presented in critical areas of a structure at a level well below known endurance limits of the material. In many instances this results in extreme expense. In spite of this "over-designing," catastrophic fatigue failures still occur. Although tests of the Fatigue Fuse have been performed in independent laboratories and the Fuse has been shown to perform as designed and as expected, Management has determined that substantial additional testing is necessary to ensure that it will be possible to calibrate various types of loading spectra. Management estimates that it will require an outlay of approximately $355,000 to accomplish this additional testing. If this money were available, Management estimates that such additional testing could be accomplished in 6 to 12 months. Management believes that the Fatigue Fuse will be of value in monitoring aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc. No special training will be needed to qualify individuals to report any broken segments of the Fatigue Fuse to the appropriate engineering authority for necessary action. The development of such value is contingent upon the Company's successful production and marketing of the Fatigue Fuse, and no assurance can be given that the Company will be able to overcome the obstacles relating to the introduction to the market of a new product. In order to determine its ability to produce and market the Fatigue Fuse, it will be necessary for the Company to have substantial capitalization and no assurance can be given that the needed capital will be available. See "Business" "and "Plan of Operations." ELECTROCHEMICAL FATIGUE SENSOR In August 1993, Tensiodyne entered into a license and development agreement with the University of Pennsylvania regarding a new invention, the EFS, designed to measure electrochemically the status of fatigue of a structure without knowing the structure's past loading history. Under this Agreement, 12,500 shares of Tensiodyne's common stock were issued, a 5% royalty on sales of the EFS was granted, and Tensiodyne undertook to pay $11,112 per month for 18 months totaling $200,000. No payments have been made on this obligation. Under the terms of the governing agreement either party may terminate the agreement effective upon written notice to the other party. The Company and the University of Pennsylvania agreed to modify their previous agreements (a) to increase the University's royalty from 5% to 7% of the sale of related products, (b) to issue additional shares of the Company's Class A Common Stock so that the University and certain affiliates will own to 5% of the outstanding Class A Common Stock of the Company as of the effective date of the modified agreements, and (c) to pay the University 30% of any financing the Company receives in excess of $150,000 (excluding amounts received from government grants or contracts) up to the $200,000 owed to the University. 23 The EFS is a high precision instrument consisting of (a) a cell which can be attached to a structure to measure electrical current and (b) software to interpret the current measurements. The cell consists of an enclosure which contains a fluid which conducts electricity and two metal electrodes connected to external wires leading to a battery and the current measuring instrument. The sensor is temporarily attached to a structural member, then the member is subjected to multiple loads while the instrument records the current. A computer analyzes the current record to determine the degree of fatigue damage present at the location of the sensor in the structure. Then the sensor is removed. The EFS is in the initial stage of research. No assurance can be given that it can be developed successfully or that, if developed, it can be produced at a price which will permit its marketing, or that, even if these two conditions are met, that the EFS will find a market. PATENTS The Company is the assignee of four patents originally issued to Tensiodyne. The first was issued on May 27, 1986, and expires on May 27, 2003. It is entitled "Device for Monitoring Fatigue Life" and bears United States Patent Office Number 4,590,804. The second patent entitled "Method of Making a Device for Monitoring Fatigue Life" was issued on February 3, 1987 and expires February 3, 2004. It bears United States Patent Office Number 4,639,997. The third patent, entitled "Metal Fatigue Detector," was issued on August 24, 1993 and expires on August 24, 2010. It bears United States Patent Number 5,237,875. The fourth patent, entitled "Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same," was issued on June 14, 1994 and expires on June 14, 2011. It bears United States Patent Number 5,319,982. This latter patent was pending when Tensiodyne assigned the rights to Matech 1 in February 1994 and was assigned to Matech 1 upon issuance later in 1994. DISTRIBUTION METHODS OF PRODUCT If funds become available, the Company intends to exhibit the Fatigue Fuse and the EFS at various aerospace trade shows and market its products directly to end users, including aircraft manufacturing companies, aircraft maintenance companies, manufacturers and operators of cranes, certain state regulatory agencies which oversee bridge maintenance, companies engaged in manufacturing and maintaining ships and tankers, and the military. Although management intends 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. See "Very High Risk Factors" p. 3. COMPETITION The Company's Products 1. The EFS is intended to provide a fatigue measurement which cannot now be obtained from any other instrument, namely, an assessment of the extent of fatigue damage before cracks have grown to a size detectable by nondestructive inspection, in a structure 24 which has not previously been instrumented or monitored to record the loads or strains experienced in service. 2. The Fatigue Fuse provides a simple low-tech way to assess and predict fatigue damage, which otherwise requires complex instrumentation, precision data recording, and sophisticated analytical computer programs. Competitor's Products Nevertheless, other technologies exist which indicate fatigue damage. Single cracks larger than a certain minimum size can be found by nondestructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics. Tracking of load and strain history, for subsequent estimation of fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers. These methods have been used for up to 40 years and also offer the advantage that they have been accepted in the marketplace, whereas the Company's products will remain largely unproved for some currently indeterminable period. Companies marketing these alternate technologies include Magnaflux Corporation, Kraut-kremer-Branson, Dunegan-Endevco, and MicroMeasurements. These companies have more substantial assets, greater experience, more human and other resources than the Company, 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 the Company is still in its development stages, it is unable to predict whether its technologies may be successfully developed and commercially attractive to various potential markets. SOURCES OF BASIC MATERIAL All of the materials used in the Company's technologies are easily available from numerous sources. The Company will not be dependent on any supplier as a sole provider of materials. DEPENDENCE UPON ONE OR MORE MAJOR CUSTOMERS The Company believes that its products may be utilized within the aerospace, crane, bridge, large ship and tanker industries and by the military. If it successfully develops its products, as to which no assurance can be given, the Company will attempt to market its products to a variety of companies and governmental agencies. See "Business - Distribution Methods of Products." Nevertheless, the Company believes that it is likely, for several years following introduction of its products, that it may be dependent on a small number of large customers, the loss of any one of which would have a material adverse effect upon the Company's revenues and the perceived reliability of its products within the marketplace. TOTAL NUMBER OF EMPLOYEES The Company has three employees, Robert M. Bernstein, its President and Chief Executive Officer, who spends substantially full time on its affairs, John Goodman, its Chief Engineer, who works part time, and a secretary. The Company will employ other persons as 25 needed on a part time or consulting basis, as appropriate, based on the availability of funds and as a result of the Air Force contract. PLAN OF OPERATIONS The Company estimates that it requires $5,000,000 in order to become fully operational. Of this sum, it estimates that funds would be allocated approximately as follows: - ---------------------------------------------------------------------------- Preparation of production models $1,250,000 - ---------------------------------------------------------------------------- Referral fees for prior funding $625,000 - ---------------------------------------------------------------------------- Fatigue Fuse lab testing for specific "loading conditions $500,000 - ---------------------------------------------------------------------------- Fatigue Fuse Beta test completion $250,000 - ---------------------------------------------------------------------------- EFS Beta testing on Turbine blades $500,000 - ---------------------------------------------------------------------------- Marketing efforts for two years including personnel $660,000 - ---------------------------------------------------------------------------- University of Pennsylvania license payment $200,000 - ---------------------------------------------------------------------------- Office administration and overhead for two years $1,015,000 - ---------------------------------------------------------------------------- TOTAL $5,000,000 - ---------------------------------------------------------------------------- The Company is seeking to raise funds from numerous sources, including various state and federal governmental agencies and/or private or public offerings of securities. At this time, however, the Company has no firm agreements other than the subcontract with Southwest Research Institute related to the Air Force contract signed on February 25, 1997. That contract will provide $2,500,000 for basic feasibility research on the EFS related to air frames and engines through the application of EFS to specific military aircraft alloys. The Company will receive approximately $550,000 to fund its operations related specifically to that research which will also be conducted at the University of Pennsylvania and SWRI. DESCRIPTION OF PROPERTY The Company leases offices at 11835 West Olympic Boulevard, Suite 705, Los Angeles, California 90064. The lease expires on May 30, 1997. As of April 10, 1997, the Company entered into a new lease with a term of twenty four months beginning June 1, 1997 at 11661 San Vicente Boulevard, Suite 706, Los Angeles, California, 90025. The space consists of 830 square feet of useable space and will be adequate for the Company's current and foreseeable needs. The rent is $40,464.00 payable at $1,868.00 per month. The Company owns a remote monitoring system and certain manufacturing equipment which is presently leased to the University of Pennsylvania (Laboratory for Research on the Structure of Matter) for instructional and testing purposes. In consideration of the leasing of this equipment, the University of Pennsylvania has agreed to perform 1,200 hours of testing on materials to be used in conjunction with the Fatigue Fuse. The first five year term of this lease will expire on March 31, 1998. Lessee has the right to borrow the equipment for a further five year period. 26 Upon the expiration of the second five year period, the University has the right to purchase the equipment at its then fair market value. LEGAL PROCEEDINGS The Company is not presently involved in any legal proceedings which in management's opinion might have a material effect on the Company. MANAGEMENT The name, age and office of principal occupation of the executive officers and directors of the Company and certain information relating to their business experiences are set forth below: NAME AGE POSITION - ---- --- -------- Robert M. Bernstein 62 President/Chief Financial Officer Chairman of the Board Joel R. Freedman 35 Secretary/Director Dr. John W. Goodman 62 Chief Engineer/Director The directors' and officers' term of office is until the 1998 annual meeting to be held prior to April 1, 1998. Robert M. Bernstein, 62 years of age, is the Company's President, Chief Financial Officer, and Chairman of the Board of Directors and Principal Shareholder. Mr. Bernstein received a Bachelor of Science degree from the Wharton School of the University of Pennsylvania in 1956. From August 1959 to August 1972 he was a Certified Public Accountant licensed in Pennsylvania. In August 1972, his accounting license expired because he was no longer a practicing accountant in Pennsylvania. From 1961 to 1981 he acted as a consultant specializing in mergers, acquisitions, and financing. From 1981 to 1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc., of Philadelphia, Pennsylvania, an oil and gas exploration company. In December 1985, he formed a research and development partnership funding approximately $750,000 for research on the Fatigue Fuse. From October of 1988, until February 2, 1994, Mr. Bernstein was president and chief executive officer of Tensiodyne. He retained these positions with Matech 1 after the reorganization in February 1994. Joel R. Freedman, 35 years of age, is Secretary and a Director of the Company. From October 1989 until February 1994, Mr. Freedman was Secretary and a Director of Tensiodyne, retaining these positions with Matech 1 after the reorganization in February 1994. Mr. Freedman attends board meetings and provides advice to the Company as needed. Since 1983, he has been president of Genesis Securities, Inc., a full-service brokerage firm in Philadelphia, Pennsylvania. His duties there are a full-time commitment. Accordingly, he does not take part in the Company's day to day activities. He is not a director of any other company. 27 Dr. John W. Goodman, 62 year of age, is a Director and Chief Engineer for the Company. As of February 25, 1997, the Company rehired Dr. Goodman part time after a two year hiatus while Matech 1 sought funding. Dr. Goodman is also Senior Staff Engineer, Materials Engineering Department of TRW Space and Electronics and Chairman of the Aerospace Division of the American Society of Mechanical Engineers. He holds a Doctorate of Philosophy in Materials Science which was awarded with distinction by the University of California at Los Angeles in 1970, received in 1957 a Masters of Science degree in Applied Mechanics from Penn State University and in 1955 he received a Bachelor of Science degree in Mechanical Engineering from Rutgers University. From 1972 to 1987 Dr. Goodman was with the United States Air Force as Lead Structural Engineer for the B-1 aircraft; Chief of the Fracture and Durability Branch and Materials Group Leader, Structures Department, Aeronautical Systems Center, Wright-Patterson Air Force Base. From 1987 to December, 1993, he was on the Senior Staff, Materials Engineering Department of TRW Space and Electronics. He has been the chief engineer developing the Company's products since May 1993. He worked full time for Tensiodyne and Matech 1 from August 1993 to December 1994 when he returned to TRW. From December 1994 to February 25, 1997, he consulted with Matech 1 periodically. ADVISORY BOARD Since 1987, Tensiodyne and then Matech 1, as the successor to Tensiodyne's former business, has had an Advisory Board presently consisting of Alexander M. Adelson, William F. Ballhaus, Robert P. Coogan, Campbell Laird, Ronald Landgraf, Robert Maddin, and Samuel I. Schwartz. These individuals will consult with the Company on an as needed basis usually a few hours per month. The members of the Advisory Board serve at will. Each member of the board will receive 18,000 shares of Class A Common Stock as consideration for accepting a two year term if and when the Company is funded. The Advisory Board advises 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: Alexander M. Adelson, age 51: Has thirty years as an applied physicist and businessman specializing in technical marketing matters. Since 1974, Mr. Adelson has led the Technology Resource Group of RTS Research Lab, Inc. ("RTS"). This group provides management, product development, and related marketing services to various clients with specialization in technical marketing matters. For example, RTS helped conceive and develop the first portable bar code scanner and acted as program manager for 12 years while developing two generations of portable bar code laser scanners for Symbol Technologies, Inc. Mr. Adelson holds 64 patents in the fields of optical electronics, bar code technology, automatic inspection and medical software. Mr. Adelson serves on the board of directors of Base 10, Inc., Nocopi Technologies, Inc., and PatComm Corporation. William F. Ballhaus, age 78: Now retired, was an Aerodynamacist with Douglas Aircraft Co., a Vice President and General Manager, Nortronics Division of Northrop Aircraft, Inc., Executive Vice President of Northrop Corp., and was President of Beckman Instruments, Inc. from 1965-1983. He is a director of Republic Automotive Parts, Microbics Corp., and Nuco Industries. 28 Vice Admiral Robert P. Coogan, age 72: Retired from a distinguished naval career spanning 40 years during which he held numerous posts including; Commander U.S. Third Fleet, Commander Naval Air Force -- U.S. Pacific Fleet, Commandant of Midshipmen -- U.S. Naval Academy, and Chief of Staff -- Commander Naval Air Force -- U.S. Atlantic Fleet. From 1980 to 1991 he was with Aerojet General Company and served as Executive Vice President of Aerojet Electrosystems Co. from 1982 -- 1991. Campbell Laird, age 60: Received his Ph.D. in 1963 from the University of Cambridge. His Ph.D. thesis title was "Studies of High Strain Fatigue." He is presently Professor and graduate group Chairman in the Department of Materials, Science & Engineering at the University of Pennsylvania. His research has focused on the strength, structure and fatigue of materials, in which areas he has published in excess of 250 papers. He is the co-inventor of the EFS. Ronald W. Landgraf, age 57: Presently a Professor in the Department of Engineering Science & Mechanics at Virginia Tech, Blacksburg, Virginia. He spent 20 years in the industrial sector, first as a Materials Engineer in the Micro Switch Division of Honeywell, Inc. in Freeport, Illinois, and later as a Research Scientist, Metallurgy Dept., Engineering & Research Staff of Ford Motor Company in Dearborn, Michigan. In 1988, he became a Visiting Professor at Virginia Tech and in 1990, a Professor. Robert Maddin, age 77: Presently retired, received his BS from Purdue University in 1942 and Doctor of Engineering from Yale University in 1948. From 1957 to 1972, he was a director and later chairman of the Department of Metallurgy, University of Pennsylvania; from 1973 to 1983 was a Professor of Metallurgy at the University of Pennsylvania, from 1984 to 1987 was a visiting professor of anthropology at Harvard University, and from February 1987 to the present is an honorary curator of archeological sciences, Peabody Museum of Archeology and Ethnology, Harvard University. Samuel I. Schwartz, age 48: 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 has acted as a director of Infrastructure Institute at the Cooper Union College, New York City, New York. From April 1990 to 1994 he was a Senior Vice President of Hayden Wegman Consulting Engineers, and a columnist for the NEW YORK DAILY NEWS. EXECUTIVE COMPENSATION 29
SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------------------------- AWARDS PAYOUTS Other Restricted All Other Name and Annual Stock Options/ LTIP Compen- Principal Salary Bonus Compen- Awards SARs Payouts sation Position Year ($) ($) sation ($) ($) (#) ($) ($) - --------------------------------------------------------------------------------------------------- Robert M. 1993 $130,000(1) 0 0 0 0 0 $165,300(2) Bernstein 1994 $72,000(3) 0 0 0 0 0 $10(4) CEO 1995 0 0 0 0 0 0 0 1996 $200,000(3) 0 0 0 0 0 - --------------------------------------------------------------------------------------------------- John W. 1993 $55,796 0 0 0 0 Goodman 1994 71,096 0 0 0 0 0 0 Director and 1995 2,745 0 0 0 0 0 0 Engineer 1996 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------
(1) Of this $130,000, $30,000 was paid and $100,000 was accrued. (2) In 1993, Matech 1 issued 300,000 shares to Mr. Bernstein at par value of $.001 per share. In addition $165,000 results from Tensiodyne agreeing to reduce the purchase price of stock that Mr. Bernstein purchased in 1992 from $30 per share to $2.50 per share by reducing the amount of a promissory note executed by Mr. Bernstein by $165,000. (3) This amount was accrued. On April 25, the Matech 1 agreed to issue Mr. Bernstein 1,499,454 shares of its Class A Common Stock in exchange for cancellation of the $372,000 in salary accrued by Mr. Bernstein. (4) In February 1994, Matech 1 issued 10,000 shares of Class A Common Stock, par value $.001, to Mr. Bernstein To date, the Company's Board has not authorized any salaries for 1997. As a result of the subcontract with SWRI, the Company expects Mr. Bernstein to begin receiving a salary of at least $120,000 per year. Neither Mr. Bernstein nor Mr. Goodman have received perquisites, other personal benefits, securities, or property exceeding 10% of their salary in any calendar year from 1993 to the present. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On March 9, 1997, the Company authorized the issuance of 60,000 shares of Class B Common Stock to Mr. Bernstein in exchange for cancellation of his 60,000 shares of Class B Common Stock in Matech 1. Class B Common has voting rights of 200 votes per share but no dividend or liquidation rights. Thus, this transaction assured Mr. Bernstein voting control of the Company by giving him 12,000,000 votes. On February 28, 1994, Tensiodyne authorized the issuance of 10,000 shares of Class A Common Stock to Mr. Bernstein for past services. 30 In March 1994, Mr. Bernstein advanced Matech 1 $48,750 of which $12,000 was canceled in exchange for the issuance of 1,200,000 shares of Matech 1's Class A Common Stock. Mr. Bernstein sold 420,000 share for $4,200 to Joel Freedman and certain preferred shareholders. On June 21, 1994, Matech 1 amended its By-Laws and increased the number of Directors from 3 to 5 and established an advisory board of five individuals. It also authorized the issuance of 36,000 shares of its Class A Common Stock to each of its new board members and the issuance of 18,000 shares of its Class A Common Stock to each advisory board member. During 1994, the President, Mr. Bernstein, and a director, Joel Freedman, purchased 278,550 shares of the Matech 1's Class A Common Stock for $2,786. In connection with the reorganization of Tensiodyne in February 1994, certain preferred shareholders of Tensiodyne, known as the Baker Group exchanged their preferred shares in Tensiodyne for 350,000 Matech 1 Class A Preferred Stock. In connection with the Stock Purchase Agreement, the Baker Group has exchanged their 350,000 Matech 1 Class A Preferred Shares for 350,000 of the Company's Class A Preferred Shares. August 10, 1994, Matech 1's Board of Directors granted 994,500 Class A Warrants to Mr. Robert Bernstein, 170,000 Class A Warrants to Mr. Joel Freedman, and 535,500 Warrants to Mr. Baker and his associates. Each Class A Warrant entitled the registered holder to purchase one share of Class A Common Stock of Matech 1 for $.50 per share until August 9, 1996. On December 15, 1995, Matech 1's Board extended the expiration date to August 22, 1999. In connection with the Stock Purchase Agreement these warrants are being exchanged for the same number of the Company's warrants and with same terms. From time to time, Robert M. Bernstein has advanced funds to Tensiodyne and Matech 1 and at December 31, 1996, Matech 1 owed him $179,544. The amount of accrued interest charged to operations on the President's loans were $5,268 in 1995 and $9,430 in 1996. Robert M. Bernstein is under no obligation to make advances to the Company but may to do so at his sole discretion. In addition, on December 31, 1996, Matech 1 was obligated to Robert M. Bernstein in the amount of $372,000 for accrued salary. On April 25, 1997, Matech 1 agreed to issue Mr. Bernstein 1,499,454 shares of its Class A Common Stock in exchange for cancellation of the $372,000 in salary accrued by Mr. Bernstein. As a result of the transfer of Matech 1's assets and liabilities to the Company, these are the Company's liabilities. On July 24, 1995, Matech 1 authorized issuance of convertible notes to Robert M. Bernstein and the Baker Group. Mr. Bernstein's note was for $108,000 and in exchange for $108,000 in cash advances from Mr. Bernstein. The note's term was three years. Mr. Bernstein had the right at any time to convert the note or any ratable portion into 520,000 shares of the Company's Class A Common Stock. The note to the Baker Group was for $58,000 and in exchange for $58,000 cash paid to the Company. The term was also three years. The Baker Group had the right at any time to convert the note or any ratable portion thereof into 280,000 shares of the Company's Class A Common Stock. In connection with the Stock Purchase Agreement these notes were converted into 580,000 shares of Matech 1's Class A Common Stock to Mr. Bernstein and 280,000 shares 31 of Matech 1's Class A Common Stock to the Baker Group. Accordingly, these notes are no longer in existence. On the other hand, the conversion of these notes entitled Mr. Bernstein and the Baker Group to receive a like number of the Company's Class A Common shares as part of Matech 1's distribution of 5,000,000 shares of the Company's Class A Common. PRINCIPAL STOCKHOLDERS As of the date of this Prospectus, the following table sets forth information the stock ownership of each officer and directors and each person known to the Company to be the beneficial owner of more than five percent of each class of the Company's voting securities.
- --------------------------------------------------------------------------------------------------- Name and Address of Amount and Nature of Percent of Class Class of Stock Beneficial Owner Beneficial Ownership - --------------------------------------------------------------------------------------------------- Class A Robert M. Bernstein, CEO 2,936,130 Shares 52.8%(1) Common Stock East Tower, Suite 705 11835 Olympic Blvd. Los Angeles, CA 90064 - --------------------------------------------------------------------------------------------------- Joel R. Freedman, Director 113,481 Shares 2.0% 1 Bala Plaza Bala Cynwyd, PA 19004 - --------------------------------------------------------------------------------------------------- John Goodman, Director 50,000 Shares 0.9% 11835 Olympic Blvd. East Tower, Suite 705 Los Angeles, CA 90064 - --------------------------------------------------------------------------------------------------- Directors and executive offi- 3,099,611 Shares 55.7% cers as a group (3 persons) - --------------------------------------------------------------------------------------------------- Material Technology, Inc. 560,000 Shares 10.1%(2) 11835 Olympic Blvd. East Tower, Suite 705 Los Angeles, CA 90064 - --------------------------------------------------------------------------------------------------- Sherman Baker 505,700 Shares 9.1%(3) 555 Turnpike St. Canton, MA 02021 - --------------------------------------------------------------------------------------------------- Class B Robert M. Bernstein 60,000 Shares 100.00%(1) Common Stock East Tower, Suite 705 11835 Olympic Blvd. Los Angeles, CA 90064 - --------------------------------------------------------------------------------------------------- Class A Sherman Baker 131,600 Shares, Beneficial 37.60%(3) Preferred 555 Turnpike St. Owner (1) Canton, MA 02021 - --------------------------------------------------------------------------------------------------- Nathan Greenberg 35,000 Shares, Beneficial 10.00% 306 Main Street Owner (1) Worchester, MA 01608 - --------------------------------------------------------------------------------------------------- 32 - --------------------------------------------------------------------------------------------------- Melvin Nessel 35,000 Shares, Beneficial 10.00% 180 Beacon Street Owner (1) Boston, MA 02111 - --------------------------------------------------------------------------------------------------- Eugene Ribakoff 35,000 Shares, Beneficial 10.00% 46 W. Boylston Street Owner (1) Worchester, MA 01608 - --------------------------------------------------------------------------------------------------- Norman Fain 21,000 Shares, Beneficial 6.00% 505 Central Avenue Owner (1) Pawtucket, RI 02862 - --------------------------------------------------------------------------------------------------- Morris Loeb 21,000 Shares, Beneficial 6.00% 2368 Century Hill Owner (1) Los Angeles, CA 90067 - --------------------------------------------------------------------------------------------------- A. Sandler 21,000 Shares, Beneficial 6.00% 139 Atlantic Avenue Owner (1) Swamscott, MA 01907 - --------------------------------------------------------------------------------------------------- Class B Tensiodyne Corporation 15 Shares 100% Preferred 400 S. Colorado Blvd. Denver, CO 80222 - ---------------------------------------------------------------------------------------------------
(1) Robert M. Bernstein's Class A and Class B common stock ownership entitle him to cast 83.4% of all votes entitled to be cast by all common and preferred shareholders and thus voting control of the Company. All shares of the Company's common and preferred stock have one vote each except Class B common which has 200 votes each. (2) Matech 1's Class A Common Stock entitle it to cast 3.1% of the votes entitled to be cast by all common and preferred shareholders. (3) Sherman Baker's Class A Common Stock and his Class A Preferred Stock entitle him to cast 3.6% of the votes entitled to be cast by all common and preferred shareholders. The Sherman Baker Group composed of 15 investors including Mr. Baker are entitled to cast 6.9% of the votes entitled to be cast by all common and preferred shareholders. In addition, the Company is committed under its modified agreement with the University of Pennsylvania to issue the University and its affiliates additional shares of the Company's Class A Common Stock so that their holdings equal 5% of the outstanding Class A Common Stock. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 11,000,000 shares of stock. Each of the 11,000,000 shares of stock has a par value of $.001. Of the shares authorized, 10,000,000 are Class A Common Stock; 100,000 are Class B Common Stock; and 900,000 are Preferred Stock. The Company has designated 350,000 shares as Class A Preferred Stock and 100 shares as Class B Preferred Stock. Holders of the Class A Common stock have one vote per share of common stock held and vote as a single Class with holders of Class B Common Stock, who have 200 votes per share, on all 33 matters submitted to stockholder vote. Otherwise, Class A Common stockholders have the usual rights and privileges of common stockholders under Delaware Corporation Law. Holders of Class B Common stock have 200 votes for each share of Class B Common held but are not entitled to have dividends paid on Class B Common Stock; nor are they entitled to participate in any proceeds in the event of a liquidation of the company. The Company's Certificate of Incorporation provides that the designation of powers, preferences and rights, including voting rights, if any, qualifications, limitations or restrictions on Preferred Stock is to be fixed by resolution or resolutions of the Board of Directors. On April 28, 1997, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation designating 350,000 shares of preferred stock designated Class A Convertible Preferred Stock (hereinafter referred to as "Class A Preferred".) Class A Preferred has a liquidation preference. In the event of liquidation, holders of Class A Preferred have the right to receive $.72 for each share of Class A Preferred held; before any payment is made or any assets are distributed to holders of Common Stock, or any other stock of any other series or class ranking junior to these shares. In the event of liquidation, holders of Class A Preferred are not entitled to payment beyond $.72 per share. These provisions may have the effect of delaying, deferring or preventing a change in control. Each share of Class A Preferred is convertible into common stock at the discretion of the holder, at the rate of one share of Class A Preferred for each .72 share of common stock. Thus, the 350,000 outstanding shares of Class A Preferred Stock are convertible into 486,111 shares of Class A Common Stock. Under the Certificate of Designation, the Company is not permitted to issue stock which is senior to or pari passu with Class A Preferred without prior consent of a majority of the outstanding Class A Preferred shares. Adjustment of the number of Class A Preferred outstanding is provided for in the event of any reclassification of outstanding securities or of the class of securities which are issuable upon conversion of shares and in the event of any reorganization of the Company which results in any reclassification or change in the number of shares outstanding. Similarly, in the event of any such change, the conversion price is subject to adjustment to reflect such change. If at any time while shares of Class A Preferred are outstanding a stock dividend on the Common Stock is issued, the conversion price will be adjusted to prevent any dilution of the holders of Class A Preferred right of conversion. If (a) there is a reclassification or change in the Company's Common Stock to which the Class A is convertible other than stock splits or other decrease or increase in the number of shares outstanding, (b) the Company consolidates or merges with another corporation, or (c) the Company sells or transfers substantially all of its assets, then the Class A Preferred shareholders are entitled to the same consideration as they would have been entitled to if their shares had been converted prior to the reclassification, change, consolidation, merger, sale, or transfer. This provision may have the effect of delaying, deferring or preventing a change in control. Voting rights and the right to receive dividends inherent in Class A Preferred are similar to those rights of the Common Stock. On April 28, 1997, the Company filed a Certificate of Designation bringing into existence a Class B Preferred Stock. Class B Preferred Stock is junior and subordinate to Class A Convertible Preferred Stock. 100 shares of Class B Preferred Stock were authorized from the 34 550,000 undesignated preferred shares. Fifteen (15) shares have been issued to Tensiodyne in exchange for canceling its 15 Class B Preferred shares in Matech 1. In the event of liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of Class B Preferred Stock are entitled to receive $10,000 per share as a liquidation preference. This liquidation preference is senior to liquidation rights of all other classes of stock except the Class A Preferred's liquidation rights. This provision may have the effect of delaying, deferring or preventing a change in control. At any time, the Company has the option to redeem Class B Preferred stock for $10,000 per share plus any unpaid dividends. At any time after January 31, 2002, holders have the right to compel the Company to redeem their shares for $10,000 per share plus any unpaid dividends. The holders have the right to receive cash dividends, which are determined pursuant to a formula in the Certificate of Designation. That formula reads as follows: "Each time a cash dividend is paid on the Common Stock there shall also be paid with respect to each outstanding share of Class B Preferred Stock an amount determined by multiplying the aggregate amount of the dividend paid with respect to the Common Stock by a fraction (i) the numerator of which is 3,214,480 and (ii) the denominator of which is the number of shares of Common Stock on which the dividend was paid, and (x) multiplying the resulting product by thirty percent (30%) and then (y) dividing the resulting product by five hundred and ten (510)." Holders of Class B Preferred Stock shall have one (1) vote per share and shall be entitled by class vote to elect one (1) director and to vote, as a class, on removal of any director so elected. Otherwise, holders of Class B Preferred Stock shall not have the right to vote as a class on any matter. As of the date hereof, 5,560,000 shares of Class A common stock are outstanding and upon distribution of the shares under this prospectus 405 shareholders will hold 369,172 shares; 60,000 shares of Class "B" Common stock are outstanding and held by one shareholder, Robert M. Bernstein; 350,000 shares of Class A Convertible Preferred stock are outstanding and are held by 12 shareholders; and 15 shares of Class B Preferred stock are outstanding and are held by one shareholder, Tensiodyne. WARRANTS On March 9, 1997, the Company's Board granted 1,700,000 Class A Warrants, 994,500 to Robert M. Bernstein, 170,000 to Joel Freedman, and 535,500 to Sherman Baker and his associates in exchange for each of these individuals agreeing to cancel a like number of warrants to purchase Matech 1 common stock on the same terms. Each Class A Warrant entitles the registered holder to purchase one share of Class A Common Stock at $.50 per share until August 22, 1999. Each holder may exercise by surrendering the warrant certificate, with the form of election completed and executed, together with payment of the exercise price to the Company at its corporate offices. The exercise price is payable in cash or by check acceptable to the Company. If less than all warrants evidenced by the warrant certificate are exercised, a new certificate is issued for the remaining warrants. The Board has the right to extend the exercise period and price. DESCRIPTION OF SHARES 35 The Shares being distributed are 369,172 shares of the Company's Class A Common Stock. No assurance can be given that a public market will develop for the Company's Shares. LEGAL MATTERS The Law Offices of C. Timothy Smoot, Torrance, California, has opined on the validity of the Shares of Class A Common Stock being distributed. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article VII, Section 3 of the Company's bylaws permit the Corporation "to indemnify to the fullest extent permitted by applicable law any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) relating to such person's status or acts as a director, officer, employee, or agent of the Corporation, or relating to such person's service at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such per-son in connection with such proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action, had no reasonable cause to believe his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful." Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against the public policy as expressed in the Act and is therefore unenforceable. EXPERTS Jonathon Reuben, CPA, An Accounting Corporation, Independent Certified Public Accountants, has opined on the financial statements of the Company for the three years ended December 31, 1996, 1995, and 1994 included in the prospectus and in the registration statement and audited the financial statements to the extent and for the period set forth in their report appearing elsewhere herein and in the registration statement. The financial statements are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. 36 FURTHER INFORMATION The Company has filed with the Commission a registration statement under the Securities Act of 1933 as amended, with respect to the securities being distributed. This prospectus does not contain all the information set forth in the registration statement. Certain parts of the registration statement are omitted in accordance with the Commission's rules. The statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete but include descriptions of the material provisions of such contracts, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the registration statement. Copies of these contracts and other documents may be obtained upon payment of prescribed fees or examined without charge at the office of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Moreover, the Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Commission's Web address is http://www.sec.gov. Matech 1's periodic reports are available for inspection at the Commission's Washington Office and, from the second quarter of 1996 to date, at the Commission's Web site. 37 FINANCIAL STATEMENTS - INDEX MATERIAL TECHNOLOGIES, INC. (Formerly Material Technology, Inc.) (Formerly Tensiodyne Scientific Corporation) (A Development Stage Company) Page Independent Auditor's Report F-1 Balance Sheets F-3 Statements of Operations F-5 Statement of Stockholder's Equity (Deficiency) F-6 Statement of Cash Flows F-14 Notes to Financial Statements F-16 MATERIAL TECHNOLOGIES, INC. (Formerly Tensiodyne Scientific Corporation) (A Development Stage Company) FINANCIAL STATEMENTS CONTENTS Page ---- Independent Auditors' Report F1 Balance Sheets F3 Statements of Operations F5 Statement of Stockholders' Equity (Deficiency) F6 Statements of Cash Flows F14 Notes to Financial Statements F16 [LETTERHEAD] INDEPENDENT AUDITORS' REPORT Board of Directors Material Technologies, Inc. (A Development Stage Company) Los Angeles, California We have audited the accompanying balance sheets of Material Technologies, Inc. (A Development Stage Company) as of December 31, 1996 and 1995, and the related statements of operations, cash flows, and stockholders' equity (deficit) for each of the three years in the period ended December 31, 1996, and for the period from January 1, 1991, through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Statements of operations and cash flows for the period from October 21, 1983 (inception) through December 31, 1990, (with the exception of 1989 which was unaudited) were audited by other auditors whose reports dated on various dates, expressed unqualified opinions including an explanatory paragraph, as discussed in Note 3, regarding the Company's ability to continue as a going concern. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. F-1 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Material Technologies, Inc. as of December 31, 1996, and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the period from January 1, 1991 through December 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Jonathon P. Reuben Jonathon P. Reuben, Certified Public Accountant Calabasas, California April 25, 1997 F-2 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) BALANCE SHEETS ASSETS December 31, March 31, 1995 1996 1997 --------- --------- --------- (Unaudited) CURRENT ASSETS Cash and Cash Equivalents $ 1,226 $ -- $ 2,783 Accounts Receivable -- -- 4,555 Prepaid Expenses -- 6,472 5,848 --------- --------- --------- TOTAL CURRENT ASSETS 1,226 6,472 13,186 --------- --------- --------- FIXED ASSETS Property and Equipment, Net of Accumulated Depreciation 100,958 98,016 97,318 --------- --------- --------- OTHER ASSETS Investments -- 55,200 13,800 Intangible Assets, Net of Accumulated Amortization 22,658 20,669 20,172 Note Receivable (Including Accrued Interest) 23,661 25,753 25,753 Refundable Deposit 2,189 2,189 2,189 --------- --------- --------- TOTAL OTHER ASSETS 48,508 103,811 61,914 --------- --------- --------- TOTAL ASSETS $ 150,692 $ 208,299 $ 172,418 --------- --------- --------- --------- --------- --------- See accompanying notes and independent accountants' report. F-3 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' (DEFICIT)
December 31, March 31, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) CURRENT LIABILITIES Bank Overdraft $ -- $ 2,422 $ -- Legal Fees Payable 111,343 128,191 126,835 Other Accounts Payable 18,185 33,221 39,687 Accrued Officers Salary 172,000 372,000 45,000 Accrued Payroll Taxes 12,051 19,124 22,656 Loan Payable - Officer 23,272 56,846 12,846 Loans Payable-Others 84,439 32,627 32,627 Payable on Research and Development Sponsorship 188,495 188,495 188,495 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 609,785 832,926 468,146 Loan Payable - Officer 113,268 122,698 -- Loans Payable - Other 60,829 90,893 25,000 ----------- ----------- ----------- TOTAL LIABILITIES 783,882 1,046,517 493,146 ----------- ----------- ----------- REDEEMABLE PREFERRED STOCK Class B Preferred Stock, $.001 Par Value Authorized 510 Shares, Outstanding 15 Shares at December 31, 1996; Redeemable at $10,000 Per Share After January 31, 2002 150,000 150,000 150,000 ----------- ----------- ----------- STOCKHOLDERS' (DEFICIT) Class A Common Stock, $.001 Par Value, Authorized 10,000,000 Shares, Outstanding 2,157,880 Shares at December 31, 1995, 2,580,546 Shares at December 31, 1996, and 5,560,000 Shares at March 31, 1997 2,157 2,580 5,560 Class B Common Stock, $.001 Par Value, Authorized 300,000 Shares, Outstanding 60,000 Shares 60 60 60 Class A Preferred, $.001 Par Value, Authorized 900,000 Shares Outstanding 350,000 Shares 350 350 350 Additional Paid in Capital 1,763,698 1,799,181 2,458,794 Less Notes and Subscriptions Receivable - Common Stock (14,720) (14,720) (36,464) Deficit Accumulated During the Development Stage (2,380,135) (2,830,869) (2,912,828) Unrealized Holding Gain on Investment Securities -- 55,200 13,800 ----------- ----------- ----------- TOTAL STOCKHOLDERS' (DEFICIT) (783,190) (988,218) (470,728) ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 150,692 $ 208,299 $ 172,418 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes and independent accountants' report. F-4 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS
From Inception For the Three Months Ended (October 21, 1983) March 31, Through 1994 1995 1996 1996 1997 March 31, 1997 --------- --------- --------- --------- --------- --------------- (Unaudited) (Unaudited) (Unaudited) REVENUES Sale of Fatigue Fuses $ -- $ -- $ -- $ -- $ -- $ 64,505 Sale of Royalty Interests -- -- -- -- -- 198,750 Research and Development Revenue -- -- -- -- 4,555 717,135 Test Services -- -- -- -- -- 10,870 --------- --------- --------- --------- --------- ---------- TOTAL REVENUES -- -- -- -- 4,555 991,260 --------- --------- --------- --------- --------- ---------- COSTS AND EXPENSES Research and Development 83,360 15,104 10,700 -- 4,555 1,512,851 General and Administrative 295,488 188,745 472,486 150,541 83,094 2,233,602 --------- --------- --------- --------- --------- ---------- TOTAL COSTS AND EXPENSES 378,848 203,849 483,186 150,541 87,649 3,746,453 --------- --------- --------- --------- --------- ---------- INCOME (LOSS) FROM OPERATIONS (378,848) (203,849) (483,186) (150,541) (87,649) (2,755,193) --------- --------- --------- --------- --------- ---------- OTHER INCOME (EXPENSE) Expense Reimbursed -- -- 12,275 1,135 (5,392) Interest Income 1,785 1,928 2,427 507 -- 39,487 Miscellaneous Income -- 4,375 -- -- -- 25,145 Loss on Sale of Equipment -- -- -- -- -- (12,780) Settlement of Teaming Agreement -- -- -- -- -- 50,000 Litigation Settlement -- -- -- -- -- 18,095 Gain on Sale of Stock -- -- 17,750 9,656 -- 17,750 --------- --------- --------- --------- --------- ---------- TOTAL OTHER INCOME 1,785 6,303 32,452 10,163 1,135 132,305 --------- --------- --------- --------- --------- ---------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND PROVISION FOR INCOME TAXES (377,063) (197,546) (450,734) (140,378) (81,959) (2,622,888) PROVISION FOR INCOME TAXES -- -- -- -- -- (7,000) --------- --------- --------- --------- --------- ---------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (377,063) (197,546) (450,734) (140,378) (81,959) (2,629,888) EXTRAORDINARY ITEMS Forgiveness of Debt -- -- -- -- -- (289,940) Utilization of Operating Loss Carry forward -- -- -- -- -- 7,000 --------- --------- --------- --------- --------- ---------- NET INCOME (LOSS) $ (377,063) $ (197,546) $ (450,734) $ (140,378) $ (81,959) $(2,912,828) --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- ---------- PER SHARE DATA Income (Loss) Before Extraordinary Item $ (0.17) Extraordinary Items -- --------- NET INCOME (LOSS) $ (0.17) --------- --------- COMMON SHARES OUTSTANDING 2,580,546 --------- ---------
See accompanying notes and accountants' report. F-5
MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996 Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Initial Issuance of Common Stock, October 21, 1983 2,408 $ 2 -- $ -- -- $ -- Adjustment to Give Effect to Recapitalization on December 15, 1986 Cancellation of Shares (2,202) (2) -- -- -- -- ------- ---- ------- ------- ------- ------- 206 0 -- -- -- -- Balance, October 21, 1983 Shares Issued By Tensiodyne Corporation in Connection With Pooling of Interests 42,334 14 -- -- -- -- Net (Loss), Year Ended December 31, 1983 -- -- -- -- -- -- ------- --- ------- ------- ------- ------- Balance, January 1, 1984 42,540 14 -- -- -- -- Capital Contribution -- 28 -- -- -- -- Issuance of Common Stock 4,815 5 -- -- -- -- Costs Incurred in Connection with Issuance of Stock -- -- -- -- -- -- Net (Loss), Year Ended December 31, 1984 -- -- -- -- -- -- ------- ---- ------- ------- ------- -------
Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Initial Issuance of Common Stock, October 21, 1983 -- $ -- $ 2,498 $ -- Adjustment to Give Effect to Recapitalization on December 15, 1986 Cancellation of Shares -- -- (2) -- ------- ------- --------- --------- -- -- 2,496 -- Balance, October 21, 1983 Shares Issued By Tensiodyne Corporation in Connection With Pooling of Interests -- -- 4,328 -- Net (Loss), Year Ended December 31, 1983 -- -- -- (4,317) ------- ------- --------- --------- Balance, January 1, 1984 -- -- 6,824 (4,317) Capital Contribution -- -- 21,727 -- Issuance of Common Stock -- -- 10,695 -- Costs Incurred in Connection with Issuance of Stock -- -- (2,849) -- Net (Loss), Year Ended December 31, 1984 -- -- -- (21,797) ------- ------- --------- ---------
See accompanying notes and independent accountants' report. F-6
MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH DECEMBER 31, 1996 Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Balance, January 1, 1985 47,355 47 -- -- -- -- Shares Contributed Back to Company (315) (0) -- -- -- -- Capital Contribution -- -- -- -- -- -- Sale of 12,166 Warrants at $1.50 Per Warrant -- -- -- -- -- -- Shares Cancelled (8,758) (9) -- -- -- -- Net (Loss), Year Ended December 31, 1985 -- -- -- -- -- -- ------- --- ------- ------- ------- ------- Balance, January 1, 1986 38,282 38 -- -- -- -- Net (Loss), Year Ended December 31, 1986 -- -- -- -- -- -- ------- --- ------- ------- ------- ------- Balance, January 1, 1987 38,282 38 -- -- -- -- Issuance of Common Stock Upon Exercise of Warrants 216 0 -- -- -- -- Net (Loss), Year Ended December 31, 1987 -- -- -- -- -- -- ------- --- ------- ------- ------- -------
Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Balance, January 1, 1985 -- -- 36,397 (26,114) Shares Contributed Back to Company -- -- 0 -- Capital Contribution -- -- 200,555 -- Sale of 12,166 Warrants at $1.50 Per Warrant -- -- 18,250 -- Shares Cancelled -- -- 9 -- Net (Loss), Year Ended December 31, 1985 -- -- -- (252,070) ------- ------- --------- --------- Balance, January 1, 1986 -- -- 255,211 (278,184) Net (Loss), Year Ended December 31, 1986 -- -- -- (10,365) ------- ------- --------- --------- Balance, January 1, 1987 -- -- 255,211 (288,549) Issuance of Common Stock Upon Exercise of Warrants -- -- 27,082 -- Net (Loss), Year Ended December 31, 1987 -- -- -- (45,389) ------- ------- --------- ---------
See accompanying notes and independent accountants' report. F-7 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Balance, January 1, 1988 38,498 38 -- -- -- -- Issuance of Common Stock Sale of Stock (Unaudited) 2,544 3 -- -- -- -- Services Rendered (Unaudited) 3,179 3 -- -- -- -- Net (Loss), Year Ended December 31, 1988 (Unaudited) -- -- -- -- -- ------- --- ------- ------- ------- ------- Balance, January 1, 1989 (Unaudited), 44,221 44 -- -- -- -- Issuance of Common Stock Sale of Stock 4,000 4 -- -- -- -- Services Rendered 36,000 36 -- -- -- -- Net (Loss), Year Ended December 31, 1989 -- -- -- -- -- -- ------- --- ------- ------- ------- ------- Balance, January 1, 1990 84,221 84 -- -- -- -- Issuance of Common Stock Sale of Stock 2,370 2 -- -- -- -- Services Rendered 6,480 7 -- -- -- -- Net Income, Year Ended December 31, 1990 -- -- -- -- -- -- ------- --- ------- ------- ------- -------
Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Balance, January 1, 1988 -- -- 282,293 (333,938) Issuance of Common Stock Sale of Stock (Unaudited) -- -- 101,749 -- Services Rendered (Unaudited) -- -- 70,597 Net (Loss), Year Ended December 31, 1988 (Unaudited) -- -- -- (142,335) ------- ------- --------- --------- Balance, January 1, 1989 (Unaudited), -- -- 454,639 (476,273) Issuance of Common Stock Sale of Stock -- -- 1,996 -- Services Rendered -- -- 17,964 -- Net (Loss), Year Ended December 31, 1989 -- -- -- (31,945) ------- ------- --------- --------- Balance, January 1, 1990 -- -- 474,599 (508,218) Issuance of Common Stock Sale of Stock -- -- 59,248 -- Services Rendered -- -- 32,393 -- Net Income, Year Ended December 31, 1990 -- -- -- 133,894 ------- ------- --------- ---------
See accompanying notes and independent accountants' report. F-8 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Balance January 1, 1991 as Restated 93,071 93 -- -- -- -- Issuance of Common Stock Sale of Stock 647 1 -- -- 350,000 350 Services Rendered 4,371 4 -- -- -- -- Conversion of Warrants 30 -- Conversion of Stock (6,000) (6) 60,000 60 -- -- Net (Loss), Year Ended December 31, 1991 -- -- -- -- -- -- ------- --- ------ --- ------- ------- Balance January 1, 1992 92,119 92 60,000 60 350,000 350 Issuance of Common Stock Sale of Stock 20,000 20 -- -- -- -- Services Rendered 5,400 5 -- -- -- -- Conversion of Warrants 6,000 6 -- -- -- -- Sale of Class B Stock -- -- 60,000 60 -- -- Issuance of Stock to Unconsolidated Subsidiary 4,751 5 -- -- -- -- Conversion of Stock 6,000 6 (60,000) (60) -- -- Cancellation of Shares (6,650) (7) -- -- -- -- Net (Loss), Year Ended December 31, 1992 -- -- -- -- -- -- --------- ----- ------- ------- ------- -------
Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Balance January 1, 1991 as Restated -- -- 566,240 (374,324) Issuance of Common Stock Sale of Stock -- -- 273,335 -- Services Rendered -- -- 64,880 -- Conversion of Warrants -- Conversion of Stock -- -- -- -- Net (Loss), Year Ended December 31, 1991 -- -- -- (346,316) ------- ------- --------- --------- Balance January 1, 1992 -- -- 904,455 (720,640) Issuance of Common Stock Sale of Stock -- -- 15,980 -- Services Rendered -- -- 15,515 -- Conversion of Warrants -- -- 14,994 -- Sale of Class B Stock -- -- 14,940 -- Issuance of Stock to Unconsolidated Subsidiary -- -- 71,659 -- Conversion of Stock -- -- -- -- Cancellation of Shares -- -- 7 -- Net (Loss), Year Ended December 31, 1992 -- -- -- (154,986) ------- ------- --------- ---------
See accompanying notes and independent accountants' report. F-9 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Balance December 31, 1992 127,620 127 60,000 60 350,000 350 Issuance of Common Stock Licensing Agreement 12,500 13 -- -- -- -- Services Rendered 67,030 67 -- -- -- -- Warrant Conversion 56,000 56 -- -- -- -- Cancellation of Shares (31,700) (32) -- -- -- -- Net (Loss) for Year Ended December 31, 1993 (Restated) -- -- -- -- -- -- --------- ----- ------- ------- ------- ------- Balance December 31, 1993 231,449 231 60,000 60 350,000 350 --------- ----- ------- ------- ------- ------- Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Balance December 31, 1992 -- -- 1,037,550 (875,626) Issuance of Common Stock Licensing Agreement -- -- 6,237 -- Services Rendered -- -- 13,846 -- Warrant Conversion 304,943 -- Cancellation of Shares -- -- (7,537) -- Net (Loss) for Year Ended December 31, 1993 (Restated) -- -- -- (929,900) ------- ------- --------- --------- Balance December 31, 1993 -- -- 1,355,039 (1,805,526) ------- ------- --------- ---------
See accompanying notes and independent accountants' report. F-10 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Adjustment to Give Effect to Recapitalization on February 1, 1994 30,818 31 -- -- -- -- Issuance of Shares for Services Rendered 223,000 223 -- -- -- -- Sale of Stock 1,486,112 1,486 -- -- -- -- Issuance of Shares for the Modification of Agreements 34,000 34 -- -- -- -- Net (Loss) for the Year Ended December 31, 1994 - -- -- -- -- -- -- --------- ----- ------- ------- ------- ------- Balance - December 31, 1994 2,005,380 2,005 60,000 60 350,000 350 Issuance of Common Stock in Consideration for Modification of Agreement 152,500 153 -- -- -- -- Net (Loss) for the Year Ended December 31, 1995 - -- -- -- -- -- -- --------- ----- ------- ------- ------- ------- Balance - December 31, 1995 2,157,880 2,157 60,000 60 350,000 350 ========= ===== ======= ======= ======= ======= Redeemable Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Adjustment to Give Effect to Recapitalization on February 1, 1994 -- -- 385,393 -- Issuance of Shares for Services Rendered -- -- -- -- Sale of Stock 15 150,000 23,300 -- Issuance of Shares for the Modification of Agreements -- -- (34) -- Net (Loss) for the Year Ended December 31, 1994 - -- -- -- (377,063) ------- ------- --------- --------- Balance - December 31, 1994 15 150,000 1,763,698 (2,182,589) Issuance of Common Stock in Consideration for Modification of Agreement -- -- -- -- Net (Loss) for the Year Ended December 31, 1995 - -- -- -- (197,546) ------- ------- --------- --------- Balance - December 31, 1995 15 150,000 1,763,698 (2,380,135) ======= ======= ========== ==========
See accompanying notes and independent accountants' report. F-11 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Issuance of Shares for Services Rendered 164,666 165 -- -- -- -- Sale of Stock 70,000 70 -- -- -- -- Issuance of Shares for the Modification of Agreements 250,000 250 -- -- -- -- Cancellation of Shares Held in Treasury (62,000) (62) -- -- -- -- Net (Loss) for the Year Ended December 31, 1996 -- -- -- -- -- -- --------- ----- ------- ------- ------- ------- Balance - December 31, 1996 2,580,546 2,580 60,000 60 350,000 350 Sale of Stock 100,000 100 -- -- -- -- Conversion of Indebtedness 800,000 800 -- -- -- -- Class A Common Stock Issued in Cancellation of $372,000 Accrued Wages Due Officer 1,499,454 1,500 -- -- -- --
Redeemable Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Issuance of Shares for Services Rendered -- -- 16,301 -- Sale of Stock -- -- 173,970 -- Issuance of Shares for the Modification of Agreements -- -- (250) -- Cancellation of Shares Held in Treasury -- -- (154,538) -- Net (Loss) for the Year Ended December 31, 1996 -- -- -- (450,734) ------- ------- --------- --------- Balance - December 31, 1996 15 150,000 1,799,181 (2,830,869) Sale of Stock -- -- 99,900 -- Conversion of Indebtedness -- -- 187,793 -- Class A Common Stock Issued in Cancellation of $372,000 Accrued Wages Due Officer -- -- 370,500 --
See accompanying notes and independent accountants' report. F-12 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD OCTOBER 21, 1983 (INCEPTION) THROUGH MARCH 31, 1997
Class A Common Class B Common Class A Preferred Stock -------------------------- ---------------------- ----------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------- ------- ----------- --------- --------- --------- Issuance of Shares for Services Rendered 20,000 20 -- -- -- -- Adjustment to Give Effect to Recapitalization on March 9, 1997 560,000 560 -- -- -- -- Net (Loss) for the Three Months Ended March 31, 1997 -- -- -- -- -- -- --------- ----- ------- ------- ------- ------- 5,560,000 $ 5,560 60,000 $ 60 350,000 $ 350 ========= ===== ======= ======= ======= =======
Redeemable Deficit Class B Preferred Stock Accumulated ----------------------- Capital During the Shares in Excess of Development Outstanding Amount Par Value Stage ----------- --------- ------------ ----------- Issuance of Shares for Services Rendered -- -- 1,980 -- Adjustment to Give Effect to Recapitalization on March 9, 1997 -- -- (560) -- Net (Loss) for the Three Months Ended March 31, 1997 -- -- -- (81,959) ------- ------- --------- --------- 15 $ 150,000 $ 2,458,794 $(2,912,828) ======= ======= ========== ==========
See accompanying notes and independent accountants' report. F-13 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS
From Inception For the Three Months (October 21, 1983) December 31, Ended March 31, Through 1994 1995 1996 1996 1997 March 31, 1997 --------- --------- --------- --------- --------- -------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (377,063) $ (197,546) $ (450,734) $ (140,378) $ (81,959) $(2,912,828) --------- --------- --------- --------- --------- ---------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities Depreciation and Amortization 5,553 5,555 4,931 1,388 1,194 160,909 Gain on Sale of Tensiodyne Corporation Common Stock -- -- (17,750) (9,656) (17,750) Charge off of Deferred Offering Costs -- 31,480 -- -- -- 31,480 (Increase) Decrease in Accounts Receivable -- -- -- -- (4,555) (4,555) (Increase) Decrease in Prepaid Expenses -- -- (1,472) -- 625 (847) Loss on Sale of Equipment -- -- -- -- -- 12,780 Issuance of Common Stock for Services 223 -- 16,467 -- 2,000 297,965 Issuance of Common Stock for Agreement Modifications -- 152 -- -- -- 152 Forgiveness of Indebtedness -- -- -- -- -- 165,000 Increase (Decrease) in Accounts -- -- Payable and Accrued Expenses 97,612 16,032 238,957 100,000 53,644 606,179 Interest Accrued on Notes Payable -- 10,870 17,681 3,917 -- 28,551 Increase in Research and Development -- Sponsorship Payable -- -- -- -- 188,495 (Increase) in Note for Litigation Settlement (1,766) (1,921) (2,092) (507) -- (25,753) (Increase) in Deposits -- -- -- -- -- (2,189) --------- --------- --------- --------- --------- ---------- TOTAL ADJUSTMENTS 101,622 62,168 256,722 95,142 35,158 1,458,167 --------- --------- --------- --------- --------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (275,441) (135,378) (194,012) (45,236) (46,801) (1,454,661) --------- --------- --------- --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds From Sale of Equipment -- -- -- -- -- 10,250 Purchase of Property and Equipment -- -- -- -- -- (226,109) Proceeds from Sale of Tensiodyne Corporation Common Stock -- -- 17,750 9,656 17,750 -- (Increase) in Other Assets -- -- -- -- -- (69,069) Payment for License Agreement -- -- -- -- -- (6,250) --------- --------- --------- --------- --------- ---------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES -- -- 17,750 9,656 17,750 (291,178) --------- --------- --------- --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common Stock Net of Offering Costs 24,787 -- 174,040 25,000 78,256 810,575 Costs incurred in Offering (31,480) -- -- -- -- (31,480) Sale of Common Stock Warrants -- -- -- -- -- 18,250 Sale of Preferred Stock -- -- -- -- -- 258,500 Sale of Redeemable Preferred Stock 140,000 -- -- -- -- 150,000 Capital Contributions -- -- -- -- -- 301,068 Proceeds From Note Payable -- -- -- -- -- -- Payment on Proposed Reorganization -- -- (5,000) -- (5,000) Loans From Officers 135,050 100,874 43,250 26,250 19,000 375,307 Repayments to Officer (78,446) (16,000) (64,676) -- (63,000) (293,262) Increase in Loan Payable-Others 78,495 58,000 25,000 -- -- 164,664 --------- --------- --------- --------- --------- ----------
See accompanying notes and accountants' report. F-14 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS
From Inception For the Three Months Ended (October 21, 1983) December 31, March 31, Through 1994 1995 1996 1996 1997 March 31, 1997 --------- --------- --------- --------- --------- -------------- (Unaudited) (Unaudited) (Unaudited) NET CASH PROVIDED BY FINANCING ACTIVITIES $ 268,406 $ 142,874 $ 172,614 $ 51,250 $ 34,256 $ 1,748,622 --------- --------- --------- --------- --------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,035) 7,496 (3,648) 15,670 5,205 2,783 BEGINNING BALANCE - CASH AND CASH EQUIVALENTS 765 (6,270) 1,226 1,226 (2,422) -- --------- --------- --------- --------- --------- ------------ ENDING BALANCE - CASH AND CASH EQUIVALENTS $ (6,270) $ 1,226 $ (2,422) $ 16,896 2,783 $ 2,783 --------- --------- --------- --------- --------- ------------ --------- --------- --------- --------- --------- ------------
SUPPLEMENTAL INFORMATION: A. Definition of Cash and Cash Equivalents For the purpose of the statements of cash flows, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. B. During the periods from the date of inception (October 21, 1983) to December 31, 1995, there have been no cash payments for income taxes or interest. During 1996, the Company made interest payments totalling $2,000. There were no payments in 1996 for income taxes. C. Non Cash Investing and Financing Activities During 1994, the Company authorzed the issuance to certain directors and to members of its advisory board a total of 198,000 shares of its Class A Common Stock. Also in 1994, the Company authorized the issuance of 15,000 to unrelated third parties for services rendered to the Company and also authorized the issuance of 10,000 shares of Class A Common Stock to its president for past services. During 1995, the Company forgave $154,600 on an obligation due from the Company's President in consideration for the President returning 62,000 shares of the Company's Class A Common Stock to its treasury. During 1995, the Company also issued 152,500 shares of its Class A Common stock to third parties in consideration for the modification of certain agreements. During 1996, the Company issued 250,000 shares of its Class A Common stock in consideration for the cancellation of a 2.5% royalty interest in the Company's Fatigue Fuse During 1996, a unrelated third party assigned his interest in a $55,000 loan owed him by the Company to the Company's President. See accompanying notes and accountants' report. F-15 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 1 - Organization Material Technologies, Inc. (the "Company") was organized on March 4, 1997, under the laws of the state of Delaware. On March 9, 1997, the Company's Board of Directors authorized the issuance of 5,560,000 of its Class A Common Stock to Material Technology, Inc. ("Matech 1") in exchange for all of Matech 1's operations including all of its assets and the assumption of all of Matech 1's liabilities. The formation of this subsidiary and related transfer of assets and liabilities is in connection with a February 17, 1997 Stock Purchase Agreement among Matech 1, Montpilier Holdings, Inc., SecurFone America, Inc. and the Company's President. Under this agreement, the parties intend to effect a reverse merger of SecurFone into Matech 1 immediately after the distribution of this Company's stock to the shareholders of Matech 1 (See Note 15). A schedule of the assets and liabilities acquired is as follows: Assets Prepaid Expenses $ 6,472 Property & Equipment Net 98,016 Licensing Agreement and Patents 20,669 Notes Receivable 25,753 Other Assets 57,389 --------- $ 208,299 --------- --------- F-16 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 1 - Organization (continued) Liabilities Bank Overdraft $ (2,422) Payables and Other Accrued Expenses (180,536) Accrued Salaries - Officer (372,000) Loans Payable - Officer (56,846) Loans Payable - Other (57,627) Note Payable on Licensing Agreement (188,495) ------------ (857,926) Redeemable Preferred Stock (150,000) ------------ Liabilities in Excess of Assets Transferred $ (799,627) ------------ ------------ The amounts reflected above are the balances reflected in Matech 1's audited balance sheet as of December 31, 1996, adjusted to take into effect the conversion of certain loans due a shareholder and the Company's President as discussed further in Notes B and 12. Management has determined that the activity between this balance sheet date and the actual date of transfer is immaterial. For financial reporting purposes, the above transaction was treated as a recapitalization. Therefore, the assets and liabilities transferred have been recorded at historical cost. The Company is in the development stage, as defined in FASB Statement 7, with its principal activity being research and development in the area of metal fatigue technology with the intent of future commercial application. The Company has not paid any dividends and dividends which may be paid in the future will depend on the financial requirements of the Company and other relevant factors. F-17 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 2 - Summary of Significant Accounting Policies a. Property and Equipment The cost of property and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line method for financial reporting purposes and for income tax reporting purposes. b. Intangible Assets Intangibles are amortized on the straight-line method over periods ranging from 5 to 20 years (see Note 4). c. Net Loss Per Share Net loss per share is computed pursuant to SAB Topic 1.B.2. d. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Note 3 - Realization of Assets The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial operating losses totaling $2,824,669 since its inception through December 31,1996. These continuing losses are an indication that the Company may not be able to continue to operate. F-18 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 3 - Realization of Assets The Company anticipates that it needs approximately $5,000,000 in order to complete the development and marketing of its two products. Management believes the source of the $5,000,000 will be through government grants, sale of the Company's stock, entering into joint ventures, and or through the sale of royalty interests. Note 4 - Intangibles Intangible assets consist of the following: Period of December 31, Amortization 1995 1996 ------------ -------- -------- Patent Costs 17 Years $ 28,494 $ 28,494 Organization Costs 5 Years 9,076 9,076 License Agreement 20 Years 6,250 6,250 (See Note 7) -------- -------- 43,820 43,820 Less Accumulated Amortization (21,162) (23,151) -------- -------- $ 22,658 $ 20,669 -------- -------- -------- -------- Amortization charged to operations for 1994, 1995, and 1996, were $1,988, $1,988 and $1,989, respectively. Note 5 - Litigation Settlement On October 26, 1992, the Company agreed to an out-of-court settlement resulting from improprieties by its chief technical consultant, who was also an officer and director. The settlement resulted in a return from the individual of 5,650 shares of the Company's common stock, a return of 600 warrants to purchase 600 shares of common stock, and a promissory note for $50,000 secured by a mortgage interest on the individual's residence. The note is non-interest bearing due and payable upon either the death of the individual's spouse or upon conveyance or attempted conveyance of any interest in F-19 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 5 - Litigation Settlement (continued) the individual's residence. Interest has been imputed pursuant to APB-21 at an annual rate of 8.5%. The balance of this note as of December 31, 1995, and 1996, was $23,661 and $25,753, respectively. As of December 31, 1996, the note was in default due to the failure by the individual to maintain insurance on the property and to pay property taxes. The Company commenced foreclosure proceedings with a public foreclosure sale pending and scheduled for March 1997. Management estimates that the net amount the Company should receive on the sale of the property approximates the balance of the note as of December 31, 1996. Accrued interest credited to operations for the years 1994, 1995 and 1996 were $1,766, $1,929 and $2,091, respectively. Note 6 - License Agreement The Company has entered into a license agreement with the University of Pennsylvania regarding the development and marketing of the Electrochemical Fatigue Sensor. The Sensor is designed to measure electrochemically the status of a structure without knowing the structure's past loading history. The Company is in the initial stage of developing the Sensor. Under the terms of the agreement the Company issued to the University 12,500 shares of its common stock, and a 5% royalty on sales of the product. The Company valued the licensing agreement at $6,250. Under the terms of the agreement, the license terminates upon the expiration of the underlying patents, unless sooner terminated as provided in the agreement. The Company is amortizing the license over 20 years. In addition to entering into the licensing agreement, the Company also agreed to sponsor the development of the Sensor. Under the Sponsorship agreement, the Company agreed to reimburse the University development costs totaling approximately $200,000 which was to be paid in 18 monthly installments of $11,112. The research and development costs are recorded at present value, using an annual interest rate of 8.5%. At December 31, 1995, and 1996, the present value of this obligation was $188,494. The Company charged the full $188,494 to operations as research and development in 1993. The Company has not made any payments toward this obligation. F-20 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 6 - License Agreement (continued) Pursuant to the terms of the agreement, the Company reimbursed the University in 1996, $10,000 for the cost it incurred in the prosecution and maintenance of its patents relating to the Electrochemical Fatigue Sensor. The Company and the University have agreed to modify the terms of the licensing agreement and related obligation. The terms of the modified agreements include an increase in the University's royalty to 7% of the sale of related products, the issuance of additional shares of the Company's Class A Common Stock to equal 5% of the outstanding stock of the Company as of the effective date of the modified agreements, and to pay to the University 30% of any amounts raised by the Company in excess of $150,000 (excluding amounts received on government grants or contracts) up to the amount owed to the University. Note 7 - Property and Equipment The following is a summary of property and equipment: December 31, 1995 1996 ---- ---- Office Equipment $ 14,345 $ 14,345 Remote Monitoring system 97,160 97,160 Manufacturing Equipment 100,067 100,067 ------- ------- 211,572 211,572 Less: Accumulated Depreciation (110,614) (113,556) ------- ------- $100,958 $ 98,016 ------- ------- ------- ------- Depreciation charged to operations was $3,567, $3,566 and $2,942 in 1994, 1995, and 1996, respectively. The useful lives of office and manufacturing equipment for the purpose of computing depreciation is five years. The Company's equipment has been pledged as collateral on the note payable to Advanced Technology Center (See Note 9(b). F-21 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 7 - Property and Equipment (continued) The Company has entered into an agreement dated April 1, 1993, with the University of Pennsylvania acting through the Laboratory for Research on the Structure of Matter ("LRSM") to loan certain manufacturing equipment to the LRSM for instructional and research related purposes for a period of 5 years, beginning December 1, 1992, and ending December 1, 1997. Upon expiration of the five year period, LRSM may retain the right to borrow the equipment for another 5 year period. In exchange for loaning the equipment to LRSM, the Company receives substantial testing from LRSM which aides the Company in the development of the Fatigue Fuse. Upon the expiration of the second five year period, LRSM has the option to purchase the equipment at its fair market value then prevailing. Under the terms of the agreement, LRSM shall perform 1,200 hours of research and testing of materials to be used in conjunction with the Fatigue Fuse. Note 8 - Notes Payable On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker, a current shareholder. The loan is evidenced by a promissory note which is assessed interest at major bank prime rate. The principal and all accrued interest is fully due and payable in 2 years, but the Company is required to pay-off the loan and accrued interest in full from the proceeds of any independent financing. As additional consideration for the loan, the Company granted to Mr. Baker, a 1% royalty interest in the Fatigue Fuse and a .5% royalty interest in the Electrochemical Fatigue Sensor. The Company has not placed a value on the royalty interest granted. The balance due on this loan as of December 31, 1995 and 1996 was $29,270 and $32,459, respectively. The Company did not pay any amounts due on this note when it matured on May 26, 1996, and the note is in default. F-22 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 8 - Notes Payable (continued) In addition, the Company borrowed an additional $58,000 from Mr. Baker in 1995. Under the terms of the loan agreement, interest accrues on this loan at the prime lending rate of Mellon Bank N.A., and is fully payable with accrued interest on June 11, 2000. At the option of Mr. Baker, he can convert the balance due at any time into approximately 280,000 shares of the Company's Class A common stock. The balances due on this note as of December 31, 1995, and 1996 were approximately $60,829 and $65,893, respectively. In March 1997, Mr. Baker converted the balance owed him into the 280,000 shares of Common Stock. In October 1997, the Company borrowed $25,000 from an unrelated third party. Under the terms of the promissory note, the loan is assessed interest at an annual rate of 10% and matures on October 15, 1998. The loan is convertible at any time prior to payoff at the option of the payee into 25,000 shares of the Company's Class A Common Stock. Interest charged to operations on this loan in 1996 amounted to approximately $527. Note 9 - Income Taxes Income taxes are provided based on earnings reported for financial statement purposes pursuant to the provisions of Statement of Financial Accounting Standards No. 109 ("FASB 109"). FASB 109 uses the asset and liability method to account for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax basis and financial reporting basis of assets and liabilities. An allowance has been provided for by the Company which reduced the tax benefits accrued by the Company for its net operating losses to zero, as it can not be determined when, or if, the tax benefits derived from these operating losses will materialize. F-23 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies The Company's commitments and contingencies are as follows: a. On December 24, 1985, in order to provide funding for research and development related to the Fatigue Fuse, the Company entered into various agreements with the Tensiodyne 1985-I R & D Partnership. These agreements were amended on October 9, 1989, and under the revised terms, obligated the Company to pay the Partnership a royalty of 10% of future gross sales. The Company's obligation to the Partnership is limited to the capital contributed to it by its partners in the amount of approximately $912,500 and accrued interest. b. On August 30, 1986, the Company entered into a funding agreement with the Advanced Technology Center ("ATC"), whereby ATC paid $45,000 to the Company for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue. The royalty is limited to the $45,000 plus an 11% annual rate of return. At December 31, 1995, and 1996, the future royalty commitment was limited to $107,510 and $119,336, respectively. The payment of future royalties is secured by equipment used by the Company in the development of technology as specified in the funding agreement. c. On May 4, 1987, the Company entered into a funding agreement with ATC, whereby ATC provided $63,775 to the Company for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenues. The agreement was amended August 28, 1987, and as amended, the royalty 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, 1995, and 1996, the total future royalty commitments, including the accumulated 26% annual rate of return, was limited to approximately $440,265, and $554,734, respectively. The future royalties are secured by the Company's patents, products, and accounts receivable, which may be related to technology developed with the funding. F-24 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies (Continued) d. In 1994, the Company issued to Variety Investments, Ltd. of Vancouver, Canada ("Variety"), a 22.5% royalty interest on the Fatigue Fuse in consideration for the cancellation of cash advances made to the Company by Variety. In December 1996, in exchange for the issuance by the Company of 250,000 shares of its Class A Common Stock, Variety reduced its royalty interest to 20%. e. Under an agreement which was effective February 2, 1994, Tensiodyne Corporation, the Company's former parent, was obligated to provide $5,100,000 in financing. During 1994, the Company received $150,000 under this agreement in exchange for the issuance of 7,560 shares of its Class A common stock and 15 shares of its Redeemable Class B Preferred Stock. The $150,000 has been classified for financial purposes as Redeemable Preferred Stock. The Shareholders of the preferred stock have the right of redemption at $10,000 per share, if the preferred shares are not redeemed by the Company within 10 years of issuance. Dividends are payable on the preferred shares to the same extent as aggregate dividends on the number of shares of common stock equal to 30% of shares of the Company's common stock outstanding on the closing date. The holders of the preferred shares will be allowed to elect a director of the Company. Tensiodyne was not able to fund the full amount of its obligation to the Company and on November 22, 1994, the Company filed suit against Tensiodyne for breach of contract. On March 28, 1995, a settlement agreement was entered into whereby Tensiodyne issued to the Company 6,375,000 shares of its Common Stock. The proceeds received from the sale of these shares will be used to reduce Tensiodyne's obligation to pay the remaining balance owing of $4,950,000 and accrued interest which is assessed under the settlement agreement at 7% per annum. F-25 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies (Continued) The Company also received upon the signing of the settlement agreement 250,000 shares of Tensiodyne common stock. Management believes that Tensiodyne has insufficient capital to meet its obligation to pay any of the amounts owed and the Company will have to rely on the proceeds it receives through the sale of the Tensiodyne shares to reduce the amount due. The shares received are subject to restrictions imposed under SEC Rule 144. Based upon these restrictions and the limited market in which to sell the Tensiodyne stock, it is impractical to estimate the full value of the obligation owed the Company by Tensiodyne. On December 30, 1996, an agreement was entered into whereby Tensiodyne agreed to exchange the 15 shares of Redeemable Class B Preferred Stock it owned in Matech 1 for 15 shares of the Company's Redeemable Class B Preferred Stock. The rights of the new issuance will be the same as the rights of the shares exchanged except the shares in the Company will be redeemable two years earlier on January 31, 2002. In consideration for the exchange, the Company paid Tensiodyne $5,000. f. The Company entered into an agreement with an unrelated third party for providing the idea of pursuing a government contract for the funding of the development of the Company's technologies, under which he would receive a number of the Company's Class A Common Stock equal to 2.5% of the number of shares outstanding as of the date a government contract is signed, 15% of the amount of the government contract, and an appointment to the Company's Board of Directors. Funds due him will be paid only when such funds become available to the Company. The Company's obligation is created on the date the government contract is signed. Under the agreement with this individual, the amounts due will be evidenced by a promissory note bearing interest at major bank prime. F-26 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies (Continued) Interest accrues nine months after the government contract is executed, and is payable quarterly. The principal balance and any accrued interest is paid through funds raised or earned by the Company. The Company is obligated to pay 12.5% of the first $1,000,000 earned or raised and 15% of any amount in excess of the $1,000,000. The Agreement contains anti-dilution provisions relating to the shares to be issued which expire once $50,000 is paid. The Company's obligation to have this person as a Director expires once all amounts due are paid. The contingent amount due has been personally guaranteed by the Company's President and is secured by the Company's patents. The personal guarantee expires upon the individual receiving $100,000. g. As discussed in Note 8, the Company granted a 1% royalty interest in the Company's Fatigue Fuse and a .5% royalty interest in its Electrochemical Fatigue Sensor to Mr. Sherman Baker as part consideration on a $25,000 loan made by Mr. Baker to the Company. A summary of royalty interests which the Company has granted and are outstanding as of December 31, 1996, follows: Fatigue Fatigue Fuse Sensor ----------------- ------ Tensiodyne 1985-1 R&D Partnership --* -- Advanced Technology Center Future Gross Sales 6.00%* -- Sublicensing Fees --** -- Variety Investments, Ltd 20.00% -- University of Pennsylvania Net Sales of Licensed Products -- 7.00% Net Sales of Services -- 2.50% Sherman Baker 1.00% 0.50% ----- ----- 27.00% 10.00% ------ ------ ------ ------ *Royalties limited to specific rates of return as discussed in Notes 10(a) and (c) above. F-27 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies (Continued) ** The Company granted 12% royalties on sales from sublicensing. These royalties are also limited to specific rates of return as discussed in Note 11(c) above. h. The Company has a teaming agreement with Southwest Research Institute ("SWRI") and the University of Pennsylvania (Collectively known as the "Team"). On February 25, 1997, the United States Air Force awarded the Team a $2,500,000 Phase I contract to "determine the feasibility of [the Company's Electrochemical Fatigue Sensor ("EFS")] to improve the Unites States Air Force capability to perform durability assessments of military aircraft, including both air frames and engines through the application of EFS to specific military aircraft alloys". The Company is a subcontractor to SWRI and its share of the award is approximately $550,000 which is to be disbursed for specific purposes as defined in the contract. Note 11 - Investments The Company through a settlement with Tensiodyne Corporation received 6,625,000 of Class A Common Stock of Tensiodyne Corporation. These shares are restricted and subject to Rule 144 of the Securities and Exchange Commission. During 1996, the Company received approximately $17,750 through the sale of 50,000 shares of Tensiodyne Corporation stock. As of December 31, 1996, of the remaining 6,575,000 shares owned by the Company, approximately 690,000 shares were free trading. The Company is accounting for the free trading shares pursuant to FASB Statement 115. The 690,000 shares were valued at their market value using the price as quoted on the bulletin board at December 31, 1996, of $.08 per share. The Company has classified these shares as available for sale and the unrealized gain on these shares at December 31, 1996, amounting to $55,200 has been classified to stockholders' deficit. F-28 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 12 - Stockholders' Equity a. Warrants On August 10, 1994, the Company granted 994,500 Class A Warrants to Mr. Robert Bernstein, 170,000 Class A Warrants to Mr. Joel Freedman, and 535,500 Class A Warrants to certain preferred shareholders. Each Class A Warrant entitles the registered holder to purchase one share of Class A Common Stock of the Company for $.50. On December 15, 1995, the Company's Board of Directors extended the expiration date of the Warrants from August 22, 1996 to August 22, 1999. At the dates of the original grant and subsequent extension, the exercise price was greater than market value, therefore, no compensation costs were recognized. b. Class A Common Stock The holders of the Company's Class A Common Stock are entitled to one vote per share of common stock held. c. Class B Common Stock The holders of the Company's Class B Common Stock are not entitled to dividends, nor are they entitled to participate in any proceeds in the event of a liquidation of the Company. However the holders are entitled to 200 votes for each share of Class B Common held. d. Class A Preferred Stock During 1991, the Company sold to a group of 15 individuals 2,585 shares of $100 par value preferred stock and warrants to purchase 2,000 shares of common stock for a total consideration of $258,500. In the Company's spin off, these shares were exchanged for 350,000 shares of the Company's Class A Convertible Preferred Stock and 300,000 shares of its Class A Common Stock. The holders of these shares have a liquidation preference to receive out of assets of the Company, an amount F-29 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 12 - Stockholders' Equity (Continued) equal to $.72 per one share of Class A Preferred Stock. Such amounts shall be paid upon all outstanding shares before any payment shall be made or any assets distributed to the holders of the common stock or any other stock of any other series or class ranking junior to the Shares as to dividends or assets. These shares are convertible to shares of the Company's common stock at a conversion price of $.72 ("initial conversion price") per share of Class A Preferred Stock which will be adjusted depending upon the occurrence of certain events. The holders of these preferred shares shall have the right to vote and cast that number of votes which the holder would have been entitled to cast had such holder converted the shares immediately prior to the record date for such vote. The holders of these shares shall participate in all dividends declared and paid with respect to the Common Stock to the same extent had such holder converted the shares immediately prior to the record date for such dividend. e. Redeemable Preferred Stock The Company has authorized a class of 900,000 shares of preferred stock ($.001 par value) of which 100 shares have been designated Class B Preferred Shares. The holders of these shares have a liquidation preference to receive out of assets of the Company, an amount equal to $10,000 per share. Such amounts shall be paid upon all outstanding shares before any payment shall be made or any assets distributed to the holders of the common stock or any other stock of any other series or class ranking junior to the Shares as to dividends or assets. The holders of these preferred shares shall have the right to vote and cast one vote per share on all matters on which the holders of common stock have the right to vote. The holders of these shares shall be entitled by class to vote to elect one member of the board of directors and to vote as a class F-30 to remove any director so elected. The holders of these shares shall participate in all cash dividends declared and paid with respect to the MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 12 - Stockholders' Equity (Continued) to remove any director so elected. The holders of these shares shall participate in all cash dividends declared and paid with respect to the Common Stock based upon a set formula as defined in the Company's Class B Preferred Stock Certificate of Designation. These shares may be redeemed at the option of the Corporation at any time upon the payment of $10,000 per share, plus any unpaid dividend to which the holders are entitled. The shares shall be redeemed at the option of the holders thereof at any time after January 31, 2002. g. Issuances Involving Non-cash Consideration All issuances of the Company's stock for non-cash consideration have been assign a dollar amount equaling either the market value of the shares issued or the value of consideration received whichever is more readably determinable. The majority of the non-cash consideration received pertains to services rendered by consultants and others. Note 13 - Transactions With Management a. On December 10, 1992, the Company issued to Mr. Robert M. Bernstein, the President of the Company, 60,000 shares of the Company's Class B common stock. In exchange for the stock, Mr. Bernstein executed a five year non-interest bearing note for $15,000. The Note is non-recourse as the only security pledged for the obligation was the stock purchased. b. During 1993, Mr. Bernstein exercised warrants to purchase 56,000 shares of the Company's Class A common stock. Pursuant to the resolution on April 12, 1993, adjusting the per share amount from $10.00 to $2.50, Mr. Bernstein paid $560 and executed two five year non-interest bearing notes F-31 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 13 - Transactions With Management (continued) to the Company for $124,500 and $14,940. The Note is non-recourse as the only security pledged for the obligation was the stock purchased. c. On February 28, 1994, the Company authorized the issuance of 10,000 shares of Class A Common Stock to Mr. Bernstein for past services. d. In March 1994, Mr. Bernstein advanced the Company $48,750 of which $12,000 was canceled in exchange for the issuance of 1,200,000 shares of the Company's Class A Common Stock. Of these shares purchased, Mr. Bernstein sold 420,000 shares for $4,200 to Joel Freedman and certain preferred shareholders. e. In 1994, the president and a director of the Company purchased 278,550 shares of the Company's Class A common stock for $2,786. f. In 1995, the Company's Board of Directors amended the Company's By-Laws increasing the number of Directors from 2 to 3, and establishing an advisory board consisting of 7 people. The Company authorized the issuance of 58,000 shares of its Class A Common Stock to the new board member and authorized the issuance of 20,000 shares of its Class A Common Stock to each member of the advisory board. Each member must serve on the advisory board for at least 2 years or will have to return the issued shares back to the Company. g. On June 12, 1995, $108,000 of the total advances made by the Company's President to the Company was converted into an interest bearing loan. The loan is assessed interest at Mellon Bank, N.A. prime lending rate and is convertible into 520,000 shares of the Company's Class A Common Stock on a pro rata basis. The loan matures in five years and the conversion of the $108,000 or any portion thereof can occur any time prior to maturity. In March 1997, the President converted the balance owed him into 520,000 shares of Common Stock. F-32 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS h. In 1995, the Company forgave $154,600 on an obligation due from the Company's President in consideration for the President returning 62,000 shares of the Company's Class A Common Stock to the Company's Treasury. Note 13 - Transactions With Management (continued) i. During 1996, the Company's President made advances to the Company totaling approximately $43,250. During 1996, the Company paid back to the President approximately $64,676. During 1996, a loan owed by the Company to an unrelated third party in the amount of $55,000 was assigned to the Company's President. The total amounts owed the president of the Company as of December 31, 1995 and 1996 amounted to $136,540 and $179,544, respectively. The amount of accrued interest charged to operations on the President's loans were $5,268 in 1995, and $9,430 in 1996. In 1996, the Company issued the President 62,000 shares of its Class A Common Stock for services. Note 14 - Stock Option Plan In January 1996, the Company registered with the Securities Exchange Commission its 1996 Stock Option Plan. The plan was formed to encourage ownership of the Common Stock of the Company by key employees, advisors, consultants, and officers providing service to the Company. 120,000 shares of Class A Common Stock are reserved under the plan. The option price will be determined by a Committee appointed by the Company's Board of Directors. In the case of Incentive Stock Options granted to an optionee who owns more than 10% of the Company's outstanding stock, the option price shall be at least 110% of the fair market value of a share of common stock at date of grant. F-33 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS Note 14 - Stock Option Plan (continued) During 1996, the Company received $174,040 through the issuance of 70,000 shares of the Company's Class A Common Stock through the plan. Note 15 - Subsequent Events The Company is in the process of preparing a registration statement under the Securities Act of 1993 whereby the Company will register 369,172 shares of its common stock which will then distributed to shareholders of Matech. During the three month period ended March 31, 1997, the Company issued 100,000 shares of its Class A Common Stock. The amount received in 1997 to date amounted to approximately $78,256. The remaining balance due is secured by 3,300 shares of Nevada Manhattan common stock. During the three month period ended March 31, 1997, the Company cancelled the approximately $372,000 of accrued salary owed the Company's President in exchange for issuing to him 1,499,454 shares of the Company's Class A Common Stock. F-34 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS NOTES TO UNAUDITED FINANCIAL STATEMENTS Note 1. Summary of Accounting Policies In the opinion of the Company's Management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 1996 and 1995, and the results of operations and cash flows for the three month periods then ended. The operating results of the Company on a quarterly basis may not be indicative of the operating results for the full year. Note 2. Investments As of March 31, 1997, of the remaining 6,575,000 shares of Tensiodyne Corporation Common Stock owned by the Company, approximately 690,000 shares were free trading and were valued at their market value using the price as quoted on the bulletin board at March 31, 1997, of $.02 per share. The Company has classified these shares as available for sale and the unrealized loss on these shares at March 31, 1997, amounting to $41,400 has been classified to stockholders' deficit. F-35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, sales person, or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the distribution made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having beeen authorized by the Company. Neither the delivery of this Prospectus nor any distribution made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. This Prospectus does not constitute an offer to sell or solicitation to buy the Shares of the Company. MATERIAL TECHNOLOGIES, INC. 369,172 SHARES OF CLASS A COMMON STOCK PROSPECTUS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-0 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Fees and expenses incurred or to be incurred in connection with the distribution of securities being registered are as follows: Securities and Exchange Commission filing fee $11 State Securities Laws (Blue Sky) fees and expenses $5,000 (Estimated) Transfer Agent's Fees $500 (Estimated) Printing and mailing expenses $3,000 (Estimated) Legal fees and costs $30,000 (Estimated) Accounting fees and costs $5,000 Miscellaneous Expenses $3,000 (Estimated) ------ ----------- TOTAL $46,511 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS In accordance with Delaware general corporation law, the Company has included a provision in its Certificate of Incorporation to limit the personal liability of its directors for violation of their fiduciary duty. The provision serves to eliminate such directors' liability to the Company or its stockholders for monetary damages, except for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payment of dividends or unlawful stock purchases or redemptions, or (iv) any transaction from which a director derived an improper personal benefit. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On March 9, 1997, the Company's Board authorized the issuance 5,560,000 shares of its Class A Common Stock to Material Technology, Inc., in connection with the February 17, 1997 Stock Purchase Agreement among Montpilier Holdings, Inc., SecurFone America, Inc., Material Technology, Inc., and Robert M. Bernstein. Material Technology, Inc., will retain 560,000 shares and the remaining 5,000,000 shares are being distributed on the effective date of this registration statement to the holders of Material Technology, Inc.'s 5,000,000 shares of common stock in a ratio of one to one as follows: (a) 2,936,130 to Robert M. Bernstein, (b) 339,172 to 405 shareholders of Material Technology, Inc., under this registration statement, and (c) 1,724,698 shares to insiders and affiliates including 1,580,441 shares to the Baker Group. On March 9, 1997, the Company's Board authorized the issuance of 60,000 shares of Class B Common Stock to Robert M. Bernstein. On March 9, 1997, the Company's Board authorized the issuance of 350,000 shares Class A Preferred Stock to the Baker Group. On March 9, 1997, the Company's Board authorized the issuance of 15 shares of Class B Convertible Preferred to Tensiodyne Corporation. On March 9, 1997, the Company's Board authorized the issuance of 1,700,000 Class A Warrants, 994,500 to Robert M. Bernstein, 170,000 to Joel Freedman, and 535,500 to Sherman Baker and his associates. For additional information concerning these transactions, see "Principal Stockholders" and "Warrants." The securities were issued in reliance upon applicable exemptions including the exemption from the registration contained in Section 4(2) of the Securities Act of 1933, as amended (the "Act"). The issuances did not involve public offerings of securities, no general solicitation or advertising was involved in connection with the offering and the purchasers took for investment only and not with a view to distribution of the securities. ITEM 16. EXHIBITS - -------------------------------------------------------------------------------- Exhibit No. Description Page No. - -------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement among Montpilier Holdings, Inc., SecurFone America, Inc., Material Technology, Inc., and Robert M. Bernstein - -------------------------------------------------------------------------------- 2.2 Letter Agreement among Montpilier Holdings, Inc., Material Technology, Inc., and Robert M. Bernstein - -------------------------------------------------------------------------------- 3(i) Certificate of Incorporation of Material Technologies, Inc. - -------------------------------------------------------------------------------- 3(ii) Bylaws of Material Technologies, Inc. - -------------------------------------------------------------------------------- 4.1 Class A Convertible Preferred Stock Certificate of Designations - -------------------------------------------------------------------------------- 4.2 Class B Convertible Preferred Stock Certificate of Designations - -------------------------------------------------------------------------------- 5 Opinion of C. Timothy Smoot re legality - -------------------------------------------------------------------------------- 10.1 License Agreement Between Tensiodyne Corporation and the Trustees of the University of Pennsylvania - -------------------------------------------------------------------------------- 10.2 Sponsored Research Agreement between Tensiodyne Corporation and the Trustees of the University of Pennsylvania - -------------------------------------------------------------------------------- 10.3 License Agreement Between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania - -------------------------------------------------------------------------------- 10.4 Repayment Agreement Between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania - -------------------------------------------------------------------------------- 10.5 Teaming Agreement Between Tensiodyne Scientific Corporation and Southwest Research Institute - -------------------------------------------------------------------------------- 10.6 Letter Agreement between Tensiodyne Scientific Corporation, Robert M. Bernstein, and Stephen Forrest Beck and Handwritten modification. - -------------------------------------------------------------------------------- 10.7 Agreement Between Tensiodyne Corporation and Tensiodyne 1985-1 R&D Partnership is incorporated by reference from Exhibit 10.3 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.8 Amendment to Agreement Between Material Technology, Inc. and Tensiodyne 1985-1 R&D Partnership is incorporated by reference from Exhibit 10.6 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.9 Agreement Between Advanced Technology Center of Southeastern Pennsylvania and Material Technology, Inc. is incorporated by reference from Exhibit 10.4 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.10 Addendum to Agreement Between Advanced Technology Center of Southeastern Pennsylvania and Material Technology, Inc. is incorporated by reference from Exhibit 10.5 of Material Technology, Inc.'s S-1 Regis- tration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.11 Shareholder Agreement Between Tensiodyne Corporation, Variety Investments, Ltd. and Countryman Investments, Ltd. is incorporated by reference from Exhibit 10.7 of Material Technology, Inc.'s S-1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.12 Agreement and Plan of Reorganization By and Between Tensiodyne Corporation, Pegasus Technologies, Inc. and Lloyd and E. Anne Eisenhower and Doug Froom is incorporated by reference from Exhibit 2.1 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.13 Settlement Agreement and Modification to Agreement and Plan of Reorganization is incorporated by reference from Exhibit 2.3 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 10.14 Equipment Loan Agreement between Tensiodyne and the University of Pennsylvania is incorporated by reference from Exhibit 10.8 of Material Technology, Inc.'s S-1 Registration Statement, File No. 33-83526 which became effective on January 19, 1996. - -------------------------------------------------------------------------------- 23.1 Consent of Jonathan P. Reuben, C.P.A., An Accountancy Corporation - -------------------------------------------------------------------------------- 23.2 Consent of C. Timothy Smoot, Attorney - -------------------------------------------------------------------------------- 27 Financial Data Schedule - -------------------------------------------------------------------------------- ITEM 17. UNDERTAKINGS ITEM 512(h) - Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1993, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on the 28th day of April, 1997. Registrant: MATERIAL TECHNOLOGIES, INC. By: Robert M. Bernstein Robert M. Bernstein President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- Robert M. Bernstein Chairman of the Board, President, April 28, 1997 Robert M. Bernstein Chief Executive Officer, Chief Financial Officer (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) Joel Freedman Director and Secretary April 28, 1997 Joel Freedman John Goodman Director April 28, 1997 John Goodman EX-2.1 2 STOCK PURCHASE AGREEMENT EXHIBIT 2.1 STOCK PURCHASE AGREEMENT AMONG MONTPILIER HOLDINGS, INC. SECURFONE AMERICA, INC. MATERIAL TECHNOLOGY, INC. and ROBERT M. BERNSTEIN DATED AS OF FEBRUARY __, 1997 TABLE OF CONTENTS Page ---- 1. Sale and Purchase of Shares. 1 1.1 Sale of Shares. 1 1.2 Payment of the Purchase Price 1 1.3 Delivery of Shares. 1 1.4 Reimbursement of Expenses 1 1.5 Consulting Fee to RMB 2 2. Closing; Closing Date 2 3. Representations and Warranties of the Company 2 3.1 Due Incorporation and Authority 2 3.2 Authority to Execute and Perform Agreement 3 3.3 Qualification; Subsidiaries, Etc. 3 3.4 Outstanding Capital Stock 3 3.5 Options or Other Rights 4 3.6 Certificate of Incorporation and By-laws 4 3.7 Financial Statements 4 3.8 No Material or Adverse Change 5 3.9 Tax Matters 5 3.10 Compliance with Laws 5 3.11 No Breach 5 3.12 Actions and Proceedings 6 3.13 Contracts and Other Agreements 6 3.14 Real Property 7 3.15 Environmental Matters 8 3.16 Intangible Property 9 3.17 Title to Assets 10 3.18 Liabilities 10 3.19 Employee Obligations 10 3.20 Employee Benefit Plans 11 3.21 Officers, Directors and Key Employees 11 3.22 Operations of Matech 12 3.23 Potential Conflicts of Interest 13 3.24 Full Disclosure 13 4. Representations and Warranties of MHI 14 4.1 Title to Shares. 14 4.2 Authority to Execute and Perform Agreement 14 4.3 Purchase for Investment 14 5. Representations and Warranties of SecurFone 15 5.1 Due Incorporation 15 5.2 Authority to Execute and Perform Agreement 15 5.3 No Breach 15 5.4 Qualification; Subsidiaries, Etc. 15 5.5 Outstanding Capital Stock 16 5.6 Options or Other Rights 16 5.7 Certificate of Incorporation and By-laws 16 5.8 Financial Statements 16 5.9 No Material or Adverse Change 17 5.10 Tax Matters 17 5.11 Compliance with Laws 17 5.12 No Breach 17 5.13 Actions and Proceedings 18 5.14 Contracts and Other Agreements 18 5.15 Real Property 19 5.16 Environmental Matters 20 5.17 Intangible Property 21 5.18 Title to Assets 22 5.19 Liabilities 22 5.20 Employee Obligations 22 5.21 Employee Benefit Plans 23 5.22 Officers, Directors and Key Employees 23 5.23 Operations of SecurFone 24 5.24 Potential Conflicts of Interest 25 5.25 Full Disclosure 25 6. Covenants and Agreements 26 6.1 Spin-Off of Business of Matech 26 6.2 RMB's Accrued Salary and Class B Stock and Convertible Notes 26 6.3 Preferred Stock of Matech 26 6.4 No Sale of Stock by RMB 27 6.5 Conduct of Business of SecurFone 27 6.6 Continued Effectiveness of Representations and Warranties 27 6.7 Corporate Examinations and Investigations 27 6.8 Expenses 28 6.9 Indemnification of Brokerage 28 6.10 Further Assurance 28 7. Conditions Precedent to the Obligation of MHI and SecurFone to Close 29 7.1 Representations and Covenants 29 7.2 Governmental Permits, Approvals and Third Party Consents 29 7.3 Legal Proceedings 29 7.4 Certified Copy of Resolutions 29 7.5 Officer's Certificate 29 7.6 Approval of Counsel to the Buyer 30 7.7 Releases 30 7.8 Resignations 30 7.9 Lock-Up and Registration Rights Agreement 30 7.10 Delivery of Documents 30 8. Conditions Precedent to the Obligation of Matech and RMB to Close 30 8.1 Representations and Covenants 30 8.2 Governmental Permits and Approvals 31 8.3 Certified Copy of Resolutions 31 8.4 Officer's Certificates 31 8.5 Approval of Counsel to Matech and RMB 31 8.6 Completion of Spin-Off 31 8.7 Pledge of Newco Shares. 31 8.8 Consulting Agreement 31 9. Survival of Representations and Warranties 31 10. General Indemnification 32 10.1 Obligation of RMB to Indemnify 32 10.2 Obligation of SecurFone to Indemnify 32 10.3 Notice and Opportunity to Defend 33 10.3.1 Notice of Asserted Liability 33 10.3.2 Opportunity to Defend 33 11. Termination of Agreement 34 11.1 Termination 34 11.2 Survival 34 12. Resolution of Disputes 34 12.1 Required Notice and Limitations Period 35 12.2 Procedures 35 12.3 The Arbitrator's Decision 37 13. Miscellaneous 37 13.1 Certain Definitions 37 13.2 Publicity 38 13.3 Notices 38 13.4 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies 39 13.5 Governing Law 39 13.6 Binding Effect; Assignment 40 13.7 Variations in Pronouns 40 13.8 Counterparts 40 13.9 Exhibits and Schedules 40 13.10 Headings 40 13.11 Entire Agreement 40 EXHIBITS A: Escrow Agreement Section 1.2(i) B: Note Section 1.2(ii) C: Form of Release Section 7.7 D: Form of Letter of Resignation Section 7.8 E: Consulting Agreement Section 8.8 SCHEDULES COMPANY 3.3 -- Qualifications 3.5 -- Options or Other Rights 3.6 -- Certificate of Incorporation and By-laws 3.7 -- Financial Statements 3.10 -- Compliance with Laws 3.11 -- Approvals or Consents 3.12 -- Actions and Proceedings 3.13 -- Contracts 3.14 -- Real Property 3.15 -- Environmental Matters 3.16 -- Intangible Property 3.17 -- Liens or Encumbrances 3.18 -- Liabilities 3.19 -- Employee Obligations 3.20 -- Employee Benefit Plans 3.21 -- Officers, Directors and Key Employees 3.22 -- Operations of the Company 3.23 -- Potential Conflicts of Interest SECURFONE 5.3 -- Approvals or Consents 5.4 -- Qualifications 5.6 -- Options or Other Rights 5.7 -- Certificate of Incorporation and By-laws 5.8 -- Financial Statements 5.11 -- Compliance with Laws 5.12 -- Approvals or Consents 5.13 -- Actions and Proceedings 5.14 -- Contracts 5.15 -- Real Property 5.16 -- Environmental Matters 5.17 -- Intangible Property 5.18 -- Liens or Encumbrances 5.19 -- Liabilities 5.20 -- Employee Obligations 5.21 -- Employee Benefit Plans 5.22 -- Officers, Directors and Key Employees 5.23 -- Operations of SecurFone 5.24 -- Potential Conflicts of Interest 6.6 -- Certain Affiliated Stockholders 6.9 -- Brokers STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") dated as of the __th day of February 1997, among MONTPILIER HOLDINGS, INC., a Nevada corporation ("MHI"), SECURFONE AMERICA, INC., a Delaware corporation ("SecurFone"), and ROBERT M. BERNSTEIN, a resident of Los Angeles, California ("RMB"), and MATERIAL TECHNOLOGY, INC. ("Matech"), a Delaware corporation. RECITALS: MHI owns all of the issued and outstanding shares of capital stock of SecurFone. RMB owns or controls (i) 916,676 shares of Class A Common Stock of Matech, constituting 33.45% of the issued and outstanding shares of such class and (ii) 60,000 shares of Class B Common Stock of Matech, constituting 100% of the issued and outstanding shares of such class. At the Closing, RMB will own or control 2,371,130 shares of the Class A Common Stock of Matech, constituting 47.4% of the 5,000,000 then issued and outstanding shares of Class A Common Stock, and no shares of Class B Common Stock will be outstanding. Matech wishes to sell, and MHI wishes to purchase, 4,500,000 (as adjusted to reflect the 1-for-10 reverse stock split described in Section 6.1 of this Agreement) authorized but unissued shares of Class A Common Stock of Matech (the "Shares"), which shares will constitute 90% of the Class A Common Stock to be issued and outstanding as of the Closing Date, upon the terms and conditions of this Agreement. Accordingly, the parties agree as follows: 1. SALE AND PURCHASE OF SHARES. 1.1 SALE OF SHARES. At the closing provided for in Section 2 (the "Closing"), (i) Matech shall sell and MHI shall purchase all of the Shares for a purchase price consisting of all of the 3,000 issued and outstanding shares of common stock of SecurFone. 1.2 PAYMENT OF THE PURCHASE PRICE . The Purchase Price shall be paid by MHI by delivery to Matech at Closing of certificate(s) representing all of the 3,000 issued and outstanding shares of SecurFone, duly endorsed in blank for transfer. 1.3 DELIVERY OF SHARES. At the Closing, Matech shall deliver or cause to be delivered to MHI stock certificates representing all of the Purchased Shares, duly endorsed in blank for transfer. 1.4 REIMBURSEMENT OF EXPENSES . SecurFone agrees to reimburse Matech for its expenses, in an amount equal to $120,000, incurred in connection with the transactions 1 contemplated by this Agreement. No proof of these expenses need be provided to SecurFone. This payment shall be made by (1) delivery to Kohrman Jackson & Krantz P.L.L. (the "Escrow Agent"), at the execution of this Agreement of $70,000, by certified check or by wire transfer of immediately available funds, payable to the order of Newco, as defined in Section 6.1 hereof, to be held until the Closing and to be distributed by the Escrow Agent in accordance with the terms of the Escrow Agreement attached hereto as Exhibit A; and (2) delivery to Newco at the Closing of a non-recourse promissory note of SecurFone, substantially in the form of Exhibit B hereto (the "Note"). The Note shall be in the principal amount of $50,000, shall not bear any interest, and shall be payable in two installments of $25,000 on the date that is 30 days after Closing and $25,000 on the date that is 75 days after Closing. Payment of the Note shall be secured by a pledge to Newco of 500,000 shares of common stock of Newco that will be retained by Matech and not distributed to Matech's shareholders, pursuant to the terms of a pledge agreement to be agreed to by SecurFone and Matech prior to Closing. 1.5 CONSULTING FEE TO RMB . SecurFone agrees to pay a consulting fee to RMB in the amount of $5,000 in consideration for his services pursuant to the Consulting Agreement referred to in Section 8.8 of this Agreement. This amount shall be deposited into escrow together with the $70,000 deposited pursuant to Section 1.4 of this Agreement and paid to RMB at the closing. 2. CLOSING; CLOSING DATE. The closing of the sale and purchase of the Purchased Shares contemplated hereby shall take place at the offices of Matech, 11835 West Olympic Boulevard, Los Angeles, California, at 10:00 a.m. local time, on the third business day after the effectiveness of the registration statement on Form S-1 (the "Registration Statement") to be filed by Matech with the Securities and Exchange Commission with respect to the spin-off of its subsidiary, as described herein (the "Closing"), or such other time, date or place as MHI and Matech agree in writing, but in no event later than May 30, 1997. The time and date upon which the Closing occurs is hereinafter referred to as the "Closing Date." 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the date of this Agreement and as of the Closing Date, Matech and RMB, jointly and severally, represent and warrant to MHI as follows: 3.1 DUE INCORPORATION AND AUTHORITY . Matech is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and lawful authority to own, lease and utilize its assets, properties and business and to carry on its business as such business is presently being conducted and as it is presently contemplated that such business will be conducted in the future. 2 3.2 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT . Matech and RMB have the full legal right and power and all authority and approval required to enter into, execute and deliver this Agreement, and to perform fully their respective obligations hereunder. This Agreement has been duly executed and delivered by Matech and RMB. This Agreement is the valid and binding obligation of Matech and RMB, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights, or by limitations in the availability of the remedy of specific performance or injunctive relief. 3.3 QUALIFICATION; SUBSIDIARIES, ETC. Matech is duly qualified or otherwise authorized as a foreign corporation to transact business and is in good standing in each jurisdiction where such qualification or authorization is required, which jurisdictions are set forth on Schedule 3.3. The failure to obtain such qualification or authorization in any other jurisdiction will not adversely affect the "condition of Matech" (as defined in Article 13). Except as set forth on Schedule 3.3, Matech does not directly or indirectly own any interest in any other person, corporation, partnership or other entity. 3.4 OUTSTANDING CAPITAL STOCK. Matech is authorized to issue (i) 100,000,000 shares of Class A Common Stock, $.001 par value, of which 2,740,546 shares are issued and outstanding as of the date of this Agreement and 5,000,000 shares will be issued and outstanding as of the Closing Date; (ii) 300,000 shares of Class B Common Stock, $.001 par value, of which 60,000 shares are issued and outstanding as of the date of this Agreement and no shares will be outstanding as of the Closing Date; (iii) 10,000,000 shares of Class A Preferred Stock, $.001 par value, of which 350,000 shares are issued and outstanding as of the date of this Agreement and no shares will be outstanding as of the Closing Date; and (iv) 510 shares of Class B Preferred Stock, $.001 par value, none of which are issued and outstanding. No other class of capital stock of Matech is authorized or outstanding. All of the Shares are duly authorized and are validly issued, fully paid and nonassessable and are not subject to any preemptive rights. There are no voting trust agreements or other contracts, agreements, or arrangements restricting voting or dividend rights or transferability with respect to the Shares. Matech has not violated any federal, state or local law, ordinance, rule or regulation in connection with the offer for sale or sale and issuance of its outstanding shares of capital stock or any other securities. RMB represents and warrants that since December 13, 1996, he has sold no more than 26,000 shares of Class A Common Stock of Matech. The list of holders of Matech's Class A Comon Stock, dated December 19, 1996, previously delivered to MHI and SecurFone, is true and correct as of the date of this Agreement, except that an additional 100,000 shares were issued between December 19, 1996 and the date of this Agreement, and 3 each of the share certificates identified with the letter "I" in such list contains a legend restricting the transfer of the shares represented by such certificate, without compliance with or exemption from the provisions of the Securities Act of 1933, as amended. 3.5 OPTIONS OR OTHER RIGHTS . Except as set forth on Schedule 3.5, there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind, and there is no commitment of Matech to issue or grant such right, to purchase or otherwise to receive from Matech any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other security of Matech, and there is no outstanding security of any kind convertible or exchangeable into such capital stock. 3.6 CERTIFICATE OF INCORPORATION AND BY-LAWS . Matech has heretofore delivered to the Buyer true and complete copies of the Certificate of Incorporation and of the By-laws of Matech (certified by the secretary of Matech) as in effect on the date hereof; prior to the Closing Date, Matech will deliver a copy if its Certificate of Incorporation certified by the Delaware Secretary of State. Matech's corporate record book and stock transfer records shall accurately reflect all action taken through the Closing Date. 3.7 FINANCIAL STATEMENTS . The audited balance sheets of Matech as of December 31, 1994, 1995 and 1996, and the related statements of income and retained earnings and cash flow for the 12 month periods then ended, including the notes thereto (the "Annual Financial Statements"), shall be delivered to MHI by Matech prior to the filing of the Registration Statement. The Annual Financial Statements will be certified by a firm of independent certified public accountants and will be accurate and complete and present fairly in all material respects the financial position of Matech as at such dates and the results of operations of Matech for such respective periods, in each case in accordance with generally accepted accounting principles consistently applied for the periods covered thereby and prepared on a basis consistent with the Matech's prior practices. Except as reflected on said financial statements, as of the dates thereof there were no accrued or undisclosed liabilities, there were no special or non-recurring charges against income, and there were no matters for which reserves should be established. 3.8 NO MATERIAL OR ADVERSE CHANGE . Since December 31, 1996, there has been no material or adverse change in the condition of Matech, and neither Matech nor RMB knows of any such change which is threatened, nor has there been any damage, destruction or loss, whether or not covered by insurance, which could have or has had a material or adverse effect on the condition of Matech. 3.9 TAX MATTERS . All tax returns (federal, state, county and local) which were required to be filed through December 31, 1996 will be duly filed with the appropriate taxing 4 authority, and Matech will pay all taxes shown as due and payable on such returns, prior to the filing of the Registration Statement. All payments of taxes (including amounts withheld from employees) due and payable through the Closing, including, without limitation, federal, state and local income taxes, personal property taxes, sales taxes, excise taxes and real estate taxes, will be fully paid prior to the Filing of the Registration Statement. Matech has not made or entered into any agreement or arrangement pursuant to which the statute of limitations, or any other time limitations, or the right by or of the Internal Revenue Service or any other tax body or authority to audit, review or challenge any tax return filed by Matech, would be extended beyond the periods provided by law or regulation. 3.10 COMPLIANCE WITH LAWS . Matech is not in violation of any applicable federal, state, local or foreign law, ordinance, regulation, order, judgment, injunction, award, decree or other requirement of any governmental or regulatory body, court or arbitrator, which violation could have a material or adverse effect on the condition of Matech. Matech has all licenses, permits, orders or approvals of, and has made all required registrations with, any governmental or regulatory body that are material to the conduct of the business of Matech and to its use of its properties and assets (collectively, "Permits"). The Permits are listed on Schedule 3.10 and are in full force and effect. No material violations are or have been recorded in respect of any Permit, and no proceeding is pending or threatened to revoke or limit any Permit. There is no federal, state or local ordinance, regulation or order which adversely effects or may adversely effect the ability of Matech to produce and distribute its products or otherwise conduct its business. 3.11 NO BREACH . The execution and delivery by Matech of this Agreement, the consummation of the contemplated transactions (including the transfer of assets to a new subsidiary), and the performance by Matech of this Agreement in accordance with the terms and conditions hereof, will not (i) require the approval or consent of any federal, state, county, local or other governmental regulatory body (domestic or foreign), or the approval of any other person or entity, except as set forth on Schedule 3.11; (ii) conflict with or result in any breach or violation of any of the terms of, result in a material modification of, or otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, the Certificate of Incorporation or Bylaws of Matech, or any material contract or other agreement to which Matech is a party or by or to which Matech's assets or properties may be bound or subject; (iii) violate any order, writ, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, Matech or upon the assets of Matech; (iv) violate any statute, law or regulation of any jurisdiction, which violation could have a material or adverse effect on the condition of Matech; 5 U (v) violate or result in the revocation or suspension of any Permit, or (vi) result in the imposition of any lien, security interest or claim in favor of any person or entity other than MHI. 3.12 ACTIONS AND PROCEEDINGS . There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against Matech. Except as set forth on Schedule 3.12, there are no actions, suits or claims or legal, administrative or arbitral proceedings or investigations (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) pending, or to the knowledge of the Seller threatened, against or involving Matech or any of its properties or assets. All notices required to have been given to any insurance company listed as insuring against any action, suit or claim set forth on Schedule 3.12 have been timely and duly given and no insurance company has asserted, orally or in writing, that such claim is not covered by the applicable policy relating to such claim or has reserved its right to so assert at a later date. Schedule 3.12 also describes any dispute with or claim from a sales agent, broker or customer in connection with or related to a product warranty claim, commission, fee, pricing or any other monetary dispute which involves $5,000 or more. 3.13 CONTRACTS AND OTHER AGREEMENTS . Schedule 3.13 sets forth all of the following contracts and other agreements to which Matech is a party or by or to which it or its assets or properties are bound or subject: (i) contracts and other agreements with any current or former employee, officer, director or affiliate or with any other current employee or consultant or with an entity in which any of the foregoing is a controlling person; (ii) contracts and other agreements with any labor union or association representing any employee; (iii) contracts and other agreements with any person to sell, distribute or otherwise market, or to produce, any products or services of Matech; (iv) contracts and other agreements, pursuant to which Matech will receive payments in excess of $10,000; (v) contracts and other agreements for the sale of any of its assets other than in the ordinary course of business or for the grant to any person of any option or preferential rights to purchase any of its assets; (vi) joint venture agreements; (vii) contracts and other agreements under which it agrees to indemnify any party or to share tax liability of any party; (viii) contracts or other agreements pursuant to which Matech is a licensor or licensee of any rights; (ix) contracts and other agreements that can be canceled without liability, premium or penalty only on ninety days' or more notice; (x) contracts and other agreements with customers, distributors or suppliers for the sharing of fees, the rebating of charges or other similar arrangements; (xi) contracts and other agreements containing covenants of Matech not to compete in any line of business or with any person in any geographical area or covenants of any other person not to compete with Matech in any line of business or in any geographical area; (xii) contracts and other agreements relating to the 6 acquisition by Matech of any operating business or the capital stock of any other person; (xiii) contracts and other agreements requiring the payment to any person of an override or similar commission or fee; (xiv) contracts and other agreements relating to the borrowing of money; or (xv) any other contracts and other agreements whether or not made in the ordinary course of business (other than those reflected on any other Schedule) pursuant to which payments in excess of $5,000 may be expected to be made. All of the foregoing shall be collectively referred to hereinafter as the "Contracts". Matech has made available to MHI true, correct and complete copies of all of the Contracts. All of the Contracts are valid, binding and in full force and effect. Except as described on Schedule 3.13, Matech is not in default under any of the Contracts, nor, to the knowledge of Matech and RMB, is any other party to any of the Contracts in default thereunder in any material respect, nor does any condition exist that with notice or lapse of time or both would constitute a material default thereunder. Except as separately identified on Schedule 3.13, no approval or consent of any person is needed in order that any of the Contracts continue in full force and effect following the consummation of the transactions contemplated hereby. Schedule 3.13 also lists all contracts and other agreements currently in negotiation or proposed by Matech of a type which if entered into by Matech would be required to be listed on Schedule 3.13 or on any other Schedule. Matech has made available to MHI true and correct copies of the latest drafts or summaries of all such proposed contracts and other agreements and copies of all documents relating thereto. 3.14 REAL PROPERTY . Matech owns no real property. Matech leases certain office space located at 11835 West Olympic Boulevard, East Tower 705, Los Angeles, California 90064 ("Leased Property"), a copy of which lease has been furnished to MHI. Matech is not in default under any lease for Leased Property, and, with respect to Matech, there is no default or event of default or set of facts which has occurred which, with notice or lapse of time or both, would constitute a default. The Leased Property is zoned to permit its present use, there is no record of any violation of any zoning, building or other restriction relating to the use of the Leased Property, the existing use and current operation of the building or buildings on the Leased Property does not, and the past operations did not, violate any applicable environmental laws or regulations and all certificates, permits, licenses and other authorizations of governmental bodies or authorities which are necessary to permit the use and occupancy of the Leased Property for its current operations have been obtained by Matech, have not been violated or breached, and are in full force and effect. The only real property in which Matech has any interest is the Leased Property described above. Such property shall be referred to hereinafter as the "Property".] 7 3.15 ENVIRONMENTAL MATTERS . The terms used in this Section 3.15 shall have the meanings specified by applicable local, state, federal or foreign statutes or regulations with the respect to environmental protection, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 ET SEQ., and regulations promulgated thereunder, each as amended ("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., and regulations promulgated thereunder, each as amended ("RCRA"), and other laws and regulations concerning water pollution, groundwater protection, air pollution, solid wastes, hazardous wastes, spills or other releases of toxic or hazardous substances, transportation and disposal of hazardous substances, materials and wastes and occupational or employee health and safety (collectively, the "environmental laws"). (a) There has been no past, and there is no current or presently anticipated, storage, disposal, generation, manufacture, refinement, transportation, production or treatment of toxic wastes, solid wastes, hazardous wastes or hazardous substances by Matech (or any of its predecessors-in-interest or any predecessor owner or operator of any of the Property) at, upon, or away from any of the Property. There has been no spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto any of the Property, or into the environment surrounding any of the Property, of any toxic wastes, solid wastes, hazardous wastes or hazardous substances. No asbestos fibers or materials or polychlorinated biphenyls (PCBs) are on or in any of the Property. (b) None of the Property has previously been used, is now being used, or is contemplated to be used, for the treatment, collection, storage or disposal of any refuse or objectionable wastes so as to require a permit or approval from the United States Environmental Protection Agency (the"EPA") or any state agency responsible for protection of the environmental (a "State EPA"). (c) None of the Property has previously been used, is now being used, or is contemplated to be used, for the generation, transportation, treatment, storage or disposal of any hazardous wastes subject to regulation by the EPA or any State EPA pursuant to the environmental laws. (d) No written reports of environmental audits or internal audits relating to environmental matters have been prepared within the last five years, and no citations, orders and decrees have been issued within the last five years by, for or on behalf of Matech and/or concerning any of the Property by or with any governmental agency with respect to the treatment, storage or disposal of hazardous wastes or with respect to air, water and noise pollution. Matech has not received notification pursuant to CERCLA or any of the 8 environmental laws, or any regulations thereunder, of any potential liability with the respect to the clean-up of any waste disposal site at which it has disposed of any hazardous substances or with respect to any other alleged violation of any of the environmental laws. 3.16 INTANGIBLE PROPERTY . Schedule 3.16 sets forth all patents, trademarks, copyrights, service marks and trade names, all applications for any of the foregoing, and all permits, grants and licenses or other rights running to or from Matech relating to any of the foregoing that are material to the business of Matech (collectively, "Patents and Trademarks"). Matech has the right to use, free and clear of any claims or rights of others, all trade secrets, inventions, know how, processes, logos and technology, designs utilized in or incident to the conduct of its business as presently conducted or as being developed ("Trade Secrets"). Except as set forth on Schedule 3.16, Matech does not have any notice that any other person or entity disputes Matech's ownership or right to use any Patents and Trademarks and/or Trade Secrets, or notice of any claim of any other person or entity relating to any of the Patents and Trademarks or any of the Trade Secrets of Matech, and neither Matech nor RMB knows of any basis for any such dispute or claim. Neither Matech nor RMB has any knowledge that any person or entity has infringed upon the rights of Matech with respect to any Patents and Trademarks or Trade Secrets, and Matech has not infringed upon any patent, copyright, trademark, trade secret or other intellectual property right of any other person or entity. The books of account and other corporate records of Matech are complete and correct in all material respects and have been maintained in accordance with good business practice. Schedule 3.16 lists all bank accounts maintained by Matech and the names and capacities of all persons authorized to draw thereon or who have access thereto. 3.17 TITLE TO ASSETS . Matech owns outright and has good and marketable title to all of the assets used in its business, including, without limitation, all of the assets reflected on the Balance Sheet, in each case free and clear of any lien or other encumbrance, except for (i) liens or encumbrances specifically described in Schedule 3.17 hereto; (ii) assets disposed of, or subject to purchase or sales orders, in the ordinary course of business since the Balance Sheet Date; (iii) liens or other encumbrances securing taxes, assessments, governmental charges or levies, or the claims of materialmen, carriers, landlords and like persons, all of which are not yet due and payable; or (iv) minor liens or other encumbrances of a character that do not substantially impair the assets to which they apply. 3.18 LIABILITIES . As at December 31, 1996, Matech does not have any indebtedness, liability, claim or loss, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise, of a kind required by generally accepted accounting principles to be set forth on a financial statement or in the notes thereto ("Liabilities") that were 9 not fully and adequately reflected or reserved against on the Balance Sheet or described in the notes to the Financial. Matech has not, except in the ordinary course of business, incurred any Liabilities since December 31, 1996. 3.19 EMPLOYEE OBLIGATIONS . Matech has no policies with respect to vacation pay, holiday and/or sick pay, severance pay, pension and profit-sharing contributions, health, medical or any other type of employee benefit plan to which Matech presently contributes or is required to contribute, nor is Matech indebted to any employee other than for wages and benefits earned during the current payroll period which are not yet due and payable and compensation due to RMB as disclosed in the financial statements. There are no controversies pending between Matech and any of its employees, which controversies have affected or may affect materially and adversely the condition of Matech (as defined in Article 13). Matech has complied with all applicable federal, state and local statutes relating to the employment of labor, including, without limitation, the Occupational Safety and Health Act ("OSHA"), the Fair Labor Standards Act, the National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, all as amended, and similar state and local statutes; and Matech has complied with all applicable federal, state and local statutes relating to wages, fringe benefits and the payment of withholding and Social Security taxes, and Matech is not liable for any arrearage in the payment of wages or any taxes or penalties for failure to comply with any of the foregoing. 3.20 EMPLOYEE BENEFIT PLANS . Schedule 3.20 contains a true and complete list of all pension, profit sharing, retirement, deferred compensation, stock purchase, stock option, incentive, bonus, vacation, severance, disability, hospitalization, medical insurance, life insurance and other employee benefit plans (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), programs or arrangements maintained by Matech or under which Matech has any obligations (other than obligations to make current wage or salary payments or to pay sales commissions to employees or agents whose employment or engagement may be terminated by Matech without penalty or breach by giving a termination notice of 30 days or less) in respect of, or which otherwise cover, any of the current or former officers or employees of Matech, or their beneficiaries (hereinafter individually referred to as a "Plan" and collectively referred to as the "Plans"). Matech has delivered or made available to MHI true and complete copies of all documents, as they may have been amended to the date hereof, embodying or relating to the Plans. Except as specifically set forth in Schedule 3.20, (a) Matech has made all payments due and payable by Matech to date under or with respect to each Plan, and all amounts properly 10 accrued to date as liabilities of Matech under or with respect to each Plan which have not been paid have been recorded on the books of Matech; (b) Matech has performed all material obligations required to be performed by it under, and is not in default under or in violation of, any Plan; and (c) Matech is in compliance in all material respects with the requirements prescribed by all statutes, orders or governmental rules or regulations applicable to the Plans, including, without limitation, ERISA and the Code 3.21 OFFICERS, DIRECTORS AND KEY EMPLOYEES . The Registration Statement will set forth the name and total compensation of each person who is now or has been during the last three fiscal years of Matech an officer or director of Matech or who is now or has been during the last three fiscal years of Matech an employee, consultant, agent or other representative of Matech whose annual rate of compensation (including bonuses, profit sharing and commissions) exceeds or exceeded $60,000. Since December 31, 1996, except as set forth in the pending contract with the U.S. Air Force, Matech has not made a commitment or agreement to increase the compensation or to modify the conditions or terms of employment of any such person. None of such persons currently holding such a position has threatened to cancel or otherwise terminate such person's relationship with Matech and none of such persons has utilized or has threatened to utilize any Trade Secrets of Matech in competition with Matech. 3.22 OPERATIONS OF MATECH . Except as to be set forth in the Registration Statement or in Schedule 3.22 to be attached on the Closing Date, since December 31, 1996, Matech has not: (i) declared or paid any dividends or declared or made any other distributions of any kind to its shareholders, or made any direct or indirect redemption, retirement, purchase or other acquisition of any shares of its capital stock; (ii) incurred any indebtedness for borrowed money; (iii) reduced its cash or short term investments or their equivalent, other than to meet cash needs arising in the ordinary course of business, consistent with past practices; (iv) waived any material right under any Contract; (v) made any material change in its accounting methods or practices or made any material change in depreciation or amortization policies or rates adopted by it; (vi) materially changed any of its business policies, including, without limitation, advertising, distributing, marketing, pricing, purchasing, personnel, sales, returns or budget; 11 (vii) except as set forth in the pending contract with the U.S. Air Force, made any wage or salary increase or bonus, or increase in any other direct or indirect compensation, or any payment or commitment to pay any severance or termination pay to any of its officers, directors, employees, consultants, agents or other representatives, or any accrual for or commitment or agreement to make or pay the same; (viii) made any loan or advance to any of its shareholders, officers, directors, employees, consultants, agents or other representatives; (ix) except in the ordinary course of business, incurred or assumed any obligation or liability (whether absolute or contingent and whether or not currently due and payable); (x) disposed of any property, equipment or assets except for inventory disposed of in the ordinary course of business or made any acquisition of all or any part of the assets, properties, capital stock or business of any other person; (xi) paid, directly or indirectly, any of its material Liabilities before the same became due in accordance with its terms or otherwise than in the ordinary course of business; (xii) terminated or failed to renew, or received any written threat (that was not subsequently withdrawn) to terminate or fail to renew, any contract or other agreement that is or was material to the condition of Matech; (xiii) except in the ordinary course of business, entered into or amended any Contract; (xiv) merged or consolidated with any other person, firm, corporation or entity; (xv) failed to maintain in full force and effect policies of insurance of the same type, character and coverage as the policies currently carried; or (xvi) amended, changed or modified its Certificate of Incorporation or By-laws. 3.23 POTENTIAL CONFLICTS OF INTEREST . Except as to be set forth in the Registration Statement , neither any officer, director or affiliate of Matech, nor any entity controlled by any such officer, director or affiliate, nor RMB, nor any relative or spouse (or relative of such spouse) of RMB or of any such officer, director or affiliate: (i) owns, directly or indirectly, any interest in (excepting less than 1% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any person which is, or is engaged in business as, a competitor, lessor, lessee, distributor or supplier of Matech; 12 (ii) owns, directly or indirectly, in whole or in part, any tangible or intangible property material to the condition of Matech that Matech uses in the conduct of business; or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, Matech, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof. 3.24 FULL DISCLOSURE . All documents and other papers delivered by or on behalf of Matech or RMB in connection with this Agreement and the transactions contemplated hereby are true, complete and authentic in all material respects. This Agreement, including the Schedules and Exhibits hereto, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. No representation or warranty of Matech or RMB contained in this Agreement contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not materially false or misleading. There is no fact that Matech or RMB has not disclosed to MHI in writing that materially adversely affects the condition of Matech or the ability of Matech to perform this Agreement. 4. REPRESENTATIONS AND WARRANTIES OF MHI. As of the date of this Agreement and as of the Closing Date, MHI represents and warrants to Matech and RMB as follows: 4.1 TITLE TO SHARES. MHI owns beneficially and of record, free and clear of any lien, option or other encumbrance, and has full power and authority to convey free and clear of any lien, claims, charges, assessments, adverse intent or other encumbrance, all of the 3,000 issued and outstanding shares of common stock of SecurFone, and, in accordance with Section 1.2, MHI will convey to Matech good and valid title thereto, free and clear of any lien or other encumbrance. 4.2 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT . MHI has the full legal right and power and all authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered by MHI and is the valid and binding obligation of MHI enforceable in accordance with its terms. The execution and delivery by MHI of this Agreement, the consummation of the transactions contemplated hereby and thereby and the performance by MHI of this Agreement in accordance with its respective terms 13 and conditions will not (i) require the approval or consent of any foreign, federal, state, county, local or other governmental or regulatory body or the approval or consent of any other person which has not been obtained and disclosed to Matech; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice or lapse of time or both constitute) a default under, any statute, regulation, order, judgment or decree applicable to MHI or to the shares of SecurFone held by MHI, or any instrument, contract or other agreement to which MHI is a party or by or to which MHI is or the shares of SecurFone held by MHI are bound or subject; (iii) result in the creation of any lien or other encumbrance on the shares of SecurFone held by MHI; or (iv) conflict with or result in any breach or violation of any instrument governing or applicable to the MHI. 4.3 PURCHASE FOR INVESTMENT . MHI is purchasing the Shares for investment and not for resale or distribution. 5. REPRESENTATIONS AND WARRANTIES OF SECURFONE. As of the date of this Agreement and as of the Closing Date, SecurFone represents and warrants to Matech and RMB as follows: 5.1 DUE INCORPORATION . SecurFone is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to own, lease and operate its assets and business and to carry on its business as now being and as heretofore conducted. 5.2 AUTHORITY TO EXECUTE AND PERFORM AGREEMENT . SecurFone has the full legal right and power and all authority and approval required to enter into, execute and deliver this Agreement, and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered by SecurFone. This Agreement is valid and binding obligation of SecurFone enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights, or by limitations and the availability of the remedy of specific performance or injunctive relief. 5.3 NO BREACH . The execution and delivery by SecurFone of this Agreement, the consummation of the contemplated transactions, and the performance by SecurFone of this Agreement in accordance with the terms and conditions hereof, will not (i) require the approval or consent of any federal, state, county, local or other governmental or regulatory body (domestic or foreign), or the approval or consent of any other person or entity, except as set forth on Schedule 5.3; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice 14 or lapse of time or both constitute) a default under, the Certificate of Incorporation or Bylaws of SecurFone, any statute, regulation, order, judgment or decree of or applicable to SecurFone, or any instrument, contract or other agreement to which SecurFone is a party or by or to which SecurFone or any of its properties is bound or subject; or (iii) result in the creation of any lien or encumbrance on any of the properties of SecurFone. 5.4 QUALIFICATION; SUBSIDIARIES, ETC. SecurFone is duly qualified or otherwise authorized as a foreign corporation to transact business and is in good standing in each jurisdiction where such qualification or authorization is required, which jurisdictions are set forth on Schedule 5.4. The failure to obtain such qualification or authorization in any other jurisdiction will not adversely affect the "condition of SecurFone" (as defined in Article 13). Except as set forth on Schedule 5.4, SecurFone does not directly or indirectly own any interest in any other person, corporation, partnership or other entity. 5.5 OUTSTANDING CAPITAL STOCK . SecurFone is authorized to issue 3,000 shares of Common Stock, $.01 par value, all of which are issued and outstanding. No other class of capital stock of SecurFone is authorized or outstanding. All of the Shares are duly authorized and are validly issued, fully paid and nonassessable and are not subject to any preemptive rights. There are no voting trust agreements or other contracts, agreements, or arrangements restricting voting or dividend rights or transferability with respect to the Shares. SecurFone has not violated any federal, state or local law, ordinance, rule or regulation in connection with the offer for sale or sale and issuance of its outstanding shares of capital stock or any other securities. 5.6 OPTIONS OR OTHER RIGHTS . There is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind, and there is no commitment of SecurFone to issue or grant such right, to purchase or otherwise to receive from SecurFone any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other security of SecurFone, and there is no outstanding security of any kind convertible or exchangeable into such capital stock. 5.7 CERTIFICATE OF INCORPORATION AND BY-LAWS. SecurFone will deliver to the Buyer true and complete copies of the Certificate of Incorporation (certified by the Secretary of State of Delaware) and of the By-laws of SecurFone (certified by the secretary of SecurFone) as in effect on the date hereof. SecurFone's corporate record book and stock transfer records accurately reflect all action taken through the date of this Agreement. 15 5.8 FINANCIAL STATEMENTS . The unaudited balance sheet of SecurFone as of November 30, 1996, and the related statement of income and retained earnings for the six months period then ended, (the "Financial Statements") will be delivered to Matech by SecurFone. The Financial Statements are accurate and complete and present fairly in all material respects the financial position of SecurFone as at such date and the results of operations of SecurFone for such period, in accordance with generally accepted accounting principles consistently applied for the periods covered thereby and prepared on a basis consistent with SecurFone's prior practices. Except as reflected on the Financial Statements, as of the date thereof there were no accrued or undisclosed liabilities, there were no special or non-recurring charges against income, and there were no matters for which reserves should be established. The balance sheet included in the Financial Statements is sometimes herein called the "Balance Sheet" and November 30, 1996, is sometimes herein called the "Balance Sheet Date." 5.9 NO MATERIAL OR ADVERSE CHANGE . Since the Balance Sheet Date, there has been no material or adverse change in the condition of SecurFone, and SecurFone knows of no such change which is threatened, nor has there been any damage, destruction or loss, whether or not covered by insurance, which could have or has had a material or adverse effect on the condition of SecurFone. 5.10 TAX MATTERS . All tax returns (federal, state, county and local) which were required to be filed through the Closing have been duly filed with the appropriate taxing authority, and SecurFone has paid all taxes shown as due and payable on such returns. All payments of taxes (including amounts withheld from employees) due and payable through the Closing, including, without limitation, federal, state and local income taxes, personal property taxes, sales taxes, excise taxes and real estate taxes, have been fully paid in a timely fashion. SecurFone has not made or entered into any agreement or arrangement pursuant to which the statute of limitations, or any other time limitations, or the right by or of the Internal Revenue Service or any other tax body or authority to audit, review or challenge any tax return filed by SecurFone, would be extended beyond the periods provided by law or regulation. 5.11 COMPLIANCE WITH LAWS . SecurFone is not in violation of any applicable federal, state, local or foreign law, ordinance, regulation, order, judgment, injunction, award, decree or other requirement of any governmental or regulatory body, court or arbitrator, which violation could have a material or adverse effect on the condition of SecurFone. SecurFone has all licenses, permits, orders or approvals of, and has made all required registrations with, any governmental or regulatory body that 16 are material to the conduct of the business of SecurFone and to its use of its properties and assets (collectively, "Permits"). The Permits are listed on Schedule 5.11 and are in full force and effect. No material violations are or have been recorded in respect of any Permit, and no proceeding is pending or threatened to revoke or limit any Permit. There is no federal, state or local ordinance, regulation or order which adversely effects or may adversely effect the ability of SecurFone to produce and distribute its products or otherwise conduct its business. 5.12 NO BREACH . The execution and delivery by SecurFone of this Agreement, the consummation of the contemplated transactions, and the performance by SecurFone of this Agreement in accordance with the terms and conditions hereof, will not (i) require the approval or consent of any federal, state, county, local or other governmental regulatory body (domestic or foreign), or the approval of any other person or entity, except as set forth on Schedule 5.13; (ii) conflict with or result in any breach or violation of any of the terms of, result in a material modification of, or otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, the Certificate of Incorporation or Bylaws of SecurFone, or any material contract or other agreement to which SecurFone is a party or by or to which SecurFone assets or properties may be bound or subject; (iii) violate any order, writ, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, SecurFone or upon the assets of SecurFone; (iv) violate any statute, law or regulation of any jurisdiction, which violation could have a material or adverse effect on the condition of SecurFone; (v) violate or result in the revocation or suspension of any Permit, or (vi) result in the imposition of any lien, security interest or claim in favor of any person or entity other than Matech. 5.13 ACTIONS AND PROCEEDINGS . There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against SecurFone. There are no actions, suits or claims or legal, administrative or arbitral proceedings or investigations (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) pending, or to the knowledge of SecurFone threatened, against or involving SecurFone or any of its properties or assets. All notices required to have been given to any insurance company listed as insuring against any action, suit or claim set forth on Schedule 5.13 have been timely and duly given and no insurance company has asserted, orally or in writing, that such claim is not covered by the applicable policy relating to such claim or has reserved 17 its right to so assert at a later date. Schedule 5.13 also describes any dispute with or claim from a sales agent, broker or customer in connection with or related to a product warranty claim, commission, fee, pricing or any other monetary dispute which involves $5,000 or more. 5.14 CONTRACTS AND OTHER AGREEMENTS . Schedule 5.14 sets forth all of the following contracts and other agreements to which SecurFone is a party or by or to which it or its assets or properties are bound or subject: (i) contracts and other agreements with any current or former employee, officer, director or affiliate or with any other current employee or consultant or with an entity in which any of the foregoing is a controlling person; (ii) contracts and other agreements with any labor union or association representing any employee; (iii) contracts and other agreements with any person to sell, distribute or otherwise market, or to produce, any products or services of SecurFone; (iv) contracts and other agreements, pursuant to which SecurFone will receive payments in excess of $10,000; (v) contracts and other agreements for the sale of any of its assets other than in the ordinary course of business or for the grant to any person of any option or preferential rights to purchase any of its assets; (vi) joint venture agreements; (vii) contracts and other agreements under which it agrees to indemnify any party or to share tax liability of any party; (viii) contracts or other agreements pursuant to which SecurFone is a licensor or licensee of any rights; (ix) contracts and other agreements that can be canceled without liability, premium or penalty only on ninety days' or more notice; (x) contracts and other agreements with customers, distributors or suppliers for the sharing of fees, the rebating of charges or other similar arrangements; (xi) contracts and other agreements containing covenants of SecurFone not to compete in any line of business or with any person in any geographical area or covenants of any other person not to compete with SecurFone in any line of business or in any geographical area; (xii) contracts and other agreements relating to the acquisition by SecurFone of any operating business or the capital stock of any other person; (xiii) contracts and other agreements requiring the payment to any person of an override or similar commission or fee; (xiv) contracts and other agreements relating to the borrowing of money; or (xv) any other contracts and other agreements whether or not made in the ordinary course of business (other than those reflected on any other Schedule) pursuant to which payments in excess of $5,000 may be expected to be made. All of the foregoing shall be collectively referred to hereinafter as the "Contracts". SecurFone has made available to Matech true, correct and complete copies of all of the Contracts. All of the Contracts are valid, binding and in full force and effect. Except as 18 described on Schedule 5.14, SecurFone is not in default under any of the Contracts, nor, to the knowledge of SecurFone, is any other party to any of the Contracts in default thereunder in any material respect, nor does any condition exist that with notice or lapse of time or both would constitute a material default thereunder. Except as separately identified on Schedule 5.14, no approval or consent of any person is needed in order that any of the Contracts continue in full force and effect following the consummation of the transactions contemplated hereby. Schedule 5.14 also lists all contracts and other agreements currently in negotiation or proposed by SecurFone of a type which if entered into by SecurFone would be required to be listed on Schedule 5.14 or on any other Schedule. SecurFone has made available to Matech true and correct copies of the latest drafts or summaries of all such proposed contracts and other agreements and copies of all documents relating thereto. 5.15 REAL PROPERTY . SecurFone owns no real property. SecurFone leases certain office space located at 14 East Main Street, Somerville, NJ 08876 ("Leased Property"), as more fully described in Schedule 5.15. Except as set forth in Schedule 5.15, SecurFone is not in default under any lease for Leased Property, and, with respect to SecurFone, there is no default or event of default or set of facts which has occurred which, with notice or lapse of time or both, would constitute a default. The Leased Property is zoned to permit its present use, there is no record of any violation of any zoning, building or other restriction relating to the use of the Leased Property, the existing use and current operation of the building or buildings on the Leased Property does not, and the past operations did not, violate any applicable environmental laws or regulations and all certificates, permits, licenses and other authorizations of governmental bodies or authorities which are necessary to permit the use and occupancy of the Leased Property for its current operations have been obtained by SecurFone, have not been violated or breached, and are in full force and effect. The only real property in which SecurFone has any interest is the Leased Property described above. Such property shall be referred to hereinafter as the "Property". 5.16 ENVIRONMENTAL MATTERS . The terms used in this Section 5.16 shall have the meanings specified by applicable local, state, federal or foreign statutes or regulations with the respect to environmental protection, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 ET SEQ., and regulations promulgated thereunder, each as amended ("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., and regulations promulgated thereunder, each as amended ("RCRA"), and other laws 19 and regulations concerning water pollution, groundwater protection, air pollution, solid wastes, hazardous wastes, spills or other releases of toxic or hazardous substances, transportation and disposal of hazardous substances, materials and wastes and occupational or employee health and safety (collectively, the "environmental laws"). Except as disclosed in Schedule 5.16: (a) There has been no past, and there is no current or presently anticipated, storage, disposal, generation, manufacture, refinement, transportation, production or treatment of toxic wastes, solid wastes, hazardous wastes or hazardous substances by SecurFone (or any of its predecessors-in-interest or any predecessor owner or operator of any of the Property) at, upon, or away from any of the Property. There has been no spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto any of the Property, or into the environment surrounding any of the Property, of any toxic wastes, solid wastes, hazardous wastes or hazardous substances. No asbestos fibers or materials or polychlorinated biphenyls (PCBs) are on or in any of the Property. (b) None of the Property has previously been used, is now being used, or is contemplated to be used, for the treatment, collection, storage or disposal of any refuse or objectionable wastes so as to require a permit or approval from the United States Environmental Protection Agency (the"EPA") or any state agency responsible for protection of the environmental (a "State EPA"). (c) None of the Property has previously been used, is now being used, or is contemplated to be used, for the generation, transportation, treatment, storage or disposal of any hazardous wastes subject to regulation by the EPA or any State EPA pursuant to the environmental laws. (d) No written reports of environmental audits or internal audits relating to environmental matters have been prepared within the last five years, and no citations, orders and decrees have been issued within the last five years by, for or on behalf of SecurFone and/or concerning any of the Property by or with any governmental agency with respect to the treatment, storage or disposal of hazardous wastes or with respect to air, water and noise pollution. SecurFone has not received notification pursuant to CERCLA or any of the environmental laws, or any regulations thereunder, of any potential liability with the respect to the clean-up of any waste disposal site at which it has disposed of any hazardous substances or with respect to any other alleged violation of any of the environmental laws. 20 5.17 INTANGIBLE PROPERTY . Schedule 5.17 sets forth all patents, trademarks, copyrights, service marks and trade names, all applications for any of the foregoing, and all permits, grants and licenses or other rights running to or from SecurFone relating to any of the foregoing that are material to the business of SecurFone (collectively, "Patents and Trademarks"). SecurFone has the right to use, free and clear of any claims or rights of others, all trade secrets, inventions, know how, processes, logos and technology, designs utilized in or incident to the conduct of its business as presently conducted or as being developed ("Trade Secrets"). Except as set forth on Schedule 5.17, SecurFone does not have any notice that any other person or entity disputes SecurFone's ownership or right to use any Patents and Trademarks and/or Trade Secrets, or notice of any claim of any other person or entity relating to any of the Patents and Trademarks or any of the Trade Secrets of SecurFone, and SecurFone knows of no basis for any such dispute or claim. SecurFone has no knowledge that any person or entity has infringed upon the rights of SecurFone with respect to any Patents and Trademarks or Trade Secrets, and SecurFone has not infringed upon any patent, copyright, trademark, trade secret or other intellectual property right of any other person or entity. The books of account and other corporate records of SecurFone are complete and correct in all material respects and have been maintained in accordance with good business practice. Schedule 5.17 lists all bank accounts maintained by SecurFone and the names and capacities of all persons authorized to draw thereon or who have access thereto. 5.18 TITLE TO ASSETS . SecurFone owns outright and has good and marketable title to all of the assets used in its business, including, without limitation, all of the assets reflected on the Balance, in each case free and clear of any lien or other encumbrance, except for (i) liens or encumbrances specifically described in Schedule 5.18 hereto; (ii) assets disposed of, or subject to purchase or sales orders, in the ordinary course of business since the Balance Sheet Date; (iii) liens or other encumbrances securing taxes, assessments, governmental charges or levies, or the claims of materialmen, carriers, landlords and like persons, all of which are not yet due and payable; or (iv) minor liens or other encumbrances of a character that do not substantially impair the assets to which they apply. 5.19 LIABILITIES . As at the Balance Sheet Date, SecurFone does not have any indebtedness, liability, claim or loss, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise, of a kind required by generally accepted accounting principles to be set forth on a financial statement or in the notes 21 thereto ("Liabilities") that were not fully and adequately reflected or reserved against on the Balance Sheet or described on any Schedule hereto or in the notes to the Financial. SecurFone has not, except in the ordinary course of business, incurred any Liabilities since the Balance Sheet Date. 5.20 EMPLOYEE OBLIGATIONS . SecurFone has no policies with respect to vacation pay, holiday and/or sick pay, severance pay, pension and profit-sharing contributions, health, medical or any other type of employee benefit plan to which SecurFone presently contributes or is required to contribute, nor is SecurFone indebted to any employee other than for wages and benefits earned during the current payroll period which are not yet due and payable. There are no controversies pending between SecurFone and any of its employees, which controversies have affected or may affect materially and adversely the condition of SecurFone (as defined in Article 13). SecurFone has complied with (i) all applicable federal, state and local statutes relating to the employment of labor, including, without limitation, the Occupational Safety and Health Act ("OSHA"), the Fair Labor Standards Act, the National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, all as amended, and similar state and local statutes; and (ii) all applicable federal, state and local statutes relating to wages, fringe benefits and the payment of withholding and Social Security taxes, and SecurFone is not liable for any arrearage in the payment of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.21 EMPLOYEE BENEFIT PLANS . Schedule 5.21 contains a true and complete list of all pension, profit sharing, retirement, deferred compensation, stock purchase, stock option, incentive, bonus, vacation, severance, disability, hospitalization, medical insurance, life insurance and other employee benefit plans (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), programs or arrangements maintained by SecurFone or under which SecurFone has any obligations (other than obligations to make current wage or salary payments or to pay sales commissions to employees or agents whose employment or engagement may be terminated by SecurFone without penalty or breach by giving a termination notice of 30 days or less) in respect of, or which otherwise cover, any of the current or former officers or employees of SecurFone, or their beneficiaries (hereinafter individually referred to as a "Plan" and collectively referred to as the "Plans"). SecurFone has delivered or made available to Matech true and complete copies of all documents, as they may have been amended to the date hereof, embodying or relating to the Plans. 22 Except as specifically set forth in Schedule 5.21, (a) SecurFone has made all payments due and payable by SecurFone to date under or with respect to each Plan, and all amounts properly accrued to date as liabilities of SecurFone under or with respect to each Plan which have not been paid have been recorded on the books of SecurFone; (b)SecurFone has performed all material obligations required to be performed by it under, and is not in default under or in violation of, any Plan; and (c)SecurFone is in compliance in all material respects with the requirements prescribed by all statutes, orders or governmental rules or regulations applicable to the Plans, including, without limitation, ERISA and the Code 5.22 OFFICERS, DIRECTORS AND KEY EMPLOYEES . Schedule 5.22 sets forth the name and total compensation of each person who is now or has been during the last three fiscal years of SecurFone an officer or director of SecurFone or who is now or has been during the last three fiscal years of SecurFone an employee, consultant, agent or other representative of SecurFone whose annual rate of compensation (including bonuses, profit sharing and commissions) exceeds or exceeded $20,000. Since the Balance Sheet Date, SecurFone has not made a commitment or agreement to increase the compensation or to modify the conditions or terms of employment of any such person. None of such persons currently holding such a position has threatened to cancel or otherwise terminate such person's relationship with SecurFone and none of such persons has utilized or has threatened to utilize any Trade Secrets of SecurFone in competition with SecurFone. 5.23 OPERATIONS OF SECURFONE . Except as set forth on Schedule 5.23, since the Balance Sheet Date SecurFone has not: (i) declared or paid any dividends or declared or made any other distributions of any kind to its shareholders, or made any direct or indirect redemption, retirement, purchase or other acquisition of any shares of its capital stock; (ii) incurred any indebtedness for borrowed money; (iii) reduced its cash or short term investments or their equivalent, other than to meet cash needs arising in the ordinary course of business, consistent with past practices; (iv) waived any material right under any Contract; (v) made any material change in its accounting methods or practices or made any material change in depreciation or amortization policies or rates adopted by it; 23 (vi) materially changed any of its business policies, including, without limitation, advertising, distributing, marketing, pricing, purchasing, personnel, sales, returns or budget; (vii) made any wage or salary increase or bonus, or increase in any other direct or indirect compensation, or any payment or commitment to pay any severance or termination pay to any of its officers, directors, employees, consultants, agents or other representatives, or any accrual for or commitment or agreement to make or pay the same; (viii) made any loan or advance to any of its shareholders, officers, directors, employees, consultants, agents or other representatives; (ix) except in the ordinary course of business, incurred or assumed any obligation or liability (whether absolute or contingent and whether or not currently due and payable); (x) disposed of any property, equipment or assets except for inventory disposed of in the ordinary course of business or made any acquisition of all or any part of the assets, properties, capital stock or business of any other person; (xi) paid, directly or indirectly, any of its material Liabilities before the same became due in accordance with its terms or otherwise than in the ordinary course of business; (xii) terminated or failed to renew, or received any written threat (that was not subsequently withdrawn) to terminate or fail to renew, any contract or other agreement that is or was material to the condition of SecurFone; (xiii) except in the ordinary course of business, entered into or amended any Contract; (xiv) merged or consolidated with any other person, firm, corporation or entity; (xv) failed to maintain in full force and effect policies of insurance of the same type, character and coverage as the policies currently carried; or (xvi) amended, changed or modified its Certificate of Incorporation or By-laws. 5.24 POTENTIAL CONFLICTS of Interest . Neither any officer, director or affiliate of SecurFone, nor any entity controlled by any such officer, director or affiliate, nor any relative or spouse (or relative of such spouse) of any such officer, director or affiliate: (i) owns, directly or indirectly, any interest in (excepting less than 1% stock holdings for investment purposes in securities of publicly held and traded 24 companies), or is an officer, director, employee or consultant of, any person which is, or is engaged in business as, a competitor, lessor, lessee, distributor or supplier of SecurFone; (ii) owns, directly or indirectly, in whole or in part, any tangible or intangible property material to the condition of SecurFone that SecurFone uses in the conduct of business; or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, SecurFone, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof. 5.25 FULL DISCLOSURE . All documents and other papers delivered by or on behalf of MHI or SecurFone in connection with this Agreement and the transactions contemplated hereby are true, complete and authentic in all material respects. This Agreement, including the Schedules and Exhibits hereto, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. No representation or warranty of MHI or SecurFone contained in this Agreement contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not materially false or misleading. There is no fact that MHI or SecurFone has not disclosed to Matech in writing that materially adversely affects the condition of MHI or SecurFone or the ability of MHI or SecurFone to perform this Agreement. 6. COVENANTS AND AGREEMENTS. The parties covenant and agree as follows: 6.1 SPIN-OFF OF BUSINESS OF MATECH and Reverse Stock Split. Between the date of this Agreement and the Closing Date, Matech agrees to (i) create a new wholly-owned subsidiary ("Newco") to which it will transfer all of its assets, subject to the assumption by Newco of all of its liabilities, whether fixed or contingent, known or unknown; and (ii) after such transfer not engage in any business, not acquire any assets, not undertake any obligations or assume or create any liabilities. In order to effect the spin-off of Newco to the current stockholders of Matech, Matech agrees to prepare and file, on or before March 10, 1997, with the Securities and Exchange Commission ("SEC") a registration statement for the purpose of registering the shares of Newco under the Securities Act of 1933, as amended (the "Registration Statement"). Immediately following the effectiveness of the Registration Statement, Matech will effect a 1-for-10 reverse stock split of its outstanding Class A Common Stock, pursuant to which each stockholder holding fewer than 10 shares shall be entitled to have any fractional share to which such stockholder would otherwise be entitled rounded up to 25 one full share. In addition, Matech agrees to prepare an information statement to be distributed to the stockholders of Matech in connection with the approval by its stockholders of the transfer of all of its assets to Newco and the reverse stock split. In addition, Matech shall not issue any shares of its Class A Common Stock or any securities convertible into Class A Common Stock, other than as disclosed in Schedule 6.4. 6.2 RMB'S ACCRUED SALARY AND CLASS B STOCK AND CONVERTIBLE NOTES Between the date of this Agreement and the Closing Date, RMB agrees to (i) assign all accrued salary and other compensation owed to him by Matech to Newco and to waive any claims for compensation from Matech, (ii) exchange all of the 60,000 shares of Class B Common Stock of Matech held by him for 934,454 (pre-reverse stock split) shares of Class A Common Stock of Matech, (iii) convert the promissory note of Matech in the principal amount of $108,000 held by him into 520,000 (pre-reverse stock split) shares of Class A Common Stock of Matech, and (iv) arrange for Sherman Baker to convert the promissory note of Matech in the principal amount of $58,000 into 280,000 (pre-reverse stock split) shares of Class A Common Stock. 6.3 PREFERRED STOCK OF MATECH . Between the date of this Agreement and the Closing Date, all of issued and outstanding shares of Matech's Class A and Class B Preferred Stock shall be redeemed by Matech or surrendered to Matech and canceled or converted into shares of Class A Common Stock of Matech. 6.4 NO SALE OF STOCK BY RMB . Commencing with the date of this Agreement and for a period of one year thereafter, RMB agrees not to sell, pledge or otherwise transfer any shares of Matech owned or controlled by him at the time of Closing. RMB agrees to use his best efforts to obtain the same agreement from certain other holders of Matech stock, whose names and the number of shares held by them are set forth in Schedule 6.4 hereto, covering a minimum of 90% of the total number of shares listed in such Schedule 6.4. On or before the date of this Agreement, RMB shall obtain the written agreement of David Weisberg, M.D. not to sell his 65,000 shares of Class A Common Stock until the earlier of the Closing or May 30, 1997. 6.5 CONDUCT OF BUSINESS OF SECURFONE . From the date thereof through the Closing Date, SecurFone shall conduct its business in the ordinary course and shall not undertake any of the actions specified in Section 5.23, except as disclosed on Schedule 5.23. 6.6 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES . From the date hereof through the Closing Date, RMB shall cause Matech to conduct its business in such a manner so that, except as set forth in Sections 6.1, 6.2 and 6.3, the representations and warranties contained in Section 3 shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date, and SecurFone shall conduct its affairs in such 26 a manner so that the representations and warranties contained in Section 5 shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date, and Matech and SecurFone shall give each other prompt notice of (i) any event, condition or circumstance occurring from the date hereof through the Closing Date that would constitute a violation or breach of any representation, warranty or covenant of either if them contained in this Agreement, or (ii) any event, occurrence, transaction or other item which would have been required to have been disclosed on any Schedule or statement delivered hereunder, had such event, occurrence, transaction or item existed on the date hereof. 6.7 CORPORATE EXAMINATIONS AND INVESTIGATIONS . Prior to the Closing Date, Matech and SecurFone shall be entitled, through their respective employees and representatives, including, without limitation, its lawyers and accountants, to make such investigation of the assets, properties, business and operations of each other, and such examination of the books, records and financial condition of each other as they wish. Any such investigation and examination shall be conducted at reasonable times and under reasonable circumstances and Matech and SecurFone shall cooperate fully therein. No investigation by either Matech or SecurFone shall diminish or obviate any of the representations, warranties, covenants or agreements of either of them under this Agreement. If this Agreement terminates, Matech and SecurFone and their respective affiliates shall keep confidential and shall not use in any manner any information or documents obtained from each other concerning its assets, business and operations, unless readily ascertainable from public or published information, or trade sources, or already known or subsequently developed by the party obtaining such information independently of any investigation of other party. If this Agreement terminates, any documents obtained from either Matech or SecurFone shall be returned to the party which furnished them. 6.8 EXPENSES . Except as specifically provided in Section 1.4 of this Agreement, Matech and SecurFone shall each bear its respective expenses incurred in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. Escrow fees, if any, will be shared equally by Matech and SecurFone. 6.9 INDEMNIFICATION OF BROKERAGE . Each party represents and warrants to each other party to this Agreement that, except for persons or entities identified on Schedule 6.9, there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection herewith based upon any agreement, arrangement or understanding with such party, or upon any action taken by such party. Each party agrees to indemnify and save each 27 other party to this Agreement harmless from any claim or demand for commissions or other compensation by any broker, finder, agent or similar intermediary, including persons or entities identified on Schedule 6.9 claiming to have been employed by or on behalf of the indemnifying party, and to bear the cost of legal expenses incurred in defending against any such claim. 6.10 FURTHER ASSURANCE . Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. Each such party shall use its best efforts to fulfill or obtain the fulfillment of the conditions to the Closing. 6.11 DELIVERY OF SCHEDULES. Within 10 days following the date of this Agreement, RMB and Matech shall deliver to MHI and SecurFone, and MHI and SecurFone shall deliver to RMB and Matech, all of the Schedules to this Agreement required by Sections 3 and 5, respectively, together with copies of all the documents referred to in such Schedules. 7. CONDITIONS PRECEDENT TO THE OBLIGATION OF MHI AND SECURFONE TO CLOSE. The obligation of MHI and SecurFone to proceed with the Closing is subject, at its option, to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by it: 7.1 REPRESENTATIONS AND COVENANTS . The representations and warranties of Matech and RMB contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. Matech and RMB shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with them on or prior to the Closing Date. 7.2 GOVERNMENTAL PERMITS, APPROVALS AND THIRD PARTY CONSENTS . All permits and approvals from any governmental or regulatory body, if any, required for the lawful consummation of the contemplated transactions shall have been obtained. All consents, permits and approvals from parties to material contracts or other agreements with Matech that may be required in connection with the performance by Matech of its obligations under this Agreement or the consummation of the contemplated transactions shall have been obtained. 7.3 LEGAL PROCEEDINGS . There shall be no law, and no order shall have been entered and not vacated by a court or administrative agency of competent jurisdiction in any litigation, which (a) enjoins, restrains, makes illegal or prohibits consummation of the transaction contemplated hereby; (b) imposes any lien or other encumbrance on the Shares or imposes any restriction on their transfer; or (c) interferes with, in any material way, or materially or adversely affects the condition of Matech; and there shall be no litigation pending before a 28 court or administrative agency of competent jurisdiction, or threatened, seeking to do, or which, if successful, would have the effect of, any of the foregoing. 7.4 CERTIFIED COPY OF RESOLUTIONS . Matech shall have each delivered to MHI a certified copy of the resolutions duly adopted by its Board of Directors and shareholders authorizing the execution and delivery of this Agreement and any other documents described or referred to herein, and the consummation of the transactions contemplated hereby. 7.5 OFFICER'S CERTIFICATE . MHI shall have received a certificate executed by an executive officer of Matech, dated the Closing Date, reasonably satisfactory in form and substance MHI, certifying that the conditions specified in Sections 7.1, 7.2, 7.3 and 7.4 hereof have been satisfied. 7.6 APPROVAL OF COUNSEL TO THE BUYER . All actions and proceedings hereunder and all documents and other papers required to be delivered by the Seller hereunder or in connection with the consummation of the contemplated transactions, and all other related matters, including compliance with federal and state securities laws, shall have been approved by Kohrman Jackson & Krantz P.L.L., counsel to MHI and SecurFone, as to their form and substance. 7.7 RELEASES . Each officer and director of Matech shall have executed and delivered to Matech and MHI duplicate counterparts of a Release, dated the Closing Date, in the form of Exhibit C. 7.8 RESIGNATIONS . Simultaneously with Closing, Matech shall deliver to MHI the written resignation of each officer and director of Matech as the Buyer shall request, in the form of Exhibit D. 7.9 LOCK-UP AND REGISTRATION RIGHTS AGREEMENT . RMB and the other holders of Matech stock listed on Schedule 6.4 shall have entered into agreements restricting the sale or other transfer of their shares for a period of one year following the Closing Date and granting them certain registration rights for a period of 18 months following the Closing with respect to shares in an amount equal to 25% of any shares registered by Matech (other than on Form S-8) during such 18 months, such agreements to be in form and substance reasonably satisfactory to MHI. MHI shall also enter into the agreement granting registration rights and MHI (and other shareholders of SecurFone) shall be entitled to to register shares held by them in an aggregate amount equal to 75% of any shares registered by Matech (other than on Form S-8). 7.10 DELIVERY OF DOCUMENTS . Simultaneously with Closing, all corporate records and record books of Matech shall be delivered to MHI along with such other documents as MHI may reasonably request. 29 8. CONDITIONS PRECEDENT TO THE OBLIGATION OF MATECH AND RMB TO CLOSE. The obligation of Matech and RMB to proceed with the Closing is subject, at the option of Matech and RMB acting in accordance with the provisions of this Agreement with respect to termination hereof, to the fulfillment of the following conditions, any one or more of which may be waived: 8.1 REPRESENTATIONS AND COVENANTS . The representations and warranties of SecurFone contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. SecurFone shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 8.2 GOVERNMENTAL PERMITS AND APPROVALS . All permits and approvals from any governmental or regulatory body, if any, required for the lawful consummation of the contemplated transactions shall have been obtained. 8.3 CERTIFIED COPY OF RESOLUTIONS . SecurFone shall have delivered to Matech a certified copy of the resolutions duly adopted by its Board of Directors authorizing the execution and delivery of this Agreement and any other documents described or referred to herein, and the consummation of the transactions contemplated hereby. 8.4 OFFICER'S CERTIFICATES . Matech shall have received a certificate executed by an executive officer of SecurFone, dated the Closing Date, reasonably satisfactory in form and substance to Matech, certifying that the conditions specified in Sections 8.1, 8.2 and 8.3 hereof have been satisfied. 8.5 APPROVAL OF COUNSEL TO MATECH AND RMB . All actions and proceedings hereunder and all documents or other papers required to be delivered by SecurFone hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, including compliance with federal and state securities laws, shall have been approved by C. Timothy Smoot, counsel to Matech and RMB, as to their form and substance. 8.6 COMPLETION OF SPIN-OFF AND REVERSE STOCK SPLIT. The Registration Statement shall have been filed with the Securities and Exchange Commission and shall have become effective under the Securities Act of 1933, as amended, the spin-off shall have been accomplished with Matech retaining 560,000 of Newco and the outstanding shares of Class A Common Stock shall have been split on a 1-for-10 basis, with no fractional shares being issued and each stockholder who would otherwise be entitled to receive a fractional share entitled to one full share. 30 8.7 PLEDGE OF NEWCO SHARES. SecurFone shall have entered into a pledge agreement, in form reasonably satisfactory to Matech, pledging 560,000 shares of Newco to secure the payment of the Note. 8.8 CONSULTING AGREEMENT . Matech and RMB shall have executed and delivered the Consulting Agreement substantially in the form attached hereto as Exhibit E. 9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any right of either Matech or SecurFone fully to investigate the affairs of each other and notwithstanding any knowledge of facts determined or determinable by any party to this Agreement pursuant to such investigation or right of investigation, each party has the right to rely fully upon the representations, warranties, covenants and agreements of the other parties contained in this Agreement or in any certificate delivered pursuant to any of the foregoing. All of the representations, warranties, covenants and agreements contained in this Agreement shall survive the execution and delivery of this Agreement and the Closing hereunder, and, except as otherwise specifically provided in this Agreement, shall thereafter terminate and expire (A) on February 12, 1999, with respect to any General Claim (as herein defined) based upon, arising out of or otherwise in respect of any fact, circumstance, action or proceeding of which the party asserting such claim shall have given notice on or prior to February 12, 1999 to the party against which such General Claim is asserted, and (B) with respect to any Tax Claim (as herein defined), on the later of (1) the date upon which the liability to which any such Tax Claim may relate is barred by all applicable statutes of limitation, and (2) the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitations. As used in this Agreement, the following terms have the following meanings: (i) "General Claim" means any claim (other than a Tax Claim) based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement contained in this Agreement; (ii) "Tax Claim" means any claim based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement contained in this Agreement related to Taxes. 10. GENERAL INDEMNIFICATION. 10.1 OBLIGATION OF RMB TO INDEMNIFY . RMB agrees to indemnify, defend and hold SecurFone (and its directors, officers, employees, affiliates, successors and assigns) harmless from and against all losses, liabilities, damages, deficiencies, costs or expenses (including interest, penalties and reasonable attorneys' and accounting fees and disbursements), which are referred to collectively hereinafter as "Losses", based upon, arising out of or otherwise in respect of (i) any inaccuracy in or any breach of any representation, 31 warranty, covenant or agreement of Matech or RMB contained in this Agreement or in any document or other papers delivered by Matech or RMB pursuant to this Agreement, and (ii) all claims, demands or actions by any person holding shares of capital stock of Matech arising out of events occurring prior to the Closing Date. 10.2 OBLIGATION OF SECURFONE TO INDEMNIFY . SecurFone agrees to indemnify, defend and hold Matech and RMB (and their respective directors, officers, employees, affiliates, successors and assigns) harmless from and against all Losses based upon, arising out of or otherwise in respect of (i) any inaccuracy in or any breach of any representation, warranty, covenant or agreement of SecurFone contained in this Agreement or in any document or other papers delivered by SecurFone pursuant to this Agreement and (ii) all claims, demands or actions by any person holding shares of capital stock of Matech arising out of events occurring after the Closing Date. 10.3 NOTICE AND OPPORTUNITY TO DEFEND . 10.3.1 NOTICE OF ASSERTED LIABILITY . Promptly after receipt by any party hereto (the "Indemnitee") of notice of any demand, claim or circumstances which gives rise, or with the lapse of time would or might give rise, to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation that may result in a Loss (an "Asserted Liability"), the Indemnitee shall give notice thereof (the "Claims Notice") to any other party (or parties) obligated to provide indemnification pursuant to Section 10.1 or 10.2 (the "Indemnifying Party"). The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary and to the extent feasible) of the Loss that has been or may be suffered by the Indemnitee. No failure or delay to provide notice shall reduce or otherwise affect the obligation to indemnify. 10.3.2 OPPORTUNITY TO DEFEND . The Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel, any Asserted Liability. If the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall within 30 days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall cooperate, at the expense of the Indemnifying Party, in the compromise of or defense against, such Asserted Liability. If the Indemnifying Party elects not to compromise or defend the Asserted Liability, fails to notify the Indemnitee of its election as herein provided or contests its obligation to indemnify under this Agreement, the Indemnitee may pay, compromise or defend such Asserted Liability. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld. In any event, the Indemnitee and the Indemnifying Party may 32 participate, at their own expense, in the defense of such Asserted Liability. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. 11. TERMINATION OF AGREEMENT. 11.1 TERMINATION . This Agreement may be terminated prior to the Closing as follows: (i) at the election of MHI, if Matech or RMB have breached any material representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured by the Closing Date, or if any of the conditions precedent set forth in Article 7 has not been satisfied by the Closing Date; (ii) at the election of Matech, if SecurFone has breached any material representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured by the Closing Date, or if any of the conditions precedent set forth in Article 8 has not been satisfied by the Closing Date; (iii) at the election of SecurFone, if the Registration Statement has not been filed with the SEC by March 10, 1997, or has not become effective by May 27, 1997; (iv) at the election of either Matech or SecurFone, if any legal proceeding is commenced or threatened by any governmental or regulatory body or other person directed against the consummation of the Closing or any other transaction contemplated under this Agreement and either the Matech or SecurFone, as the case may be, reasonably and in good faith deems it impractical or inadvisable to proceed in view of such legal proceeding or threat thereof; or (v) at any time on or prior to the Closing Date, by mutual written consent of Matech and SecurFone. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 11.2. 11.2 SURVIVAL . If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect, except for the provisions of Section 6.3 relating to the obligations of Matech and SecurFone to keep confidential and not to use certain information and data obtained by them from each other and to return documents to each other and except for the provisions of Section 6.6. No party hereto shall have any liability to any other party in respect of a termination of this Agreement except pursuant to Sections 6.5, 6.6 or 6.7. 33 12. RESOLUTION OF DISPUTES. The parties to this Agreement agree to submit any disputes arising under or in relation to this Agreement to mediation to be conducted by a mediator approved by SecurFone and RMB. If mediation fails to resolve all disputes, the parties agree to submit the disputes to binding arbitration. If no party is claiming more than $40,000, excluding cost and expenses, the dispute shall be submitted to a single arbitrator approved by SecurFone and RMB. If any party is claiming more than $40,000, the dispute shall be submitted to a panel of three neutral arbitrators, one arbitrator appointed by each of SecurFone and RMB and the third to be agreed upon by the two appointed arbitrators. No party shall appoint an arbitrator with any conflict of interest. SecurFone and RMB shall each bear one-half of the cost of mediation and pay its own attorneys' fees related to mediation. If arbitration becomes necessary, the prevailing party shall be entitled to recover all costs, expenses, and attorneys' fees related to the prior mediation and the arbitration, which recovery shall be made a part of the arbitration award. The parties agrees to provide each other with any and all documents and information relevant to any disputes within 20 days of receipt of a written request. SecurFone and RMB further agree that an arbitrator or panel of arbitrators may impose monetary sanctions for failure to timely provide relevant documents or information. 12.1 REQUIRED NOTICE AND LIMITATIONS PERIOD . SecurFone and RMB agree that within one year of the discovery of any claim related to this Agreement or, in any event, within two years of the accrual of any claim, the claiming party shall give written notice to the other parties of the nature of the claim and the specific facts upon which the claim is based, and demand mediation of the claim. The parties understand that this provision has two separate limits. The first limit means that the claiming party has one year from the date that party discovers the facts to support a claim to give notice and make a demand. If notice and a demand are not made within that time, a claim cannot be brought. The second limit is two years regardless of when the facts are discovered. If no notice and demand are made within two years, the claim cannot be brought even if it is not discovered until after the two years has expired. The parties further agree that if mediation fails to resolve the claim within six months of the receipt of notice and the claiming party fails to demand arbitration within the second six months, the claim of the claiming party shall be forever barred. The intent is that all claims be resolved or submitted to binding arbitration within one year of written notice of a claim. 12.2 PROCEDURES . Within two months of the receipt of notice and demand, the parties to the claim shall choose a person acceptable to all such parties to mediate the claim. Absent agreement within two months, the claiming party shall ask the American Arbitration Association ("AAA") to appoint a person who is experienced in the process of deciding contract disputes and the parties shall, in good faith, attempt to mediate the claim. 34 (i) If after six months from the date of receipt of demand and notice, no agreement is reached, any party to the dispute may demand in writing that the dispute be submitted to binding arbitration. Once such a demand is made, the claim shall be submitted to AAA for binding arbitration. (ii) The parties to the claim shall, in good faith, attempt to agree on a single arbitrator if no more than $40,000 excluding costs and expenses is claimed by either party. If within two months of a demand for arbitration, the parties have not agreed, the arbitrator shall be selected by alternate striking from a list of nine arbitrators drawn by the AAA from a panel of arbitrators with expertise in the process of deciding contract disputes. (iii) Arbitration shall be conducted under the appropriate AAA rules in the form they exist on the date the claim is submitted to AAA. Delaware substantive and procedural law shall apply to any such arbitration and shall control if in conflict with AAA's rules. The arbitration shall take place in San Diego, California. (iv) The arbitrator shall have the discretion to order any and all reasonable discovery permitted under the laws of Delaware upon the written request of any party. The request for discovery shall include the discovery requested and the reasons therefore. The responding party shall be given a reasonable opportunity to submit any objections in writing prior to an order of discovery. No hearing, however, shall be required but may be held if the arbitrator believes that it may assist in a decision. The parties agree that the arbitrator should honor all reasonable discovery requests. In addition, the arbitrator may order the parties to exchange any relevant information prior to the hearing, including, but not limited to, documents, exhibit lists, witness lists, expert witnesses with a summary of their opinions and credentials, pre-hearing briefs and summaries of testimony of proposed witnesses. (v) In deciding the claim and the appropriate award or other relief, the arbitrator shall determine the rights and obligations of the parties to the claim under the substantive and procedural laws of Delaware as though the arbitrator was a court of competent jurisdiction in Delaware and may afford any relief that could be afforded by Delaware courts including, but not limited to, specific performance, punitive damages, injunctive relief, and/or sanctions for abusing or frustrating the arbitration process. In addition, the arbitrator shall award costs of this action to the prevailing party or parties including but not limited to the arbitrator's fees. Any party, at its expense, may arrange for and pay the cost of a court reporter or video recorder to provide a record of proceedings. 35 12.3 THE ARBITRATOR'S DECISION . The decision of the arbitrator must be based on a written statement of decision explaining the factual and legal bases for each material issue relevant to the claim and raised in the briefs or at the hearing. Only if the arbitrator's decision correctly applies the substantive and procedural laws of Delaware shall the facts found be conclusive and binding on the parties who appear in the arbitration proceeding. If the arbitrator's decision correctly applies the substantive and procedural laws of Delaware, it may be confirmed and entered as a judgment by an appropriate court of Delaware and may be challenged only for (1) errors of law or (2) errors of fact appearing in the written decision. 13. MISCELLANEOUS. 13.1 CERTAIN DEFINITIONS . As used in this Agreement, the following terms have the following meanings unless the context otherwise requires: (i) "AFFILIATE" with respect to any person, means any other person controlling, controlled by or under common control with, or the parents, spouse, lineal descendants or beneficiaries of such person. (ii) "CONDITION OF THE MATECH OR SECURFONE" means the assets, liabilities, properties, business, results of operations, prospects and financial condition of Matech or SecurFone, as the case may be. (iii) "DOCUMENT OR OTHER PAPERS" means any document, agreement, instrument, certificate, notice, consent, affidavit, letter, telegram, telex, statement, schedule (including any Schedule to this Agreement), exhibit (including any Exhibit to this Agreement) or any other paper whatsoever. (iv) "GOVERNMENTAL OR REGULATORY BODY" means any government or political subdivision thereof, whether federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision. (v) "KNOWLEDGE" of a party means within the knowledge, information or belief of the party, which knowledge, information or belief has been obtained by the party after investigation, and, in the case of a party which is a corporation, after an appropriate officer of the party has reviewed all relevant facts and corporate records and files, including those in the possession and under control of the party and its employees, attorneys, accountants and other agents, and after making inquiry of those employees of the party who might have relevant information. (vi) "LIEN OR OTHER ENCUMBRANCE" means any lien, pledge, mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, encumbrance or any other restriction or limitation whatsoever. 36 (vii) "PERSON" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental or regulatory body or other entity. (viii) "PROPERTY" means real, personal or mixed property, tangible or intangible. 13.2 PUBLICITY . No publicity release or announcement concerning this Agreement or the transactions contemplated hereby shall be made without advance approval thereof by the Seller and the Buyer. 13.3 NOTICES . Any notice or other communication required or permitted hereunder shall be in writing and shall be either (i) delivered personally, (ii) sent by telegraph or telex, (iii) sent by facsimile transmission, (iv) delivered by nationally recognized overnight courier service against a receipt therefor, or (v) sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given (A) when so delivered personally, telegraphed, telexed or sent by facsimile transmission if applicable; (B) when delivered by courier if applicable; or (C) if mailed, five days after the date of deposit in the United States mail if applicable, as follows: (i) if to MHI or SecurFone: SecurFone America, Inc. 14 East Main Street Somerville, NJ 08876 Fax No: 908-575-1233 with a copy to: Steven L. Wasserman Kohrman Jackson & Krantz P.L.L. One Cleveland Center - 20th Floor Cleveland, OH 44114 Fax No: 216-621-6536 (ii) if to Matech or RMB: Robert M. Bernstein 11835 West Olympic Boulevard East Tower 705 Los Angeles, CA 90064 Fax No: 310-473-3177 with a copy to: C. Timothy Smoot 37 23505 Crenshaw Boulevard Suite 174 Torrance, CA 90505 Fax No: 310-530-2211 Any party may, by notice given in accordance with this Section to the other parties, designate another address or person for receipt of notices hereunder. 13.4 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES; PRESERVATION OF REMEDIES . This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the Buyer and the Seller or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. 13.5 GOVERNING LAW . This Agreement shall be governed and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely within such State. 13.6 BINDING EFFECT; ASSIGNMENT . This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. Buyer may, in its sole discretion, assign any and all of its right, title and interest under this Agreement to such assignee or nominee as it shall, in its sole discretion, elect. 13.7 VARIATIONS IN PRONOUNS . All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 13.8 COUNTERPARTS . This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart 38 may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 13.9 EXHIBITS AND SCHEDULES . The Exhibits and Schedules are a part of this Agreement as if fully set forth herein. All references herein to sections, subsections, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. 13.10 HEADINGS . The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement. 13.11 ENTIRE AGREEMENT . This Agreement (including the Schedules and Exhibits) and the collateral agreements executed in connection with the consummation of the transactions contemplated herein contain the entire agreement among the parties with respect to the purchase of the Shares and supersedes all prior agreements, written or oral, with respect thereto. IN WITNESS WHEREOF, the parties hereto have signed and sealed this Agreement as of the day and year first above written. MONTPILIER HOLDINGS, INC. By: /s/ Nicholas R. Wilson ------------------------------- President SECURFONE AMERICA, INC. By: /s/ Nicholas R. Wilson ------------------------- President MATERIAL TECHNOLOGY, INC. By: /s/ Robert M. Bernstein ----------------------------- Robert M. Bernstein, President Dated: February 18, 1997 /s/ Robert M. Bernstein ----------------------------------- Robert M. Bernstein Dated: February 18, 1997 39 EXHIBIT A ESCROW AGREEMENT This Escrow Agreement, dated as of February 21, 1997, among MONTPILIER HOLDINGS, INC., a Nevada corporation ("MHI"), SECURFONE AMERICA, INC., a Delaware corporation ("SecurFone"), ROBERT M. BERNSTEIN, a resident of Los Angeles, California ("RMB"), MATERIAL TECHNOLOGY INC., a Delaware corporation ("Matech") and KOHRMAN JACKSON & KRANTZ P.L.L., an Ohio registered partnership having limited liability, as escrow agent ("Escrow Agent"). This is the Escrow Agreement referred to in the Stock Purchase Agreement, dated as of February 17, 1997 (the "Stock Agreement") among MHI, SecurFone, RMB, and Matech. Capitalized terms used in this Agreement without definition shall have the respective meanings given to them in the Stock Agreement. The parties, intending to be legally bound, hereby agree as follows: 1. ESTABLISHMENT OF ESCROW (a) Contemporaneously with the execution of the Stock Agreement, SecurFone is depositing with Escrow Agent $75,000 (as increased by any earnings thereon and as reduced by any disbursements, amounts withdrawn under Section 3, the "Escrow Fund"). Escrow Agent acknowledges receipt thereof. (b) Escrow Agent hereby agrees to act as escrow agent and to hold, safeguard and disburse the Escrow Fund pursuant to the terms and conditions hereof. 2. INVESTMENT OF ESCROW FUND The Escrow Agent shall hold the Escrow Fund in a separate bank account bearing interest at the rate normally paid by the bank on commercial accounts. Any interest shall be paid to the party receiving the Escrow Fund pursuant to this Agreement. 3. PURPOSE OF ESCROW MHI and Matech acknowledge and agree that the purpose of the escrow established by this Agreement is to hold the funds in escrow between the execution of the Stock Agreement and the closing scheduled thereunder. In the event that the closing does not occur because of the failure of the conditions set forth in Section 7 of the Stock Agreement to be satisfied, the Escrow Fund and any interest earned thereon shall be returned by the Escrow Agent to SecurFone. In the event that the transactions contemplated by the Stock Agreement are consummated, the Escrow Fund shall be paid (a) $70,000 to Matech's subsidiary and (b) $5,000 to RMB. In the event that the closing does not occur because of MHI's or SecurFone's breach of the Stock Agreement, the Escrow Fund shall be paid to Matech. The procedures for disbursement of the Escrow Fund are set forth in Section 4 of this Agreement. 1 4. PAYMENT OF ESCROW FUND; DISPUTES (a) In the event that the transactions contemplated by the Stock Agreement are not consummated on the Closing Date set forth in the Stock Agreement, SecurFone shall promptly give give notice (the "Notice") to Matech and Escrow Agent specifying in reasonable detail the reasons that the transactions did not close on schedule and the party to whom the Escrow Fund should be paid. Escrow Agent shall not independently inquire into or consider the accuracy or adequacy of such reasons but shall be entitled to rely upon and shall perform its duties hereunder in strict accordance with the provisions of this Escrow Agreement. (b) If Matech gives notice (a "Counter Notice") to SecurFone and Escrow Agent disputing the reasons set forth in the Notice, the Counter Notice shall specify in reasonable detail the reason for the dispute (the "Dispute") within ten (10) days following receipt by Escrow Agent of the Notice (the "Counter Notice Period"), Escrow Agent shall not make any payment to SecurFone with respect to any such Dispute except upon Escrow Agent's receipt of, and then only in accordance with the terms of, (i) a joint written instruction of SecurFone and Matech instructing Escrow Agent to disburse or retain all or a portion of the Escrow Fund in resolution of such Dispute or (ii) a Certified Arbitration Order (as hereinafter defined). For purposes of this Escrow Agreement, a "Certified Arbitration Order" shall be an order of the arbitrator or arbitrators rendered in accordance with the provisions of the Stock Agreement with respect to arbitration. Escrow Agent shall upon receipt and without further investigation, act upon and comply with the terms of any such joint written instruction or Certified Arbitration Order. (c) If the Escrow Agent does not receive a Counter Notice before expiration of the Counter Notice Period, it shall pay the Escrow Fund pursuant to the terms of the Notice. 5. DUTIES OF ESCROW AGENT (a) Escrow Agent shall not be under any duty to give the Escrow Fund held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Agreement. (b) Escrow Agent shall not be liable, except for its own gross negligence or willful misconduct and, except with respect to claims based upon such gross negligence or willful misconduct that are successfully asserted against Escrow Agent, the other parties hereto shall jointly and severally indemnify and hold harmless Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and expenses, including reasonable attorneys' fees and disbursements, arising out of and in connection with this Agreement. Without limiting the foregoing, Escrow Agent shall in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof, including, without limitation, any liability for any delays (not resulting from its gross negligence or willful misconduct) in the investment or reinvestment of the Escrow Fund, or any loss of interest incident to any such delays. 2 (c) Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that the person purporting to give receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. Escrow Agent may conclusively presume that the undersigned representative of any party hereto which is an entity other than a natural person has full power and authority to instruct Escrow Agent on behalf of that party unless written notice to the contrary is delivered to Escrow Agent. (d) Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. (e) Escrow Agent does not have any interest in the Escrow Fund deposited hereunder but is serving as escrow holder only and having only possession thereof. Any payments of income from this Escrow Fund shall be subject to withholding regulations then in force with respect to United States taxes. The parties hereto will provide Escrow Agent with appropriate Internal Revenue Service Forms W-9 for tax identification number certification, or non-resident alien certifications. This Section 6(e) and Section 6(b) shall survive notwithstanding any termination of this Agreement or the resignation of Escrow Agent. (f) Escrow Agent makes no representation as to the validity, value, genuineness or the collectability of any security or other document or instrument held by or delivered to it. (g) Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. (h) Escrow Agent (and any successor Escrow Agent) may at any time resign as such by delivering the Escrow Fund to any successor Escrow Agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Agreement. The resignation of Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction) or (b) the day which is 30 days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time Escrow Agent has not received a designation of a successor Escrow Agent, Escrow Agent's sole responsibility after that time shall be to retain and safeguard the Escrow Fund until receipt of a designation of successor Escrow Agent or a joint written disposition instruction by the other parties hereto or a final non-appealable order of a court of competent jurisdiction. (i) In the event of any disagreement between the other parties hereto resulting in adverse claims or demands being made in connection with the Escrow Fund or in the event that Escrow Agent is in doubt as to what action it should take hereunder, Escrow Agent shall be entitled to retain the Escrow Fund until Escrow Agent shall have received (a) a final non-appealable order of a court of competent jurisdiction directing delivery of the Escrow Fund or (b) 3 a written agreement executed by the other parties hereto directing delivery of the Escrow Fund, in which event Escrow Agent shall disburse the Escrow Fund in accordance with such order or agreement. Any court order shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to Escrow Agent to the effect that the order is final and non-appealable. Escrow Agent shall act on such court order and legal opinion without further question. (j) Escrow Agent shall not charge a fee for the services to be rendered by Escrow Agent hereunder, but the parties agree to reimburse Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). Any such compensation and reimbursement to which Escrow Agent is entitled shall be borne 50% by MHI, and 50% by Matech. Any fees or expenses of Escrow Agent or its counsel that are not paid as provided for herein may be taken from any property held by Escrow Agent hereunder. (k) No printed or other matter in any language (including, without limitation, prospectuses, notices, reports and promotional material) that mentions Escrow Agent's name or the rights, powers, or duties of Escrow Agent shall be issued by the other parties hereto or on such parties' behalf unless Escrow Agent shall first have given its specific written consent thereto. (l) The other parties hereto authorize Escrow Agent, for any securities held hereunder, to use the services of any United States central securities depository it reasonably deems appropriate, including, without limitation, the Depositary Trust Company and the Federal Reserve Book Entry System. 6. LIMITED RESPONSIBILITY This Agreement expressly sets forth all the duties of Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this agreement against Escrow Agent. Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Agreement. 7. OWNERSHIP FOR TAX PURPOSES Matech agrees that, for purposes of federal and other taxes based on income, it will be treated as the owner of the Escrow Fund, and that Matech will report all income, if any, that is earned on, or derived from, the Escrow Fund as its income, in the taxable year or years in which such income is properly includible and pay any taxes attributable thereto. 8. NOTICES All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in 4 each case to the appropriate addresses and telecopier numbers set forth in the Stock Agreement. 9. JURISDICTION; SERVICE OF PROCESS Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement shall be decided by arbitration in accordance with the applicable provisions of the Stock Agreement. 10. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same. 11. SECTION HEADINGS The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. 12. WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 13. EXCLUSIVE AGREEMENT AND MODIFICATION This Agreement supersedes all prior agreements among the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by MHI, SecurFone, RMB, Matech and the Escrow Agent. 14. GOVERNING LAW 5 This Agreement shall be governed by the laws of the State of Delaware, without regard to conflicts of law principles. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. MONTPILIER HOLDINGS, INC. SECURFONE AMERICA, INC. By: /s/ Nicholas R. Wilson By: /s/ Nicholas R. Wilson ------------------------------- ----------------------- Nicholas R. Wilson Nicholas R. Wilson /s/ Robert M. Bernstein MATERIAL TECHNOLOGY, INC. - ----------------------------------- Robert M. Bernstein Dated: February 18, 1997 By: /s/ Robert M. Bernstein --------------------------- Robert M. Bernstein Dated: February 18, 1997 Escrow Agent: KOHRMAN JACKSON & KRANTZ P.L.L. By: H. Clark Harvey, Jr. ---------------------------- H. Clark Harvery, Jr. 6 EXHIBIT B NON-RECOURSE PROMISSORY NOTE $50,000 __________, _________ _________, 1997 For value received the undersigned, SECURFONE AMERICA, INC., (hereinafter "Payor"), promises to pay to the order of [NEWCO] (hereinafter "Payee") the sum of Fifty Thousand Dollars ($50,000) with no interest, payable in two installments of principal each in the amount of $25,000, the first installment due on ____________ , 1997, and the second installment due on ____________ , 1997. Installments of principal shall be payable at 11835 West Olympic Boulevard, East Tower 705, Los Angeles California 90064, or any place hereafter designated by Payee. Payor may prepay this note, in full or in part, at any time without penalty. If all or any part of any installment due hereunder is not received by the Payee by the close of business on the fifth (5th) day after the date on which such payment is due, then the outstanding principal balance hereof shall at once become due and payable at the option of Payee without notice or demand. Payor hereby waives diligence, presentment, demand, protest and notice of every kind whatsoever; and hereby consents to an unlimited number of extensions or modifications of the time of any payment hereunder before or after maturity at Payee's sole discretion without notice to Payor, and that the obligations evidenced hereby shall not be discharged by reason of any such extensions and/or modifications. The failure of Payee to exercise any of its rights hereunder shall not constitute a waiver of the same or of any other right in that or any subsequent instance. This Note is secured by a Pledge Agreement (referred to herein as the "Pledge Agreement") validly executed and delivered by the Maker to the payee hereof pledging certain shares of common stock of [Newco], to which agreement reference is made for a description of the security and the rights of the holder hereof and the obligations of the Maker in respect thereto, but neither this reference to the Pledge Agreement nor any provisions thereof shall affect or impair the absolute and unconditional obligation of the Maker to pay the principal of this Note when due. By its acceptance of this Note, [Newco], the Payee, for itself and its successors and assigns as owner and holder hereof, covenants and agrees that from and after the date hereof, neither the Maker nor its successors and assigns shall have any personal liability for payment of the indebtedness evidenced hereby, and that the holder hereof shall look exclusively to the shares described in, and encumbered by, the Pledge Agreement, and to such other and further security as may from time to time be given; and that no judgment, order or execution of this Note, the Pledge Agreement, or any other instrument securing the indebtedness evidenced hereby shall be rendered or enforced against either the Maker or its successors or assigns personally in any such action, suit or proceeding, whether legal or equitable, brought on this Note, the Pledge 1 Agreement, or such other agreements; provided, however, that nothing herein contained shall limit, or be construed to limit or impair, the enforcement of the rights and remedies of the holder hereof, and its successors and assigns as owner and holder hereof, under this and any other instruments now or hereafter securing the same, against the shares encumbered by the Pledge Agreement, and against such other and further security as may from time to time be given as security for the payment of the indebtedness evidenced by this Note. The provisions hereof shall inure to the benefit of, and shall be binding upon, Payor, Payee and their respective, successors and permitted assigns. IN WITNESS WHEREOF, Payor has executed and delivered this note on the date first set forth above. PAYOR: SECURFONE AMERICA, INC. By: 2 EXHIBIT C RELEASE The undersigned, having been a duly elected officer and/or director of MATERIAL TECHNOLOGY, INC. (the "Company"), for good and valuable consideration, the receipt of which is hereby acknowledged, does for myself and my heirs, executors, administrators, assigns and all parties in interest with me, release and forever discharge the Company, and its officers, directors, employees, agents, successors and all parties in interest with it, from any and all manner of claims, demands, damages, causes of action or suits that I might now have, or that might subsequently accrue to me by reason of any matter or thing whatsoever, from the beginning of time to the date hereof, arising out of or related to my service as an officer and/or director of the Company or any subsidiary of the Company or any other matter, including, but not limited to, any claims for wages, salaries, commissions or other compensation, fees, reimbursed expenses, etc., but excluding any amounts to which I may be entitled by reason of my participation in any pension or profit sharing plan of the Company, if applicable, and further excluding any claim I might have for indemnification as an officer or director of the Company or any subsidiary of the Company with respect to claims against me for actions taken in such capacity on behalf of the Company. Dated this_____ day of______, 1997. EXHIBIT D LETTER OF RESIGNATION Board of Directors Material Technology, Inc. Gentlemen: The undersigned hereby resigns from any and all positions which I now hold as an officer and/or director of Material Technology, Inc. and any related entity, effective immediately. Dated this____ day of_____, 1997. EXHIBIT E CONSULTING AGREEMENT CONSULTING AGREEMENT As of the last date written below, Material Technology, Inc., ("Matech") and Robert M. Bernstein ("Consultant") agree that Consultant shall act as a consultant to Matech on the following terms and conditions: WHEREAS, the willingness of Matech to enter into the Stock Purchase Agreement among Montpilier Holdings, Inc., SecurFone America, Inc., Matech, and Robert M. Bernstein was conditioned on the willingness of Consultant to act as consultant on the terms in this Agreement; and WHEREAS, Consultant is willing to act as a consultant as described below and on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties hereto agree as follows: 1. AGREEMENT TO ACT AS CONSULTANT . Effective on the Closing Date of the Stock Purchase Agreement, Consultant hereby agrees to act as a consultant to Matech for eighteen months following the Closing (as defined in the Stock Purchase Agreement). Upon request of Matech's officers or directors, Consultant shall make himself available for up to fifty (50) hours per calendar quarter to consult with Matech's officers and directors on matters involving Matech's business and affairs. Consultant shall be entitled to reasonable notice to prepare to perform the services requested and to render such services at times reasonable convenient to Consultant. Moreover, Consultant shall be reimbursed for all reasonable travel expenses in connection with such services, provided such expenses are adequately documented. 2. COMPENSATION . On the Closing Date under the Stock Purchase Agreement, RMB shall be paid $5,000 out of the escrow referred to in such Stock Purchase Agreement. In addition, for a period of five years from Closing, Consultant shall be entitled to receive stock options entitling him to purchase Class A Common Stock of Matech. The number of shares of Matech Class A Common Stock subject to such options shall be equal to seven per cent (7%) of the sum of (A) the total number of shares of any class of equity security of Matech that, during the five years following the Closing, Matech registers with the Securities Exchange Commission on Form S-8 plus (B) the total number of shares of any class of equity security of Matech that, during the five years following Closing, Matech sells under Regulation S of the Securities Act of 1933. The shares issuable upon exercise of all such options granted to Consultant shall be registered on Form S-8 within 180 days following the date of grant. In addition, (i) Consultant's options based on shares registered on Form S-8 shall be granted to him on the date each such registration statement becomes effective, shall not be exercisable until one year following the date of grant, and shall be exercisable for a period of five years following the expiration of such one-year period and (ii) Consultant's options based on shares sold under Regulation S shall be granted within twenty (20) days of any sales under Regulation S and shall grant Consultant the right to purchase shares on the same terms and conditions as the purchasers under Regulation S, except that (i) such option shall not be exercisable for a period of one year following the date of grant ; (ii) any restrictions on resale of the Regulation S shares shall not apply to the shares Consultant receives upon exercising his options after such one-year period; and (iii) the shares shall be registered on Form S-8 within 180 days following the date of grant of options to Consultant; provided that Matech shall not be obligated to file more than two Form S-8 registration statements in any calendar year. Consultant shall pay for shares purchased upon exercise of such options in full at the time of exercise. 3. NO SET-OFF OR REDUCTION. Matech agrees that the right of Consultant to receive the compensation set forth in Paragraph 2 above shall not be subject to reduction or set-off for any reason whatever, including, but not limited to, any alleged breach of warranties or other obligations under this Agreement or the Stock Purchase Agreement. 4. REMEDIES OF CONSULTANT. In the event of any breach by Matech of its obligations to compensate consultant, in addition to any remedies Consultant may have at law, any and all options previously granted to Consultant shall become immediately exercisable. In the event that Consultant incurs costs, expenses, and/or attorneys fees to enforce his rights under this Agreement, Matech shall reimburse Consultant for any and all such costs, expenses, and/or reasonable attorneys fees. 5. AUTHORIZATION. This Agreement has been authorized by Matech's directors prior to Closing and by Matech's replacement directors after the Closing. 6. CONFIDENTIAL INFORMATION. Consultant will acquire information of a confidential nature relating to the operation, finances, business relationships, intellectual property, and trade secrets of Matech. During the term of this Agreement and for two years following termination of the 18-month term of his consulting obligation, Consultant will not, without Matech's prior written consent, use, publish, or disclose or authorize anyone else to use, publish, or disclose,any confidential information pertaining to Matech or its affiliated entities, including, without limitation, any information relating to existing or potential business, customers, trade or industrial practices, plans, costs, processes, technical or engineering data, or trade secrets; provided, however, that Consultant shall be prohibited from ever using, publishing, or disclosing or authorizing anyone else to use, publish, or disclose any confidential information which constitutes a trade secret under applicable law. The foregoing notwithstanding, Consultant has 2 no obligation to refrain from using, publishing, or disclosing any such confidential information which is or hereafter shall become available to the public otherwise than by Consultant's use, publication, or disclosure. This prohibition also does not prohibit Consultant from disclosing confidential information in response to lawful process compelling disclosure. On the other hand, Consultant shall provide reasonable notice to Matech of any such process to allow Matech to timely object to such disclosure. 7. RETURN OF DOCUMENTS. Within five days of termination of the 18-month consulting period under this Agreement, Consultant shall return to Matech or destroy all of Matech's papers, documents, and things, including information stored for use in or with computers and software applicable to Matech's business and all copies of such papers, documents, and things, which are in Consultant's possession, custody, or control and Consutant shall certify in writing that he has complied with this provision. 8. AGREEMENT ON FAIRNESS. Consultant acknowledges that: (i) this Agreement has been specifically bargained between the parties and reviewed by Consultant and his counsel and (ii) the covenants made by and the duties imposed upon Consultant hereby are fair, reasonable, and minimally necessary to protect the legitimate business interests of Matech, and such covenants and duties will not place an undue burden upon Consultant's livelihood. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the last date written below. Date: CONSULTANT ------------------------------- Robert M. Bernstein Date: MATERIAL TECHNOLOGY, INC. By: ----------------------------- Print Name and Title 3 EX-2.2 3 STOCK PURCHASE AGREEMENT EXHIBIT 2.2 February 18, 1997 Material Technology, Inc. 11835 West Olympic Boulevard East Tower 705 Los Angeles, CA 90064 Gentlemen: Reference is made to the Stock Purchase Agreement dated as of February 17, 1997 among Montpilier Holdings, Inc. ("MHI"), SecurFone America, Inc. ("SecurFone"), Material Technology, Inc. ("Matech") and Robert M. Bernstein ("RMB"). In consideration for entering into the Stock Purchase Agreement, the parties agree as follows: 1. The officers of SecurFone are: Chief Executive Officer - William Steuber; President - Nicholas Wilson; Vice President - Derek Davis; Treasurer and Chief Financial Officer - Michael Lee; Secretary - Steven Wasserman. These persons and David Neibert are the directors. The sole shareholder of SecurFone is Montpilier Holdings, Inc. 2. MHI agrees, for a period of two years following the closing, to vote its shares of Matech to elect Steven L. Wasserman as a director of Matech. 3. Matech agrees to retain 560,000 shares of the 5,560,000 total number of outstanding shares of the new subsidiary to be formed for the purpose of transferring all of the assets and assuming all of the liabilities of Matech. 4. RMB agrees that all shares of Matech owned by him as of the date hereof and at the Closing Date shall not be sold, pledged or otherwise transferred by him for a period of one year following the Closing under the Stock Purchase Agreement. In addition, RMB shall use his best efforts to obtain the same agreement, not to sell or otherwise transfer shares, with respect to not less than 90% of the total number of shares held, from the shareholders listed on Exhibit A attached hereto. 5. MHI and RMB agree that MHI, any other shareholders of SecurFone, RMB and the other shareholders of Matech listed in Exhibit A shall have the right, for a period of 18 months following the Closing, to have shares owned by them registered together with any shares that Matech may elect to register (excluding shares registered on Form S-8) in an amount equal to 75% (for MHI and any other shareholders of SecurFone) and 25% (for RMB and the other shareholders of Matech listed on Exhibit A) of the number of shares to be registered by Matech. The complete terms and conditions of these registration rights shall be set forth in a Registration Rights PAGE 2 CONSULTING AGREEMENT Agreement to be entered into prior to Closing, but the terms shall be generally as follows: Matech shall give MHI, RMB and the other shareholders not less than 15 days prior written notice of any proposed registration and such shareholders shall notify Matech whether or not they wish to exercise their rights to be included in any such registration within such 15 days. Notwithstanding any shareholders' election to exercise their rights, Matech shall have the right to postpone or terminate any registration for any reason and, in the case of any such determination, it shall have no obligation to register MHI's, RMB's and the other stockholders' shares until the next time it decides to register shares. Matech shall pay all expenses of any such registration, except any fees, discounts and commissions of underwriters or dealers applicable to shares sold by any shareholders and any fees or expenses of legal counsel retained by any shareholders. Please acknowledge your agreement with the foregoing by signing a copy of this letter. Sincerely, MONTPILIER HOLDINGS, INC. By: Agreed to: Robert M. Bernstein MATERIAL TECHNOLOGY, INC. By: 2 EX-3.I 4 CERTIFICATE OF INCORPORATION EXHIBIT 3(i) PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TURE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "MATERIAL TECHNOLOGIES, INC.", FILED IN THIS OFFICE ON THE FOURTH DAY OF MARCH, A.D. 1997, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ EDWARD J. FREEL [SEAL] ----------------------------------- EDWARD J. FREEL, SECRETARY OF STATE AUTHENTICATION: 8357767 DATE: 03-04-97 CERTIFICATE OF INCORPORATION OF MATERIAL TECHNOLOGIES, INC. FIRST: The name of the corporation is Material Technologies, Inc. SECOND: Its registered office in the State of Delaware is to be located at 1013 Centre Road, Wilmington, DE 19805, New Castle County. The registered agent in charge thereof is Corporation Service Company whose address is the same as above. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The corporation is authorized to issue eleven million (11,000,000) shares of stock all of which stock shall have a par value of $.001 per share in classes as follows: a. Ten million (10,000,000) shares of stock designated as "Common Stock", $.001 par value and one hundred thousand (100,000) shares of stock designated as "Class B Common Stock", $.001 par value. The holders of Common Stock shall be entitled to receive such dividends out of the funds or assets of the Corporation legally available therefor as, from time to time, the Board of Directors may declare. The holders of Class B Common Stock shall not be entitled to receive dividends. The holders of Common Stock and the holders of Class B Common Stock shall vote as a single class on all matters submitted to a vote of stockholders, with each share of Common Stock entitled to one (1) vote and each share of Class B Common Stock entitled to two hundred (200) votes. In all other respects, the Common Stock and Class B Common Stock shall be identical. b. Nine hundred thousand (900,000) shares of stock designated as "Preferred Stock", $.001 par value. The Board of Directors is granted the authority by resolution to authorize the corporation to issue one or more series of the Preferred Stock and to determine the voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights of each and every series of Preferred Stock and the qualifications, limitations or restrictions on such preferences and/or rights. FIFTH: The name and mailing address of the incorporator is as follows: DEBRA M. CARLL, CORPORATION SERVICE COMPANY 1013 CENTRE ROAD WILMINGTON, DE 19805 SIXTH: The names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify are: Robert M. Bernstein Joel Freedman John Goodman East Tower, Suite 705 1 Bala Plaza East Tower, Suite 705 11835 Olympic Blvd. Bala Cynwyd, PA 19004 11835 Olympic Blvd. Los Angeles, CA 90064 Los Angeles, CA 90064 SEVENTH: The Board of Directors shall have the power to adopt, amend or repeal the corporation's bylaws. This provision does not divest the stockholders nor limit their power to adopt, amend, or repeal the corporation's bylaws. EIGHTH: The directors of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty to the full extent permitted by Delaware law or PAGE 2 CERTIFICATE OF INCORPORATION MATERIAL TECHNOLOGIES, INC. by the law of any other jurisdiction that legally applies to a claim for such breach at the time of any director's alleged breach of fiduciary duty. NINTH: The directors are authorized to provide through bylaw provisions or through agreement with the corporation's agents, or both, to indemnify directors, officers, and other agents of the corporation to the fullest extent permitted by Delaware law and/or in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. TENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. DATED: March 4, 1997 /s/ Debra M. Carll ------------------------------ DEBRA M. CARLL INCORPORATOR EX-3.II 5 BYLAWS EXHIBIT 3(ii) BYLAWS OF MATERIAL TECHNOLOGIES, INC. A DELAWARE CORPORATION TABLE OF CONTENTS ARTICLE I - OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 1. REGISTERED OFFICE.. . . . . . . . . . . . . . . . . . . . . 3 SECTION 2. PRINCIPAL OFFICE.. . . . . . . . . . . . . . . . . . . . . 3 SECTION 3. OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II - STOCKHOLDERS' MEETING . . . . . . . . . . . . . . . . . . 3 SECTION 1. ANNUAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2. SPECIAL MEETINGS.. . . . . . . . . . . . . . . . . . . . . 3 SECTION 3. VOTING LIST. . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 4. NOTICE OF MEETING. . . . . . . . . . . . . . . . . . . . . 4 SECTION 5. WAIVER OF NOTICE OF MEETING.. . . . . . . . . . . . . . . . 4 SECTION 6. ORGANIZATION.. . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 7. INSPECTORS.. . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 8. QUORUM OF STOCKHOLDERS AND MAJORITY VOTE.. . . . . . . . . 5 SECTION 9. ADJOURNMENTS OF STOCKHOLDER MEETINGS.. . . . . . . . . . . 5 SECTION 10. DECISIONS AT STOCKHOLDERS' MEETINGS.. . . . . . . . . . . 5 SECTION 11. VOTING RIGHTS.. . . . . . . . . . . . . . . . . . . . . . 5 SECTION 12. PROXIES.. . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 13. SHARES HELD BY FIDUCIARIES, RECEIVERS, PLEDGEES AND TWO OR MORE PERSONS . . . . . . . . . . . . . . . . . . . . . 6 SECTION 14. ACTION BY WRITTEN CONSENT.. . . . . . . . . . . . . . . . 7 SECTION 15. INSPECTION OF BOOKS AND RECORDS.. . . . . . . . . . . . . 7 ARTICLE III - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . 7 SECTION 1 POWERS OF THE BOARD OF DIRECTORS. . . . . . . . . . . . . . 7 SECTION 2. NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . 7 SECTION 3. ELECTION AND TERM. . . . . . . . . . . . . . . . . . . . . 7 SECTION 4. RESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 5. VACANCY AND INCREASE.. . . . . . . . . . . . . . . . . . . 8 SECTION 6. REMOVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV - MEETINGS OF THE BOARD OF DIRECTORS. . . . . . . . . . . . 9 SECTION 1. PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . 9 SECTION 2. ANNUAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3. SPECIAL MEETINGS.. . . . . . . . . . . . . . . . . . . . . 9 SECTION 4. NOTICE.. . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 5. ACTION WITHOUT MEETING.. . . . . . . . . . . . . . . . . . 9 SECTION 6. MEETING BY TELEPHONE OR ELECTRONIC CONFERENCE. . . . . . . 9 SECTION 7. QUORUM.. . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 8. COMPENSATION.. . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 9. ORDER OF BUSINESS. . . . . . . . . . . . . . . . . . . . . 10 SECTION 10. REMOVAL.. . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V - COMMITTEES OF THE BOARD OF DIRECTORS . . . . . . . . . . . 10 SECTION 1. FORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 2. POWERS.. . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 3. MEETINGS.. . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLES VI - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 1. PRINCIPAL OFFICERS.. . . . . . . . . . . . . . . . . . . . 11 SECTION 2. ADDITIONAL OFFICERS. . . . . . . . . . . . . . . . . . . . 11 i SECTION 3. TERM OF OFFICE/RESIGNATION.. . . . . . . . . . . . . . . . 11 SECTION 4. REMOVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5. POWERS AND DUTIES OF OFFICERS. . . . . . . . . . . . . . . 11 SECTION 6. CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . 11 SECTION 7. CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . . . . 11 SECTION 8. THE PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 9. CHIEF OPERATING OFFICER.. . . . . . . . . . . . . . . . . . 12 SECTION 10. VICE PRESIDENTS.. . . . . . . . . . . . . . . . . . . . . 12 SECTION 11. CHIEF FINANCIAL OFFICER.. . . . . . . . . . . . . . . . . 12 SECTION 11. TREASURER.. . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 12. ASSISTANT TREASURERS. . . . . . . . . . . . . . . . . . . 13 SECTION 13. SECRETARY.. . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 14. ASSISTANT SECRETARIES.. . . . . . . . . . . . . . . . . . 13 ARTICLE VII - CONFLICT OF INTEREST AND INDEMNIFICATION . . . . . . . . 13 SECTION 1. DIRECTOR' AND OFFICERS' INTERESTS IN CONTRACTS.. . . . . . 13 SECTION 2. NONLIABILITY OF DIRECTORS IN CERTAIN CASES.. . . . . . . . 14 SECTION 3. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE. . . . . . . . . . . . . . . . . . . . 14 ARTICLE VIII - BOOKS, DOCUMENTS AND ACCOUNTS . . . . . . . . . . . . . 16 ARTICLE IX - CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 1. STOCK CERTIFICATES.. . . . . . . . . . . . . . . . . . . . 16 SECTION 2. STOCK TRANSFERS. . . . . . . . . . . . . . . . . . . . . . 16 SECTION 3. REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . . 16 SECTION 4. LOST, STOLEN, OR DESTROYED CERTIFICATES. . . . . . . . . . 16 SECTION 5. DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6. RECORD DATE. . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE X - MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . 17 SECTION 1. FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 2. SEAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 3. SECURITIES OF OTHER CORPORATIONS.. . . . . . . . . . . . . 18 SECTION 4. FUND DEPOSITORIES. . . . . . . . . . . . . . . . . . . . . 18 SECTION 5. SIGNING OF CHECKS, NOTES, ETC. . . . . . . . . . . . . . . 18 SECTION 6. PERSONS. . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7. HEADINGS.. . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE XI - AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . 19 ii BYLAWS OF MATERIAL TECHNOLOGIES, INC. A DELAWARE CORPORATION ARTICLE I - OFFICES SECTION 1. REGISTERED OFFICE. The registered Office in Delaware of Material Technologies, Inc., (the "Corporation") shall be the Corporation Service Company, 1013 Centre Road, Wilmington, DE 19805, New Castle County, but the Corporation's Board of Directors (the "Board") may change the registered office without amending these By-Laws. The registered office shall not be the Corporation's principal place of business. SECTION 2. PRINCIPAL OFFICE. The Corporation's principal executive office shall be at East Tower, Suite 705, 11835 W. Olympic Boulevard, Los Angeles, CA 90064, but the Board may change the principal office without amending these By-Laws. SECTION 3. OTHER OFFICES. The Board may establish offices, in and/or outside California, for the Corporation's business. ARTICLE II - STOCKHOLDERS' MEETING SECTION 1. ANNUAL MEETINGS. The Board shall hold an annual meeting of the Corporation's stockholders ("Stockholders") to elect directors and transact any other business properly brought before the meeting. Except as otherwise limited by law and/or these By- Laws, any and all action may be taken and any and all business transacted at any annual meeting. The Board may choose any place for holding the annual meeting which is reasonably convenient for holders of the majority of the Corporation's stock. Such annual meeting shall be held at a convenient time designated by the Board prior to April 1 of each calendar year. If the annual meeting is not held prior to April 1, the Board shall cause the meeting to be held as soon thereafter as convenient. SECTION 2. SPECIAL MEETINGS. At any reasonable times, the Board, the Chairman of the Board, the President, or any two other officers of the Corporation may call special meetings of the Stockholders. Within a reasonable time of receiving a written request, the Secretary shall call a special Stockholders' meeting upon the written request of holders of not less than 10% of the votes of all outstanding securities of the Corporation then entitled to vote. Unless otherwise prescribed by law, special meetings may be called to take any and all actions or conduct any and all business which actions or business requires Stockholder vote. The Secretary shall fix a reasonable, date, time, and place for each special meeting within 60 days of receipt of such request and give due notice of such meeting including a specific description of matters to be decided and acted upon unless all Stockholders waive such notice in writing signed by each Stockholder or the Stockholder's lawful representative. Any Stockholder request must be in writing, include a specific description of matters to be decided, and be sent by registered mail to the Corporation's President or Secretary at the Corporation's principal office or delivered to such officer in person. If the Secretary neglects or refuses to fix the date, time, and place of the special meeting and give notice of such meeting, the person or persons calling the meeting may do so. Business transacted at all special meetings shall be confined to matters stated in the notice and matters reasonably related thereto unless all Stockholders entitled to vote are present and consent. SECTION 3. VOTING LIST. The Secretary shall prepare a complete list of Stockholders entitled to vote at each Stockholders' meeting, arranged in alphabetical order, with each Stockholder's name, address, number of shares registered in that name, and, if the shares are owned by more than one person or in some other capacity, such further information as is necessary to determine how the shares are held and how they may be voted. For at least ten (10) business days prior to each Stockholders' meeting , the Secretary shall make such Stockholders' list reasonably available for any Stockholder to inspect during usual business hours at a place or places designated in the Notice of Meeting. During each Stockholder's meeting, the list shall be available for inspection by any Stockholder present at the meeting. SECTION 4. NOTICE OF MEETING. Whenever a Stockholders' meeting is called, the Secretary or a person designated by the Board, shall deliver, personally or by mail, a written Notice of Meeting, annual or special, to each Stockholder of record entitled to vote at such meeting. If mailed, the Notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the Stockholder at the address as it appears on the stock transfer books of the Corporation. Unless otherwise provided by law, the Notice shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting. The Notice shall state the place, day, time, and where and when Stockholders may inspect the Stockholders list and, in the case of a special meeting, the purpose or purposes of the meeting. SECTION 5. WAIVER OF NOTICE OF MEETING. Any Stockholder may waive receiving notice of any meeting by, at any time, signing a written waiver of notice to the specific meeting or by attending the meeting. In either case, waiver shall be deemed equivalent to receiving proper notice. The waiver of notice need not specify the business to be transacted or any purpose for the meeting. A person does not waive notice by attending a meeting and, at the beginning of such meeting, objecting to transacting any business on the grounds that the meeting was unlawfully called or convened. SECTION 6. ORGANIZATION. The President or an officer designated by the Board, shall call each Stockholder meeting to order and act as Chairperson. If no Chairperson is designated or present, a majority of Stockholders present in person or by proxy and entitled to vote, may by a majority vote elect a Stockholder to act as Chairperson. The Secretary or a person designated by the Chairperson shall act as Secretary of Stockholders' meetings and keep minutes of the meeting. The Chairperson shall determine the order of business at all Stockholders' meetings. SECTION 7. INSPECTORS. In advance of any Stockholders' meeting, the Board may elect to have one or more inspectors of election act at the meeting. If the Board does not so elect, the Chairperson of such meeting may, and on written request of any Stockholder or his proxy shall, shall appoint one or more inspectors. If inspectors are to be appointed, the Chairperson shall appoint one or more inspectors to act at the meeting and write a report of the meeting. Each inspector shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality, in good faith, and 2 according to the best of his or her ability. Inspectors shall have the following duties: (a) to determine the number of shares outstanding on the record date for the meeting and the voting power of each; (b) to determine what shares are represented at the meeting and whether a quorum exists; (c) to determine the validity of proxies and ballots; (d) to count all votes and ballots; (e) to hear and decide any and all questions or challenges related to the right to vote at the meeting; (f) to make and retain for a reasonable time a record of any challenges and their disposition; and (g) to certify the number of shares represented at the meeting and the counts of all votes and ballots. Inspectors may appoint or retain assistants. SECTION 8. QUORUM OF STOCKHOLDERS AND MAJORITY VOTE. Unless otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws, holders of a majority of shares entitled to vote at a Stockholders meeting, represented in person or by proxy, shall constitute a quorum for transacting business. SECTION 9. ADJOURNMENTS OF STOCKHOLDER MEETINGS. A majority of Stockholders represented at any properly noticed meeting, with or without a quorum, may adjourn the meeting. If a quorum is present for the adjournment vote and a new time and place of the adjourned meeting are announced prior to the vote of adjournment, notice of the new time and place of the adjourned meeting is not required. If (a) a Stockholders' meeting is adjourned without a quorum, (b) the adjournment is for less than 30 days, and (c) no new record date is fixed for the adjourned meeting, a Notice of Meeting need not be delivered to each Stockholder of record entitled to vote at the adjourned meeting. If (a) a meeting is adjourned for more than 30 days or (b) a new record date is fixed for the adjourned meeting, a new Notice of Meeting shall be delivered to each Stockholder of record entitled to vote at the adjourned meeting. If a quorum is present at any meeting previously adjourned with less than a quorum present or represented, any business may be transacted which might have been transacted at the original meeting as originally noticed. SECTION 10. DECISIONS AT STOCKHOLDERS' MEETINGS. Except when applicable law, the Certificate of Incorporation, or these By-Laws specifically require otherwise, Stockholders shall decide all matters to be decided by vote of Stockholders at any Stockholder's meeting by majority vote of the shares represented, in person or by proxy, and entitled to vote. A quorum of Stockholders must be present for the first vote of Stockholders at any meeting except for a vote to adjourn. If, after the first vote of a duly called meeting, enough Stockholders withdraw to leave less than a quorum, the Stockholders present may continue to transact business until adjournment. In that case, the majority vote of a quorum shall be the Stockholders' act. Voting for election of directors shall be by written ballot. Voting on all other matters shall be by voice vote unless, prior to voting, the Chairperson decides, or a majority of the shares entitled to vote at such meeting demand, that voting on any or all other matters shall be by written ballot. Only ballots stating the number of shares voted and signed by the Stockholder voting or by proxy shall be valid. SECTION 11. VOTING RIGHTS. Unless otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws, each outstanding share of common stock standing in the Stockholder's name on the stock transfer books on the record date of a Stockholders' meeting shall be entitled to one (1) vote on each matter submitted to a vote at that meeting. In electing directors, if one or more Stockholders or their proxy deliver written notice to the Secretary of the Corporation prior to the meeting, or to the Chairperson prior to the vote for 3 directors, all Stockholders may cumulate their votes in electing directors. If and only if such notice is given, every Stockholder entitled to vote for directors shall have the number of votes determined by multiplying the number of directors to be elected by the number of shares the Stockholder is entitled to vote and each Stockholder may then give one nominated candidate all such votes or distribute such votes in any proportion among the nominated candidates. The Corporation is not entitled to vote or count for quorum purposes shares of its own capital stock owned by the Corporation or by another corporation in which the Corporation is entitled to vote a majority of the shares of that other corporation in an election of directors. The Corporation, however, may vote and count for quorum purposes shares it holds in a fiduciary capacity. SECTION 12. PROXIES. Each Stockholder entitled to vote at a specific Stockholders' meeting or to execute consents may attend such meeting and vote and execute consents either in person or by proxy. To be valid, a proxy must be in writing and signed by the Stockholder or by such Stockholder's duly authorized agent or attorney-in-fact and filed with the Secretary before or at the time of the meeting. No proxy shall be valid after three (3) years from its execution date unless such proxy expressly provides a longer period. Each proxy shall be revocable unless it specifically provides that it is irrevocable and it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. A Stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing with the Secretary (a) an instrument in writing revoking the proxy or (b) another duly executed proxy bearing a later date. In advance of any annual or special meeting of Stockholders, the Board may prescribe additional rules concerning execution, filing, and/or validation of proxies to be voted at any such meeting. SECTION 13. SHARES HELD BY FIDUCIARIES, RECEIVERS, PLEDGEES AND TWO OR MORE PERSONS. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote the pledged shares unless, in the transfer on the Corporation's books, the pledgor has expressly empowered the pledgee to vote the shares in which case only the pledgee or proxy for the pledgee may represent and vote the pledged shares. Unless interested Stockholders deliver to the Secretary written notification and a copy of the instrument providing for voting their shares, if shares stand of record in the name of two or more persons, including, but not limited to, fiduciaries, members of a partnership, joint tenants, tenants in common, and/or tenants by the entirety, or if two or more persons have the same fiduciary relationship respecting the same shares, the acts of the two or more persons with respect to voting the shares shall have the following effect: a. If only one votes the shares, that act binds all record owners of those shares; b. If more than one vote, the vote of the majority voting binds all record owners of those shares; and c. If more than one vote, but the vote is evenly split on a particular matter, each faction may vote the securities in question proportionally or any person with the right to vote such shares or a beneficiary may apply to any court with jurisdiction to have another person appointed to vote the shares in which case the vote of the majority voting binds all record owners of those shares. 4 Under this subsection, if the instrument filed with the Secretary shows that any tenancy is held in an equal interest, a majority or even-split shall mean a majority or even split in interest. SECTION 14. ACTION BY WRITTEN CONSENT. Without meeting, without prior notice, without a vote, and by signing a consent or consents in writing specifying the action taken, Stockholders, having not less than the minimum number of votes necessary to take an action at a meeting at which all shares entitled to vote were voted, may take any action required or permitted to be taken at any meeting. The Secretary shall give prompt notice of any action taken by consent of less than all the Stockholders to those who do not consent in writing. SECTION 15. INSPECTION OF BOOKS AND RECORDS. Upon written demand under oath stating the purpose for inspection, during normal business hours, and for any proper purpose, any Stockholder or Stockholders' agent, shall have the right to inspect, and to make copies or abstracts of, the Corporation's stock ledger, a list of its Stockholders, and its other books and records. A pro-per purpose shall mean a purpose reasonably related to such person's interest as a Stockholder. In every in-stance where an attorney or other agent seeks the right to inspect, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to act on behalf of the Stockholder in exercising the right to inspect. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. ARTICLE III - BOARD OF DIRECTORS SECTION 1 POWERS OF THE BOARD OF DIRECTORS. The Board shall manage and direct the business, property, and affairs of the Corporation. Subject to the restrictions imposed by law, the Certificate of Incorporation, and these By-Laws, the Board may exercise all of the powers of the Corporation. SECTION 2. NUMBER OF DIRECTORS. The Board shall consist of not less than two (2) nor more than five (5) directors. Except as otherwise provided by law or the Certificate of Incorporation, the exact number of directors shall be fixed and may be changed from time to time by resolution of the Board. SECTION 3. ELECTION AND TERM. Except as otherwise provided in Section 5 of this Article III, each year Stockholders shall elect the directors at the annual Stockholders' meeting or at a special meeting of Stockholders held in lieu of the annual meeting. Each director shall hold office until the earlier of his or her successor being duly elected and qualified, death, resignation, or removal. Each director shall qualify by expressly accepting his election to the Board or by acting as a director. SECTION 4. RESIGNATION. Any director or officer of the Corporation may resign at any time by giving written notice of his resignation to the Corporation. The resignation shall take effect at the time of its receipt by either the Board, the President, or the Secretary. Acceptance of a resignation shall not be necessary to make it effective unless expressly so provided in the resignation. 5 SECTION 5. VACANCY AND INCREASE. By affirmative vote and with or without a quorum, a majority of directors in office or a sole remaining director may fill any Board vacancy and any newly created directorships resulting from any increase in the authorized number of directors. Each director so chosen shall be elected for the unexpired term of his or her office. SECTION 6. REMOVAL. Except as otherwise provided by Delaware General Corporation Law, a majority of Stockholders entitled to vote at any Stockholders' meeting at which a quorum is present may remove, with or without cause, any director. The Board may remove a director (a) if by order a court declares the director of unsound mind, (b) a director is convicted of a felony, or (c) if a director fails to qualify with-in sixty (60) days after notice of his or her election. No reduction in the number of directors shall have the effect of removing any director prior to expiration of his or her term of office. 6 ARTICLE IV - MEETINGS OF THE BOARD OF DIRECTORS SECTION 1. PLACE OF MEETINGS. The Board may hold meetings, both annual and special, at any reasonable place and time. SECTION 2. ANNUAL MEETINGS. As soon as practicable after each annual Stockholders' meeting and at the same place where such annual meeting was held, the Board shall meet to organize, elect officers, and transact other business. Notice of the Board's annual meeting need not be given. If the annual meeting of Stockholders is not so held, the annual meeting of the Board may be held at a place, on a date, and at a time specified in a written notice thereof delivered in accordance with Section 4 of this Article IV. SECTION 3. SPECIAL MEETINGS. The President, the Chairman of the Board, the Secretary, or any two (2) Directors may call a special meeting of the Board which meeting shall be held at any reasonable time and place determined by the person or persons calling the meeting. SECTION 4. NOTICE. The Secretary or an officer designated by the Board shall give notice to each director of the date, time, and place of each special meeting of the Board. Such notice shall be given either by United States mail at least three (3) days prior to the meeting or delivered personally or by telephone, telecopier, or any electronic means reasonably calculated to provide actual notice to each director at least twenty-four (24) hours prior to the meeting. By attending any meeting, a director waives notice of that meeting except when a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. In addition, a written waiver of notice of a meeting, signed by the person entitled to notice, whether before or after the time for the meeting, shall be deemed equivalent to notice. SECTION 5. ACTION WITHOUT MEETING. The Board or of any committee thereof may take, without meeting, any action required or permitted to be taken at a meeting if all members of the Board or the committee consent to such action in writing and the writing or writings are filed with the minutes of the Board or such committee. SECTION 6. MEETING BY TELEPHONE OR ELECTRONIC CONFERENCE. Directors may participate in Board meetings or any committee meeting by telephone or other communications equipment which allows all directors participating in the meeting to directly communicate to, and to directly receive communications from, all other directors attending the meeting. Any director's participation through such equipment shall constitute presence in person at the meeting. SECTION 7. QUORUM. A majority of directors holding office shall constitute a quorum for transacting any and all business. If at any Board meeting less than a quorum is present, a majority of directors present may adjourn the meeting without notice, other than by announcement at the meeting, until a 7 quorum is present. The act of a majority of the directors present at any Board meeting at which there is a quorum shall constitute the act of the Board unless the act of a greater number is required by law, the Certificate of Incorporation, or these Bylaws. SECTION 8. COMPENSATION. The Board shall have the authority to fix by resolution the compensation of directors including, but not limited to, (a) their expenses, if any, incurred in attending each Board meeting, special committee meeting, and/or committee meeting, (b) a fixed sum for attending each such meeting, and/or (c) a stated salary as a director and/or committee member. These Bylaws shall not limit any director from serving the Corporation in any other capacity and receiving separate compensation for such service. SECTION 9. ORDER OF BUSINESS. The Board determines the order of business at its meetings. The Chairman of the Board shall preside at all Board meetings, provided, however, that in the Chairman's absence, the Board shall choose a temporary chairman from among the directors present who shall preside at the meeting. SECTION 10. REMOVAL. The Stockholders may remove, with or without cause, any director or the entire Board of Directors by a vote the majority of the shares then entitled to vote at an election of directors. ARTICLE V - COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. FORMATION. The Board, by resolution, may designate an Executive Committee, an Audit Committee, a Compensation Committee, and any other committee which the Board deems appropriate. Each committee shall consist of one or more directors as alternate members of any committee who may replace any absent or disqualified member at any committee meeting. SECTION 2. POWERS. In the resolution establishing any committee, the Board may delegate to that committee, and that committee shall have and may exercise, all powers and authority of the Board in managing the business and affairs of the Corporation except where applicable law requires Board action. Regardless of Board resolution, however, Board committees shall have no power to do the following: (a) amend the Certificate of Incorporation; (b) adopt a merger or consolidation agreement; -C- recommend to Stockholders the sale, lease, or exchange of all or substantially all of the Corporation's assets; (d) recommend to Stockholders dissolution of the Corporation or revocation of a dissolution; or (e) amend the Bylaws. Unless a Board resolution, the Certificate of Incorporation, or these Bylaws expressly so provides, no committee shall have the authority to (a) declare a dividend, (b) authorize the issuance of stock, or (c) adopt a certificate of ownership and merger. SECTION 3. MEETINGS. Board committees shall hold regular meetings at such times and places as the committee may determine. At any time, an officer of the Corporation or any committee member may call a special meeting of a committee at a reasonable time and place. No notice of any committee meeting shall be required. A majority of committee members shall constitute a quorum for transacting 8 business. Each committee shall keep minutes of all meetings and present them to the Board upon request. ARTICLES VI - OFFICERS SECTION 1. PRINCIPAL OFFICERS. The Board shall choose the Corporation's officers. The principal officers shall be a Chief Executive Officer, a President, an Chief Operating Officer, a Chief Financial Officer, Secretary, and, from time to time, a Treasurer and as many Vice Presidents, Assistant Secretaries, or Assistant Treasurers as the Board may determine and elect. The same individual may hold any number of offices. SECTION 2. ADDITIONAL OFFICERS. From time to time, the Board may appoint such other officers and agents as it deems necessary for such term and shall exercise such powers and perform such duties as the Board may determine. SECTION 3. TERM OF OFFICE/RESIGNATION. Each officer shall hold office until his or her successor is duly elected and qualified or until his or her earlier death, resignation, or removal. Any officer may resign at any time upon giving written notice to the Corporation. Any resignation shall take effect at the time specified therein, or if no time is specified, immediately upon receipt by the Corporation. Unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. SECTION 4. REMOVAL. All officers shall serve at the Board's pleasure. Whenever in its judgment the best interests of the Corporation will be served, the Board may remove any officer, agent, or member of any committee but such removal shall be without prejudice to contract rights, if any, of the person so removed. No contract rights shall be created solely by the Board electing or appointing an officer or agent. SECTION 5. POWERS AND DUTIES OF OFFICERS. Each officer shall perform the duties and exercise the powers (a) expressly conferred or provided for in these Bylaws, (b) that are customary and incident to such office, and (c) such other duties and powers as, from time to time, the Board, the Chief Executive Officer, or the President may assign. SECTION 6. CHAIRMAN OF THE BOARD. The Board may select from among its members a Chairman who may preside at all meetings of the Board and approve the minutes of all proceedings. The Chairman shall consult with and advise the Corporation's officers with respect to conducting the Corporation's business and affairs. SECTION 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be primarily responsible for implementing Board policies and directives. He or she shall have all powers of the President, and such additional general, 9 executive, and management powers as the Board or applicable law specifically assigns to him or her. SECTION 8. THE PRESIDENT. Subject to control of the Board and the Chief Executive Officer, the President shall manage and control the Corporation's affairs, properties, and operations in the ordinary course of its business, with all duties, powers and authority with respect to such affairs, properties, and operations as may be reasonably incident to such responsibilities. The President may appoint or employ and discharge employees and agents of the Corporation and fix their compensation. The President may make, execute, acknowledge, and deliver any and all contracts, leases, deeds, assignments, bills of sale, transfers, releases, receipts, mortgages, deeds of trust, pledges, liens, bonds, debentures, notes, any and all other obligations and encumbrances, and any and all other instruments and documents of any kind or character for and on behalf of and in the name of the Corporation. With the Secretary or an Assistant Secretary, the President may sign all certificates for the Corporation's capital stock. The President shall perform such other duties and have such additional authority and powers as from time to time the Board and/or the Chief Executive Officer may assign or confer upon her or him. SECTION 9. CHIEF OPERATING OFFICER. Subject to the control of the Board, the Chief Executive Officer, and the President, the Chief Operating Officer shall have the same duties and responsibilities as the President. SECTION 10. VICE PRESIDENTS. In the absence of the President and the Chief Executive Officer, or if they are both disabled from acting or refuse to act, the Vice President (or if there are more than one Vice President, the Vice Presidents in the order designated by the Board, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform other duties as, from time to time, the Chief Executive Officer, President, Chief Operating Officer, or the Board Directors may assign. SECTION 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have general supervision, direction, and control of the financial affairs of the Corporation and shall have such other powers and duties as the Board, the Chief Executive Officer, the President, or the Chief Operating Officer may assign. In the absence of a named Treasurer, the Chief Financial Officer shall also have the powers and duties of the Treasurer and shall be authorized and empowered to sign as Treasurer where such officer's signature is required. SECTION 11. TREASURER. The Treasurer shall have custody of corporate funds and securities and shall keep full and accurate accounts of the Corporation's receipts, disbursements, and books and shall deposit all monies and all other valuables in the name and to the credit of the Corporation in such depositories as the Board may designate. Whenever the Board requires, the Treasurer shall render a statement of the Corporation's cash account. The Treasurer shall enter or cause to be entered on the Corporation's books full and accurate accounts of all monies received and paid out by, for, or on account of the Corporation. The Treasurer shall keep such books under his supervision or direction. The Treasurer shall have such other powers and duties as the Board, Chief Executive Officer, President, or Chief Operating Officer may confer upon or assign to him 10 or her. The Board may require the Treasurer to give a bond for the faithful discharge of his or her duties in any reasonable form and amount. SECTION 12. ASSISTANT TREASURERS. An Assistant Treasurer shall perform such duties of the Treasurer as, from time to time, the Treasurer may delegate and such other duties as, from time to time, the Board, the Chief Executive Officer, President, or Chief Operating Officer may prescribe or delegate to him or her. In the absence of the Treasurer, or if the Treasurer is unable to or refuses to act, the Assistant Treasurer shall perform the duties and exercise the powers of the Treasurer. SECTION 13. SECRETARY. The Secretary: (a) shall keep minutes of all Board meetings and minutes of all meetings of Stockholders in books for those purposes; (2) shall give and serve all notices; (3) may sign with the President or a Vice President in the Corporation's name and/or attest the signatures of any officer on all contracts, conveyances, transfers, assignments, encumbrances, authorizations, and all other instruments and documents of or executed for or on behalf of the Corporation and affix the Corporation's seal thereto; (4) may sign with the President or a Vice President all certificates for the Corporation's capital stock and affix the corporate seal thereto; (5) shall have charge of and maintain and keep or supervise and control the maintenance and keeping of the stock certificate books, transfer books, and stock ledgers and such other books and papers as the Board may authorize all of which books, ledgers, and papers shall at all reasonable times be open for any director, upon request, to inspect at the Corporation's office during business hours; (6) shall in general perform all the duties incident to the office of Secretary; and (7) shall have such other powers and duties as the Board may assign. SECTION 14. ASSISTANT SECRETARIES. Each Assistant Secretary shall have the usual powers and duties of the office, with such other powers and duties as the Board or the Secretary may confer upon or assign to him or her. Assistant Secretaries shall have and exercise the Secretary's powers during that officer's absence or inability to act. ARTICLE VII - CONFLICT OF INTEREST AND INDEMNIFICATION SECTION 1. DIRECTOR' AND OFFICERS' INTERESTS IN CONTRACTS. When the Corporation enters into a contract or transaction with one or more of its directors or officers, or with any other corporation, partnership, or entity in which one or more of the Corporation's directors or officers are directors, stockholders, or officers, or have a financial interest, such contract or transaction shall not be void or voidable solely because of this appearance of a conflict of interest, or solely because the director or officer is present at or participates in the Board meeting or committee which authorizes the contract or transaction, or solely because his, her, or their votes are counted for such purpose, if: a. the Board or committee approving the contract or transaction has received or knows all material facts relating to such relationships and/or interests in the contract or transaction, and the Board or committee in good faith authorizes, approves or ratifies the contract or other transaction by affirmative vote of a majority of the disinterested directors present, even though the disinterested directors be less than a quorum. Interested directors are to be counted only in calculating the presence of a quorum; or, 11 b. Stockholders entitled to vote on the contract or transaction has received or know all material facts relating to such relationships and/or interests in the contract or transaction, and the Stockholders specifically approve such contract or other transaction in good faith; or c. the contract or transaction is fair to the Corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof, or the Stockholders. SECTION 2. NONLIABILITY OF DIRECTORS IN CERTAIN CASES. A Board member, or any Board committee, in the performing his, her, or its duties, shall be fully protected in relying in good faith upon the Corporation's records and upon such information, opinions, reports, or statements presented by any of the Corporation's officers, employees, Board committees, or by any other person as to matters the member or Committee reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. SECTION 3. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE. a. The Corporation shall have the power to indemnify to the fullest extent permitted by applicable law any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) relating to such person's status or acts as a director, officer, employee, or agent of the Corporation, or relating to such person's service at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such per-son in connection with such proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action, had no reasonable cause to believe his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. b. The Corporation shall have power to indemnify any person who was, is a party, or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the Corporation relating to such person's status or acts as a director, officer, employee, or agent of the Corporation, or relating to such person serving at the Corporation's request as a director, officer, employee, or agent of another corporation, partner-ship, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the Corporation's best interests except that no indemnification shall be made relating to any claim as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses. c. To the extent that a director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of any proceeding referred to in subsections (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against 12 expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. d. The Corporation shall make any indemnification under subsections (a) and (b) (unless ordered by a court) only as authorized in the specific case upon a determination that indemnifying the director, officer, employee, or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; or (2) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (3) by the Stockholders. e. The Corporation may pay the expenses (including attorneys' fees) of an officer, director, employee, or agent in defending any civil, criminal, administrative, or investigative proceeding in advance of final disposition of such proceeding at the Board's discretion, upon such terms and conditions as the Board may decide, and if such director, officer, employee, or agent undertakes in writing to repay such amount if it is ultimately deter-mined that he or she is not entitled to be indemnified by the Corporation. f. The provisions of this Section shall not be exclusive of any other rights to which one seeking indemnification or advancement of expenses may be entitled. g. The Corporation shall have the power to purchase and maintain insurance for any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the Corporation's request as a director, officer, employee, or agent of another corporation, partnership, joint venture, or other enterprise against any liability asserted against and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Corporation has the power to indemnify him or her against such liability under these By-Laws. h. For purposes of this Section, references to the "Corporation" includes the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. i. For purposes of this Section, references to "other enterprises" includes employee benefits plans; references to "fines" includes any excise taxes assessed with respect to an employee benefit plan; and references to "serving at the request of the Corporation" includes any service as a director, officer, employee, or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Section. j. The indemnification and expenses advance provided herein shall, unless otherwise provided when authorized or ratified, continue when a person ceases to be a director, officer, em- 13 ployee, or agent and shall inure to the benefit of such person's heirs, executors, and administrators. k. Any repeal or modification of this Section shall not affect any right or protection of any person with respect to any act or omission occurring prior to such repeal or modification. ARTICLE VIII - BOOKS, DOCUMENTS AND ACCOUNTS The Board shall have power to keep the books, documents, and accounts of the Corporation outside of the State of Delaware. A record of the Corporation's Stockholders, giving the names and addresses of all Stock-holders and the number and class of shares held by each, shall be kept at its registered office or principal place of business, or at the office of its transfer agent or registrar. ARTICLE IX - CAPITAL STOCK SECTION 1. STOCK CERTIFICATES. The Corporation's stock certificates shall be numbered and registered in the Corporation's share ledger and transfer books as they are issued. Every owner of the Corporation's stock ("Stock") shall be entitled to have a certificate in such form consistent with the Certificate of Incorporation or any law and as the Board may prescribe, certifying the number of Shares, and the class or series, owned. Every certificate for Stock shall bear the Corporate Seal and be signed by the Chairman of the Board or the President and the Secretary or an Assistant Secretary. Unless otherwise provided by law, signatures may be facsimile and shall be effective irrespective of whether any person whose signature appears on the certificates shall have ceased to be an officer before the certificate is delivered. SECTION 2. STOCK TRANSFERS. Stock transfers shall be made on the Corporation's books upon surrender of certificates for transfer endorsed by the person named in the certificate or by such person's attorney-in-fact or legal representative. Only the person named in the certificate, his or her attorney-in-fact, or legal representative, duly and lawfully authorized in writing, may have a Stock transfer recorded on the Corporation's books. Upon surrender, the certificate for Stock transferred to another shall be canceled. Within a reasonable time thereafter, a new certificate shall be issued for the same number of shares. SECTION 3. REGISTERED STOCKHOLDERS. To the extent permitted by law, the Corporation shall be entitled to treat the person in whose name any share of stock or any warrant, right, or option is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such Stock, warrant, right or option on the part of any other person, whether or not the Corporation shall have express or other notice thereof. SECTION 4. LOST, STOLEN, OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate for Stocks in place of any certificate previously issued by it, alleged to have been lost, stolen, or destroyed, and the Corporation may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. 14 SECTION 5. DIVIDENDS. Except at limited by law and the Certificate of Incorporation, the Board may declare and pay dividends on the Stock, which dividends may be paid either in cash, securities, or other property. SECTION 6. RECORD DATE. a. The Board may fix a record date determining who is entitled to notice of, and/or to vote at any meeting of Stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights with respect to any change, conversion or exchange of stock or for the purpose of any other lawful action. The record date so fixed shall not precede the date upon which the resolution fixing the record date is adopted by the Board; and i. in determining who is entitled to vote at any Stockholders' meeting, the record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, unless otherwise provided by law; ii. in determining who is entitled to consent to corporate action in writing without a meeting, the record date shall not be more than ten (10) days from the date upon which the resolution fixing the date is adopted by the Board; and iii. for any other action, the record date shall not be more than sixty (60) days prior to such other action. b. The determination of Stockholders of record entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of the meeting; provided however, that the Board may fix a new record date for the adjourned meeting. c. If no record date is fixed by the Board: i. the record date for determining who is entitled to notice of or to vote at a Stockholders' meeting shall be at the close of business on the next business day before the day notice is given or, if notice is waived, at the close of business on the next business day before the day the meeting is held; ii. the record date for determining who is entitled to express consent to corporate action in writing, when no prior Board action is required by law, shall be the first day on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior Board action is required by law, shall be at the close of business on the day on which the Board adopts the resolution taking such prior action; and iii. the record date for determining who are the Stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. ARTICLE X - MISCELLANEOUS PROVISIONS SECTION 1. FISCAL YEAR. The Board shall establish a fiscal year for the Corporation. SECTION 2. SEAL. 15 The Board shall have the power to prescribe a form of seal for the Corporation and to use it by causing it or a facsimile thereof to be impressed, affixed, printed, or reproduced in any manner. SECTION 3. SECURITIES OF OTHER CORPORATIONS. The Chief Executive Officer, the President, or any person authorized by the Board shall have power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. SECTION 4. FUND DEPOSITORIES. Funds of the Corporation not otherwise employed shall be deposited from time to time in such banks or other depositories as either the Board, the President, or the Treasurer may select or approve. SECTION 5. SIGNING OF CHECKS, NOTES, ETC. Unless otherwise provided by law or these Bylaws, from time to time, the Board shall authorize one or more officers of the Corporation to sign all checks, drafts, and other orders to pay money out of the Corporation's funds and all notes and other evidences of indebtedness of the Corporation. Without such authorization, no person has such authority. SECTION 6. PERSONS. Wherever used in these Bylaws, all pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person(s) may require. SECTION 7. HEADINGS. The headings of the Articles and Sections of these Bylaws are inserted for convenience of reference only and shall not be deemed to be a part thereof or used in the construction or interpretation thereof. 16 ARTICLE XI - AMENDMENT OF BYLAWS These Bylaws may be amended, repealed, or new Bylaws may be made or adopted: a. by affirmative vote of the holders of at least a majority of the Corporation's outstanding stock at any annual or special meeting of Stockholders; or b. by affirmative vote of a majority of Directors present at any Board meeting at which a quorum is present. 17 EX-4.1 6 CERTIFICATE OF DESIGNATIONS EXHIBIT 4.1 MATERIAL TECHNOLOGIES, INC. (a Delaware corporation) CLASS A CONVERTIBLE PREFERRED STOCK CERTIFICATE OF DESIGNATIONS Material Technologies, Inc., organized and existing under Delaware General Corporation Law (the "Corporation") by its President and Secretary, does hereby certify that, pursuant to authority conferred on the Board of Directors (the "Board") by Paragraph 4 of the Corporation's Certificate of Incorporation authorizing a class of Nine Hundred Thousand (900,000) shares Preferred Stock with a par value of one mill ($.001) per share, and pursuant to Section 151 of the Delaware General Corporation Law, as amended, the Board duly adopted a resolution providing as follows for the issuance out of such class the series of up to three hundred fifty thousand (350,000) shares of Class A Convertible Preferred Stock, and setting forth the designations and powers, preferences and rights, including voting rights, if any, and the qualifications, limitations or restrictions thereof: WHEREAS, the Corporation's Certificate of Incorporation states, among other things, that the Corporation is authorized to issue up to Nine Hundred Thousand (900,000) shares of Preferred Stock, of the par value of one mill ($.001) per share, and that the Board is granted the authority to fix, by resolution, the designations and powers, preferences, and rights, including voting rights, if any, and the qualifications, limitations or restrictions thereof, if any, of such shares; NOW, THEREFORE, BE IT RESOLVED that the Board does hereby designate Three Hundred fifty Thousand (350,000) shares of its authorized but previously unissued Preferred Stock as "Class A Convertible Preferred Stock" which may be issued from time to time. The designations and the powers, preferences and rights, including voting rights of the Class A Convertible Preferred Stock and the qualifications, limitations and restrictions thereof, shall be as follows:: 1. LIQUIDATION PREFERENCE 1.1 In the event of liquidation, dissolution or winding up of the Corporation, whether such be voluntary or involuntary, the holders of shares of Class A Convertible Preferred Stock (the "Shares") shall be entitled to receive out of the Corporation's assets, an amount equal to seventy-two cents ($.72) per Share (the "Liquidation Preference"). Such amount shall be paid upon all outstanding Shares before any payment shall be made or any assets distributed to the holders of shares of common stock or any other stock of any other series or class ranking junior to the Shares as to dividends or assets. The holders of Shares shall not be entitled to any further payment. 1.2 A merger or consolidation of the Corporation with another corporation shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 1. 1.3 While the Shares are outstanding the Corporation shall not, without the prior consent of the holders of a majority of the outstanding Shares, issue any Preferred Stock which is senior to or parri passu with the Shares with respect to liquidation preference. 2. CONVERSION 2.1 RIGHT TO CONVERT: CONVERSION PRICE Subject to and upon compliance with this Section 2, at the option of the holder thereof, each outstanding Share may at any time be converted into duly authorized, validly issued, fully paid and nonassessable shares of the Corporation's common stock, par value one Mil ($.001) per share ("Common Stock") at Seventy-two cents ($.72) per share (The "Initial Conversion Price") or, in case an adjustment in the conversion price has taken place pursuant to Section 3 below, then at the applicable conversion price as so adjusted (the "Conversion Price"), upon surrender of the certificate representing the Shares to be converted to the Corporation at any time during usual business hours at the Corporation's principal executive, accompanied by a written notice of election to convert as provided in Section 2.2 below. All Shares surrendered for conversion shall be restored to the status of authorized but unissued and undesignated shares of Preferred Stock. The number of shares of Common Stock to be issued on conversion shall be determined by dividing (i) an amount equal to the sum of the aggregate Liquidation Preference of the converted Shares by (ii) the Conversion Price as in effect on the date the Shares are surrendered for conversion. 2.2 ISSUANCE OF COMMON STOCK ON CONVERSION. As promptly as practicable after surrender of any Shares for conversion, the Corporation shall deliver or cause to be delivered to, or upon the written order of, the holder of surrendered Shares a certificate or certificates representing the number of duly authorized, validly issued, fully paid, and nonassessable shares of Common Stock into which such Shares have been converted in accordance with this Section 2. Prior to delivery of such certificate or certificates, the Corporation shall require written notice at its said office from the holder of the Shares so surrendered stating that the holder irrevocably elects to convert such shares. Such notice shall also state the name or names (with address and social security or other taxpayer identification number) in which said certificate or certificates are to be issued. Such conversion shall be deemed to have been made at the time that such shares shall have been surrendered for conversion and such notice shall have been received by the Corporation (the "Conversion Date"). The Corporation shall have the right to pay cash or to round up to the next whole share in lieu of issuing fractional shares of Common Stock. 3. ADJUSTMENT OF CONVERSION PRICE. The kind of securities issuable upon conversion of Shares and Conversion Price shall be subject to adjustment from time to time upon the happening of certain events as follows: 3.1 RECLASSIFICATION, CONSOLIDATION OF MERGER. In case of any reclassification or change of outstanding securities of the class of securities which are issuable upon conversion of the Shares (other than as a result of subdivision or combination or an increase or decrease in the number of such securities outstanding) or in case of any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is the surviving corporation and which does not result in any reclassification or change, other than a subdivision or combination of outstanding securities issuable upon the conversion of Shares or an increase or decrease in the number of such securities outstanding), or in case of any sale or transfer to another corporation of all or substantially all of the Corporation's assets, the holders of the Shares shall have the right to receive upon conversion, in lieu of Common Stock issuable upon such conversion, the kind and amount of shares of stock, other securities, money, or property receivable upon such reclassification, change, consolidation, merger, sale, or transfer by the holder of shares of Common Stock issuable upon conversion of such Shares had such Shares been converted immediately prior to such reclassification, change, consolidation, merger, sale, or transfer. The Corporation shall not permit any such reclassification, change, consolidation, merger, sale, or transfer to take place without adequate and lawful provisions to protect the rights of the holders of Shares, including provisions assuring that this Section 3 shall thereafter be applicable, as nearly as may be, with respect to shares of stock, securities, or assets deliverable upon conversion of the Shares. This Section 3.1 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales, and transfers. 3.2 SUBDIVISION OR COMBINATION. If the Corporation at any time while Shares are outstanding, shall subdivide or combine its outstanding securities of the class of securities which are issuable upon conversion of Shares, the conversion price shall be proportionately reduced, in case of subdivision of such securities, as of the effective date of such subdivision, or shall be proportionately increased, in the case of combination of such securities, as of the effective date of such combination. 3.3 STOCK DIVIDENDS. If the Corporation at any time while Shares are outstanding shall pay a dividend or make any other distribution on its Common Stock payable in shares of its common stock, then the conversion price shall be adjusted, as of the date of such payment or other distribution to that price determined by multiplying the conversion price in effect immediately prior to such payment or other distribution by a fraction (a) the numerator of which shall be the total number of shares of Common Stock 2 outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. 3.4 NOTICE OF ADJUSTMENTS. Whenever the Conversion Price shall be adjusted under Section 3 hereof, the Corporation shall make a certificate signed by its president or a vice president and by its chief financial officer, treasurer, assistant treasurer, secretary or assistant secretary setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the conversion price after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to the holders of Shares promptly after each adjustment. A determination of any adjustment to the Conversion Price or the number or kind of shares or other securities issuable upon conversion of Shares, by independent certified public accountants selected by the Corporation, shall be final and binding on all parties. 4. VOTING RIGHTS. Each holder of Shares shall have the right to vote on all matters on which the holders of Common Stock have the right to vote and to cast that number of votes which the holder would have been entitled to cast had such holder converted his Shares immediately prior to the record date for such vote (or if there be no record date, immediately prior to the vote). 5. DIVIDENDS. The Shares shall participate in all dividends declared and paid with respect to the Common Stock to the same extent as if the Shares had been converted immediately prior to the record date for the payment of such dividend (or if there be no record date, immediately prior to the dividend), except for dividends or distributions on the Common Stock payable in shares of Common Stock (to which Section 3.3 applies) and dividends or distributions in liquidation or partial liquidation (to which Section 3.4 applies). IN WITNESS WHEREOF, Material Technologies, Inc., has caused this certificate of Designation to be signed by its President and attested by its Secretary on this 9th day of March, 1997, and each of such persons hereby affirms under penalty of perjury that this Certificate of Designation is the act and deed of Material Technologies, Inc. and that the facts stated herein are true and correct. MATERIAL TECHNOLOGIES, INC. By /s/ Robert M. Bernstein ------------------------------ Robert M. Bernstein, President Attest: /s/ Joel R. Freedman - --------------------------- Joel R. Freedman, Secretary 3 EX-4.2 7 CERTIFICATE OF DESIGNATIONS (CLASS B) EXHIBIT 4.2 MATERIAL TECHNOLOGIES, INC. (a Delaware corporation) CLASS B PREFFERED STOCK CERTIFICATE OF DESIGNATIONS Material Technologies, Inc., a Corporation organized and existing under Delaware General Corporation Law (the "Corporation"), by its President and Secretary, does hereby certify that, pursuant to authority conferred upon the Board of Directors (the "Board") by Paragraph 4 of the Corporation's Certificate of Incorporation authorizing a class of Nine Hundred Thousand (900,000) shares of Preferred Stock with a par value of one mill ($.001) per share, and pursuant to Section 151 of the Delaware General Corporation Law, as amended, the Board duly adopted a resolution as follows providing for the issuance out of such class of a series of up to fifteen (15) shares of Class B Preferred Stock, and setting forth the designations and powers, preferences, and rights, including voting rights, if any, and the qualifications, limitations, or restrictions thereof: WHEREAS, the Corporation's Certificate of Incorporation states, among other things, that the Corporation is authorized to issue up Nine Hundred Thousand (900,000) shares of Preferred Stock, of the par value of one mill ($.001) per share, and that the Board is granted the authority to fix, by resolution, the designations and powers, preferences, and rights, including voting rights, if any, and the qualifications, limitations or restrictions thereof, if any, of such shares; NOW, THEREFORE, BE IT RESOLVED that the Board does hereby designate an aggregate of Fifteen (15) shares of its authorized but previously unissued Preferred Stock as "Class B Preferred Stock" which may be issued from time to time. The designations and powers, preferences, and rights, including voting rights of the Class B Preferred Stock and the qualifications, limitations, and restrictions thereof, shall be as follows: 1. LIQUIDATION PREFERENCE 1.1 In the event of a liquidation, dissolution or winding up of the Corporation, whether such be voluntary or involuntary, the holders of shares of Class B Preferred Stock (the "Shares") shall be entitled to receive out of the Corporation's assets, an amount equal to Ten Thousand Dollars ($10,000) per Share (the "liquidation Preference"). Such amount shall be paid upon all outstanding Shares before any payment shall be made or any assets distributed to the holders of shares of Common Stock or any other stock of any other series or class ranking junior to the Shares as to dividends or assets, but shall be junior and subordinate to the rights of the holders of the Corporation's outstanding Class A Convertible Preferred Stock. The holders of Shares shall not be entitled to any further payment. 1.2 A merger or consolidation of the Corporation with another corporation shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 1. 2. VOTING RIGHTS The holders of Class B Preferred Stock shall have one vote per Share on all matters on which the holders of Common Stock have the right to vote. 3. DIVIDENDS. The Shares shall participate in all cash dividends declared and paid with respect to the Common Stock to the extent set forth in this Section 3. Each time a cash dividend is paid on the Common Stock there shall also be paid with respect to each outstanding share of Class B Preferred Stock an amount determined by multiplying the aggregate amount of the dividend paid with respect to the Common Stock by a fraction (I) the numerator of which is 3,214,480 and (ii) the denominator of which is the number of shares of Common Stock on which the dividend was paid, and (x) multiplying the resulting product by thirty percent (30%) and then (y) dividing the resulting product by five hundred ten (510). 4. REDEMPTION The Shares may be redeemed at the option of the Corporation at any time upon payment to holders thereof Ten Thousand Dollars ($10,000) per Share, plus any unpaid dividends to which such holders are entitled under Section 3 above. The Corporation has the option to redeem less than all outstanding Shares. If less than all of the outstanding Shares are redeemed, the Corporation shall select the Shares to be redeemed pro rata, by lot or other means deemed fair by the Board, but the Corporation may not redeem only a fraction of a Share. The Shares shall be redeemed at the option of the holders thereof at any time after January 31, 2002. IN WITNESS WHEREOF, Material Technologies, Inc., has caused this Certificate of Designation to be signed by its President and attested by its Secretary on this 9th day of March, 1997, and each of such persons hereby affirms under penalty of perjury that this Certificate of Corporation and that the facts stated herein are true and correct. MATERIAL TECHNOLOGIES, INC. By /s/ Robert M. Bernstein ------------------------------ Robert M. Bernstein, President Attest: /s/ Joel R. Freedman - --------------------------- Joel R. Freedman, Secretary 2 EX-5 8 OPINION EXHIBIT 5 LAW OFFICES OF C. TIMOTHY SMOOT Suite 174 23505 Crenshaw Boulevard Torrance, California 90505-5221 Telephone: 310/530-3366 Telecopier: 310/530-2211 E-mail: smoot@earthlink.net April 28, 1997 Board of Directors Material Technologies, Inc. East Tower, Suite 705 11835 W. Olympic Blvd. Los Angeles, CA 90064 Re: Material Technologies, Inc., Form S-1 Dear Sirs: I have formed a legal opinion regarding the proposed distribution of 369,172 shares of Class A Common Stock of Material Technologies, Inc., ("Matech"). In coming to my opinion, I have examined Matech 2's Certificate of Incorporation, the minutes of Matech's Board of Directors, Matech's Certificate of Incorporation and Bylaws, certain minutes of Material Technology, Inc., pertinent agreements relating to the spin-off of Matech from its parent Material Technology, Inc., Matech's Form S-1 Registration statement, and various other documents. In addition, I have discussed various aspects of the transaction with Robert M. Bernstein, Chairman and President of Matech and Jonathon Reuben, Matech's independent Certified Public Accountant. In forming this opinion, I have relied on the apparent bona fides of the documents which Matech provided to me and various representations of Mr. Robert Bernstein. In my opinion, the 369,172 shares of Matech's Class A Common Stock being registered for distribution to the shareholders of Material Technology, Inc., as of the effective date of the S-1 Registration Statement, will, when distributed be legally issued, fully paid and non-assessable. Very truly yours, C. Timothy Smoot C. Timothy Smoot Attorney EX-10.1 9 LICENSE AGREEMENT EXHIBIT 10.1 LICENSE AGREEMENT BETWEEN TENSIODYNE CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA (JULY ___, 1993) TECHNOLOGY AREA: METAL FATIGUE MEASUREMENT TABLE OF CONTENTS RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1 - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 - LICENSE GRANT. . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 3 - ROYALTIES, RECORDS AND ACCOUNTING. . . . . . . . . . . . . . 5 ARTICLE 4 - IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 5 - CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 6 - TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 7 - PATENT MAINTENANCE . . . . . . . . . . . . . . . . . . . .10 ARTICLE 8 - INFRINGEMENT AND LITIGATION. . . . . . . . . . . . . . . . .11 ARTICLE 9 - DISCLAIMER OF WARRANTIES; INDEMNIFICATION. . . . . . . . . .12 ARTICLE 10 - USE OF PENN'S NAME; INDEPENDENCE. . . . . . . . . . . . . .14 ARTICLE 11 - COMPLIANCE WITH LAWS; EXPORT CONTROL. . . . . . . . . . . .14 ARTICLE 12 - ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . .14 ARTICLE 13 - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . .15 ARTICLE 14 - JURISDICTION; ENTIRE AGREEMENT - DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . .15 LICENSE AGREEMENT BETWEEN TENSIODYNE CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA (JULY __, 1993) This License Agreement ("AGREEMENT") is made by and between The Trustees of the University of Pennsylvania, a Pennsylvania not for profit corporation, having an office at 3700 Market Street, Suite 300, Philadelphia, Pennsylvania 19104-3147 ("PENN") and Tensiodyne Corporation having a place of business at 11835 West Olympic Boulevard, East Tower, Suite 705, Los Angeles, California 90064 ("LICENSEE"). This AGREEMENT is effective as of July __, 1993 ("EFFECTIVE DATE"). RECITALS WHEREAS, PENN is the sole and exclusive owner and proprietor of certain inventions and improvements together with technical information and proprietary rights developed by Drs. Campbell Laird and Li Yuan-Feng relating to electrochemical methods and devices to determine metal fatigue; and, WHEREAS, PENN is the owner of application(s) for United States and foreign letters patent(s) in Appendix 1 attached hereto relating to the foregoing inventions and improvements of Drs. Laird and Yuan-Feng; and, WHEREAS, PENN, through the continuing work of Dr. Laird or such other PRINCIPAL INVESTIGATOR as may be designated by the parties in accordance with the SPONSORED RESEARCH AGREEMENT between the parties of even date herewith, may make additional inventions and improvements and may develop additional technical information and proprietary rights relating to electrochemical methods and devices to determine metal fatigue; and, WHEREAS, LICENSEE desires to secure the exclusive right and license to use, develop, manufacture, market and exploit any inventions and improvements of Dr. Laird and/or any other PRINCIPAL INVESTIGATOR, owned by PENN as set forth in Appendix 1 hereto and to use, develop, manufacture, market and exploit the additional inventions, improvements, technical information and proprietary rights relating to electrochemical methods and devices to determine metal fatigue; and, WHEREAS, PENN has determined that the exploitation of the inventions and improvements of Drs. Laird and Yuan-Feng and/or any other PRINCIPAL INVESTIGATOR is in the best interest of PENN and is consistent with its educational and research missions and goals; and, WHEREAS, PENN and LICENSEE have entered into a SPONSORED RESEARCH AGREEMENT on even date herewith providing support for the continuing work of Dr. Laird [together with a STOCK PURCHASE AGREEMENT providing for the issuance to PENN and Drs. Laird and Yuan-Feng of shares of LICENSEE's Common Stock in partial consideration of the exclusive license granted hereunder]; NOW, THEREFORE, in consideration of the premises and of the promises and covenants contained herein and intending to be legally bound hereby, the parties agree as follows: ARTICLE - DEFINITIONS 1.1 AFFILIATE means, when used with reference to LICENSEE, any ENTITY directly or indirectly controlling, controlled by or under common control with LICENSEE. For purposes of this AGREEMENT, "control" means the direct or indirect ownership of over 50% of the outstanding voting securities of an ENTITY, or the right to receive over 50% of the profits or earnings of an ENTITY, or the power to direct or cause the direction of the management and -2- policies of an ENTITY, whether through the ownership of voting securities, by contract, or otherwise. 1.2 BANKRUPTCY EVENT means the ENTITY in question becomes insolvent, or voluntary or involuntary proceedings by or against such ENTITY are instituted in bankruptcy or under such insolvency law, or a receiver or custodian is appointed for such ENTITY, or proceedings are instituted by or against such ENTITY for corporate reorganization or the dissolution of such ENTITY, which proceedings, if voluntary, shall not have been dismissed within ninety (90) days after the date of filing, or such ENTITY makes an assignment for the benefit of creditors, or substantially all of the assets of such ENTITY are seized or attached and not released within sixty (60) days thereafter. 1.3 CALENDAR QUARTER means each three-month period, or any portion thereof, beginning on January 1, April 1, July 1 and October 1. 1.4 CALENDAR YEAR means a period of twelve (12) months beginning on January 1 and ending on December 31. 1.5 ENTITY means a corporation, an association, a joint venture, a partnership, a trust, a business, an individual, a government or political subdivision thereof, including an agency, or any other organization which can exercise independent legal standing. 1.6 FAIR MARKET VALUE means the gross sales price which LICENSEE would realize from an unaffiliated, unrelated buyer in an arm's length sale of an identical item sold in the same quantity and at the same time and place of the transaction. 1.7 FIELD OF USE means the field of the use or application of PENN PATENT RIGHTS or PENN TECHNICAL INFORMATION to obtain electrochemical data on metals to determine the fatigue status of such metals. 1.8 LICENSEE shall include LICENSEE and its AFFILIATES together with any other business ENTITY in which LICENSEE or any of its AFFILIATES own a controlling interest or over which LICENSEE or any of its AFFILIATES -3- possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of an ENTITY, whether through the ownership of voting securities, by contract or otherwise. 1.9 NET SALES means gross revenues, whether or not invoiced, billed, or received by LICENSEE from a third party, attributable to LICENSEE's use, SALE, lease, or transfer of any PENN LICENSED PRODUCT(S) or SERVICES, less qualifying costs directly attributable to such use, SALES, lease, or transfer and actually allowed, identified on the invoice, and borne by LICENSEE. 1.9.1 Such qualifying costs shall be limited to costs of the following: 1.9.1.1 Discounts, in amounts customary in the trade, for quantity purchases, cash payments, prompt payments, wholesalers, and distributors. 1.9.1.2 Credits or refunds, not exceeding the original or customary billing or invoice amount, for claims or returns. 1.9.1.3 Prepaid transportation insurance premiums. 1.9.1.4 Prepaid outbound transportation expenses. 1.9.1.5 Sales and use taxes, separately billed or invoiced, and borne by LICENSEE, imposed by a government agency an such use, SALES, lease or transfer. 1.10 PENN LICENSED PRODUCT(S) means products which in the absence of this AGREEMENT would infringe at least one claim of PENN PATENT RIGHTS or products which are made using a process or machine covered by a claim of PENN PATENT RIGHTS, or products made, at least in part, using PENN TECHNICAL INFORMATION. 1.11 PENN PATENT RIGHTS means those United States and foreign patent applications listed in Appendix 1 hereto together with any and all patents issuing thereupon, including continuation, divisional and re-issue applications and -4- continuation-in-part applications thereof based upon inventions and improvements discovered by PENN through Dr. Campbell Laird, Dr. Li Yuan-Feng and/or any other PRINCIPAL INVESTIGATOR as a result of the SPONSORED RESEARCH AGREEMENT between the parties. 1.12 PENN TECHNICAL INFORMATION means research and development information, unpatented inventions, know-how, trade secrets, and technical data in the possession of PENN at the EFFECTIVE DATE of this AGREEMENT and/or becomes known through the Sponsored Research Agreement, which are needed to produce to PENN LICENSED PRODUCTS and/or SERVICES. 1.13 PRINCIPAL INVESTIGATOR(S) is as defined in the SPONSORED RESEARCH AGREEMENT executed between the parties. 1.14 SALE means a transaction for which consideration is received or expected by LICENSEE for the use or transfer of PENN LICENSED PRODUCT(S). A SALE of PENN LICENSED PRODUCT(S) shall be deemed completed at the time LICENSEE receives payment for such PENN LICENSED PRODUCT(S). 1.15 SERVICES means and includes services, testing, and evaluation of metal fatigue performed by LICENSEE which includes or uses PENN TECHNICAL INFORMATION or PENN LICENSED PRODUCTS, or which, without the benefit of this License Agreement, would infringe a claim of the PENN PATENT RIGHTS. 1.16 SPONSORED RESEARCH AGREEMENT means the document appended as Appendix 2. ARTICLE 2 - LICENSE GRANT 2.1 PENN grants to LICENSEE for the term of this AGREEMENT an exclusive, world-wide right and license, with the right to grant sublicenses, to -5- make, have made, use and sell PENN LICENSED PRODUCT(S) in the FIELD OF USE. No other rights or licenses are granted hereunder. 2.2 The license grant of this Article 2 is exclusive but for the reserved right OF PENN to use and permit the use of by nonprofit organizations, the PENN PATENT RIGHTS and the PENN TECHNICAL INFORMATION solely for educational and research purposes on a non-commercial basis. 2.3 Any license granted to LICENSEE pursuant to Article 2 hereof shall be subject to the rights of the United States government reserved under Public Laws 96-517, 97-256 and 98-620, codified at 35 U.S.C. 200-212, and any regulations issued thereunder, to the extent funded, in whole or in part, by the United States government. 2.4 The right to sublicense conferred upon LICENSEE under this AGREEMENT is subject to the following conditions: 2.4.1 In each sublicense, the sublicensee shall be prohibited from further sublicensing and shall be subject to the terms and conditions of the license granted to LICENSEE under this AGREEMENT. 2.4.2 LICENSEE shall forward to PENN, within thirty (30) days of execution, a complete and accurate copy written in the English language of each sublicense granted hereunder. PENN's receipt of such sublicense shall not constitute an approval of such sublicense or a waiver of any of PENN's rights or LICENSEE's obligations hereunder. 2.4.3 If LICENSEE becomes subject to a BANKRUPTCY EVENT, all payments then or thereafter due and owing to LICENSEE from its sublicensees shall upon notice from PENN to any such sublicensee become payable directly to PENN for the account of LICENSEE; provided however, that PENN shall remit to LICENSEE the amount by which such payments exceed the amounts owed by LICENSEE to PENN. 2.4.4 Notwithstanding any such sublicense, LICENSEE shall remain primarily liable to PENN for all of the LICENSEE'S duties and obligations -6- contained in this AGREEMENT, and any act or omission of a sublicensee which would be a breach of this AGREEMENT if performed by LICENSEE shall be deemed to be a breach by LICENSEE of this AGREEMENT. ARTICLE 3 - ROYALTIES, RECORDS AND ACCOUNTING 3.1 In partial consideration of the exclusive license granted herein and in lieu of a license initiation fee, LICENSEE shall issue to PENN upon execution of this AGREEMENT, a non-refundable of five percent (5%) of the common stock of LICENSEE, to be distributed by LICENSEE as follows: (a) approximately 2.5 percent (2.5%) of the common stock of LICENSEE directly to Penn; and (b) approximately 1.25 percent (1.25%) of the common stock of LICENSEE directly to Dr. Campbell Laird; and (c) approximately 1.25 percent (1.25%) of the common stock of LICENSEE directly to Dr. Li Yuan-Feng. The issuance of such stock shall be in accordance with a Stock Agreement which is attached to this Agreement as Appendix 3. 3.2 In further consideration of the exclusive licenses grant herein, LICENSEE shall pay to PENN a royalty of five percent (5%) of all NET SALES of PENN LICENSED PRODUCTS and two-and-one-half percent (2.5%) royalty of NET SALES of SERVICES made, made for, used or sold by LICENSEE taken together with all sublicensees in any CALENDAR YEAR. 3.2.1 For sublicenses, LICENSEE shall pay to PENN the above scheduled royalty on the NET SALES for such PENN LICENSED PRODUCTS and/or SERVICES sold by such sublicensee. Any noncash consideration received by the LICENSEE from sublicensees in lieu of a license fee or on account of sales of PENN LICENSED PRODUCT and/or SERVICES shall be valued at its FAIR MARKET VALUE as of the date of receipt. 3.2.2 NET SALES of any PENN LICENSED PRODUCT or SERVICES shall not be subject to more than one assessment of the scheduled royalty due PENN. -7- 3.3 LICENSEE agrees to the following performance milestones: 3.3.1 LICENSEE shall make the first commercial sale of PENN LICENSED PRODUCTS and/or SERVICES within twenty-four (24) months of completion of commercial development of a PENN LICENSED PRODUCT. 3.3.2 LICENSEE shall pay to PENN annual minimum royalties of $20,000.00 (twenty thousand dollars) due and payable on each anniversary of the EFFECTIVE DATE of this AGREEMENT commencing one year after the first commercial sale of PENN LICENSED PRODUCTS and/or SERVICES. If the LICENSEE sponsors research in the FIELD OF USE at PENN during that year, the full amount of research funding paid may be applied as a credit against license maintenance fees due that year. 3.3.3 Minimum royalty payments due hereunder shall be paid on the due date listed. Upon termination of this AGREEMENT, such amounts shall be applied pro rata to any shorter period. 3.3.4 A minimum royalty payment paid under Section 3.3.2 herein shall serve as an advanced payment against royalties due under Section 3.2 herein solely for the CALENDAR YEAR for which such minimum royalty payment was paid. 3.4 LICENSEE shall deliver to PENN within sixty (60) days after the end of each CALENDAR QUARTER a report, certified by the chief financial officer of LICENSEE setting forth in reasonable detail the calculation of the royalties due to PENN for such CALENDAR QUARTER, including, without limitation: 3.4.1 NET SALES amounts. 3.4.2 Royalties due, broken down by category, including earned, pass-through, and minimum royalty categories. 3.4.3 Earned royalty amounts credited against minimum royalty amounts. -8- 3.4.4 Gross consideration amounts, including sales price or fees, revenues, or monies invoiced, billed, or received for all PENN LICENSED PRODUCT(S) and/or SERVICES. 3.4.5 Qualifying costs, as defined in Section 1.13 by category of cost, deducted from gross consideration to derive NET SALES. 3.4.6 Number of PENN LICENSED PRODUCT(S) and/or SERVICES used, leased, or transferred in each country. 3.4.7 NET SALES broken down by country. 3.4.8 Date LICENSEE or an AFFILIATE used, leased, or otherwise transfers each PENN LICENSED PRODUCT and/or SERVICE. 3.4.9 A profit and loss statement showing LICENSEE'S activity during the reporting period. 3.5 Royalties payable under Section 3.2 hereof shall be paid within ninety (90) days following the last day of the calendar quarter in which the royalties accrue. 3.6 All dollar amounts referred to in this AGREEMENT are expressed in United States dollars. All payments to PENN under this AGREEMENT shall be made in United States dollars by check payable to "The Trustees of the University of Pennsylvania." 3.6.1 If LICENSEE receives revenues from SALES of PENN LICENSED PRODUCTS and/or SERVICES in currency other than United States dollars, royalties shall be converted into United States dollars at the conversion rate for the foreign currency as published in the eastern edition of THE WALL STREET JOURNAL as of the last business day of the applicable CALENDAR QUARTER. 3.6.2 Amounts that are not paid when due shall accrue interest from the due date until paid, at a rate equal to then prevailing United States prime rate -9- of interest as published in the eastern edition of THE WALL STREET JOURNAL plus two percent (2%). 3.7 LICENSEE will maintain and cause its sublicensees to maintain, complete and accurate books and records which enable the royalties payable hereunder to be verified. The records for each CALENDAR QUARTER shall be maintained for five years after the submission of each report under Article 3 hereof. Upon reasonable prior notice to LICENSEE, PENN and its accountants shall have access to the books and records relating to the SALES of PENN LICENSED PRODUCTS and SERVICES by LICENSEE and its sublicensees to conduct a review or audit thereof. Such access shall be available not more than once each CALENDAR YEAR, during normal business hours, and for each of three years after the expiration or termination of this AGREEMENT. If PENN determines that LICENSEE has underpaid royalties by 5% or more, LICENSEE will pay the costs and expenses of PENN and its accountants in connection with its review or audit. ARTICLE 4 - IMPROVEMENTS 4.1 Title to all intellectual property created or conceived by individuals owing duty to assign to PENN, including PENN TECHNICAL INFORMATION, shall remain in PENN. 4.2 Inventions made during the performance of the SPONSORED RESEARCH AGREEMENT shall be governed by the provisions of the SPONSORED RESEARCH AGREEMENT. ARTICLE 5 - CONFIDENTIALITY 5.1 CONFIDENTIAL INFORMATION means any information or material in tangible form that is marked as confidential or proprietary to PENN at the time it is delivered to LICENSEE, and any other information that is furnished orally if -10- PENN identifies such information as confidential or proprietary when it is disclosed and confirms such designation in writing within thirty (30) days after such disclosure. 5.2 CONFIDENTIALITY 5.2.1 LICENSEE agrees to maintain in confidence and not to disclose to any third party any CONFIDENTIAL INFORMATION of PENN received pursuant to this AGREEMENT. The foregoing obligation shall not apply to: 5.2.1.1 information that is known to LICENSEE or independently developed by LICENSEE prior to the time of disclosure, in each case, to the extent evidenced by written records promptly disclosed to PENN upon receipt of the CONFIDENTIAL INFORMATION; 5.2.1.2 information disclosed to LICENSEE by a third party that has a right to make such disclosure; 5.2.1.3 information that becomes patented, published or otherwise part of the public domain as a result of acts by PENN or a third person obtaining such information as a matter of right; or 5.2.1.4 information that is required to be disclosed by order of the FDA or similar authority or a court of competent jurisdiction; provided that the LICENSEE shall use its best efforts to obtain confidential treatment of such information by the agency or court. 5.3 LICENSEE agrees to take all reasonable steps to protect the CONFIDENTIAL INFORMATION of PENN with the same degree of care that LICENSEE uses to protect its own confidential or proprietary information. Without limiting the foregoing, LICENSEE agrees to ensure that all of its employees having access to the CONFIDENTIAL INFORMATION are on need-to-know basis and are obligated (in writing) to abide by LICENSEE's obligations hereunder. -11- 5.4 PENN shall not be obligated to accept any confidential information from LICENSEE. PENN bears no institutional responsibility for maintaining the confidentiality of any confidential information of LICENSEE. 5.5 LICENSEE agrees that it shall utilize all such CONFIDENTIAL INFORMATION solely for furthering the objectives of this AGREEMENT and it will not, either during the term of this AGREEMENT or at any time subsequent to the termination of this AGREEMENT, otherwise use such information for its own benefit or for the benefit of others; nor will LICENSEE publish or otherwise disclose such CONFIDENTIAL INFORMATION to any other individual or entity. This paragraph shall not restrict LICENSEE's disclosure to the extent required by all pertinent securities laws, rules and regulations. 5.6 PENN's placement of a copyright notice on any portion of a document, software, or CONFIDENTIAL INFORMATION shall not be construed to mean that such portion has been published and will not release LICENSEE from its obligation of confidence hereunder. ARTICLE 6 - TERM AND TERMINATION 6.1 This AGREEMENT, unless sooner terminated as provided herein, shall terminate upon the expiration of the last to expire or become abandoned of the PENN PATENT RIGHTS, subject to the provisions of paragraph 6.3 hereof. 6.2 LICENSEE may, at its option, terminate this AGREEMENT at any time by doing all of the following: 6.2.1 Cease making, having made, using and selling any PENN LICENSED PRODUCT and SERVICES; and 6.2.2 Revokes all sublicenses causing all sublicensees to cease making, having made, using and selling any PENN LICENSED PRODUCT and SERVICES; and -12- 6.2.3 Gives sixty (60) days notice to PENN of such cessation and of LICENSEE intent to terminate; and 6.2.4 Tenders payment of all accrued royalties. 6.3 PENN may terminate this AGREEMENT if any of the following occur: 6.3.1 LICENSEE becomes more than sixty days in arrears in payment of royalties or expenses due pursuant to this AGREEMENT and LICENSEE does not provide full payment immediately upon demand; or 6.3.2 LICENSEE becomes subject to a BANKRUPTCY EVENT; or 6.3.3 LICENSEE breaches this AGREEMENT and does not cure within-sixty(60) days written notice thereof; or 6.3.4 LICENSEE has not made a commercial sale of PENN LICENSED PRODUCT or SERVICE within twenty-four (24) months of the completion of commercial development of a PENN LICENSED PRODUCT. 6.4 If LICENSEE becomes subject to a BANKRUPTCY EVENT, all duties of PENN and all rights (but not duties) of LICENSEE under this AGREEMENT shall immediately terminate without the necessity of any action being taken either by PENN or by LICENSEE. In the event of entry by LICENSEE into bankruptcy or reorganization, PENN shall be considered to be a preferred creditor and lienholder against all stocks of PENN LICENSED PRODUCT. PENN is also granted a security interest in and shall be considered to be a preferred creditor of LICENSEE with respect to PENN TECHNICAL INFORMATION and PENN PATENT RIGHTS. 6.5 Upon termination of this AGREEMENT, LICENSEE shall, at PENN's request, return to PENN all data, formulas, drawings, specifications, literature and other technical information comprising PENN TECHNICAL -13- INFORMATION fixed in any tangible medium of expression as well as any data generated by LICENSEE during the term of this AGREEMENT which will facilitate the development of the technology licensed hereunder. 6.6 LICENSEE's obligation to pay royalties accrued under Article 3 hereof shall survive termination of this AGREEMENT. In addition, the provisions of Sections 4.1 and 7.2 and Articles 5, 6, 9, 10, and 14 shall survive such termination. ARTICLE 7 - PATENT MAINTENANCE 7.1 PENN shall prosecute and maintain PENN PATENT RIGHTS as set forth in Appendix 1 hereto as the same may be supplemented from time to time in accordance with Article 4, provided however, that such prosecution, and maintenance fees shall not exceed $10,000.00 as provided for in Section 7.2. 7.2 LICENSEE shall promptly reimburse PENN for all documented attorneys fees, expenses, official fees and other charges incident to the preparation, prosecution and maintenance of PENN PATENT RIGHTS, including patents and patent applications in the United States and in countries foreign to the United States on developments set forth in foregoing Sections 4.2. LICENSEE's obligation to reimburse PENN's documented patent expenses, under this Section 7.2, shall not exceed $10,000. PENN shall provide LICENSEE with itemized statements reflecting these expenses and LICENSEE shall reimburse PENN for such expenses within thirty (30) days after receipt of such statement. 7.2.1 LICENSEE may provide advice to PENN regarding preparation, filing, and prosecution of any U.S. Patent Applications developed under this Agreement and/or the Sponsored Research Agreement with Dr. Laird (see Attachment B). 7.2.2 LICENSEE shall have the first option, for a period not to exceed ten (10) months from the date of filing a U.S. patent application, to support and pay for foreign applications of any U.S. Patent Application licensed under this Agreement. If LICENSEE notifies PENN, in writing, of its desire to have PENN -14- file any particular U.S. Patent Application in foreign venues, then PENN will diligently file and prosecute such applications after consultation with LICENSEE. Such foreign patent preparation, filing, and prosecution fees and expenses shall not be subject to the reimbursement limitations ($10,000 limit) of LICENSEE set forth in Section 7.2. If LICENSEE does not advise PENN that it will support the foreign filing of a particular U.S. Patent Application, then PENN shall be free to pursue such foreign filings at PENN's own expense; provided that PENN notifies LICENSEE of its intention to so file a foreign application and LICENSEE does not itself file such application with sixty (60) days of said notice. Such foreign filings which are made by PENN shall not be included as part of this Agreement and PENN shall be free to license such foreign patents to other third parties without further obligation to LICENSEE. 7.3 LICENSEE and its sublicensees shall comply with all Federal and foreign jurisdiction laws in respect of patent marking, if any, but the selection, location and particulars of such marking shall be at LICENSEE'S discretion. ARTICLE 8 - INFRINGEMENT AND LITIGATION 8.1 Both PENN and LICENSEE are responsible for notifying the other of any infringement of PENN PATENT RIGHTS or JOINT PATENT RIGHTS which may come to their attention. PENN and LICENSEE shall consult concerning any suspected infringement in an effort to agree upon terms and conditions for instigation and maintenance of litigation activities or forbearance from same. 8.2 To the extent litigation is mutually agreed upon, LICENSEE shall have the right, but not the obligation to prosecute such infringement at its own expense. In such event, PENN shall cooperate with LICENSEE, at LICENSEE'S expense. LICENSEE shall not settle or compromise any such suit in a manner that poses any obligations or restrictions on PENN or grants any rights to the PENN TECHNICAL INFORMATION or the PENN PATENT RIGHTS, without PENN's written permission. -15- 8.3 Financial recoveries from any such litigation will first be applied to reimburse LICENSEE for its litigation expenditures with additional recoveries being paid to LICENSEE, subject to a royalty due PENN based on the provisions of Article 3 hereof. 8.4 Such rights of Section 8.2 shall be subject to the continuing right of PENN to intervene at PENN's own expense and join LICENSEE in any claim or suit for infringement of the PENN PATENT RIGHTS. Any consideration received by LICENSEE in settlement of any claim or suit shall be shared between PENN and LICENSEE in proportion with their share of the litigation expenses in such infringement action. If counsel chosen by LICENSEE is reasonably acceptable to PENN, for these purposes its litigation expenses should not be deemed to include counsel fees. 8.5 In any infringement suit to enforce any of the PENN PATENT RIGHTS or the JOINT PATENT RIGHTS, either party, at the request and expense of the other party shall cooperate in all respects and, to the fullest extent reasonably possible, shall have its employees testify when requested and shall make available relevant records, papers, information, samples, specimens, and the like. This provision shall not be construed to require either party to undertake any activities, including legal discovery, at the request of any third party except as may be required by lawful process of a court of competent jurisdiction. ARTICLE 9 - DISCLAIMER OF WARRANTIES; INDEMNIFICATION 9.1 THE LICENSED TECHNOLOGY IS PROVIDED ON AN "AS IS" BASIS AND PENN MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PENN TECHNICAL INFORMATION OR THE PENN LICENSED PRODUCTS. BY WAY OF EXAMPLE BUT NOT OF LIMITATION, PENN MAKES NO REPRESENTATIONS OR WARRANTIES (i) OF COMMERCIAL UTILITY, (ii) OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR (iii) THAT THE USE OF THE PENN TECHNICAL INFORMATION WILL NOT INFRINGE ANY PATENT, COPYRIGHT OR TRADEMARK OR OTHER PROPRIETARY RIGHT OR PROPERTY RIGHTS OF OTHERS. PENN SHALL -16- NOT BE LIABLE TO LICENSEE, LICENSEE'S SUCCESSORS OR ASSIGNS OR ANY THIRD PARTY WITH RESPECT TO ANY CLAIM ON ACCOUNT OF, OR ARISING FROM, THE USE OF PENN TECHNICAL INFORMATION IN CONNECTION WITH THE LICENSED TECHNOLOGY SUPPLIED HEREUNDER OR THE MANUFACTURE, USE OR SALE OF PENN LICENSED PRODUCTS OR ANY OTHER MATERIAL DERIVED THEREFROM. PENN SHALL NOT BE LIABLE TO LICENSEE OR ANY OTHER PERSON FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS OR INTERRUPTION OF BUSINESS, OR FROM ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND INCURRED BY LICENSEE OR ANY OTHER PERSON WHETHER UNDER THIS AGREEMENT OR OTHERWISE, EVEN IF PENN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS. 9.2 LICENSEE will defend, indemnify and hold harmless PENN, its trustees, officers, agents and employees (collectively, the "Indemnified Parties"), from and against any and all liability, loss, damage, action, claim or expense suffered or incurred by the Indemnified Parties (including attorney's fees) (individually, a "Liability", and collectively, the "Liabilities") which results from or arises out of: (a) the development, use, manufacture, promotion, sale or other disposition, of any PENN LICENSED PRODUCTS and/or SERVICES by LICENSEE, its AFFILIATES, assignees, sublicensees, vendors or other third parties; (b) breach by LICENSEE of any covenant or agreement contained in this AGREEMENT; and (c) the enforcement by an Indemnified Party of its rights under this Section. The indemnification obligation under clause (a) shall apply regardless of any contributory negligence of the Indemnified Party. Without limiting the foregoing, LICENSEE will defend, indemnify and hold harmless the indemnified Parties from and against any Liabilities resulting from: 9.2.1 any product liability or other claim of any kind related to the use by a third party of a PENN LICENSED PRODUCT and/or SERVICE that was manufactured, sold or otherwise disposed by LICENSEE, its AFFILIATES, assignees, sublicensees, vendors or other third parties; 9.2.2 a claim by a third party that the PENN TECHNICAL INFORMATION or the design, composition, manufacture, use, sale or other -17- disposition of any PENN LICENSED PRODUCT and/or SERVICE infringes or violates any patent, copyright, trademark or other intellectual property rights of such third party; and 9.3 The Indemnified Party shall promptly notify LICENSEE of any claim or action giving rise to Liabilities subject to the provisions of the foregoing Section. LICENSEE shall have the right to defend any such claim or action, at its cost and expense. LICENSEE shall not settle or compromise any such claim or action in a manner that imposes any restrictions or obligations on the University or grants any rights to the PENN TECHNICAL INFORMATION. If LICENSEE fails or declines to assume the defense of any such claim or action within thirty (30) days after notice thereof, PENN may assume the defense of such claim or action for the account and at the risk of LICENSEE, and any Liabilities related thereto shall be conclusively deemed a liability of LICENSEE. LICENSEE shall pay promptly to the Indemnified Party any Liabilities to which the foregoing indemnity relates, as incurred. The indemnification rights of PENN or other Indemnified Party contained herein are in addition to all other rights which such Indemnified Party may have at law or in equity or otherwise. 9.4 LICENSEE shall maintain general liability insurance, including contractual liability, and, if commercially available at standard rates product liability insurance in amounts not less than $2,000,000 per incident and $2,000,000 in the aggregate, issued by an insurance company rated A or better and naming PENN as an additional insured for ten (10) years after LICENSEE ceases manufacturing and marketing the PENN LICENSED PRODUCTS and/or SERVICES. The minimum insurance amounts specified herein shall not be deemed a limitation on LICENSEE's indemnification liability under this AGREEMENT. LICENSEE shall provide PENN with copies of the endorsements to such policies, upon request of PENN. LICENSEE shall notify PENN at least thirty (30) days prior to cancellation of any such coverage. PENN shall receive a royalty on any insurance award constituting compensation to LICENSEE for lost profits on the sale of PENN LICENSED PRODUCTS. -18- ARTICLE 10 - USE OF PENN'S NAME; INDEPENDENCE 10.1 LICENSEE and its employees and agents shall not use and LICENSEE shall not permit its sublicensees to use PENN's name, any adaptation thereof, any PENN logotype, trademark, service mark or slogan or the name mark or logotype of any PENN representative or organization in any way without the prior, written consent of PENN, except as required by law. In this regard, PENN acknowledges and agrees that the LICENSEE may use PENN's name in various documents used by LICENSEE for capital raising and financing purposes, provided that PENN grants prior written approval of such use, which approval shall not be unreasonably withheld. 10.2 PENN and LICENSEE are independent entities and contractors and neither is an agent of the other. LICENSEE shall take no action which would suggest to a reasonable person that an agency relationship exists between LICENSEE and PENN. 10.3 Neither party shall use directly or by implication the name of the other or any staff member, faculty member, student or employee of the other in connection with any products, publicity, promotion, financing or advertising without the prior written permission of the other party, except as required by law. ARTICLE 11 - COMPLIANCE WITH LAWS; EXPORT CONTROL 11.1 LICENSEE shall comply with all prevailing laws, rules and regulations pertaining to the development, testing, manufacture, marketing, sale, use, import or export of products. Without limiting the foregoing, it is understood that PENN is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities, articles and information, including the Arms Export Control Act as amended in the Export Administration Act of 1979, and that its obligations hereunder are contingent upon compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require -19- a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without prior approval of such agency. PENN neither represents that a license is not required nor that, if required, it will issue. ARTICLE 12 - ASSIGNMENT 12.1 This AGREEMENT and the rights and duties appertaining thereto may not be assigned by either party other than to an Affiliate without first obtaining the express written consent of the other party. Any such purported assignment, without the written consent of the other party, shall be null and of no effect. ARTICLE 13 - NOTICES 13.1 Notices, payments, statements, reports and other communications under this AGREEMENT shall be in writing and shall be deemed as having been received as of the date dispatched if sent by public courier (e.g. Federal Express) or by express mail, receipt requested and addressed as follows: If for PENN: University of Pennsylvania Center for Technology Transfer 3700 Market Street, Suite 300 Philadelphia, PA 19104 Attention: Director with a copy to: Office of General Counsel University of Pennsylvania 221 College Hall Philadelphia, PA 19104-6303 Attention: General Counsel -20- If for LICENSEE: Tensiodyne Corporation 11835 West Olympic Boulevard East Tower, Suite 705 West Los Angeles, CA 90064 with a copy to: Stephen M. Goodman, Esquire Wolf, Block, Schorr and Solis-Cohen 12th Floor Packard Building S.E. Corner 15th & Chestnut Streets Philadelphia, PA 19102-2678 Either party may change its official address upon notice to the other party. ARTICLE 14 - JURISDICTION; ENTIRE AGREEMENT - DISPUTE RESOLUTION 14.1 This AGREEMENT shall be interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Jurisdiction and venue shall be proper in the Commonwealth of Pennsylvania. 14.2 This AGREEMENT and the SPONSORED RESEARCH AGREEMENT (Appendix 2 hereto) [and the STOCK PURCHASE AGREEMENT (Appendix 3 hereto)] are being entered into simultaneously and each is related to the other in setting forth the entire agreement of the parties. Any modification of this AGREEMENT shall be in writing and signed by an authorized representative of each party. 14.3 In the event that a party to this AGREEMENT perceives the existence of a dispute with the other party concerning any right or duty provided for herein, the parties shall, as soon as practicable, confer in an attempt to resolve the dispute. In the event that resolution of the dispute is not forthcoming, the parties shall -21- consult with a view toward submitting the dispute to mediation or arbitration under mutually-acceptable terms. There is no enforceable obligation to enter into mediation or arbitration conferred by this paragraph. IN WITNESS WHEREOF the parties, intending to be legally bound, have caused this AGREEMENT to be executed by their duly authorized representatives. THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA - ---------------------------------------------------------------------- DATE: August 26, 1993 ----------------------------------------------------------------- SIGNATURE: /s/ Stephen M. Sammut ------------------------------------------------------------ TYPED NAME: Stephen M. Sammut ----------------------------------------------------------- TITLE: Managing Director ---------------------------------------------------------------- LICENSEE DATE: 9/9/93 ----------------------------------------------------------------- SIGNATURE: /s/ Robert M. Bernstein ------------------------------------------------------------ TYPED NAME: Robert M. Bernstein ----------------------------------------------------------- TITLE: PRES. ---------------------------------------------------------------- -22- EX-10.2 10 SPONSORED RESEARCH AGREEMENT EXHIBIT 10.2 SPONSORED RESEARCH AGREEMENT between TENSIODYNE CORPORATION (SPONSOR) and THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA (PENN) TABLE OF CONTENTS RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. Sponsored Research . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 3. Term of Agreement. . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 4. Reimbursement of Costs, Payment. . . . . . . . . . . . . . . 3 ARTICLE 5. Intellectual Property. . . . . . . . . . . . . . . . . . . . 3 ARTICLE 6. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 7. Publication, Use of Name . . . . . . . . . . . . . . . . . . 4 ARTICLE 8. Termination. . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 9. Disclaimer of Warranties, Indemnification. . . . . . . . . . 6 ARTICLE 10. Additional Provisions. . . . . . . . . . . . . . . . . . . . 7 ATTACHMENT A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 SPONSORED RESEARCH AGREEMENT This Sponsored Research Agreement ("AGREEMENT") is made by and between The Trustees of the University of Pennsylvania, a Pennsylvania nonprofit corporation ("PENN"), with offices located at Suite 300, 133 South 36th Street, Philadelphia, PA 19104-3246, and Tensiodyne Corporation, a corporation organized and existing under the laws of Delaware ("SPONSOR"), having a place of business at Los Angeles, California. This AGREEMENT is effective as of the ____day of July, 1993 ("EFFECTIVE DATE"). RECITALS WHEREAS, the SPONSOR desires to fund the research of Dr. Campbell Laird of PENN's School of Engineering in fatigue properties of metals; WHEREAS, the Sponsor desires to support such research conducted by PENN in accordance with the terms and conditions of this AGREEMENT; WHEREAS, the research program contemplated by this AGREEMENT is of mutual interest to SPONSOR and PENN and furthers the educational, scholarship and research objectives of PENN as a nonprofit, tax-exempt educational institution and may benefit both SPONSOR and PENN through the creation or discovery of new inventions; NOW, THEREFORE, in consideration of the premises and of the promises and mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS 1.1 CONFIDENTIAL INFORMATION means PENN INTELLECTUAL PROPERTY and any information or materials in tangible form that is marked as confidential or proprietary to PENN at the time it is delivered to SPONSOR, and any other information that is furnished orally if PENN identifies such information as confidential or proprietary when it is disclosed and promptly confirms such designation in writing within thirty (30) days after such disclosure. 1.2. EFFECTIVE DATE means the first date written above. -1- 1.3 LICENSE AGREEMENT means the License Agreement between the SPONSOR and PENN of even date herewith. 1.4 PENN INTELLECTUAL PROPERTY means and includes all technical information, inventions, trade secrets, developments, discoveries, software, know-how, methods, techniques, formulae, data, processes and other proprietary ideas, whether or not patentable or copyrightable, that are first conceived, discovered, developed or reduced to practice in the conduct of the SPONSORED RESEARCH. 1.5 PRINCIPAL INVESTIGATOR is Dr. Campbell Laird who has agreed to serve as PRINCIPAL INVESTIGATOR for the SPONSORED RESEARCH and shall be responsible for the administration and supervision of the SPONSORED RESEARCH. 1.6 SPONSORED RESEARCH means the research program described in Attachment A to this AGREEMENT. ARTICLE 2. SPONSORED RESEARCH 2.1 PENN shall commence the SPONSORED RESEARCH promptly after the EFFECTIVE DATE of this AGREEMENT and upon payment by SPONSOR of any funds owed, and shall use reasonable efforts to conduct such SPONSORED RESEARCH substantially in accordance with the terms and conditions of this AGREEMENT. SPONSOR acknowledges that PENN and the PRINCIPAL INVESTIGATOR shall have the freedom to conduct and supervise the SPONSORED RESEARCH in a manner consistent with PENN's research mission. This AGREEMENT shall not be construed to limit the freedom of individuals participating in the SPONSORED RESEARCH to engage in any other research. 2.2 If the services of the PRINCIPAL INVESTIGATOR become unavailable to PENN for any reason, PENN shall be entitled to designate another member of its faculty who is acceptable to both parties to serve as the PRINCIPAL INVESTIGATOR of the SPONSORED RESEARCH. If a substitute PRINCIPAL INVESTIGATOR has not been designated within sixty (60) days after the original PRINCIPAL INVESTIGATOR ceases his or her services under this AGREEMENT, either party may terminate this AGREEMENT upon written notice thereof to the other party, subject to the provisions of Article 7. -2- ARTICLE 3. TERM OF AGREEMENT 3.1 The initial term of this AGREEMENT shall begin on the EFFECTIVE DATE of this AGREEMENT and shall end on July _, 1995 unless terminated sooner pursuant to Sections 2.2 or 8.1 hereof. This AGREEMENT may be extended or renewed only by the parties' mutual written agreement, which shall be incorporated as an attached to this AGREEMENT. ARTICLE 4. REIMBURSEMENT OF COSTS, PAYMENTS 4.1 SPONSOR agrees to reimburse PENN for all direct and indirect costs incurred in the conduct of the SPONSORED RESEARCH in an amount not to exceed the total amount of $200,000.00 as set forth in Attachment A. SPONSOR acknowledges that this amount is a good faith estimate only and not a guarantee of the cost to conduct the SPONSORED RESEARCH. If at any time PENN determines that it will require additional funds for the SPONSORED RESEARCH, it shall notify SPONSOR and provide an estimate of the additional amount. SPONSOR shall not be liable for any costs in excess of the amount of $200,000.00 as set forth in Attachment A unless it has agreed in writing to provide additional funds. 4.2 SPONSOR agrees to make payments to PENN at the rate of $11,112 per month for eighteen months beginning October 15, 1995. All payments are to be made by check payable in United States dollars, to "The Trustees of the University of Pennsylvania", and sent to the address set forth in Section 10.5. 4.3 PENN shall maintain accurate records and books of account relating to this AGREEMENT in accordance with accepted accounting practices, and shall make such records and books available to SPONSOR upon reasonable notice during PENN's normal business hours, but not more frequently than once each calendar year. 4.4 SPONSOR agrees that title to any equipment, laboratory animals, or any other materials made or acquired with funds provided under this AGREEMENT shall vest in PENN, and such equipment, animals, or materials shall remain the property of PENN following termination of this AGREEMENT. ARTICLE 5. INTELLECTUAL PROPERTY 5.1 Prosecution of Patent Applications and Maintenance of Patents 5.1.1 PENN agrees to provide promptly to SPONSOR a complete written disclosure of any PENN INTELLECTUAL PROPERTY reasonably considered -3- patentable. SPONSOR agrees to advise PENN, no later than thirty (30) days after receipt of such disclosure, whether it requests PENN to file and prosecute a United States patent application related to such PENN INTELLECTUAL PROPERTY. If SPONSOR does not request PENN to file and prosecute a patent application, PENN may proceed with such preparation and prosecution at its own cost and expense; but such patent applications shall be excluded from SPONSOR's right under the License Agreement. 5.1.2 The mutual rights and obligations of the parties with respect to filing, maintenance and prosecution of patents and patent applications respecting PENN's INTELLECTUAL PROPERTY shall be as set forth in the LICENSE AGREEMENT. 5.2 The preparation, prosecution, and maintenance of copyright, trademark and other intellectual property applications for the PENN INTELLECTUAL PROPERTY shall be subject to the provisions of Section 5.1. 5.3 PENN shall retain all right, title and interest in and to the PENN INTELLECTUAL PROPERTY and any patents, copyrights and other intellectual property protections related thereto, regardless of which party prepares and prosecutes the applications associated therewith, or maintains any resulting patents, copyrights or other intellectual property protections, subject to any express license granted to SPONSOR under the LICENSE AGREEMENT. ARTICLE 6. CONFIDENTIALITY The rights and obligations of the parties respecting Confidential Information of the parties received pursuant to this Agreement shall be as set forth in the License Agreement. ARTICLE 7. PUBLICATION, USE OF NAME 7.1 SPONSOR acknowledges that the basic objective of research activities at PENN is the generation of new knowledge and its expeditious dissemination. To further that objective, PENN retains the right, at its discretion, to demonstrate, publish or publicize a description of the results of the SPONSORED RESEARCH, subject to the provisions of Section 8.2 below. 7.2 Should the PRINCIPAL INVESTIGATOR desire to disclose publicly, in writing or by oral presentation, the results of the SPONSORED RESEARCH, the PRINCIPAL INVESTIGATOR shall notify SPONSOR and PENN in writing of his or her intention at least thirty (30) days before such disclosure. The PRINCIPAL INVESTIGATOR shall include with such notice a description of the oral presentation or, in the case of a manuscript or other proposed written disclosure, a current draft of such written disclosure. SPONSOR may request PENN, no later than thirty (30) days following the receipt of such -4- notice, to file a patent, copyright or other application related to PENN INTELLECTUAL PROPERTY contained in such disclosure. All such filings shall be subject to the provisions of ARTICLE 5 of this Agreement. Upon receipt of such request, PENN and the PRINCIPAL INVESTIGATOR shall arrange a short delay in publication not to exceed sixty (60) days, to permit filing of a patent application, copyright or other application by PENN. 7.3 PENN agrees not to use the SPONSOR's name without the SPONSOR's prior written consent except that PENN may acknowledge the SPONSOR's funding of this SPONSORED RESEARCH in scientific publications and in listings of SPONSORED RESEARCH projects. SPONSOR agrees not to use PENN's name, or the name of any trustee, officer, faculty member, student or employee thereof, except in a manner consistent with the provisions of the LICENSE AGREEMENT. ARTICLE 8. TERMINATION 8.1 In addition to the termination right set forth in Section 2.2 hereof, either party may terminate this AGREEMENT effective upon written notice to the other party, if the other party breaches any of the terms or conditions of this AGREEMENT and fails to cure such breach within sixty (60) days after receiving written notice thereof. 8.2 This AGREEMENT shall automatically terminate upon the occurrence of a Bankruptcy Event, as defined in the LICENSE AGREEMENT. 8.3 In addition, either party may terminate this AGREEMENT for any reason upon ninety (90) days prior written notice to the other party. 8.4 In the event of termination of this AGREEMENT prior to its stated term whether for breach or for any other reason whatsoever, PENN shall be entitled to retain from the payments made by SPONSOR prior to termination PENN's reasonable costs of concluding the work in progress. Allowable costs include, without limitation, all costs or noncancellable commitments incurred prior to the receipt, or issuance, by PENN of the notice of termination, and the full cost of each student and faculty member supported hereunder through the end of such commitments. In the event of termination, PENN shall submit a final report of all costs incurred and all funds received under this AGREEMENT within sixty (60) days after the effective termination date. The report shall be accompanied by a check in the amount of any excess of funds advanced over costs and allowable commitments incurred. In case of a deficit of funds, the SPONSOR agrees to pay PENN the amount needed to cover costs and allowable commitments incurred by PENN under this AGREEMENT. 8.5 Termination of this AGREEMENT shall not affect the rights and obligations of the parties accrued prior to termination hereof. The provisions of ARTICLES -5- 5, entitled "Intellectual Property"; 9, entitled "Disclaimer of Warranties, Indemnification"; and 10, entitled "Additional Provisions", shall survive such termination. ARTICLE 9. DISCLAIMER OF WARRANTIES, INDEMNIFICATION 9.1 PENN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, WARRANTIES WITH RESPECT TO THE CONDUCT, COMPLETION, SUCCESS OR PARTICULAR RESULTS OF THE SPONSORED RESEARCH, OR THE CONDITION OF ANY INVENTION(S) OR PRODUCT(S), WHETHER TANGIBLE OR INTANGIBLE, CONCEIVED, DISCOVERED, OR DEVELOPED UNDER THIS AGREEMENT, OR THE OWNERSHIP, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE SPONSORED RESEARCH OR ANY SUCH INVENTION OR PRODUCT. PENN SHALL NOT BE LIABLE FOR ANY DIRECT, CONSEQUENTIAL, PUNITIVE OR OTHER DAMAGES SUFFERED BY SPONSOR OR ANY OTHER PERSON RESULTING FROM THE SPONSORED RESEARCH OR THE USE OF ANY SUCH INVENTION OR PRODUCT. 9.2 SPONSOR agrees to defend, indemnify and hold harmless PENN, the PRINCIPAL INVESTIGATOR and any of PENN's faculty, students, employees, trustees, officers, affiliates and agents (hereinafter referred to collectively as the "INDEMNIFIED PERSONS") from and against any and all liability, claims, lawsuits, losses, damages, costs or expenses (including documented attorneys' fees), which the INDEMNIFIED PERSONS may hereafter incur, suffer or be required to pay as a result of SPONSOR'S use of the results of SPONSORED RESEARCH or any PENN INTELLECTUAL PROPERTY or as a result any breach of this AGREEMENT or any wrongful act or omission of SPONSOR, its employees, affiliates, contractors, licensees or agents. PENN shall notify SPONSOR upon learning of the institution or threatened institution of any such liability, claims, lawsuits, losses, damages, costs and expenses and PENN shall cooperate with SPONSOR in every proper way in the defense or settlement thereof at SPONSOR'S request and expense. -6- ARTICLE 10. ADDITIONAL PROVISIONS 10.1 In the event that a party to this AGREEMENT perceives the existence of a dispute with the other party concerning any right or duty provided for herein, the parties shall, as soon as practicable, confer in an attempt to resolve the dispute. In the event that resolution of the dispute is not forthcoming, the parties shall consult with a view toward submitting the dispute to mediation or arbitration under mutually acceptable terms. There is no enforceable obligation to enter into mediation or arbitration conferred by this paragraph. 10.2 No rights hereunder may be assigned by SPONSOR, directly or by merger or other operation of law, except in a manner consistent with the terms of the LICENSE AGREEMENT limiting such assignments. Any prohibited assignment of this AGREEMENT or the rights hereunder shall be null and void. No assignment shall relieve SPONSOR of responsibility for the performance of any accrued obligations which it has prior to such assignment. This AGREEMENT shall inure to the benefit of permitted assigns of SPONSOR. 10.3 A waiver by either party of a breach or violation of any provision of this AGREEMENT will not constitute or be construed as a waiver of any subsequent breach or violation of that provision or as a waiver of any breach or violation of any other provision of this AGREEMENT. 10.4 Nothing herein shall be deemed to establish a relationship of principal and agent between PENN and SPONSOR, nor any of their agents or employees for any purpose whatsoever. This AGREEMENT shall not be construed as constituting PENN and SPONSOR as partners, or as creating any other form of legal association or arrangement which would impose liability upon one party for the act or failure to act of the other party. 10.5 Notices, payments, statements, reports and other communications under this AGREEMENT shall be writing and shall be deemed to have been received as of the date dispatched if sent by public courier (e.g. Federal Express) or by express mail, return receipt requested and addressed as follows: If to PENN: Office of Research Administration University of Pennsylvania 133 South 36th Street, Suite 300 Philadelphia, PA 19104-3246 Attn: Executive Director Office of General Counsel -7- 221 College Hall University of Pennsylvania Philadelphia, PA 19104-6303 Attn: General Counsel If to SPONSOR: Tensiodyne Corporation 11835 West Olympic Boulevard East Tower, Suite 705 West Los Angeles, California 90064 cc: Stephen M. Goodman, Esquire Wolf, Block, Schorr and Solis-Cohen 12th Floor Packard Building S.E. Cor. 15th & Chestnut Streets Philadelphia, PA 19102-2678 10.6 This AGREEMENT embodies the entire understanding between the parties relating to the subject matter hereof and supersedes all prior understandings and agreements, whether written or oral. This AGREEMENT may not be varied except by a written document signed by duly authorized representatives of both parties. 10.7 Any of the provisions of this AGREEMENT which are determined to be invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability in such jurisdiction, without rendering invalid or unenforceable the remaining provisions hereof or affecting the validity or unenforceability of any of the terms of this AGREEMENT in any other jurisdiction. 10.8 The headings and captions used in this AGREEMENT are for convenience of reference only and shall not affect its construction or interpretation. 10.9 Nothing in this AGREEMENT, express or implied, is intended to confer on any person other than the parties hereto or their permitted assigns, any benefits, rights or remedies. 10.10 This AGREEMENT shall be construed and governed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to conflict of law provisions. -8- 10.11 PENN and SPONSOR shall not discriminate against any employee or applicant for employment because of race, color, sex, sexual or affectional preference, age, religion, national or ethnic origin, or handicap. 10.12 Neither party shall be liable for any failure to perform as required by this AGREEMENT to the extent such failure to perform is due to circumstances reasonably beyond such party's control, including, without limitation, labor disturbances or labor disputes of any kind, accidents, failure of any governmental approval required for full performance, civil disorders or commotions, acts of aggression, acts of God, energy or other conservation measures imposed by law or regulation, explosions, failure of utilities, mechanical breakdowns, material shortages, disease, or other such occurrences. 10.13 All rights granted to SPONSOR by this AGREEMENT are contingent upon compliance with United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes, and all other export controlled commodities. These laws include, but are not limited to, the Arms Export Control Act and the Export Administration Act as they may be amended. SPONSOR shall not, directly or indirectly, export any export controlled commodities, which are subject to this AGREEMENT, unless the required authorization and/or license is obtained from the proper government agency(ies) prior to export. By granting rights in this AGREEMENT, PENN does not represent that export authorization or an export license will not be necessary or, if necessary, that such authorization or export license will be granted. IN WITNESS WHEREOF, the duly authorized representatives of the parties hereby execute this AGREEMENT as of the date first written above. THE TRUSTEES OF THE [SPONSOR] UNIVERSITY OF PENNSYLVANIA By: /s/ Stephen M. Sammut By: /s/ Robert M. Bernstein -------------------------------- -------------------------------- Name: Stephen M. Sammut Name: Robert M. Bernstein ------------------------------ ------------------------------ Title: Managing Director Title: PRES. ----------------------------- ----------------------------- Date: August 26, 1993 Date: 9/9/93 ------------------------------ ------------------------------ (signatures continued on next page) -9- Acknowledged and Agreed to by PRINCIPAL INVESTIGATOR: By: /s/ Campbell Laird --------------------------- Date: Aug 31, 93 ------------------------- -10- Attachment A Summary of SPONSORED RESEARCH Work Scope 1) Details of Program - See Attachment B PRINCIPAL INVESTIGATOR Campbell Laird Representative of SPONSOR 1) Name: Robert M. Bernstein 2) Phone Number: (310) 208-5589 Period of Performance August 1, 1993 to July 31, 1995 Report Schedule Every sixty (60) days Final report within thirty (30) days after termination Budget: See Attachment C -11- EX-10.3 11 AMENDMENT 1 LICENSE AGREEMENT EXHIBIT 10.3 AMENDMENT 1 LICENSE AGREEMENT BETWEEN TENSIODYNE SCIENTIFIC CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA AMENDMENT 1 LICENSE AGREEMENT BETWEEN TENSIODYNE SCIENTIFIC CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA This Amendment 1 ("AMENDMENT 1") to the License Agreement effective October 15, 1993 ("AGREEMENT") between Tensiodyne Scientific Corporation ("LICENSEE") and the Trustees of the University of Pennsylvania ("PENN") is made between Material Technology, Inc. ("MATECH") and PENN effective by the parties as of the date of the last signature executing this AMENDMENT 1. BACKGROUND WHEREAS, MATECH, is a successor as of February 1994, to LICENSEE's business, and therefore, is obligated to perform the obligations of LICENSEE under the AGREEMENT, and this AMENDMENT 1 thereto. NOW, THEREFORE, the parties agree as follows: 1. Unless otherwise defined in this Amendment 1, all capitalized terms shall have the same meaning as set forth in the AGREEMENT. 2. The parties hereby agree that PENN, no later than thirty (30) days after the date of the last signature executing this AMENDMENT 1, will be issued shares of common stock in MATECH as will cause PENN to own shares of common stock representing at least five percent (5%) of the outstanding shares of capital stock of MATECH on a fully diluted basis subsequent to an additional two million dollars of paid in capital invested in MATECH. 3. MATECH hereby represents and warrants that it is the lawful successor to LICENSEE's rights and obligations under the AGREEMENT. 4. The parties hereby agree that Section 3.2 of the AGREEMENT is hereby amended to obligate MATECH to pay to PENN a royalty of seven percent (7%) of NET SALES. 5. Pursuant to Section 7.2 of the AGREEMENT, the parties hereby agree that, LICENSEE will reimburse PENN, with funds from 30% of any equity investment, debt, or any other capital with the exception of funds provided by any public sector funding, (FUNDING) as set forth in paragraph 5 of REPAYMENT AGREEMENT, for all documented attorney's fees, expenses, official fees and other charges incident to the preparation, prosecution, licensing and maintenance of PENN PATENT RIGHTS, including patents and patent applications in the United States and in countries foreign to the United States on developments set forth in foregoing Sections 4.2 of the AGREEMENT. However, such remittance to PENN will be subsequent to the first $150,000.00 of such FUNDING raised by LICENSEE after the date of the last signature executing this AMENDMENT 1. The provisions of paragraph 6 of the REPAYMENT AGREEMENT shall take precedence over the provisions of this paragraph 5. 6. LICENSEE will have the right to cause its patent counsel, providing that such patent counsel is acceptable to PENN, to pursue work, at the sole cost of LICENSEE, on the PENN PATENT RIGHTS. 7. Except as set forth in the foregoing provisions of this AMENDMENT 1, all of the terms and conditions of the AGREEMENT shall apply, and such AGREEMENT, as amended, shall remain in full force and effect. IN WITNESS THEREOF, the parties have executed this AMENDMENT 1 through their duly authorized representatives as set forth below, and this AMENDMENT 1 shall be attached to, and shall become a part of, the AGREEMENT between the parties. THE TRUSTEES OF THE UNIVERSITY of PENNSYLVANIA MATERIAL TECHNOLOGY INC. By: By: ------------------------------ --------------------------- Name: Name: ----------------------------- --------------------------- Title: Title: ---------------------------- -------------------------- Date: Date: ---------------------------- ---------------------------- EX-10.4 12 REPAYMENT AGREEMENT EXHIBIT 10.4 REPAYMENT AGREEMENT BETWEEN TENSIODYNE SCIENTIFIC CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA REPAYMENT AGREEMENT BETWEEN TENSIODYNE SCIENTIFIC CORPORATION AND THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA This Repayment Agreement is made between Material Technology, Inc. ("MATECH") and the Trustees of the University of Pennsylvania ("PENN") in reference to the Sponsored Research Agreement effective October 15, 1993 ("SRA") between Tensiodyne Scientific Corporation ("SPONSOR") and PENN and is made effective as of the date of the last signature executing this Repayment Agreement. BACKGROUND WHEREAS, pursuant to the terms and conditions of the SRA, SPONSOR agreed to sponsor the research of Dr. Campbell Laird of PENN's School of Engineering in fatigue properties of metals by payment of costs incurred in such research in an amount of $200,000 ("OBLIGATION"). WHEREAS, SPONSOR has not made payments as required under the SRA. WHEREAS, Material Technology, Inc. ("MATECH"), is a successor as of February 1994, to SPONSOR's business, and therefore, is obligated to perform the obligations of SPONSOR under the SRA and this REPAYMENT AGREEMENT thereto. WHEREAS, neither SPONSOR nor MATECH has made payments on OBLIGATION, WHEREAS, PENN and MATECH wish to provide for the repayment of the OBLIGATION on the following terms: NOW, THEREFORE, the parties agree as follows: 1. Unless otherwise defined in the Repayment Agreement, all capitalized terms shall have the same meaning as set forth in the SRA. 2. MATECH hereby represents and warrants that it is the lawful successor to LICENSEE's rights and obligations under the AGREEMENT. 3. MATECH agrees that the amount outstanding and due to PENN under the SRA is $200,000.00. 4. MATECH shall pay the OBLIGATION in accordance with the following terms: 5. The entire obligation with accrued interest shall be paid to PENN no later than four (4) years from the date of the last signature executing this AGREEMENT. 6. In the event that MATECH secures any proceeds in the form of an equity investment, debt, or any other capital with the exception of funds provided by any public sector entity ("FUNDING"), MATECH will immediately remit to PENN 30% of such FUNDING until OBLIGATION is paid in full. However, such remittance to PENN will be subsequent to the first $150,000.00 of such FUNDING raised by SPONSOR after the date of the last signature executing this AGREEMENT. The provisions of this paragraph 6 shall take precedence over the provisions of Amendment 1, paragraph 5 of the SRA. 7. In the event that MATECH remits payment or other consideration to Mr. Robert M. Bernstein, currently President of Tensiodyne Scientific Corporation ("BERNSTEIN") in partial or full satisfaction of any debt owed by MATECH to BERNSTEIN (a "BERNSTEIN PAYMENT"), MATECH will remit to PENN, within five (5) working days after such payment is made, an amount equal to such payment (each such payment to PENN an "EQUIVALENT PAYMENT"), until the OBLIGATION is fully repaid to PENN. Notwithstanding the foregoing, any monies which MATECH pays to BERNSTEIN which are used by MATECH in agreement with BERNSTEIN as MATECH Working Capital, shall not be considered a BERNSTEIN PAYMENT. As used herein, the term Working Capital shall mean "working capital" as defined by the Generally Accepted Accounting Principles of the Federal Accounting Standards Board, except that Working Capital shall not include any form of payment to BERNSTEIN and/or Mr. Bernstein's family other than the salary described in Section 6 of this AGREEMENT. In addition to the foregoing, in the event that BERNSTEIN provides additional monies to MATECH in the form of Working Capital within ninety (90) days after the date of the last signature executing this AGREEMENT, MATECH may repay BERNSTEIN up to one hundred thousand dollars ($100,000) of such additional monies without being obligated to remit an EQUIVALENT PAYMENT to PENN. 8. MATECH will not remit to BERNSTEIN an annual salary, or any other consideration in lieu of a salary, exceeding $150,000 per annum until OBLIGATION is paid in full. 9. Effective June 30, 1997, MATECH will owe to PENN, on an accrued basis, interest amounting to 1.5% per month of the outstanding balance of the OBLIGATION. 10. PENN will have the right to review or audit all the books and records of MATECH. If in the course of such a review or audit, PENN determines in good faith that it SPONSOR has not met any of the duties defined in paragraphs 3, 4, 5, and 6 above, PENN will, by written notice, notify MATECH that PENN has determined that it determines that MATECH has not met a duty (duties). If MATECH determines in good faith that MATECH has met all of the duties defined in paragraphs 3, 4, 5, and 6 above then MATECH and PENN shall choose a mutually agreeable independent auditor to review or audit all the books and records of MATECH at MATECH's expense. If such an auditor determines that MATECH has not met any of the duties defined in paragraphs 3, 4, 5, and 6, the entire unpaid OBLIGATION together with the accrued interest shall become immediately due and payable. Such payment will not forgive MATECH of any of the duties as defined in paragraphs 3, 4, 5, and 6 above. If such an auditor determines that MATECH has met all of the duties defined in paragraphs 3, 4, 5, and 6, PENN will reimburse MATECH for all costs associated with such review or audit. 11. Notwithstanding anything to the contrary contained in this REPAYMENT AGREEMENT, MATECH shall pay any balance remaining on the OBLIGATION no later than four (4) years from last signature executing this AGREEMENT. IN WITNESS THEREOF, the parties have executed this Repayment Agreement through their duly authorized representatives as set forth below, and this Repayment Agreement shall be attached to, and shall become a part of, the SRA between the parties. THE TRUSTEES OF THE UNIVERSITY of PENNSYLVANIA MATERIAL TECHNOLOGY INC. By: By: ---------------------------- --------------------------- Name: Name: -------------------------- -------------------------- Title: Title: ------------------------- -------------------------- Date: Date: --------------------------- -------------------------- ACKNOWLEDGEMENT I have read and agree to abide by the terms of the Agreement and this Amendment (Amendment 1). By: ---------------------------- Name: -------------------------- Title: ------------------------- Date: ------------------------- EX-10.5 13 TEAMING AGREEMENT EXHIBIT 10.5 TEAMING AGREEMENT BETWEEN TENSIODYNE CORPORATION AND SOUTHWEST RESEARCH INSTITUTE TEAMING AGREEMENT No. 96-058 THIS AGREEMENT made and entered into by and between SOUTHWEST RESEARCH INSTITUTE (hereinafter referred to as "SwRI") located at 6220 Culebra Road, San Antonio, Texas 78238-5166, and TENSIODYNE SCIENTIFIC CORPORATION (hereinafter referred to as the "Subcontractor") located at 11835 West Olympic Boulevard, Suite 705, West Los Angeles California 90064. WHEREAS, SwRI intends to submit a proposal as prime contractor to the Government in response to a Task Order Request that may be issued pursuant to an existing SwRI ID/IQ contract concerning a program entitled "ELECTROCHEMICAL METAL FATIGUE MONITORING TECHNOLOGY" (hereinafter referred to as "the Program"); WHEREAS, the existing Electrochemical Metal Fatigue Monitoring Technology ("EPS") is a proprietary technology previously developed by Subcontractor and the University of Pennsylvania. WHEREAS, SwRI and the Subcontractor desire to combine their respective capabilities with the capabilities of the University of Pennsylvania in a team effort to submit said proposal for the Program and to complete the work required by any work statement in any task order (hereinafter referred to as "Task Order") resulting from such proposal; and WHEREAS, SwRI and the Subcontractor desire to define their mutual rights and obligations during the preparation and submittal of said proposal and under any subsequent Task Order resulting therefrom, consistent with federal/state laws governing restraint of trade or competition as applicable. 1 NOW THEREFORE, to effect the foregoing, SwRI and the Subcontractor in consideration of the mutual covenants hereinafter contained, agree as follows: 1. The proposal will be based on SwRI acting as the prime contractor to the Government for any resultant Task Order, and Tensiodyne Scientific Corporation and the University of Pennsylvania acting as subcontractors to SwRI, furnishing of support to the Prime Contractor under the Program. Any resulting subcontract to the Subcontractor will involve, but may not be limited to, work set forth in Exhibit "A" in Statement of Work attached hereto. 2. SwRI will prepare and submit its proposal to the Government with assistance from the Subcontractor in the following areas: inputs on selected Statement of Work tasks, related experience information, tailored resumes on key personnel, and appropriate costs information, all to be used in preparation of the SwRI proposal. Details and formats for these inputs will be provided separately. 3. SwRI will recognize and identify the Subcontractor in its proposal and use its diligent efforts to secure Government approval of the use of the Subcontractor in the Program for the area of responsibility described in Exhibit A, including but not limited to affording Subcontractor an opportunity to accompany SwRI on a visit to the Government for the purpose of securing such approval. SwRI will keep the Subcontractor fully advised of any changes which affect its area of responsibility. 4. In the event SwRI is awarded the Task Order contemplated by the Request for Task Order Proposal identified on Page One of this Agreement, to accomplish the work set forth in Exhibit "A" of this Agreement, it is agreed that SwRI and the Subcontractor will, in good faith, proceed in a timely manner to negotiate a mutually acceptable subcontract(s) for the selected portions of the work identified in Exhibit "A" and described in a responsible technical/cost proposal prepared by the Subcontractor, unless otherwise directed by the Government. The 2 subcontract shall embody, among other provisions, those terms and conditions of the prime contract which must be passed on to the Subcontractor in order to comply with such prime contract (a) terms and conditions setting forth the work specified on Exhibit A; (b) provisions setting forth the prices contained in the Subcontractor's proposal or those approved in writing by Subcontractor prior to their inclusion in the Proposal; and (c) other provisions mutually agreed to by and between SwRI and the Subcontractor including those set forth on Exhibit B. The subcontract will be negotiated at a fair and reasonable price(s) to be established after cost or price analysis in accordance with the requirements of the applicable Government procurement regulation. In the event that negotiations with the Government result in a substantial reduction of the Subcontractor's area of responsibility from that proposed by the Prime Contractor, SwRI shall afford Subcontractor an opportunity to accompany SwRI on a visit to the Government for the purpose discussing the Government's decision and making a presentation to the Government for the purpose of reversing the Government's decision and securing the Government approval for Subcontractor of the original areas of responsibility. It is understood between SwRI and the Subcontractor that any such subcontract will be subject to the approval of the Contracting Officer of the procuring authority of the United States Government, regardless of the provisions hereof. The subcontract shall include the following clause as well as those contained on Exhibit B: "In the event any cost negotiated in connection with the contract between the Government and SwRI or any cost that is reimbursable under such contract is reduced as a result of a formal demand by the Government Contracting Officer because cost or pricing data furnished and certified to by the Subcontractor is defective, the Subcontractor will reimburse SwRI for such cost. However, the Subcontractor shall not be liable for SwRI's profit on the Subcontractor's cost or pricing data. For the purposes of administering this clause and interpreting the rights and obligations of the parties, the various rules and guidelines provided for in FAR 15.804 and 15.806 shall govern. 3 SwRI agrees that the Subcontractor shall have the right in accordance with the intent set forth in the applicable FAR clause, to proceed under SwRI's name (by asserting the prime contract) by entering appeal from any decision of the Contracting Officer concerning the alleged submission of defective cost or pricing data by the Subcontractor under the subcontract, and SwRI agrees that it will give the Subcontractor prompt notice of such decision in order that an appeal may be perfected." Each party shall exert its diligent efforts toward the successful performance of the Task Order contemplated by the Request for Task Order Proposal identified on Page One of this Agreement, assuming award of the Task Order and the subcontract to the parties hereto, and shall provide appropriate and high quality managerial, marketing, advisory, technical, and other personnel to perform and support such contracts. 5. LIMITATIONS ON USE OF DATA AND INFORMATION a. The parties anticipate that under this Agreement it may be necessary for either party to transfer to the other information of a proprietary nature. Proprietary information shall be clearly identified by the disclosing party at the time of disclosure by (i) appropriate stamp or markings on the document exchanged; or (ii) written notice, with attached listings of all material, copies of all documents, and complete summaries of all oral disclosures (under prior assertion of the proprietary nature of the same) to which each notice relates, delivered within two (2) weeks of the disclosure to the other party. b. Each of the parties agrees that it will use the same reasonable efforts to protect such information as are used to protect its own proprietary information. Disclosures of such information shall be restricted to those 4 individuals who are directly participating in the proposal, contract and subcontract efforts identified in Articles 1, 2, 3, and 4 hereof. c. Neither party shall make any reproduction, disclosure, or use of such proprietary information except as follows: (1) Such information furnished by the Subcontractor may be used, reproduced and/or disclosed by SwRI in performing its obligations under this Agreement. (2) Such information furnished by SwRI may be used, reproduced and/or disclosed by the Subcontractor in performing its obligations under this Agreement. (3) Such information may be used, reproduced and/or disclosed for other purposes only in accordance with prior written authorization received from the disclosing party. d. The limitations on reproduction, disclosure, or use of proprietary information shall not apply to, and neither party shall be liable for reproduction, disclosure, or use of proprietary information with respect to which any of the following conditions exist: (1) If, prior to the receipt thereof under this Agreement, it has been developed or learned independently by the party receiving it, or has been lawfully received from other sources without any restriction of non-disclosure, including the Government, provided such other source did not receive it due to a breach of this Agreement or any other agreement. 5 (2) If, subsequent to the receipt thereof under this Agreement, (i) it is published by the party furnishing it or is disclosed, by the party furnishing it to others, including the Government, without restriction; or (ii) it has been lawfully obtained, by the party receiving it, from other sources without any restriction of non-disclosure including the Government, provided such other source did not receive it due to a breach of this or any other agreement; or (iii) such information otherwise comes within the public knowledge or becomes generally known to the public without breach of this Agreement; (3) If any part of the proprietary information has been or hereafter shall be disclosed in a United States patent issued to the party furnishing the proprietary information hereunder, the limitations on such proprietary information as is disclosed in the patent shall be only that afforded by the United States Patent Laws after the issuance of said patent. e. Neither the execution and delivery of this Agreement, nor the furnishing of any proprietary information by either party shall be construed as granting to the other party either expressly, by implication, estoppel, or otherwise, any license under any invention or patent now or hereafter owned or controlled by the party furnishing the same. f. Notwithstanding the expiration of the other portions of this Agreement, the obligations and provisions of this Article 5 shall continue for a period of 6 three (3) years from the date of this Agreement, however, any resulting contract shall take precedence. g. Each party will designate in writing one (1) or more individuals within its organization as the only point(s) for receiving proprietary or security information exchanged between the parties pursuant to this Agreement. 6. RIGHTS IN INVENTIONS Inventions conceived or first reduced to practice during the course of work under the Contract contemplated by this Agreement shall remain the property of the originating party. In the event of joint inventions, the parties shall establish their respective rights by negotiations between them. In this regard, it is recognized and agreed that the parties may be required to and shall grant license or other rights to the Government to inventions, data and other information under such standard provisions which may be contained in the Government Contract contemplated by this Agreement, provided, however, such license or other rights shall not exceed those required by said Contract. 7. No publicity or advertising regarding any proposal or contract under the Program or relating to this Agreement shall be released by either party without the prior written approval of the other party. No advertising or publicity containing any reference to the Subcontractor or any of its employees, either directly or by implication, shall be made use of by SwRI or on SwRI's behalf, without the Subcontractor's prior written approval. 8. All communication relating to this Agreement shall be directed only to the specific person designated to represent SwRI and the Subcontractor on this Program. Each of the parties to this Agreement shall appoint one (1) technical and one (1) administrative representative. These appointments shall be kept current during the period of this Agreement. Communications which are not properly directed to the persons designated to represent SwRI and the Subcontractor shall 7 not being binding upon SwRI or the Subcontractor. For purposes of this section, "properly directed" shall mean an oral communication or a written correspondence addressed and transmitted to the individuals identified below. All technical notices shall be addressed to: As to SwRI: Dr. Stephen J. Hudak, Jr. Director, Materials Engineering Department Southwest Research Institute P.O. Drawer 28510 San Antonio, Texas 78228-0510 210/522-2330 As to SUBCONTRACTOR: MR. ROBERT M. BERNSTEIN TENSIODYNE SCIENTIFIC CORPORATION 11835 WEST OLYMPIC BOULEVARD, SUITE 705 WEST LOS ANGELES, CALIFORNIA 90064 All contractual notices shall be addressed to: As to SwRI: Mr. Robert E. Chatten Director, Contracts Southwest Research Institute P.O. Drawer 28510 San Antonio, Texas 78228-0510 210/522-2235 As to SUBCONTRACTOR: MR. ROBERT M. BERNSTEIN TENSIODYNE SCIENTIFIC CORPORATION 11835 WEST OLYMPIC BOULEVARD, SUITE 705 WEST LOS ANGELES, CALIFORNIA 90064 9. Except for the conditions expressed in Articles 4 and 5 hereof, this Agreement, which is effective upon the date of its execution by the last of the signatory parties hereto, shall 8 automatically expire and be deemed terminated effective upon the date of the happening or occurrence of any one of the following events or conditions, whichever shall first occur: a. Official Government announcement or notice of the cancellation of the Program. b. The receipt by SwRI of written notice from the Government that it will not award to it the Task Order for the Program. c. The receipt of written notice from the Government that it has awarded a Contract or Task Order for the Program to someone other than SwRI. d. The receipt of official Government notice that the Subcontractor will not be approved as a major subcontractor under the Task Order to SwRI on the Program or that substantial areas of the Subcontractor's proposed responsibility AND/OR RELATED COSTS have been eliminated from the requirements, OR DISAPPROVED BY THE GOVERNMENT as long as the parties have met their obligations as set forth in Sections 3 and 4 above. e. Award of a subcontract to the Subcontractor by SwRI for its designated portion of the Program. f. Mutual agreement of the parties to terminate the Agreement. g. The expiration of a three (3) month period commencing on the effective date of this Agreement unless such period is extended by mutual agreement of the parties during which the Government fails to issue the Task Order for the Program OR, ALTERNATIVELY, THE PARTIES FAIL TO REACH AGREEMENT ON THE COSTS/PRICES AND TASKS TO BE INCLUDED IN THE SUBCONTRACTOR'S PROPOSAL TO BE SUBMITTED TO THE GOVERNMENT AS PART OF SwRI'S PROPOSAL. 9 h. FAILURE OF THE PARTIES DESPITE GOOD FAITH NEGOTIATIONS TO REACH AGREEMENT AND EXECUTE A SUBCONTRACT BASED UPON EXHIBIT A ON OR BEFORE DECEMBER 15, 1996 UNLESS MUTUALLY EXTENDED IN WHICH EVENT SwRI SHALL END ALL ACTIVITIES RELATING TO PERFORMANCE OF THE PROGRAM. i. If this Agreement terminates for any of the reasons set forth above, excluding (e) above, SwRI shall either decline to submit a proposal for the Program or alternatively, if SwRI has submitted a proposal to the 9A Government, withdraw its proposal for the Program from further consideration by the Government. 10. This Agreement pertains only to the proposal relating to the Program and to no other joint or separate effort undertaken by SwRI or the Subcontractor. The parties hereto shall be deemed to be independent contractors and the employees of one (1) party shall not be deemed to be employees of the other. This Agreement shall not constitute, create, or in any way be interpreted as a joint venture, partnership, agency relationship or formal business organization of any kind. 11. This Agreement may not be assigned or otherwise transferred by either party, in whole or in part, without the express prior written consent of the other party. 12. This Agreement shall not preclude either party from bidding or contracting independently from the other on any Government or industry program which may develop or arise in the general area of business related to this Agreement or in any other area. 13. This Agreement shall be governed, construed and interpreted in accordance with the laws of the United States and the State of Texas. 14. Access to security information classified "Top Secret," "Secret," and "Confidential," shall be governed by the provisions of FAR 52.204-2. Should provisions be established by the Government for special access handling of selected information relating to this Program, access will be governed by such provisions. 15. This Agreement contains the entire agreement of the parties and cancels and supersedes any previous understanding or agreement related to the Program, whether written or oral. All changes or modifications to this Agreement must first be agreed to in writing between the parties. 10 16. Each party to this Agreement will bear its respective costs, risks, and liabilities incurred by it as a result of its obligations and efforts under this Agreement. Therefore, neither SwRI nor the Subcontractor shall have any right to any reimbursement, payment, or compensation of any kind from each other during the period prior to the award and execution of any resulting subcontract between SwRI and the Subcontractor for the Program and work described in this Agreement. 17. To the extent permitted by law, during the effective term of this Agreement SwRI and the Subcontractor each agree that it will not participate in any manner in other teaming efforts that are competitive to this Teaming Agreement. Moreover, during the effective term of this Agreement, SwRI and the Subcontractor each agree that it will not compete independently (including the independent submission of a proposal to the Government) for the work specified in this Agreement. The term "participate" as used herein includes (but is not limited to) the interchange of technical data with competitors. 18. Either party hereto is authorized to disclose the terms and conditions of this Agreement to appropriate Government officials upon their request. 11 19. In the event a Task Order is not awarded to SwRI as a result of a proposal each party will, at the request of the other party, return all materials such as, but not limited to, those that are written, printed, drawn, or reproduced, to the originating party. 20. This Agreement is executed in multiple originals upon the date set forth beside the final execution signature. 21. Exhibit C attached contains agreed to language of Federal Lobbying Act. SOUTHWEST RESEARCH INSTITUTE By /s/ Sharon Rowe --------------------------- for Robert E. Chatten Title Director, Contracts Date August 22, 1996 TENSIODYNE SCIENTIFIC CORPORATION By /s/ Robert M. Bernstein -------------------------- Name Robert M. Bernstein -------------------------- Title Pres. -------------------------- Date 8/23/96 -------------------------- 12 EXHIBIT A In anticipation of the issuance by the San Antonio Air Logistics Center, Kelly Air Force Base, San Antonio, Texas, of a task order and a statement of work pursuant to Contract No. F41608-96-D-0108, for services to improve fatigue life prediction utilizing the Electrochemical Fatigue Sensor and its related technology (the "Services"), Southwest Research Institute ("SwRI") and Tensiodyne Scientific Corporation ("Tensiodyne") agree that Tensiodyne shall perform as subcontractor to SwRI which shall act as the prime contractor in the performance of the Services. The University of Pennsylvania ("Penn") shall also be a subcontractor to SwRI and close technical interactions will be required among Tensiodyne, Penn, and SwRI as indicated below. The purpose of the work is to improve the U.S. Air Force's capability to perform durability assessments of military aircraft, including both airframes and engines using novel Electrochemical Fatigue Sensor (EFS) technology to detect the stages of fatigue damage prior to, and after, the onset of fatigue cracking. The proposed program will include the following three phases: 1) Phase 1: Feasibility, 2) Phase 2: Development, and 3) Phase 3: Validation; work on the feasibility phase is proposed for the first year and a half of the project. The overall objectives of this phase are to 1) characterize the phenomena of current transients in representative airframe and engine materials, 2) assess the feasibility of constructing sensors from electrolytic gels and combination electrodes, and 3) evaluate both the fundamental and practical limitations associated with key technical challenges. Provided the milestones of this phase are met, the Phase 1 work will provide the basis for proceeding in subsequent years to Phase 2 and Phase 3 in development of a suitable breadboard device in support of the EFS. The tasks to be performed in the first year and a half are provided in the following Work Breakdown Structure (WBS). PHASE 1: FEASIBILITY *1.1 Establish viability of transient current measurements on a range of typical aircraft alloys (e.g., 7075-I73, Ti-6-4, and 4130 steel). - ------------------ * Penn shall have the primary technical responsibility for these tasks and be supported by Tensiodyne. + SwRI shall have the primary technical responsibility for these tasks and be supported by Tensiodyne. A-1 *1.2 Establish viability of measurements under bounding load ratios, frequencies, and waveforms associated with typical spectrum fatigue loading of fighter/trainer and transport aircraft. *1.3 Develop nondamaging electrolytic gel and establish shelf-life. *1.4 Establish possible influence of electrolytic gel on fatigue damage in selected aircraft alloys under both continuous and intermittent exposure. *1.5 Develop suitable reference electrodes which are compatible with electrolytic gel and optimize for use in aircraft component tests in Phase 2: Development. *1.6 Develop general relationships among transient current traces, key loading variables, and extent of fatigue damage for selected aircraft alloys. The key loading variables shall include loading frequency and waveform, load ratio, and load amplitude (including both elastic and plastic loading). *1.7 Explore fundamental relationship between transient current response under elastic versus elastic-plastic strains. +1.8 Establish practicality of measurements on protected (e.g., anodized, primed and painted) as well as corroded surfaces, and if necessary, develop methods to remove/reapply protective surface coatings without altering underlying fatigue damage. This effort shall be coordinated with the USAF's Coating Technology Integration Office (CTIO). +1.9 Perform tests and develop associated signal analysis techniques to establish that the sensor output will be interpretable for typical aircraft spaces. +1.10 Resolve electrical isolation issues associated with application of EFS to aircraft components and structures. In anticipation of receiving funding in the amount of $2.5 million pursuant to the anticipated task order to be issued by Kelly Air Force Base pursuant to Contract No. F41608-96-D0108 and based upon the description of tasks and division of task responsibilities in the above WBS, Tensiodyne shall receive $820,000 for their respective responsibilities. The actual funding to Tensiodyne will be based upon their cost proposals as subcontractors to SwRI in response to the Government's SOW and the subsequent acceptance of SwRI's technical and cost proposal by the Government. Tensiodyne will assist both SwRI and Penn as indicated in the above WBS. Tensiodyne assistance to Penn will be supplied by providing staff members to work under the direction of Professor Campbell Laird. A-2 EXHIBIT B Agreed to Terms and Conditions as per telephone conversation on August 22, 1996. I. Termination for Convenience II. Rights in Inventions and Works of Authorships III. Proprietary Rights IV. Government Data Rights V. Dispute Resolution VI. Indemnification EXHIBIT C No Federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the awarding of any Federal contract, the making of any Federal grant, the making of any Federal loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, amendment, or modification of any Federal contract, grant, loan, or cooperative agreement. If any funds other than Federal appropriated funds have been paid or will be paid to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with this Federal contract, grant, loan, or cooperative agreement, the undersigned shall complete and submit Standard Form -LLL, "Disclosure Form to Report Lobbying," in accordance with its instructions. The undersigned shall require that the language of this certification be included in the award documents for all subawards at all tiers (including subcontracts, subgrants, and contracts under grants, loans, and cooperative agreements) and that all subrecipients shall certify and disclose accordingly. This certification is a material representation of fact upon which reliance was placed when this transaction was made or entered into. Submission of this certification is a prerequisite for making or entering into this transaction imposed by section 1352, title 31, U.S. Code. Any person who fails to file the required certification shall be subject to a civil penalty of not less than $10,000 and not more than $100,000 for each such failure. ADDITIONAL TERMS AND CONDITIONS TO BE INCLUDED IN THE SUBCONTRACT BY AND BETWEEN SOUTHWEST RESEARCH INSTITUTE AND TENSIODYNE SCIENTIFIC CORPORATION AS AGREED TO BY THE PARTIES ON AUGUST 22 AND 23, 1996 AND AS REFERENCED IN THE TEAMING AGREEMENT BETWEEN THE PARTIES EXECUTED ON AUGUST 23, 1996 I. TERMINATION FOR CONVENIENCE Performance of work under this Subcontract may be terminated in whole or in part by SwRI, at any time, only if and to the extent that the Government terminates the corresponding work set forth in the Task Order issued to SwRI pursuant to Contract ______________. Any such termination shall be effected by delivery to Subcontractor of a Notice of Termination specifying the extent to which performance of work under this Subcontract is terminated and the date upon which such termination becomes effective. Such termination of this Subcontract shall be in accordance with FAR _________ as incorporated by reference pursuant to Exhibit __ of this Subcontract. II. RIGHTS IN INVENTIONS AND WORKS OF AUTHORSHIP A. During the performance of this Subcontract, subject to the rights granted to the Government as discussed in Article __ of this Subcontract, inventions, works of authorship and other proprietary technical data (as well as the copyrights, patents and similar rights attendant thereto): (1) conceived and reduced to practice, or, in the cases of works of authorship, authored solely by employees of, or persons under contract to, either party shall be owned exclusively by that party: (2) conceived and reduced to practice, or, in the cases of works of authorship, authored jointly by the parties shall be owned as determined by the parties' good faith negotiations to establish their respective rights. Failing agreement or resolution of the matter pursuant to the dispute resolution procedure of this Subcontract, each party shall have an equal undivided one-half interest in the invention, work of authorship, proprietary technical data, copyright or patent. Subject to the Government's rights, the parties agree to use their best efforts to reach mutual agreement as to their rights and obligations in connection with the commercial exploitation of any joint invention, work or authorship or proprietary technical data. Failing agreement, the matter shall be a Dispute and resolved as set forth in accordance with the dispute resolution procedure of this Subcontract. Each of the parties agrees to cause their employees to produce only "works made for hire" hereunder and will hold the other party harmless from their failure to do so. B. Each party agrees to use its best efforts to require its employees, and if appropriate, other persons under contract to it, to provide reasonable assistance in the procurement and protection of rights conferred by this Article and to execute all lawful documents in conjunction therewith. Expenses incurred in conjunction with the preparation of patent applications, applications for copyright registrations and in enforcing proprietary rights therein shall be borne by the party owning such rights or, if jointly owned, by the parties in proportion to their respective interests. III. PROPRIETARY RIGHTS SwRI shall be afforded, to the extent required to meet its obligations under this Subcontract and the Task Order issued pursuant to Contract No. ___, the same rights and obligations as the Government regarding technical data, computer software and other deliverables under this Subcontract. IV. GOVERNMENT DATA RIGHTS The rights granted to the Government with regard to technical data shall be determined in accordance with DFARS 252.227-7013 (Nov. 1995). Both parties acknowledge that Subcontractor and SwRI possess pre-existing technical data, developed exclusively at private expense and such data shall not be delivered with "unlimited rights." Such pre-existing technical data, as well as pre-existing patents shall be identified by Subcontractor and shall be marked in accordance with DFARS 252.227-7013 (Nov. 1995). SwRI acknowledges and agrees that it shall fully inform the Government of such pre-existing technical data and patent rights. V. DISPUTE RESOLUTION A. DISPUTES UNDER THIS SUBCONTRACT. This paragraph A governs all claims, controversies or disputes arising out of or relating to this Subcontract or its breach ("Disputes") that are not directly or indirectly subject to resolution under the Disputes Clause of the Prime Contract. Any Dispute that is not disposed of by written mutual agreement will be preliminarily determined by SwRI's Authorized Representative, who will within 15 days render a preliminary written determination on the issues in dispute and furnish a copy thereof to the Subcontractor. The preliminary determination will become final and conclusive unless the Subcontractor submits a written demand for arbitration to the American Arbitration Association within 30 days of the preliminary determination. The Dispute will then be arbitrated, pursuant to the Commercial Rules of the American Arbitration Association, before a panel of three arbitrators. The "preliminary determination" will not bind the arbitrators and will not prejudice the legal position of either party in the arbitration. One of the arbitrators will be selected by each party, and the third arbitrator will be selected by the two party-appointed arbitrators. Any such arbitration will be held in the _____________ metropolitan area. The parties will share the costs of the arbitration equally subject to final apportionment by the arbitrators. The arbitrators will apply the law chosen by the parties to govern this Subcontract. The decision of the arbitrators may be entered in any court of competent jurisdiction. Neither party will institute any action or proceeding against the other party in any court concerning any Dispute that is or could be the subject of a claim or proceeding under this paragraph A. The arbitrators shall not award exemplary or punitive damages to either party. 2 B. DISPUTES UNDER THE PRIME CONTRACT. This paragraph B governs all Disputes of the Subcontractor concerning matters that are directly or indirectly subject to resolution under the Disputes Clause of the Prime Contract. SwRI will submit any such Dispute to the Contracting Officer under the Prime Contract for a written decision under the Disputes Clause of the Prime Contract and will notify the Subcontractor of any final decision of the Contracting Officer under the Prime Contract that relates to this Subcontract or to the Subcontractor's performance under it within 10 days after SwRI receives the decision. Any final decision will be conclusive and binding upon the Subcontractor unless it is appealed pursuant to paragraph A. above or pursuant to the Disputes Clause of the Prime Contract. If SwRI elects not to appeal any final decision of the Contracting Officer under the Disputes Clause of the Prime Contract, SwRI will so notify the Subcontractor in writing within 20 days after SwRI receives the final decision. Within 30 days after Subcontractor receives SwRI's notice of its decision not to appeal the final decision of the Contracting Officer, Subcontractor notify SwRI that Subcontractor wishes to appeal that final decision pursuant to the Disputes Clause of the Prime Contract. SwRI shall, within 10 days either grant or deny the Subcontractor an indirect right to appeal that final decision in SwRI's name under the Disputes Clause of the Prime Contract. Both parties acknowledge and agree that with regard to Disputes concerning alleged submissions of defective cost or pricing data, SwRI shall grant Subcontractor's request. Subcontractor will pay all costs and expenses of any such appeal. Subcontractor will be solely responsible for prosecuting the appeal and preparing and presenting all pleadings, evidence and argument. Subcontractor will provide monthly written reports to SwRI of the progress of the appeal and will furnish SwRI copies of all pleadings and non-privileged correspondence filed or received by it concerning the appeal. If SwRI is required to submit a certification to the Government regarding a claim submitted pursuant to the Contract Disputes Act, Subcontractor will make available to SwRI all data and documentation that is necessary or appropriate to support or confirm the certification. In the event, SwRI denies Subcontractor an indirect right to appeal a final decision in SwRI's name under the Disputes Clause of the Prime Contract, both parties acknowledge and agree that such Dispute shall be considered a Dispute by and between the Subcontractor and SwRI and that such Dispute shall be submitted to arbitration in accordance with paragraph A. above. SwRI agrees that it shall not utilize as a defense the fact that the Dispute was one that concerns matters that were directly or indirectly subject to resolution under the Prime Contract to any alleged damages or costs owed to Subcontractor arising in connection with the Dispute, and SwRI agrees to step into the shoes of the Government with regard to such Dispute. C. DISPUTE-RESOLUTION METHOD AND CONTINUATION OF PERFORMANCE. Pending the final resolution of any Dispute under this Article, Subcontractor will proceed diligently to perform this Subcontract and comply with SwRI's preliminary determination. VI. INDEMNIFICATION Each party and its agents, employees and authorized assigns shall be indemnified, defended and held harmless (including reasonable attorneys fees) by the other party against all 3 third party liability (including liability to the government) that arises from or in connection with negligence, or willful, wanton, or reckless conduct of the other party, its employees, agents, subcontractors, or authorized assigns in the performance of this Subcontract which causes damage to real or tangible personal property, death or bodily injury, provided that: (1) the indemnifying party was properly notified in writing of the claim; (2) the indemnifying party was allowed to direct the defense or settlement of the claim; (3) if requested, the indemnified party reasonably assisted the indemnifying party at the indemnifying party's expense in defending or settling the claim. 4 EX-10.6 14 BECK AGREEMENT EXHIBIT 10.6 February 8, 1995 Robert M. Bernstein Tensiodyne Scientific Corporation 11835 West Olympic Blvd. Los Angeles, CA 90064 Dear Bob, We are agreed as follows: 1. Duties: Stephen Forrest Beck (hereinafter "Beck") will work to obtain funding for Tensiodyne Scientific Corporation, its assigns, affiliates, parents, successors, or any associated entity or individual, (hereinafter collectively referred to as "The Company") from one or more government agencies or private organizations. To that end, Beck will prepare correspondence, schedule and attend meetings, and assist in the development of strategy. 2. Term: The term of the agreement is eighteen months, commencing on the date of execution of this agreement. 3. Compensation: In consideration for his services you will pay Beck the following compensation: a. For work already performed for the Company, including the recommendation that the Company seek funding from governmental sources, and in particular that efforts be made in Congress to obtain support for the Company's research, Beck will receive 1/2 of 1 percent of the outstanding common shares of the Company, payable on signing of this agreement. b. (i) For work to be performed Beck will receive two percent of the outstanding common shares of the Company, payable on signing of this agreement. (ii) Beck will also receive 15% of any funding received by the Company from any governmental body or private entity during the term of this agreement. If funding for the Company is obtained from either the Commerce or the Energy Departments, and a claim for 5% of the funds received is made by Mel Levine, and such funds are actually paid, then Beck shall receive 10% of the total funds. If during the term of this agreement, events are set in motion, or contacts are made, which eventually lead to the Company obtaining funds from a governmental agency or private party after this agreement has expired, then the fees specified in this paragraph shall be payable to Beck for a period of five years from the date of expiration of the agreement. c. The cash compensation payable under this agreement shall be paid to Beck within 10 business days of the Company's receipt of such funds, in any legal manner which he shall specify, either under a 3 to 5 year employment contract, through the Company's purchase of an annuity, through the Company's purchase of an annuity, through the Company's placing the funds in escrow, or by any other means selected by Beck at his sole option. d. (i) Shares paid to Beck under this agreement shall not be diluted except by the sale of securities for cash. Beck shall have the right, for a period of 30 days after the receipt of notification in writing of the sale of shares for cash, to acquire a pro rata share of any such shares, on the same terms and conditions as any other buyer, so that Beck can maintain the same percentage interest in the Company. (ii) In the event that the Company receives $1 million or more from any governmental body or private party during the term of this agreement, or the five year period following its termination specified in b.(ii) above, then, notwithstanding d.(i) above, Beck's shares shall not be diluted unless and until the Company has completed a public offering which results in $10 million in proceeds to the Company. e. The Company agrees that it will issue the shares described in 3.(a) above as soon as shares are available to distribute to shareholders. Evidence of Beck's ownership interest will be by way of a Board of Director's resolution, a copy of which will be provided to him within 30 days of the date of this agreement. 4. The fees payable in this agreement will also be paid to Beck in the event that any non-governmental source provides funds to the Company during the term of this agreement, or for a period of five years after the expiration of this agreement, provided that Beck has introduced such source to the Company, or in the event that such source has otherwise come to the attention of the Company in a manner that is in any way related to the efforts of Beck on behalf of the Company, during the term of this agreement. 5. Beck's expenses under this agreement shall be borne by the Company. The Company agrees that it will pay for a minimum of three trips to Washington D.C. Such travel shall be paid by the Company in advance and shall be by coach class airfare and shall provide reasonable allowance for hotel, meal and other expenses. Any additional expenses beyond those cited above shall be approved by the Company in advance. 6. Dispute Resolution: Any dispute arising under this agreement shall be resolved in Los Angeles by binding arbitration under the auspices of the American Arbitration Association. The prevailing party shall be entitled to reimbursement for reasonable legal costs, fees and expenses. In any dispute under this agreement, if there is a disagreement over whether Beck's efforts, or those of some other party are responsible for the Company's obtaining funding from a government or non-government source, then the arbitrator is instructed by the parties to interpret Beck's contributions broadly, giving Beck the benefit of any doubt, and to take into account that Beck originated the concept of obtaining governmental funding, and that he has provided, and will provide, consulting services that might enable the executives or others associated with the Company to make contacts on their own that might lead to funding. In such event, the fees specified in this agreement would be fully payable to Beck. The parties represent and warrant that they are duly authorized to enter into this agreement and that it is binding upon them. If the foregoing is acceptable, please sign in the space provided below and return a copy of this agreement to me along with the appropriate stock certificates. Sincerely, /s/ STEPHEN FORREST BECK - ----------------------------------- Stephen Forrest Beck ACCEPTED AND AGREED: FOR: Tensiodyne Corporation /s/ ROBERT M. BERNSTEIN - ----------------------------------- By: Robert M. Bernstein, President ADDENDUM Robert M. Bernstein, President of Tensiodyne and Stephen Forrest Beck do hereby agree to amend that certain agreement between them (hereinafter the "Agreement") dated February 8, 1995 as follows: 7. Notwithstanding any other provision of this Agreement, any shares received by Beck shall not be subject to any dilution until the Company has completed an initial public offering of at least $10 million. 8. The obligations of Tensiodyne and Bob Bernstein to Beck are secured by the patents to the Tensiodyne technology and are personally guaranteed by Robert Bernstein. Beck's interest in the patents, and Bernstein's guarantee will both be formalized in a more complete agreement to be prepared in the future. Unless and until that agreement is completed however, this Agreement will be fully binding upon the parties. 9. This Agreement is fully binding upon Tensiodyne, Matech, their parents, subsidiaries, successors in interest, assigns, or any other person or entity associated with them. 10. The amounts payable to Beck under paragraph 3(b) of the Agreement shall be paid to Beck based on the total amount of funds which are appropriated and/or expended for the purpose of research, development, or for any other purpose related to Tensiodyne's technology, and shall not be based only on the amount which is actually received by the Company. Beck shall be paid the amounts which are due to him under this Agreement as funds become available to the Company, but only to the extent that such funds are actually available to the Company. 11. Beck will be fully indemnified and held harmless by Tensiodyne for any activity undertaken on behalf on Tensiodyne, provided that such activity is not illegal or fraudulent. ACCEPTED AND AGREED: For: Tensiodyne and for himself /s/ ROBERT M. BERNSTEIN 8/4/95 - ----------------------------------- ------------------ Robert M. Bernstein Date /s/ STEPHEN FORREST BECK 8/4/95 - ----------------------------------- ------------------ Stephen Forrest Beck Date 2/7/97 (1) Operative when gov't contract is signed (2) Pers Guar -- goes away after 100$ paid to S.B. (3) Anti Dil goes away after 50$ pd to S.B. (4) Seat on B.O.D. until all $ due is pd. (5) A note @ 15% of gov't contract (2.5 mil expected) also to add'l gov't contracts expected @ add'l 2.5 mil. (6) Int re Note @ prime recorded on Co. books, begins 9 mos after gov't contract signed -- payable quarterly. Unpaid int added to principal. (7) Method of pymt -- 12.5% of 1st mil raised (debt or equity) or earned by Co. -- and 15% over 1st mil until pd. (8) $2500 cash payment. (9) Fee for raising capital by Beck -- 5% of first 2.5 mil and 4% over. /s/ Stephen Forrest Beck /s/ Robert M. Bernstein EX-23.1 15 CONSENT OF ACCTS EXHIBIT 23.1 [LETTERHEAD] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Material Technologies, Inc. 11835 West Olympic Blvd., East Tower, Suite 705 Los Angeles, California 90064 The undersigned consents to the use of its opinion dated April 25, 1997, relating to the financial statements of Material Technologies, Inc., a Delaware Corporation, and to the reference to the firm under "Experts," all as included in the Registration Statement on Form S-1. Calabasas, California /s/ Jonathon P. Reuben, C.P.A. April 25, 1997 ------------------------------- Jonathon P. Reuben, C.P.A. EX-23.2 16 CONSENT OF COUNSEL EXHIBIT 23.2 LAW OFFICES OF C. TIMOTHY SMOOT Suite 174 23505 Crenshaw Boulevard Torrance, California 90505-5221 Telephone: 310/530-3366 Telecopier: 310/530-2211 E-mail: smoot@earthlink.net CONSENT OF COUNSEL Material Technologies, Inc. East Tower, Suite 705 11835 W. Olympic Blvd. Los Angeles, CA 90064 C. Timothy Smoot, Esq., hereby consents (1) to the use of his opinion dated March 14, 1997, relating to Material Technologies, Inc., a Delaware corporation, filing an S-1 Registration Statement with the Securities and Exchange Commission for distribution of 369,172 shares of Class A Common Stock of Material Technologies, Inc., ("Matech") and (2) to the reference to the Law Offices of C. Timothy Smoot under "Legal Matters" in the Registration Statement on Form S-1 and Amendments thereto relating to registering such shares under the Securities Act of 1933. Torrance, California C. Timothy Smoot April 28, 1997 C. Timothy Smoot, Attorney EX-27 17 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MATERIAL TECHNOLOGIES, INC., FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED) AND FOR THE THREE YEARS ENDED DECEMBER 31, 1996 AND FOR THE TWO MONTHS AND NINE DAYS ENDED MARCH 31, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 3-MOS OTHER DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1997 MAR-31-1997 MAR-31-1997 0 2,783 2,783 55,200 13,800 13,800 25,753 30,308 30,308 0 0 0 0 0 0 6,472 6,472 6,472 211,572 211,572 211,572 113,556 114,254 114,254 208,299 172,418 172,418 832,926 468,146 468,146 0 0 0 0 0 0 150,000 150,000 150,000 2,580 5,560 5,560 0 (476,288) (476,288) 208,299 172,418 172,418 0 0 0 0 4,555 991,260 0 0 0 0 0 0 483,186 87,649 3,746,453 0 0 0 18,198 625 0 (450,734) (81,959) (2,622,888) 0 0 (7,000) (450,734) (81,959) (2,629,888) 0 0 0 0 0 (282,940) 0 0 0 (450,734) (81,959) (2,912,828) (0.17) 0 0 0 0 0
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