As filed with the Securities and Exchange Commission on February 25, 2003
Registration File No. 333-101055
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM SB-2/A
Amendment No. 1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
HIENERGY TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 3826 91-2022980
(State or other jurisdiction of (primary standard (I.R.S. Employer
incorporation or organization) industrial code) Identification Number)
1601 Alton Parkway, Unit B
Irvine, California 92606
(949) 757-0855
(Address and telephone number of principal executive offices)
Agent for Service: With a Copy to:
Tom Pascoe, President Shea Wilson
HIENERGY TECHNOLOGIES, INC. QED Law Group, P.L.L.C.
1601 Alton Parkway, Unit B 3200 N.W. 68th Street
Irvine, California 92606 Seattle, Washington 98117
(949) 757-0855 (206) 781-7887
(Name, address, including zip code, and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after this registration 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.[X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -------------------------------- -------------------- --------------------- -------------------- --------------------
Title of each Amount Proposed Maximum Proposed Maximum
Class of to be Offering Price per Aggregate Offering Amount of
Securities to be Registered Registered (1) Unit price Registration Fee
Common stock, par value $0.001 8,055,034 (2) (3) (3) $ 46.41 (3)
per share
- -------------------------------- -------------------- --------------------- -------------------- --------------------
(1) In the event of a stock split, stock dividend or similar transaction
involving the Registrant's common stock, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act of
1933, as amended.
(2) As originally filed, this registration statement covered an aggregate of
7,725,346 shares. As amended by this amendment no. 1, this registration
statement now covers an aggregate of 8,055,034 shares, which includes
2,508,916 shares of common stock underlying options and warrants, 851,755 shares
of common stock underlying shares of Series A Convertible Preferred Stock,
136,300 shares of common stock issued or to be issued to Series A Convertible
Preferred stockholders as stock dividends, and 3,188,843 shares of common stock
issued to common stock private placement investors and others. Also includes an
additional 1,217,911 shares required to be registered pursuant to a registration
rights agreement with the Series A Convertible Preferred stockholders. Also
includes 151,309 shares of common stock that may be paid as penalties to the
Series A Convertible Preferred and common stock private placement investors.
(3) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of the
Securities Act of 1933. A registration fee of $4,052.76 was paid upon the
initial filing of this registration statement based upon a proposed maximum
offering price per unit of $2.195, which was the average of the high and low
reported prices of the Registrant's common stock on November 1, 2002, and an
amount to be registered of 7,725,346 shares. An additional registration fee of
$46.41 is being paid upon the filing of this amendment no. 1. This additional
registration fee was calculated by (a) multiplying (i) the difference between
the aggregate number of shares being covered by this amendment no. 1 and the
aggregate number of shares covered by the initial filing of this registration
statement (i.e., 8,055,034 minus 7,725,346 equals 329,688) by (ii) a proposed
maximum offering price per unit of $1.53, which was the average of the high and
low reported prices of the Registrant's common stock on February 19, 2003, and
then (b) multiplying that product (i.e., 329,688 multiplied by $1.53 equals
$504,422.64) by the current fee rate (i.e., $0.000092).
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement becomes effective on
such date as the Commission, acting under Section 8(a), may determine.
Subject To Completion, dated February 25, 2003
PROSPECTUS
8,055,034 Shares
[HI ENERGY TECHNOLOGIES, INC LOGO]
Common Stock
The shares of our common stock being offered under this prospectus are being
offered by some of our security holders identified in this prospectus for their
own accounts. Our common stock trades on the OTC Bulletin Board(R) under the
symbol "HIET."
The mailing address and the telephone number of our principal executive offices
are 1601 Alton Parkway, Unit B, Irvine, California 92606 and 949.757.0855.
------------------------------------------------------------------------------
Investing in our common stock involves a high degree of risk.
Please see the section of this prospectus entitled "Risk Factors" beginning on
page 3.
------------------------------------------------------------------------------
We will not receive any proceeds from the sale of the shares by the selling
security holders. We may receive proceeds in connection with the exercise of
options or warrants whose underlying shares may be sold in this offering.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is [________________], 2003.
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities.
TABLE OF CONTENTS
Page No.
Prospectus Summary...........................................................................................1
Risk Factors.................................................................................................3
Special Note Regarding Forward Looking Statements............................................................9
Use of Proceeds..............................................................................................9
Dividend Policy..............................................................................................9
Determination of Offering Price.............................................................................10
Market for Common Equity and Related Stockholder Matters....................................................10
Management's Discussion and Analysis of Financial Condition and Results of Operations.......................13
Business....................................................................................................17
Management..................................................................................................30
Certain Relationships and Related Transactions..............................................................36
Security Ownership of Certain Beneficial Owners and Management..............................................37
Selling Security Holders....................................................................................38
Plan of Distribution........................................................................................45
Description of Capital Stock................................................................................47
Transfer Agent and Registrar................................................................................50
Changes In and Disagreements with Accountants...............................................................50
Interest of Experts and Counsel.............................................................................50
Legal Matters...............................................................................................50
Where You Can Find More Information.........................................................................50
Financial Statements Index..................................................................................51
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because it is a
summary, it necessarily does not contain all of the information necessary to
your investment decision. To understand this offering fully, you should read
carefully the entire prospectus.
Investment Risks
An investment in this offering involves risk. We have a limited operating
history, and we are undercapitalized. Although we have generated some government
grant revenue to date, we have a history of operating losses. We may continue to
incur net losses in the future.
Our Company
HiEnergy Technologies, Inc. was incorporated under the laws of the State of
Washington on March 20, 2000 under the name SLW Enterprises Inc. On April 30,
2002, SLW changed its name to HiEnergy Technologies, Inc. in conjunction with a
reverse acquisition of HiEnergy Microdevices, Inc., a Delaware corporation based
in Irvine, California in the business of developing a stoichiometric-based
technology that can remotely determine the empirical chemical composition of
substances, including explosives, biological weapons and illegal drugs. The
acquisition of HiEnergy Microdevices by SLW occurred on April 25, 2002. HiEnergy
Technologies reincorporated into Delaware on October 22, 2002. We are a
development stage company.
We are developing technology capable of remote and non-intrusive, quantitative
on-line determination of the chemical composition of substances, including
explosives, biological weapons and illegal drugs. We plan to commercialize and
market our technology to agencies, organizations and ultimately industrial users
that need to improve the speed, accuracy and efficiency of their security
screening procedures. We may cooperate with established participants in the
security marketplace to market our technology through their established
distribution channels.
Our technology is a "stoichiometric" confirmation senzor that identifies
empirical chemical formulas and, at the same time, will also be capable of
producing the image of the analyzed chemical substance. "Stoichiometry" is the
scientific term for the art and science of deciphering empirical chemical
formulas of unknown substances. Because stoichiometric detection produces
quantitative identification of chemical formulas, it is a superior technology to
"pattern recognition" confirmation detection, which only qualitatively
recognizes specific chemical compounds that the detector is programmed to
identify. Confirmation detectors, which "confirm" the presence or absence of
substances in a scanned target, are distinct from so-called "anomaly detectors",
such as x-ray scanners, which merely identify objects fitting a certain profile
that require additional examination. As a general proposition, anomaly detectors
will give a high rate of "false positives" that must be further inspected while
confirmation detectors will identify the chemical nature of the target being
scanned.
We are currently developing three detection systems, the SuperSenzor, Minisenzor
and Microsenzor. These systems are being developed based on the proprietary
invention named atometry. We led the joint private sector-government-university
research consortium that developed atometry over the period from 1997-2002.
Atometry was scientifically validated at the US Department of Energy's Special
Technologies Laboratory in Santa Barbara and was for the first time publicly
presented at the White House International Symposium on Drug Control Policy in
1999 and published in the Symposium's Proceedings.
Our principal executive offices are located at 1601 Alton Parkway, Unit B,
Irvine, California 92606, and our telephone number is (949) 757-0855.
The Offering
Common stock offered by Up to 8,055,034 shares of common stock may be
selling security holders offered under this prospectus, some of which shares
are or may become issuable upon exercise of
warrants and options and upon conversion of shares
of Series A Convertible Preferred Stock ("Series A
Preferred").
The ability of various selling security holders to
exercise their warrants or options or convert their
shares of Series A Preferred into the shares of
common stock being offered under this prospectus is
subject to contractual limitations.
We have included in the "Selling Security Holders"
section beginning on page 37 a summary of these and
other shares of common stock that are covered by
this prospectus.
Use of Proceeds All proceeds of this offering will be received by
selling security holders for their own accounts. We
may receive proceeds in connection with the
exercise of options or warrants whose underlying
shares may in turn be sold by selling security
holders. Because the amount and timing of our
receipt of any such proceeds are uncertain, we have
not specifically identified the uses for such
proceeds.
Risk Factors You should read the "Risk Factors" section
beginning on page 3, as well as other cautionary
statements throughout this prospectus, before
investing in shares of our common stock.
OTC Bulletin Board(R) symbol HIET
Summary Financial Data
The following tables summarize the consolidated statements of operations and
balance sheets data for our business.
- --------------------------------------------------- --------------------- -------------------- ---------------------
For the Period from
August 21,
Six Months ended 1995 (Inception) to
October 31, 2002 Year Ended October 31, 2002
Statement of Operations Data: (unaudited) April 30, 2002 (unaudited)
- --------------------------------------------------- --------------------- -------------------- ---------------------
Revenues $ $ 148,166 $ 366,750
40,834
- --------------------------------------------------- --------------------- -------------------- ---------------------
Loss from operations $ (1,723,468) $ (1,377,110) $ (4,406,771)
- --------------------------------------------------- --------------------- -------------------- ---------------------
Net loss $ (1,913,225) $ (1,389,530) $ (4,637,789)
- --------------------------------------------------- --------------------- -------------------- ---------------------
Net loss per share $ (0.12) $ (0.06) $ (0.45)
- --------------------------------------------------- --------------------- -------------------- ---------------------
Weighted average common shares outstanding 22,783,343 17,783,760 12,173,702
- --------------------------------------------------- --------------------- -------------------- ---------------------
- ------------------------------------------------------------------ -------------------------- ----------------------
Balance Sheet Data: As at October 31, 2002 As at April 30, 2002
(unaudited)
- ------------------------------------------------------------------ -------------------------- ----------------------
Cash and cash equivalents $ 1,949,408 $ 1,078,136
- ------------------------------------------------------------------ -------------------------- ----------------------
Total assets $ 2,920,556 $ 1,229,370
- ------------------------------------------------------------------ -------------------------- ----------------------
Total liabilities $ 1,302,087 $ 1,398,320
- ------------------------------------------------------------------ -------------------------- ----------------------
Total Stockholders' equity (deficit) $ 799,147 $ (187,873)
- ------------------------------------------------------------------ -------------------------- ----------------------
RISK FACTORS
An investment in our common stock involves a high degree of risk. In addition to
the other information in this prospectus, you should carefully consider the
following risk factors before deciding to invest in shares of our common stock.
If any of the following risks actually occurs, it is likely that our business,
financial condition and operating results would be harmed. As a result, the
trading price of our common stock could decline, and you could lose part or all
of your investment.
Risks Related to Our Business
If our losses and accumulated deficit continue in the future, our business and
- ------------------------------------------------------------------------------
our stockholders will be adversely affected.
- --------------------------------------------
We have incurred net losses since our inception. For the year ended April 30,
2002, we reported a net loss of approximately $1.4 million, as compared to a net
loss of approximately $288,000 for the year ended April 30, 2001. Our
accumulated deficit through April 30, 2002 was approximately $2.7 million. For
the six months ended October 31, 2002, we reported a net loss of approximately
$1.9 million. Our accumulated deficit through October 31, 2002 was approximately
$5.5 million. We expect that our losses will continue further into the future.
We cannot assure you that we will attain profitable operations in the future.
Our recurring losses, our accumulated deficit, and our working capital
deficiency of approximately $284,000 at April 30, 2002, among other factors,
raised substantial doubt about our ability to continue as a going concern and
led our independent certified public accountants to qualify their opinion
contained in our consolidated financial statements as of and for the years ended
April 30, 2002 and 2001 to include an explanatory paragraph related to our
ability to continue as a going concern. Reports of independent auditors
questioning a company's ability to continue as a going concern are generally
viewed unfavorably by analysts and investors. This report may make it difficult
for us to raise additional debt or equity financing to the extent needed for our
continued operations or for planned expansion, particularly if we are unable to
attain and maintain profitable operations in the future. Consequently, future
losses may have a material adverse effect on our business, prospects, financial
condition, results of operations and cash flows. We urge potential investors to
review the report of our independent certified public accountants and our
consolidated financial statements before making a decision to invest in HiEnergy
Technologies.
Since we are a development stage company that has not commenced commercial
- --------------------------------------------------------------------------------
operations, we do not have the experience to predict whether we will generate
- --------------------------------------------------------------------------------
revenue in the future.
- ----------------------
We are a development stage company. As a result, our business model is still in
an evolving stage. Since we have not commenced commercial operations, we do not
have the benefit of the many years of experience that some other companies have
and can use to modify their business plans and optimize their business
strategies. Our ability to generate revenue and income is unproven.
If we do not complete the development and testing of our stoichiometric
- --------------------------------------------------------------------------------
technology and our detection systems within a reasonable period of time, we may
- --------------------------------------------------------------------------------
have to cease operations.
- -------------------------
Laboratory experiments have demonstrated the basic capability of the
stoichiometric technology to remotely determine the chemical formula of certain
hidden substances in controlled situations. That technology must now be
converted into saleable products. Experiments to increase the efficacy of the
technology are ongoing. The development of products based on the technology may
take longer, cost more or be more difficult than expected. We anticipate
responding to the markets that present themselves at the time our products are
ready to be sold, and as such, our business and marketing approach may change
from time to time. No assurances can be made that the changes in the marketing
of our products will meet with success. In addition, if we are unable to
complete the development of our technology and at least one of our detection
systems within a reasonable period of time, we may miss the opportunity to
capitalize on our lead-time to market. The lost revenue associated with such a
delay may negatively affect our ability to fund our operations and generate a
profit.
If we are unable to secure debt or equity funding, we may be unable to continue
- --------------------------------------------------------------------------------
our operations.
- ---------------
3
Our ultimate success depends on our ability to raise additional capital either
through debt or equity financing. We must secure enough funds to pay our current
liabilities and fund the research and development of our products and increasing
operational expenses. Some of our liabilities consist of amounts owing to the
IRS in taxes, interest and penalties due to the late filing of tax returns and
other forms by HiEnergy Microdevices. As of April 30, 2002, we have accrued
$350,000 as an estimate of the delinquent payroll taxes, interest and penalties,
not including delinquent income taxes, interest and penalties, that HiEnergy
Microdevices may owe to the IRS. There is no assurance that funds will be
available from any source or, if available, that they can be obtained on terms
acceptable to us. If unavailable, our operations could be severely limited, and
we may not be able to implement our business plan in a timely manner or at all.
If equity financing is used to raise additional working capital, the ownership
interests of our existing stockholders will be diluted.
Our operating results are likely to fluctuate significantly, which could
- --------------------------------------------------------------------------------
increase the volatility of our stock price.
- -------------------------------------------
We are a development stage company. For this reason, you should not rely on
period-to-period comparisons of our financial results as indications of future
results. Our future operating results could fall below the expectations of
public market analysts or investors and significantly reduce the market price of
our common stock. Fluctuations in our operating results could increase the
volatility of our stock price.
If we are unable to retain key management and employees, it may prevent us from
- --------------------------------------------------------------------------------
implementing our business plan, limit our profitability and decrease the value
- --------------------------------------------------------------------------------
of your stock.
- --------------
We are dependent on the talent and resources of our key managers and employees.
In particular, the success of our business depends to a great extent on Dr.
Bogdan Maglich, the Chairman of our Board of Directors and our Chief Scientific
Officer. Dr. Maglich is the inventor of the stoichiometric technology and the
three detection system prototypes being developed by us, and his services are
critical to our success. We have also recently hired Tom Pascoe who is our
President and CEO and a member of the board of directors. Mr. Pascoe brings
extensive experience managing and growing development stage companies, and his
services are critical to our success. We have not obtained key man insurance
with respect to Dr. Maglich or any of our executive officers. The loss of Dr.
Maglich or Mr. Pascoe may prevent us from implementing our business plan, which
may limit our profitability and decrease the value of your stock.
Because we believe that proprietary rights are material to our success,
- --------------------------------------------------------------------------------
misappropriation of those rights or claims of infringement or legal actions
- --------------------------------------------------------------------------------
related to intellectual property could adversely impact our financial condition.
- --------------------------------------------------------------------------------
We currently rely on a combination of contractual rights, copyrights, trademarks
and trade secrets to protect our proprietary rights. However, we believe that
our products in development could benefit from patent protection. As a result,
we have filed patent applications for various products with the United States
Patent and Trademark Office. Although we rely to a great extent on trade secret
protection for much of our technology and plan to rely in the future on patents
to protect a portion of our technology, we cannot assure you that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop comparable or superior technologies or obtain
unauthorized access to our proprietary technology. The failure or inability to
protect these rights could have a material adverse effect on our operations due
to increased competition or the expense of prosecuting infringements of our
intellectual property. Any litigation could result in substantial costs and
diversion of management and other resources with no assurance of success and
could seriously harm our business and operating results. Investors could lose
their entire investment.
We may receive infringement claims from third parties relating to our products
under development and technologies. We intend to investigate the validity of any
infringement claims that may be made against us and, if we believe the claims
have merit, to respond through licensing or other appropriate actions. To the
extent claims relate to technology included in components purchased from third
party vendors for incorporation into the products we are developing, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers were unable to license or otherwise provide any necessary
technology on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs in defending
any legal action taken against us.
4
If we fail to manage growth effectively, it could impair our business.
- ----------------------------------------------------------------------
Our strategy envisions a period of rapid growth that may put a strain on our
administrative and operational resources. Our ability to effectively manage
growth will require us to continue to expand the capabilities of our operational
and management systems and to attract, train, manage and retain qualified
engineers, technicians, salespeople and other personnel. We cannot assure you
that we will be able to do so. If we are unable to successfully manage our
growth, our business, prospects, financial condition, results of operations and
cash flows could be adversely affected.
We are unable to predict the impact that the continuing threat of terrorism and
- --------------------------------------------------------------------------------
the responses to that threat by military, government, business and the public
- --------------------------------------------------------------------------------
may have on our financial condition and ability to continue to implement our
- --------------------------------------------------------------------------------
business plan.
- --------------
The terrorist attacks in the United States and other countries have brought
devastation to many people, shaken consumer confidence and disrupted commerce
throughout the world. The continuing threat of terrorism in the United States
and other countries and heightened security measures, as well as current and any
future military action in response to such threat, may cause significant
disruption to the global economy, including widespread recession. We are unable
to predict whether the continuing threat of terrorism or the responses to such
threat will interfere with our efforts to raise additional capital to fund our
operations through the development stage. If we are unable to raise a sufficient
amount of capital due to economic conditions, we may not be able to finalize
development of our detection systems and bring them to market as planned.
Risks Related to This Offering
Our common stock price is subject to significant volatility, which could result
- --------------------------------------------------------------------------------
in substantial losses for investors and in litigation against us.
- -----------------------------------------------------------------
The stock market as a whole and individual stocks historically have experienced
extreme price and volume fluctuations, which often have been unrelated to the
performance of the related corporations. From February 27, 2002 (when trading in
our shares commenced) through October 31, 2002, the high and low closing bid
prices of our common stock were $2.68 and $0.20, respectively. The market price
of our common stock may exhibit significant fluctuations in the future in
response to various factors, many of which are beyond our control and which
include:
o variations in our quarterly financial results, which variations could
result from, among other things, the availability of funding;
o changes in market valuations of similar companies and stock market price
and volume fluctuations generally;
o economic conditions specific to the industries in which we operate;
o announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions, strategic
relationships, joint ventures or capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity securities.
If our operating results in future quarters fall below the expectations of
market makers, securities analysts and investors, the price of our common stock
likely will decline, perhaps substantially. In the past, securities class action
litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
5
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
Negative Publicity Could Cause Our Stock Price to Decline and Make It Difficult
- --------------------------------------------------------------------------------
for Us to Raise Capital.
- -------------------------
As discussed more fully in the section entitled "Market for Common Equity and
Related Stockholder Matters: Other Information Concerning the Market for Our
Common Stock", we have been made aware that certain of our stockholders and
directors know a person who had previously been involved in stock manipulation
schemes. We believe negative publicity concerning this matter may have
contributed to a decline in the market price of our common stock and may
continue to contribute to a further decline. In addition, this negative
publicity may make it difficult for us to raise capital. If these matters
persist or intensify as factors affecting us, our stock price will most likely
decline, and if we ultimately cannot raise additional capital, we could be
forced out of business.
If specific events occur, we may be required to pay substantial penalties to the
- --------------------------------------------------------------------------------
selling security holders.
- -------------------------
Under the documents relating to the issuance of the Series A Preferred and
accompanying warrants, and our most recent offering of common stock and
accompanying warrants, we are required to pay substantial penalties to the
Series A Preferred and certain common stock selling security holders under
specified circumstances, including, among others, the following:
o we fail to deliver shares of our common stock on conversion of the Series A
Preferred and exercise of the warrants;
o we fail to maintain the listing of our common stock on the OTC Bulletin
Board(R), or such other senior United States trading facility as we may
elect, for a period of five consecutive trading days;
o we fail to comply with a request for conversion of the Series A Preferred
or exercise of the warrants;
o we fail to meet the deadlines for filing and having this registration
statement declared effective;
o we fail to maintain the effectiveness of the registration statement
covering the shares of common stock issued to certain common stock selling
security holders and issuable on conversion of the Series A Preferred and
on exercise of the warrants;
o we fail to perform or observe any material covenant, condition or agreement
under our agreement with the Series A Preferred selling security holders;
o we make a false material misrepresentation or warranty under our agreement
with the Series A Preferred selling security holders;
o we fail to timely obtain stockholder approval of the issuance of the shares
of common stock issuable on conversion of the Series A Preferred shares and
exercise of the warrants, if such approval is required; or
o we fail to obtain stockholder approval to file an amendment to our
Certificate of Incorporation to increase our number of authorized shares of
common stock, if such increase is required.
We would generally have to pay such penalties in the form of cash or additional
shares during the time of the default and other indeterminate costs and
expenses.
The number of shares covered by this prospectus is significant in comparison to
- --------------------------------------------------------------------------------
our current public float, which could cause the stock price to decrease
- --------------------------------------------------------------------------------
substantially from the stock price immediately preceding this offering and make
- --------------------------------------------------------------------------------
it difficult for us to raise additional capital through sales of equity
- --------------------------------------------------------------------------------
securities.
- -----------
The number of shares covered by this prospectus, 8,055,034 shares, is 174% of
our current public float as of January 13, 2003, which consisted of 4,627,500
shares. Sales of a substantial number of shares of our common stock in the
public market, or the perception that sales could occur, could adversely affect
the market price for our common stock. Any adverse effect on the market price
for our common stock could make it difficult in the future for us to sell equity
securities at a time and at a price that we deem appropriate.
If our security holders engage in short sales of our common stock, including
- --------------------------------------------------------------------------------
sales of shares to be issued upon conversion or exercise of derivative
- --------------------------------------------------------------------------------
securities, the price of our common stock may decline.
- ------------------------------------------------------
6
Selling short is a technique used by a stockholder to take advantage of an
anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. Further sales of
common stock issued upon conversion or exercise of our derivative securities
could cause even greater declines in the price of our common stock due to the
number of additional shares available in the market, which could encourage short
sales that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.
Because our stock is not listed on a national securities exchange, you may find
- --------------------------------------------------------------------------------
it difficult to dispose of or obtain quotations for our common stock.
- ---------------------------------------------------------------------
Our common stock has been traded under the symbol "HIET" on the OTC Bulletin
Board(R) since May 3, 2002 and under the symbol "SLWE" from February 22, 2002
through May 3, 2002. Because our stock trades on the OTC Bulletin Board(R)
rather than on a national securities exchange, you may find it difficult to
either dispose of, or to obtain quotations as to the price of, our common stock.
Because we are subject to the "penny stock" rules, the level of trading activity
- --------------------------------------------------------------------------------
in our stock may be reduced.
- ----------------------------
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, like shares of our common stock, generally are equity
securities with a price of less than $5.00 (other than securities registered on
some national securities exchanges or quoted on Nasdaq). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, 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, and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, broker-dealers who sell these securities to persons other than
established customers and "accredited investors" must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security subject to the penny
stock rules, and investors in our common stock may find it difficult to sell
their shares.
Our preferred stock may delay or prevent a takeover of HiEnergy Technologies,
- --------------------------------------------------------------------------------
possibly preventing you from obtaining higher stock prices for your shares.
- ---------------------------------------------------------------------------
Our board of directors has the authority to issue up to 20,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights of those shares, without any further vote or action by
our stockholders. Of these shares, 345 have been designated as Series A
Convertible Preferred, of which approximately 98 were outstanding as of January
13, 2003. The rights of the holders of our common stock are subject to the
rights of the holders of our outstanding preferred stock and will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that we may issue in the future. The issuance of preferred stock, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, which would
delay, defer or prevent a change in control of HiEnergy Technologies.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.
Concentration of ownership in our management and directors may reduce the
- --------------------------------------------------------------------------------
control by other stockholders over HiEnergy Technologies.
- ---------------------------------------------------------
Our executive officers and directors own or exercise full or partial control
over more than 52% of our outstanding common stock. Assuming the sale to
non-affiliates of all 8,055,034 shares covered by this offering, our executive
officers and directors will still own or exercise full or partial control over
approximately 40% of our then outstanding common stock. As a result, other
investors in our common stock may not have much influence on corporate decision
7
making. In addition, the concentration of control over our common stock in the
executive officers and directors could prevent a change in control of HiEnergy
Technologies.
Our board of directors is staggered and stockholders do not have the authority
- --------------------------------------------------------------------------------
to call a special meeting, both of which make it more difficult for a
- --------------------------------------------------------------------------------
stockholder to acquire control of the company.
- ----------------------------------------------
Our certificate of incorporation and bylaws provide that our board of directors
be divided into three classes, with one class being elected each year by the
stockholders. Our certificate of incorporation also permits only our board of
directors to call a special meeting of the stockholders, thereby limiting the
ability of stockholders to effect a change in control of the company. These
provisions generally make it more difficult for stockholders to replace a
majority of directors and obtain control of the board.
We do not anticipate paying dividends to common stockholders in the foreseeable
- --------------------------------------------------------------------------------
future, which makes investment in our stock speculative or risky.
- -----------------------------------------------------------------
We have not paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. The board of directors
has sole authority to declare dividends payable to our stockholders. The fact
that we have not and do not plan to pay dividends indicates that we must use all
of our funds generated by operations for reinvestment in our operating
activities. Investors also must evaluate an investment in our company solely on
the basis of anticipated capital gains.
Limited liability of our executive officers and directors may discourage
- --------------------------------------------------------------------------------
stockholders from bringing a lawsuit against them.
- --------------------------------------------------
Our certificate of incorporation and bylaws contain provisions that limit the
liability of directors and officers for monetary damages and provide for
indemnification of officers and directors. These provisions may discourage
stockholders from bringing a lawsuit against directors and officers for breaches
of fiduciary duty and may also reduce the likelihood of derivative litigation
against directors and officers even though such action, if successful, might
otherwise have benefited the stockholders. In addition, a stockholder's
investment in our company may be adversely affected to the extent that costs of
settlement and damage awards against directors or officers are paid by us under
the indemnification provisions of the certificate of incorporation and bylaws.
The impact on a stockholder's investment in terms of the cost of defending a
lawsuit may deter the stockholder from bringing suit against one of our
directors or officers. To the extent indemnification for liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), may be
permitted to directors, officers and controlling persons of HiEnergy
Technologies under the above provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which generally include the
plans and objectives of management for future operations, including plans and
objectives relating to our future economic performance and our current beliefs
regarding revenues we might earn if we are successful in implementing our
business strategies. The forward-looking statements and associated risks may
include, relate to or be qualified by other important factors, including,
without limitation:
o our ability to finish developing our detection systems and produce and sell
them;
o the projected growth in those industries that may utilize our technology in
the future;
o our ability to fund the continued development, including securing
government grants, and planned commercialization of our detection systems;
and
o our ability to distinguish ourselves from our current and future
competitors.
8
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations of those terms, including their
use in the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Description of Business,"
as well as captions elsewhere in this prospectus. A number of factors could
cause results to differ materially from those anticipated by forward-looking
statements, including those discussed under "Risk Factors", "Description of
Business", and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. It is appropriate for you to evaluate our
forward-looking statements as you determine whether to buy shares of our common
stock in this offering, but we urge you not to place undue reliance on
forward-looking statements as you make your investment decision.
Any of the factors described above or in the "Risk Factors" section above could
cause our financial results, including our net income (loss) or growth in net
income (loss) to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of common
stock offered under this prospectus. Rather, the selling security holders will
receive those proceeds directly. We may receive proceeds in connection with the
exercise of options or warrants whose underlying shares may in turn be sold by
selling security holders. Because the amount and timing of our receipt of any
such proceeds are uncertain, we have not specifically identified the uses for
such proceeds.
DIVIDEND POLICY
We have not paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. The board of directors
has sole authority to declare dividends payable to our stockholders. We
currently anticipate that we will retain any earnings for use in the continued
development of our business. Investors also must evaluate an investment in our
company solely on the basis of anticipated capital gains.
DETERMINATION OF OFFERING PRICE
The shares of common stock are being registered for sale on a continuous basis
pursuant to Rule 415 of the Securities Act, and the selling security holders may
sell the shares from time to time on the over-the-counter market in regular
brokerage transactions, in transactions directly with market makers or in
privately-negotiated transactions at prices and on terms prevailing at the time
of any such sale. The price to the public, discounts and commissions and net
proceeds to the selling security holders from the sale of the shares will depend
on the nature and timing of the sales and therefore will not be known until the
sales are actually made, if at all.
9
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Below are the high and low closing bid prices of our common stock for the
periods shown, as obtained from Pink Sheets LLC, a research service that
compiles quote information reported on the National Association of Securities
Dealers composite feed or other qualified interdealer quotation medium. The
quotations listed below reflect interdealer prices, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions. Our common
stock commenced trading on the OTC Bulletin Board(R) operated by the NASD under
the symbol "SLWE" on February 22, 2002. In connection with the change of SLW
Enterprises' name to HiEnergy Technologies, Inc. on April 30, 2002, our ticker
symbol was changed from "SLWE" to "HIET" on May 3, 2002.
2002 - 2003: High Low
----------- ---------------------------------
Second Quarter (August 1, 2002 to October 31, 2002) $2.60 $1.41
First Quarter (May 1, 2002 to July 31, 2002) $2.09 $0.20
2001 - 2002:
------------
Fourth Quarter (February 27, 2002 to April 30, 2002) $2.68 $1.42
As of January 13, 2003, we had 24,076,269 shares of common stock outstanding
held of record by approximately 197 stockholders. Within the holders of record
of our common stock are depositories such as Cede & Co. that hold shares of
stock for brokerage firms which, in turn, hold shares of stock for beneficial
owners.
Convertible Securities Outstanding
Stock Options
- -------------
As of January 13, 2003, we had the following stock options outstanding.
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
No. of
Underlying Option
Name of Optionee Common Shares Exercise Price Exercise Term Date of Grant
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Bogdan C. Maglich 2,898,728 (1) (1) (1)
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Isaac Yeffet 1,000,000 $1.00 6 years 7/12/02
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Michal Levy 89,410 $0.157 5 years 9/17/02
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Tom Pascoe 3,005,038 (2) 10 years 9/25/02
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Chapin E. Wilson 36,363 (3) 10 years (2)
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Derek W. Woolston 36,363 (3) 10 years (2)
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
Total 7,065,902
- -------------------------------- -------------------- ----------------- -------------------------- -------------------
(1) 2,482,011 underlying shares granted on April 25, 2002, have an option
exercise price of $0.134 per share and a term ending on November 30,
2008; and 416,717 underlying shares granted on December 31, 2002, have
an option exercise price of $2.81 per share and a term of five years.
(2) The exercise price to purchase an underlying share shall be fixed on
the date six months after September 25, 2002, as the lesser of (a)
$1.00 per share; or (b) for any offering that closes within six months
of September 25, 2002 (other than HiEnergy Technologies' offering of
its Series A Preferred Stock), the following percentage of the price
per unit of the issuer's equity securities (or the price per share at
which a series of the issuer's preferred stock is convertible into the
issuer's common stock): (i) for preferred with warrants, 70%, (ii) for
preferred without warrants, 80%, (iii) for common with warrants, 90%,
and (iv) for common, without warrants, 100%.
(3) 22,727 underlying shares granted on September 25, 2002, have an option
exercise price of $1.00 per share, and 13,636 shares granted on
December 19, 2002, have an option exercise price of $2.24 per share.
10
Warrants
- --------
As of February 19, 2003, we had the following warrants outstanding.
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
No. of
Underlying Warrant
Name of Warrant Holder Common Shares Exercise Price Exercise Term Date of Grant
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Rheal Cote and assigns 150,000 $1.00 3 years 5/31/02
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Wolfe Axelrod Weinberger 250,000 $2.12 Until 5/1/07 12/9/02
Associates LLC
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Primoris Group Inc. 400,000 $2.00 2 years 8/1/02
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Investors in Series A Preferred 366,156 $1.50 2 years 10/7/02 and
Offering 12/9/02
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Investors in October 2002 Common 269,990 $2.50 3 years 10/29/02 and
Stock Offering 10/31/02
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
H.C. Wainwright & Co., Inc. and 84,000 $0.01 5 years 8/11/02
assigns
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
H.C. Wainwright & Co., Inc. and 102,546 $1.15 5 years 10/7/02
assigns
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
H.C. Wainwright & Co., Inc. and 145,994 $1.35 5 years 10/31/02
assigns
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
H.C. Wainwright & Co., Inc. and 150,000 $2.48 5 years 12/9/02
assigns
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Shaun Corrales 40,000 $1.50 3 years 2/17/03
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Robert W. Bellano 40,000 $1.50 3 years 2/17/03
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Total 1,998,686
- ----------------------------------- -------------------- ------------------ ------------------ ------------------
Series A Convertible Preferred Stock
- ------------------------------------
As of January 13, 2003, we had the following shares of Series A Convertible
Preferred Stock outstanding.
- ---------------------------- ----------------- --------------- -------------- --------------------- -----------------
No. of Series A Equivalent
Name of Series A Preferred No. of Common Conversion
Preferred Holder Shares Shares Price Conversion Term Date of Issuance
- ---------------------------- ----------------- --------------- -------------- --------------------- -----------------
Holders of shares of 97.93 851,755 $1.15 2 years 10/7/02
Series A Preferred
- ---------------------------- ----------------- --------------- -------------- --------------------- -----------------
11
Shares Eligible for Future Sale
The following table shows the tradability status of the 24,076,269 shares of
common stock we had issued and outstanding on January 13, 2003:
o Free trading shares that may be sold without regard to the
requirements of Rule 144: 4,627,500 shares
o Shares being sold through this prospectus, including shares underlying
convertible securities: 8,055,034 shares
o Shares held by affiliates that may be sold under Rule 144: 1,542,500 shares
o Shares held by non-affiliates that may be sold under Rule 144's
conditions beginning on February 20, 2002: 300,000 shares
o Shares held by non-affiliates that may be sold under Rule 144's
conditions beginning on April 25, 2003: 3,975,494 shares
o Shares held by affiliates that may be sold under Rule 144's conditions
beginning on April 25, 2003: 10,453,782 shares
In general, a sale under Rule 144 after holding shares for more than one year
but less than two years requires compliance with the following material
conditions:
o public information--we must be current in our requirement to file our
quarterly and annual reports with the SEC, as well as any reports
required to be filed on Form 8-K for material events;
o volume limitation--during any three-month period a stockholder may not
sell more than one percent of our total outstanding shares, as shown
on our most recent quarterly or annual report;
o manner of sale--the shares must be sold in a market transaction
through a broker or market maker, generally without solicitation of a
buyer; and
o notice--except for certain de minimis sales, the seller must file a
Form 144 with the SEC.
Sales of unregistered securities by an affiliate must always comply with these
four conditions. After holding their shares for more than two years,
stockholders that are not affiliates may sell their shares without having to
comply with these conditions. Rule 144 has a number of exceptions and
complications, and any sale under Rule 144 requires an opinion of counsel
reasonably satisfactory to us.
There are no contractual restrictions prohibiting the sale of any of our
outstanding shares.
Other Information Concerning The Market For Our Common Stock
We have become aware of rumors regarding certain stockholders and their
relationship to a person who has previously been involved in stock manipulation
schemes. Our general policy is not to respond to rumors, but we believe that
these rumors may have contributed to a decline in the market price of our common
stock and may continue to contribute to a further decline. Our Board of
Directors directed our President to hire a team of independent investigators to
investigate whether the company or any of its officers and directors engaged in
any wrongdoing. The core team of independent investigators consists of two
former federal prosecutors, a former Assistant United States Attorney in the
civil division who has been in private practice since 1981 with experience in
securities litigation and regulatory and investigative proceedings, and a former
supervisory agent from the Federal Bureau of Investigation. The independent
investigators have reviewed disclosures we have made, reviewed other publicly
available information, and conducted a number of interviews, including
interviews with the person who had previously been involved in stock
manipulation schemes and two of our directors who know him.
The independent investigators have completed their investigation. Except as
discussed in the next paragraph, the independent investigators have concluded
the following:
1. The independent investigators have not identified any evidence that
our current executive management team engaged in any wrongdoing.
2. The independent investigators have not identified any evidence of
wrongdoing following the April 2002 reverse merger of SLW Enterprises
and HiEnergy Microdevices that resulted in our public company parent,
HiEnergy Technologies.
3. The independent investigators believe there is insufficient evidence
to fully conclude that there was no wrongdoing by SLW Enterprises
prior to the reverse merger.
4. Our current officers and directors responded promptly and cooperated
fully with the investigation.
As mentioned in item 3, above, the independent investigators believe there is
insufficient evidence to fully conclude that there was no wrongdoing by SLW
Enterprises prior to the April 2002 reverse merger. The independent
investigators obtained evidence that some of our stockholders who purchased
significant amounts of SLW Enterprises shares prior to the reverse merger know
or have had business dealings with the person who had previously been involved
in stock manipulation and that one of these stockholders was a company
reportedly owned by his mother, which disposed of its shares in April 2002 at a
profit believed to be between $500,000 and $600,000. A person who later served
as our interim President and is still a director was aware of these purchases of
SLW Enterprises shares. The independent investigators believe the evidence is
inconclusive whether the person who had previously been involved in stock
manipulation had control over these SLW Enterprises shares or whether, if so,
our former President and current director had any knowledge of such control.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Financial Statements beginning at page F-1 at the end of this prospectus.
Certain statements contained in this discussion may constitute forward-looking
statements, as discussed above in the section entitled "Forward-Looking
Statements". Our actual results could differ materially from the results
anticipated in the forward-looking statements as a result of a variety of
factors, including those discussed in the sections entitled "Risk Factors" and
"Business".
Overview
Our parent public company was incorporated under the laws of the State of
Washington on March 20, 2000, under the name SLW Enterprises Inc. On April 30,
2002, SLW changed its name to HiEnergy Technologies, Inc. in conjunction with
the acquisition of an approximately 92% interest in HiEnergy Microdevices, Inc.,
a Delaware corporation based in Irvine, California in the business of developing
a stoichiometric-based technology that can remotely determine the empirical
12
chemical composition of substances, including explosives, biological weapons and
illegal drugs. HiEnergy Microdevices was formed on August 21, 1995.
The acquisition of HiEnergy Microdevices by SLW occurred on April 25, 2002. SLW
acquired HiEnergy Microdevices pursuant to a Voluntary Share Exchange Agreement
that provided the framework for the exchange of outstanding common stock of
HiEnergy Microdevices for shares of common stock of SLW. Pursuant to the
voluntary share exchange, SLW offered to exchange 22.3524 shares of its common
stock for each outstanding share of HiEnergy Microdevices' common stock. On the
closing date of the offering, 14,380,200 shares of common stock of SLW were
issued in exchange for approximately 92% of HiEnergy Microdevices' outstanding
shares of common stock in a reverse take-over transaction. As a result of this
transaction, former stockholders of HiEnergy Microdevices came to own
approximately 65% of the outstanding equity of the parent public company and the
five directors of HiEnergy Microdevices comprised five of the six directors of
the parent public company. The composition of our board of directors has
subsequently evolved to consist of the five directors discussed in the section
entitled "Management".
On October 22, 2002, we changed the domicile of our parent public company from
the State of Washington to Delaware. Our parent public company's name remains
HiEnergy Technologies, Inc., and our common shares continue to trade on the
NASD's Over-the-Counter Bulletin Board(R) under the symbol "HIET".
We plan to develop three detection systems based on our innovative
stoichiometric technology, which has been proven in the laboratory to remotely
and non-intrusively determine the chemical formulas of certain concealed
substances in controlled situations and "see through" metals and other
materials.
Prior to the reverse take-over transaction, SLW's initial efforts focused on
establishing a web-based nutritional supplement sales business.
Basis of Presentation
For accounting purposes, the voluntary share exchange transaction between
HiEnergy Technologies and HiEnergy Microdevices has been treated as a
recapitalization of HiEnergy Technologies, with HiEnergy Microdevices as the
accounting acquiror (reverse acquisition), and has been accounted for in a
manner similar to a pooling of interests.
We have prepared our Consolidated Financial Statements on a going concern basis
in accordance with generally accepted accounting principles in the United
States. This going concern basis of presentation assumes that we will continue
operations for the foreseeable future and will be able to realize our assets and
discharge our liabilities and commitments in the normal course of business. As
described below under Liquidity and Capital Resources, there is substantial
uncertainty about our ability to continue as a going concern. Our financial
statements do not include adjustments that might result from the outcome of this
uncertainty.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Operating Results
For the six months ended October 31, 2002, we incurred a net loss of
approximately $1.9 million, as compared to a net loss of approximately $156,000
for the same period in 2001. For the year ended April 30, 2002, we incurred a
net loss of approximately $1.4 million, as compared to a net loss of
approximately $288,000 for the year ended April 30, 2001. For the six months
ended October 31, 2002, we had negative cash flows from operations of
13
approximately $1.2 million. For the year ended April 30, 2002, we had negative
cash flows from operations of approximately $653,000. In addition, we had an
accumulated deficit of approximately $5.5 million and were in the development
stage as of October 31, 2002. These factors, among others, raise substantial
doubt about our ability to continue as a going concern. Our consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Six Months Ended October 31, 2002 Compared To Six Months Ended October 31, 2001
- -------------------------------------------------------------------------------
Revenue
We had revenues of approximately $41,000 during the six-month period ended
October 31, 2002, as compared to revenues of approximately $117,000 during the
same period last year. Our revenues were derived from government grants for
development and testing of our remote detection technology. We have not
commenced selling our products. Until we complete development of one of our
detector systems, our revenues will most likely be limited to government grants.
We cannot predict exactly when we will complete development of our planned
detection systems and begin production for specific applications, but we expect
that it will not be within the fiscal year that will end on April 30, 2003.
Operating Expenses
Our operating expenses consist primarily of salaries and benefits, costs for
general corporate functions, including finance, accounting and facilities, and
fees for professional services.
Our general and administration expenses increased to approximately $1.8 million
during the six-month period ended October 31, 2002, from approximately $271,000
during the same period in 2001. The increase in operating expenses was primarily
due to increases in administrative personnel, general office, legal, accounting
and investor relations expenses, as well as research and development expenses.
Depreciation
Accumulated depreciation for property and equipment at October 31, 2002 was
approximately $48,000. Depreciation expense for the six-month periods ended
October 31, 2002 and 2001 was approximately $40,000 and $2,000, respectively.
14
Year Ended April 30, 2002 Compared To Year Ended April 30, 2001
Revenue
We reported no operating revenue during the fiscal years ended April 30, 2002
and 2001. Our 2002 revenues of approximately $148,000, as compared to revenues
of approximately $80,000 for the year ended April 30, 2001, were derived from
government grants for development and testing of our remote detection
technology.
Operating Expenses
Our general and administration expenses increased to approximately $1.5 million
for the year ended April 30, 2002, from approximately $358,000 for the year
ended April 30, 2001. The increase in operating expenses was primarily due to
increases in administrative personnel, general office, legal, accounting and
investor relations expenses, as well as research and development expenses.
Transactional expenses associated with the reverse takeover transaction with
HiEnergy Microdevices also contributed to the increase in expenses.
Depreciation
Accumulated depreciation for property and equipment at April 30, 2002 was
approximately $7,000. Depreciation expense for the years ended April 30, 2002
and 2001 was approximately $5,000 and $1,000, respectively.
Other Matters
- -------------
Delinquent Tax Returns
HiEnergy Microdevices, our majority-owned subsidiary, has not filed its federal
and state tax returns due for the years ended April 30, 1996 through 2001. While
the estimated tax has been accrued as an expense, we will not be in compliance
until such reporting is made. The boards of directors of HiEnergy Microdevices
and HiEnergy Technologies have directed that any delinquent tax returns be
filed.
HiEnergy Microdevices has also not filed certain of its Forms 1099 and W-2 and
payroll tax returns for the years ended April 30, 1996 through 2002. As of April
30, 2002, HiEnergy Microdevices had accrued $350,000 for payroll taxes,
penalties and interest. The boards of directors of HiEnergy Microdevices and
HiEnergy Technologies have directed that any delinquent Forms 1099 and W-2 and
payroll tax returns be filed.
Recent Accounting Pronouncements
The subsection of Note 3 to the Notes to the Financial Statements entitled
"Recently Issued Accounting Pronouncements" is incorporated herein by reference.
Liquidity and Capital Resources; Plan of Operation
During the six months ended October 31, 2002, we used approximately $1.2 million
for operating activities, approximately $422,000 to acquire equipment and
approximately $300,000 to repay related party liabilities. These uses of cash
were funded principally through opening cash on April 30, 2002 of approximately
$1.1 million and private placement offerings that provided net proceeds of
approximately $2.9 million. As of October 31, 2002, we had cash of approximately
$1.9 million, funds in transit from a closing of approximately $184,000 and
current liabilities of approximately $1.3 million.
We raised approximately $2.5 million in net proceeds (after commissions) during
the three months ended October 31, 2002. On October 7, 2002, we closed an
offering of our Series A Convertible Preferred Stock, providing net proceeds
(after commissions) of approximately $855,000. We issued approximately 98 Series
A Preferred shares at a face value of $10,000 per share. The Series A Preferred
shares are convertible into common stock at a fixed rate of $1.15 per share.
Each investor also received 30% warrant coverage, based on the number of common
shares their Series A Preferred can be converted into, with an exercise price of
$1.50 per share. We also paid an 8% dividend on the Series A Preferred in
advance by issuing approximately 68,000 common shares to the investors. On
October 31, 2002, we completed an offering of our common stock, providing net
proceeds (after commissions) of approximately $1.7 million. We issued
approximately 1.3 million common shares at a price per share of $1.35. Each
investor also received 20% warrant coverage, based on the number of common
shares purchased, with an exercise price of $2.50 per share. The offerings and
sales of our Series A Preferred Stock and our common stock were not registered
under the Securities Act and were conducted pursuant to applicable exemptions
from the Securities Act's registration requirements. This disclosure is not an
offer of securities by us or a solicitation of an offer to buy securities from
us. Placements were made only to accredited investors with preexisting contacts
with HiEnergy Technologies and its authorized representatives.
On February 7, 2003, we repaid approximately $50,000 of the approximately
$323,000 of related party notes payable that were outstanding on October 31,
2002. Of the remaining unpaid balance, approximately $178,000 is the subject of
litigation with the former president of HiEnergy Microdevices and approximately
$95,000 is in default or due on demand. As discussed in the section entitled
"Legal Proceedings", we have tentatively settled the litigation with the former
president at a maximum cash exposure of $175,000. After filing our delinquent
tax returns, we intend to negotiate payment schedules with relevant taxing
authorities. As of October 31, 2002, we had accrued $350,000 as an estimate of
our liability in connection with unfiled returns, principally due to unpaid
employee withholding, social security and medicare taxes.
On November 6, 2002, we filed a registration statement on Form SB-2 to register
an offering of common stock by some of our shareholders on a delayed and
continuous basis. The Securities and Exchange Commission notified us that it
would not review the registration statement. During the course of our ongoing
due diligence in connection with this filing, we determined that certain
15
disclosures should be updated prior to requesting that the Securities and
Exchange Commission declare the registration statement effective. On February
21, 2003, we filed a pre-effective amendment to the registration statement
that updates these disclosures and includes updated financial statements.
Certain shareholders may have rights under their respective registration rights
agreements to demand payment of penalties because we did not request the
Securities and Exchange Commission to declare our registration statement
effective. Although we believe we have valid reasons for amending our
registration statement, we may be liable for these penalties nonetheless. If a
court determines us liable for these penalties, or if we agree to pay them to
avoid litigation, the penalties would be approximately $28,000 for the first
month (ending in December) and approximately $42,000 per month thereafter. We
cannot predict whether the Securities and Exchange Commission will decide to
review our pre-effective amendment, but a decision to review our filing could
substantially lengthen the period during which we will be exposed to liability
for penalties. We have the option to pay a portion of these penalties in common
stock that would be included in the registration statement. Although we believe
we have valid reasons for amending our registration statement, it may be
possible for our Series A shareholders to claim a right to redeem their Series A
Convertible Preferred Stock by alleging that our decision to update and amend
our registration statement is a material breach of our registration rights
agreement with them. If all of our Series A shareholders made such a claim and
prevailed, we would have to redeem their Series A shares in an amount of
approximately $1.0 million. Although this claim is a reasonable possibility, we
do not believe it is probable, and we believe we have defenses against it.
During the quarter ended October 31, 2002, our monthly cash used in operations
has been around $225,000, and we expect our monthly cash used in operations to
increase to approximately $250,000 per month. We have no contractual obligations
to make capital expenditures. During the six-month period ended October 31,
2002, we have made capital expenditures of approximately $680,000. We intend to
make additional capital expenditures of approximately $400,000 through April 30,
2003, for a total of approximately $1.1 million during the fiscal year, to
further the development and testing of our technology and proposed products. If
we make all of these capital expenditures and our cash used in operations
remains steady at approximately $250,000 per month, we expect to have enough
cash to support our operations for approximately 3 to 6 months from the date of
this prospectus.
The continued development and testing of our technology to create market-ready
products depends upon raising additional funds. We anticipate needing an
additional $4.0 million for the year ending April 30, 2004, in order to continue
our operations at their current level. We believe we have sufficient authorized
capital to raise approximately $4.0 million during the coming fiscal year, as
our Certificate of Incorporation authorizes 100,000,000 shares of common stock
and 20,000,000 shares of preferred stock. As of January 13, 2003, there were
24,076,269 shares of common stock and approximately 98 shares of preferred stock
outstanding. There can, however, be no assurance that we will be able to
continue as a going concern or achieve material revenues or profitable
operations.
In August 2002, our project to develop the SuperSenzor was competitively
selected by the Department of Defense Small Business Innovation Research
("SBIR") program to receive up to $780,000 in funding over two years for Phase
II testing and development of an anti-tank landmine detection system. The total
cost of the project is $1,400,000, which includes private matching funds of
$550,000 and $70,000 granted by the Department of Defense for Phase I testing of
the system currently being completed. The private contribution consists of
approximately $200,000 in matching funds from private individuals and
approximately $350,000 worth of HiEnergy's hi-tech equipment. On January 15,
2003, the contract with the Department of Defense was executed by the parties.
We have commenced work under year one of the contract, valued at $415,000. The
second year of the contract, valued at approximately $364,000, is under an
option that can be exercised by the DOD at the end of the first year.
We plan to continue to utilize a combination of equity financings and government
grants to fund our short-term growth. We have no definitive plans or
arrangements in place with respect to additional capital sources or lines of
credit available to us at this time. Negative publicity surrounding the matters
discussed in the section entitled "Market for Common Equity and Related
Stockholder Matters: Other Information Concerning the Market for Our Common
Stock" could increase the challenge of raising additional capital. There is no
assurance that additional capital will be available when or if required.
The forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties. Our actual funding requirements may differ materially
as a result of a number of factors, including unknown expenses associated with
the development and testing of our products, the cost of production of our
products and the timing of bringing our products to market. There can be no
guarantee that financing adequate to carry out our business plan will be
16
available on terms acceptable to us, or at all.
BUSINESS
Overview
We are developing technology capable of remote and non-intrusive, quantitative
on-line determination of the chemical composition of substances, including
explosives, biological weapons and illegal drugs. We plan to commercialize and
market our technology to agencies, organizations and ultimately industrial users
that need to improve the speed, accuracy and efficiency of their security
screening procedures. We may cooperate with established participants in the
security marketplace to market our technology through their established
distribution channels.
Our technology is a "stoichiometric" confirmation senzor that identifies
empirical chemical formulas and, at the same time, will also be capable of
producing the image of the analyzed chemical substance. "Stoichiometry" is the
scientific term for the art and science of deciphering empirical chemical
formulas of unknown substances. Because stoichiometric detection produces
quantitative identification of chemical formulas, it is a superior technology to
"pattern recognition" confirmation detection, which only qualitatively
recognizes specific chemical compounds that the detector is programmed to
identify. Confirmation detectors, which "confirm" the presence or absence of
substances in a scanned target, are distinct from so-called "anomaly detectors",
such as x-ray scanners, which merely identify objects fitting a certain profile
that require additional examination. As a general proposition, anomaly detectors
will give a high rate of "false positives" that must be further inspected while
confirmation detectors will conclusively identify the chemical nature of the
target being scanned.
During the period 1998-2002, our prototype SuperSenzor demonstrated the ability
to retrieve from three feet away, in a matter of seconds, the chemical formula
and three-dimensional location of: (1) explosive simulant through steel or soil;
(2) cocaine simulant through rice; and (3) anthrax through paper. The empirical
chemical formulas of substances and their locations are obtained
non-intrusively, trans-barrier, and online. We are unaware of any other
stoichiometric detector on the market or in the laboratory stages.
On May 8, 2002, our prototype Microsenzor demonstrated, before two inspectors of
the Office of Inspector General of the Department of Transportation, the ability
to semi-automatically, stoichiometrically identify one kilogram of TNT explosive
simulant in a metal container from a distance of one foot in 20 minutes, and
discriminate it from common non-explosive substances.
On June 3, 2002 our prototype Minisenzor demonstrated, before an ad hoc
(internal) committee led by an aviation security specialist, its ability to
stoichiometrically identify through a metal container, one pound of semtex
explosive simulant in 30 seconds, automatically and without human intervention,
as well as reject common non-explosive substances like sugar and chocolate.
The SuperSenzor, Minisenzor and Microsenzor are based on the proprietary
invention named atometry. We led the joint private sector-government-university
research consortium that developed atometry over the period from 1997-2002.
Atometry was scientifically validated at the US Department of Energy's Special
Technologies Laboratory in Santa Barbara and was for the first time publicly
presented at the White House International Symposium on Drug Control Policy in
1999 and published in the Symposium's Proceedings.
Corporate History
Our corporate structure includes a parent public company and an operating
subsidiary. Our parent public company, HiEnergy Technologies, Inc., was
incorporated under the laws of the State of Washington on March 20, 2000, under
the name SLW Enterprises Inc. On April 30, 2002, SLW changed its name to
HiEnergy Technologies, Inc. following its acquisition of an approximately 92%
ownership interest in HiEnergy Microdevices, Inc. in a reverse take-over
transaction. As a result of this transaction, former stockholders of HiEnergy
Microdevices came to own approximately 65% of the outstanding equity of the
parent public company and the five directors of HiEnergy Microdevices comprised
five of the six directors of the parent public company. The composition of our
17
board of directors has subsequently evolved due to resignations and appointments
to fill vacancies on the board and currently consists of five directors as
discussed in the section entitled "Management".
On October 22, 2002, we changed the domicile of our parent public company from
Washington to Delaware. Our parent public company's name remains HiEnergy
Technologies, Inc.
HiEnergy Microdevices is a Delaware corporation formed in 1995. It is the entity
where our technology has been developed. Dr. Bogdan Maglich, our Chairman of the
Board and Chief Scientific Officer, founded HiEnergy Microdevices to
commercialize the technology he invented to remotely and non-intrusively
decipher the chemical composition of a substance.
Prior to the reverse take-over transaction, SLW's initial efforts focused on
establishing a web-based nutritional supplement sales business.
Industry Overview
We believe our technology will have broad applicability within the substance
detection industry. The need for substance detection cuts across many spheres of
our economic and political life. Many Americans most prominently associate
substance detection with the security industry and more precisely with air
travel since September 11, 2001.
Detection technology is used to detect a wide range of substances, including
explosives, biological weapons and illegal drugs. We believe the major
commercial applications for our technology are in areas requiring security
precautions, including airports, ports of entry, military/government
installations and other secured areas. In addition, industrial quality control
processing in certain industries requires non-intrusive sampling. The table
below summarizes selected markets for detection technology.
------------------------------------- ---------------------------------
Market Area Customer
------------------------------------- ---------------------------------
Airport security screening Transportation and Security
Agency
------------------------------------- ---------------------------------
Customs contraband detection U.S. Customs
------------------------------------- ---------------------------------
Biological weapons detection Department of Defense
------------------------------------- ---------------------------------
Landmine detection Department of Defense
------------------------------------- ---------------------------------
Industrial quality control Crude oil refiners, bulk food
processing processors, steel manufactures
------------------------------------- ---------------------------------
Bureau of Alcohol, Tobacco,
Police and ATF Bomb squads Firearms (ATF); Local Bomb
explosive detection Squads
------------------------------------- ---------------------------------
We believe our core technology has applications in each of these markets. In the
aggregate we believe that the domestic demand for detection technology exceeds
$3 billion over the next several years. We cannot predict the exact timing on
which the agencies and organizations comprising these markets will purchase new
detection systems. International markets also exist in each of these market
areas.
Detection technologies can be broadly divided into anomaly detectors and
confirmation detectors. Anomaly detectors, such as x-ray scanners, identify
anomalies that require further intrusive inspection to determine whether a
threat is present. As a general proposition, anomaly detectors will give a high
rate of false positives that must be further investigated while confirmation
detectors will conclusively identify the chemistry of the target being scanned.
Pattern recognition confirmation detectors qualitatively recognize specific
chemical substances that the detector is programmed to identify. In contrast,
stoichiometric confirmation detectors produce a quantitative identification of
chemical formulas without having to seek a match to a pre-programmed qualitative
pattern. Because stoichiometric detection produces an identification of chemical
formulas, it is a superior technology to pattern recognition confirmation
detection, which only recognizes specific signal shapes that the detector is
programmed to identify.
The most commonly employed detection technology today is the x-ray, an anomaly
detector. Certain versions of the x-ray known as a CT x-ray can retrieve precise
three-dimensional images of the density of objects. The x-ray can identify
18
objects fitting a certain profile that require further inspection through some
confirmation detection process. But the x-ray is "chemically blind", and thus
unable to identify the contents of a container without opening the container. In
airport security screening, for example, the x-ray can roughly determine the
target's density and if it is similar to that of a typical explosive. There are
hundreds of common substances, however, that have a density similar to that of
explosives. As many travelers experience daily at U.S. airports, once the x-ray
identifies an anomaly, intrusive inspection is required to determine whether a
security threat is present.
Market Opportunity
The events of September 11, 2001 have fundamentally altered the way both the
public and governments view security. In response to September 11, governments
are looking to step up security not only in the air travel sector, but across a
wide array of activities. The enhanced security will demand either increased
time and expense using existing technology or the adoption of innovative
technologies to improve security while minimizing the drag on economic activity.
Specific problems that exist with current technology include the following:
Airport Security Screening
- --------------------------
Congress has passed legislation requiring that 100% of checked baggage be
screened for explosives by December 31, 2002, although a committee of the House
of Representatives recently voted to extend that deadline to December 31, 2003.
It is estimated that the Transportation and Security Administration will have to
purchase up to 900 new Explosive Detection Systems and 5800 trace detection
systems to check this amount of baggage. Existing technology, such as Computed
Tomography (CT) machines, cannot identify the contents of luggage, as they are
chemically blind. Instead, they look at the density of the objects inside a
container, and ask the operator of the CT machine to decide whether there is a
problem. This process results in a very high rate of false positives, it depends
solely upon the alertness and training of the operator, it cannot see through
metal containers, and it cannot confirm the existence of explosives.
Customs Screening
- -----------------
The U.S. Customs Agency has identified the need to screen and check packages,
shipping containers, and trucks entering all U.S. ports of entry. This task is
monumental (approximately 5.7 million sea containers enter the U.S. each year),
and requires technology that is quick, non-intrusive, and can operate at a
distance. Under the Container Security Initiative of January 2002, the U.S.
Customs has even begun pre-inspection of "high risk" cargo containers at three
major points of origin. Existing technology is limited in that it cannot see
well through metal, needs to be close to the suspected object (or inside the
container), and cannot confirm the identity of the unknown substance.
Landmine Detection
- ------------------
The Department of Defense has the difficult task of protecting its own troops
and tanks from anti-personnel and anti-tank mines. Significant damage is done to
tanks, soldiers, and civilians by old and new mines around the world. The
current technology to clear landmines that uses anomaly detectors, such as metal
detectors, Ground Penetrating Radar and infrared imaging, has significant
drawbacks: only one out of 800 anomalies turn out, after having been unearthed,
to be real mines; the rest of the anomalies are "clutter" that must nevertheless
be investigated as though they were live mines. The result is that mines cannot
be checked quickly, and humans must place themselves at risk to verify that an
area of land is clear. The United Nations has estimated that it would cost $30
billion and take more than 150 years to clear all landmines using existing
technology.
Contamination Control
- ---------------------
With the advent of security for not only people, but the actual products they
use, there is a growing market to make sure that someone does not cause panic
and widespread terrorism by contamination. We believe that contamination control
of all kinds could ultimately be one of our most significant markets. Currently
contamination control is conducted through sampling, with targets being
subjected to tests to determine whether specific contaminants are present. This
approach requires the destruction of the target (resulting in an economic
incentive to minimize sample size), it may not identify isolated instances of
19
contamination, and it may not detect a contaminant because the contaminant's
identification was excluded from the testing regimen.
In each of these areas, as well as others, we believe the market will pay for an
innovative security approach that improves security while minimizing the drag on
economic activity. The need for explosive and biological identification is a key
factor in our assessment of the market opportunity for our technology. We
believe the entire security and anti-terrorism market is a growing industry.
The HiEnergy Technologies Solution
We have developed unique detection technology that remotely and non-intrusively
determines the chemical formula of unknown substances in real time (called
"stoichiometric" detection). Our technology is unique in that it can for the
first time:
o Identify chemical compositions of unknown substances;
o Operate remotely (i.e.: from a distance of millimeters to meters);
o Operate through barriers (i.e.: through solid steel casing); and
o Operate in real-time (i.e.: in a matter of seconds).
We believe our technology represents a major innovation in the field of
detection technology because it will allow us to develop detection systems that
can - without needing to pre-program patterns to be recognized - confirm the
presence of concealed explosives, illegal drugs, biological/chemical weapons,
and other contraband. Because stoichiometric detection produces an
identification of chemical formulas, it is a superior technology to pattern
recognition confirmation detection, which only recognizes specific chemical
formulas that the detector is programmed to identify. Confirmation detectors,
which confirm the presence of specific chemicals in a scanned target, are as a
general rule superior to anomaly detectors, such as x-ray scanners, which merely
identify objects fitting a certain profile that require further examination
through some confirmation detection process (such as a time-consuming search).
We believe our stoichiometric detection technology will provide substantial
improvement over the anomaly detection-based technology that prevails today,
because stoichiometric detection will produce more accurate detection results
while simultaneously reducing the high rate of false positives (and the
accompanying time-consuming searches).
Over the last three years several successful demonstrations have been conducted
which proved the technical concepts.
o A Department of Defense funded demonstration which demonstrated the
chemical detection of an explosive simulant through 3/4 of an inch of
steel as well as 5 inches of soil from a distance of 3 feet;
o A demonstration under a U.S. Customs Service contract which
demonstrated the chemical detection of cocaine simulant buried in
rice; and
o A demonstration for the Defense Advanced Research Projects Agency that
demonstrated the chemical fingerprinting of Anthrax simulant.
We are unaware of any prior demonstrations in the history of analytic chemistry
where empirical chemical formulas have been stoichiometrically deciphered (a) on
a timely basis, (b) without sampling and (c) through barriers.
We have developed our unique technology through several years of research and
testing, including work under research contracts sponsored by the Department of
Defense and the U.S. Customs Service, as well as by research and testing at the
University of California, Irvine. Patent applications have been filed for all
proprietary components of the technology as well as for the overall system.
The technology uses the physical law that the gamma spectrum emitted from a
collision between a neutron and an atom in the target has a unique signature.
Combining information on the neutron's direction of travel with its length of
travel provides the position in space of the nucleus impacted. A proprietary
processor synthesizes the gamma spectrum data and outputs both the precise
molecular makeup (also known as stoichiometry) of the irradiated specimen as
well as its coordinates. In this manner, our technology performs remote,
non-intrusive deciphering of the chemical formulas of concealed substances and
can "see through" metals and other materials. Further, it does this analysis
20
without the need of being in close proximity with the target for inspection or
chemical identification.
We believe our technology will allow us to create leading products in several
market areas, including airport security screening, customs screening, landmine
detection and contamination control.
Airport Security Screening
- --------------------------
X-ray detectors for airport security rely on anomaly detection, where a detector
signals that a potential problem may exist. The operator must, for each bag,
decide whether there is a potential problem, and then use a secondary, usually
intrusive, means to actually determine whether there is an explosive. This
system creates several problems, including a very high rate of false positives,
and worse, the inability to detect explosives. The system depends upon the
judgment of recently federalized screeners, the training and management of whom
has proven a major stumbling block to consistent, alert security. Our proposed
systems will be dramatically different. They should improve safety by
automatically displaying the chemical formula of the target through up to 3/4
inch thick steel and not relying upon operator interpretation. Our technology
should dramatically lower the rate of false positives, improving speed and
efficiency and reducing air travel delays.
Customs Screening
- -----------------
The U.S. Customs has identified the need to screen ports of entry for
contraband, weapons, and biological agents. Currently, less than five percent of
all shipping containers are checked by any physical screening method. Senator
Charles Schumer has estimated that it could cost up to $5 billion to check every
shipping container and truck entering the United States. Because our technology
has demonstrated that it can perform detection through up to 3/4 inch thick
steel, it offers the potential for real time trans-metal deciphering of chemical
formulas. Thus, shipping containers could be checked for contraband, weapons,
and explosives in real-time without having to open and unseal the containers. We
are not aware of any other form of detection technology that can perform
trans-metal stoichiometric detection.
Landmine Detection
- ------------------
Current technology used to clear landmines, such as Ground Penetrating Radar and
metal detectors, has significant drawbacks. Existing technology is limited by
the need to penetrate soil, by the manufacture of non-metallic landmines, and by
its inability to operate from a distance in real time. Only one out of 800
anomalies turn out, after having been unearthed, to be real mines; the rest of
the anomalies are "clutter" that must nevertheless be investigated as though
they were live mines. The result of these drawbacks is that land cannot be
checked quickly or accurately, and humans must place themselves at risk to
verify that an area of land is clear. Because our technology can "see through"
soil and containers, and return a quantitative chemical formula, it should
enable field personnel to quickly, accurately, and safely confirm whether the
anomaly is an explosives loaded landmine or clutter.
Contamination Control
- ---------------------
We believe that our technology will be able to stoichiometrically analyze the
contents of a given liquid or solid and provide an immediate warning if there
are any chemicals or compounds that are not supposed to be present. We believe
our technology will be a significant improvement over existing sampling
procedures because of our technology's chemical-specific capabilities. Although
we intend to begin pursuing this market area in the coming fiscal year, the
development of this market area into a revenue-producing segment is a long-term
project.
Proposed Products
We are developing three versions of our technology:
o SuperSenzor: Fixed or van mounted, generator-powered product that can
locate a concealed substance within the item being scanned and will
include imaging.
21
o Minisenzor: A portable sensor intended to accomplish the same
objective, but without imaging, that will use a miniature accelerator
that is expected to provide a substantial speed improvement over the
Microsenzor.
o Microsenzor: Portable, battery-powered, lower-cost system, also
without imaging.
We have assembled bench-top prototypes of the Microsenzor and Minisenzor, and
are in the process of creating a bench-top prototype of the SuperSenzor. A
bench-top prototype is an improvised system, designed for laboratory use and
testing, which has not been assembled into an integrated unit.
We are using our existing bench-top prototypes to conduct tests. These tests
will determine performance parameters, e.g. detection rates and speed, for the
Microsenzor and Minisenzor.
Once tests using the bench-top prototypes have been completed, we plan to
assemble and test commercial prototypes. A commercial prototype will integrate
and assemble all of the bench-top prototype's components into a fixed unit. We
plan to test our commercial prototypes in circumstances that simulate the
environments in which they will be used. This testing process will be a crucial
link to the delivery of market-ready detection systems we seek to achieve. The
results of ongoing tests may alter the direction and focus of our technology's
development program.
We have assembled a commercial prototype (beta version) of a Minisenzor designed
for interrogating unexploded ordnances, and conducted tests in circumstances
that simulate the environment in which it would be used.
The SuperSenzor, for which we are in the process of creating a bench-top
prototype, has four key components:
1. The "emitter" is a miniature accelerator that produces a stream of
fast neutrons and alpha particles.
2. The "receiver" is a detector of gamma rays generated by the target.
3. The "gammalyzer" is a fast electronics system operating on a
billionth-of-a-second scale. It detects and analyzes the gamma rays
and alpha particles to determine the target substance's location and
separate the "signal" (i.e., the target substance, such as an
explosive) from "noise" (i.e., clutter).
4. The "controller" is a computer and software for interface and signal
coordination that displays the result of the analysis online.
None of these key components require an increase in performance parameters to
make a commercial prototype of the SuperSenzor, although design modifications
may be required to coordinate the components into a fixed unit capable of being
built on an integrated production line. We must also assess the durability of
these key components in an environment where they must function accurately
day-in and day-out, rather than occasionally in a lab experiment.
We have developed relationships with some of the manufacturers of the key
components of our technology, such as AMETEK Ortec, a manufacturer of high-end
gamma ray detectors, and Thermo MF Physics, a manufacturer of accelerators
(neutron generators). We do not presently have supply contracts with these
manufacturers or any others. Our equipment purchases to date have not entailed
the volume levels that would make it advisable to put supply contracts in place.
The Microsenzor is essentially a one-man portable version of the SuperSenzor.
The Microsenzor operates from a short range, a few inches from the object
inspected. It is 100 times slower than the SuperSenzor, making it suitable for
more static environments. We believe that certain prospective customers will
view its lower unit cost and relative ease of transport as advantages. These
prospective customers would choose a Microsenzor for security applications and
industrial applications where using a SuperSenzor would not be feasible or
efficient. The Minisenzor that we are developing is expected to perform in a
manner similar to the Microsenzor, but with a substantial speed improvement.
The Microsenzor has three key components:
1. The emitter is a neutron source via Americium isotope production.
2. The receiver is a detector of gamma rays, the same as that used in the
SuperSenzor.
3. The controller computer software for interface and results display.
22
The Microsenzor provides only chemical formulas as its result, without imaging.
We have conducted laboratory tests of the Microsenzor for inspectors from the
Office of the Inspector General of the Federal Aviation Administration, and we
have concluded a series of tests of the Minisenzor (under a Phase I DOD SBIR
Grant) at the University of California, Irvine.
Marketing Plans, Sales, Government Grants and Production
The market niche that we occupy, within the broad security and anti-terrorism
industry, is that of advanced detector technology. This niche is characterized
by expensive, technologically advanced systems such as Computed Tomograhy (CT)
and Quadrapole Resonance (QR) systems for airline and customs screening, and
Ground Penetrating Radar (GPR) based systems for landmine detection.
Within this market niche, we believe our stoichiometric technology has several
competitive advantages, including its ability to determine the exact chemical
formula of a substance, perform trans-metal deciphering, operate from a
distance, and not rely on user interpretation.
General Marketing Plans
- -----------------------
We believe our technology represents a new generation of improvements in
security technology. As a result, we believe that a general education program is
necessary to persuade opinion leaders and the public of the benefits of our
technology. We must raise customer awareness, implement a customer development
program, and create public pressure to demand adoption of our technology.
To increase customer awareness, we plan to gain an understanding of the specific
requirements for target customers and explain how our technology will satisfy
their requirements. We plan to explain our technology through technical
presentations, on-site demonstrations, publishing articles in technical
journals, speaking at technical conferences, and creating opportunities to give
interviews and generate media attention.
We expect that our customer development program will include developing a close
relationship with the appropriate technical officers within a target customer's
organization. We expect our program to include describing to potential customer
technical personnel how the technology can apply to their applications and
requirements. We hope to provide assistance in developing specifications and
statements of work and budgets and to provide additional briefings to higher
levels of management.
We also plan to develop strategic relationships with suppliers of current
security screening products. We believe that using these suppliers' established
channels and customers will afford us quicker access to our targeted markets.
We plan to raise awareness of the unique capabilities of our technology among
legislators, non-technical decision makers and the general public. Because our
technology is complex it will be very cost efficient to have a digital video
(both on CD and cassette), and printed promotional materials, that can be sent
to prospective customers, consultants, news reporters, and strategic partners.
This prepackaged promotional material will save on travel and presentation costs
- - enabling us to send packets of information that concisely explain the complex
technology and show the demonstration units in operation at minimal cost.
To facilitate international sales, we expect to work with a network of
representatives located in countries with identified opportunities. We plan to
select these representatives based on their track record in selling to the
target customers and to compensate them on a commission basis tied to the
contract sales price. We have identified some of the prospective representatives
we would like to retain.
We hope to combine the effects of technical presentations to potential
customers, news media demonstrations and public relations to create a "public
demand" for our technology. Publishing articles in technical journals, speaking
at technical conferences and creating opportunities to give interviews will be a
longer-term strategy to continue the public demand for and awareness of our
technology.
23
For the time being, we will try to segregate the deployment of our technology
from the general public. We anticipate a possible adverse public reaction to the
concept of "neutron bombardment." We anticipate the need for neutron shielding
in certain applications, such as airports, to shield personnel from our
anticipated levels of radiation bombardment. We have not determined the levels
of shielding that are required, which may vary depending on the regulations of
the states in which the system is installed.
We believe that any public objections can ultimately be overcome through
education. Our Chief Scientific Officer, Dr. Maglich, believes that our
anticipated level of neutron radiation dose will result in 10 to 100 times less
tissue damage than the level of x-ray radiation dose needed to accomplish
security screening. Fast neutrons, which are used in our technology, do not
produce the same radioactive environment as thermal neutrons. Despite the
relative safety of our technology, we propose to use our technology initially
only for screening procedures that are remote from the general public (such as
checked baggage) to avoid this adverse public reaction, instead of proposing to
use our technology for high profile procedures (such as carry-on baggage
screening). As public knowledge and awareness increase, we believe that the
broader array of uses for our technology will become available.
Specific Marketing Plans
- ------------------------
We intend to focus on three markets initially: Airport security screening
(Transportation Security Administration), landmine detection (Department of
Defense), and customs screening (US Customs). This initial list of customers may
be refined or altered as conditions dictate. A separate but potentially large
segment includes industrial users. We will pursue each market using the same
core technology.
o Stoichiometric Luggage Screening Systems: We believe that our
SuperSenzor technology can be integrated into luggage screening
systems at passenger airports throughout the world to significantly
reduce false alarm rates and to identify a wider variety of substances
than current anomaly detection scanning systems. One configuration of
the technology may be a system that will screen an entire luggage cart
at a time on a confirmation detection basis, as opposed to the current
systems that screen only one bag at a time on an anomaly detection
basis. Although these systems will be more expensive than a
single-piece luggage screening system, we believe that government
agencies may be willing to pay a higher price because of increased
volume and time efficiency. Other configurations of the technology may
be a system that will screen individual checked baggage on a
confirmation detection basis, or a system that is used in tandem with
existing systems to enhance overall detection rates and reduce false
alarm rates. We continue to work with Isaac Yeffet, a special
consultant to the Company and a leading expert on airline security due
to his years of service as director of security operations for El Al,
Israel's national airline. We believe that Mr. Yeffet will continue to
be instrumental in communicating the advantages of our technology to
government officials and the public. Developing a strategic
relationship with a current supplier of screening products could also
help us to penetrate the market more quickly.
o Confirmation Sensor for Demining: We have identified governments and
organizations dedicated to destroying landmines throughout the world
as candidates for purchasing landmine detection systems. Current
landmine detection systems succeed at identifying only metal casings
and tend to yield a very high false alarm rate. In contrast, we
believe our SuperSenzor will detect mines in both metal casings and
plastic casings and reduce the false alarm rate. In August 2002, our
project to develop the SuperSenzor was competitively selected by the
Department of Defense Small Business Innovation Research ("SBIR")
program to receive up to $780,000 in funding over two years for Phase
II testing and development of an anti-tank landmine detection system.
On January 15, 2003, the contract with the Department of Defense was
executed by the parties. We have commenced work under year one of the
contract, valued at $415,000. The second year of the contract, valued
at approximately $364,000, is under an option that can be exercised by
the DOD at the end of the first year.
o Customs Screening Systems: We plan to position ourselves as a direct
supplier to major governmental agencies responsible for customs
screening. We have completed tests on behalf of the U.S. Customs, and
believe we are well-positioned with the only stoichiometric technology
that can scan sealed shipping containers for the chemical composition
of concealed contraband.
24
We intend to pursue other markets as well. During this fiscal year, which ends
April 30, 2003, we plan to devote resources to exploiting the following markets:
o Bio-Defense: We have identified agencies such as the Department of
Defense, the U.S. Postal Service, Federal Bureau of Investigation, the
National Institutes of Health and their foreign equivalents that have
responsibility for detecting biological warfare agents as candidates
for our SuperSenzor technology.
o Bomb Squad: Because police departments and the Bureau of Alcohol,
Tobacco and Firearms have no certain method for determining if a
suspicious object contains explosives, we have identified these
agencies as our market for the Microsenzor or Minisenzor technology.
o Industrial Quality Control: We have identified a wide variety of
potential industrial applications for our SuperSenzor, Minisenzor and
Microsenzor technologies, including detecting impurities in oil, gas,
and gemstones, and providing qualitative elemental information for
food products.
Sales and Government Grants
- ---------------------------
We have not made any product sales to date. Any future sales will depend on
negotiating contracts with our targeted customers and modifying our technology
to meet the specifications of our targeted customers. Because our targeted
customers are primarily governmental agencies, we cannot predict the time frame
on which they may obtain approval to enter into contracts to adopt a new
generation of security technology. We also cannot predict the extent to which
governmental agencies may require a commercial prototype specific to their
application to be developed in advance of entering into a contract to purchase
products incorporating our technology. We hope to ship product based on our
technology within 24 months.
We have several government contracts/grants that have been awarded or are
pending, including:
o SBIR Phase I
We have completed work on a Phase I SBIR Contract for $70,000 for
testing of our Minisenzor technology for landmine detection.
o SBIR Phase II
In August 2002, our project to develop the SuperSenzor was
competitively selected by the Department of Defense Small Business
Innovation Research ("SBIR") program to receive up to $780,000 in
funding over two years for Phase II testing and development of an
anti-tank landmine detection system. As of January 15, 2003, we have
begun work under year one of the contract.
o CalTIP
We have submitted a proposal for up to $250,000 in matching funds to
the California Technology Investment Partnership (CalTIP), which is
designated for marketing and markets development. We were placed on a
waiting list for possible award of the CalTIP grant, dependent upon
available funding for the program. Based on budget shortfalls in the
State of California, we do not anticipate award of this grant.
o Navy
We have submitted a proposal for $200,000 for a feasibility study on
SuperSenzor's ability to detect Biological and Chemical weapons in
sealed containers. This includes an option to build a prototype for an
additional approximately $1.4 million.
o Transportation Security Administration ("TSA")
25
In November 2002 we submitted a funding application to the TSA for
$3.2 million, which would be matched by a contribution of
approximately $1 million from us. The funding would be used to build a
prototype SuperSenzor for the airline industry.
Production
- ----------
Taking our technology into commercial production involves refinement of our
bench-top prototypes into commercial products. The commercial unit must take
into account all relevant commercial standards for durability, usage and
shielding, as well as specific customer requirements for detection, and physical
unit packaging and installation. We intend to conduct this work both internally
and with the assistance of outside partners. This work will include developing
commercial blueprints, deciding upon final hardware configurations, developing
testing standards, designing control units to manipulate targets or manipulate
the unit itself around the target, and integrating shielding requirements.
Funding requirements include internal time as well as the cost of contracting
with outside firms. Where appropriate, we intend to ally ourselves with existing
participants in the security field to minimize our technology's time to market.
Competition
Our fast neutron scanning is the only technology we know of that provides the
chemical formula for identification of the target substance. We are not aware of
any other functional stoichiometric confirmation detector in the world today. We
have not identified any such detector being sold in the various markets we seek
to exploit. We are not aware of any other supplier or potential supplier of
detection systems that are intended to perform remote, non-intrusive
confirmation deciphering of the chemical formulas of concealed substances.
From a market perspective, as opposed to a technical perspective, there are
several other detection technologies being offered within our market niche. The
following is a partial list of companies that market high-end explosive
detection and cargo screening systems, principally for airport security
screening. While none of these systems can confirm the identity of a substance,
they are recognized currently as the only systems that can provide anomaly
detection.
--------------------------------------- ------------------------- -------------------------
Company Name Products Comment
--------------------------------------- ------------------------- -------------------------
InVision Technologies CT Explosive detection 75% of Airports
--------------------------------------- ------------------------- -------------------------
L-3 Communications CT Explosive detection 25% of Airports
--------------------------------------- ------------------------- -------------------------
OSI Systems, Inc. Portable, vehicle, Subcontractor to
Cargo X-Ray InVision
--------------------------------------- ------------------------- -------------------------
PerkinElmer X-Ray baggage screening Not CT certified
--------------------------------------- ------------------------- -------------------------
American Science & Engineering Backscatter X-ray
Systems
--------------------------------------- ------------------------- -------------------------
Quantum Magnetics, recently acquired by InVision, has a pattern recognition
confirmation detector for explosives based on magnetic pattern recognition,
which is being tested for deployment in airport security screening. To the best
of our knowledge, the detector cannot "see through" metal, has no imaging
capability and must be within two inches of the explosive to recognize it.
Our competitors are established companies with operating histories. They are
well financed and have many contacts and connections in the industries in which
they operate. We must effectively promote our technology in order to overcome
these obstacles. With respect to these detection systems, we see the real
competition as being the challenge of educating the consumer either to
incorporate or to substitute our stoichiometric confirmation detector system for
the existing detection system.
In addition to the above companies which currently operate X-ray based systems,
we have competitors that use gamma ray analysis, although their technologies do
not have the same capabilities as ours. We believe that these competitors will
seek to compete with us in cargo screening and landmine detection. We have two
principal competitors whose technology is based on gamma ray analysis:
26
---------------------------------------- ------------------------
Company Name Products
---------------------------------------- ------------------------
Ancore Pulsed Fast Neutron
Analysis
---------------------------------------- ------------------------
Thermo Gammametrics Coal, Cement, Mineral
Analysis systems
---------------------------------------- ------------------------
As we understand its current configuration, Ancore's system cannot determine
chemical formulas, and it is heavy (weighing up to 12 tons) and expensive ($8
million per system). As we understand its current configuration, Thermo
Gammametrics's systems use thermal neutrons produced by radioactive Californium,
and they cannot detect oxygen or carbon, only metallic impurities.
Science Applications International Corporation currently sells systems to U.S.
Customs that scan trucks, railroad cars and sea containers using gamma ray
technology to generate images. Science Applications International Corporation's
systems "see through" metal but do not return a chemical analysis.
In addition to these companies using gamma ray analysis techniques, several
research groups exist that are pursuing gamma ray based technologies. We are not
aware of any that are nearing commercial production. A partial list of these
companies includes the Special Technologies Lab of the DOE, the National Labs,
and the Western Kentucky University consortium.
In addition a company named Dynamics Technology, Inc., headquartered in
Torrance, California, has developed a computer simulation of a technology that
it calls Associated Particle Imaging technology. Dynamics Technologies claims
that its technology is a unique imaging technology that offers standoff 3-D
imaging and material identification through walls, metal, barriers and
structures or containers. However, we believe that Dynamics Technology simulated
technology is based on a scintillation detector of gamma rays that is
significantly less sensitive than our solid-state gamma ray detector and that
will not return specific chemical formulae in its result, and therefore is not a
stoichometric detector. Dynamics Technology was a competitive bidder for the
Department of Defense Small Business Innovation Research ("SBIR") program to
receive funding for testing and development of an anti-tank landmine detection
system.
We will encounter barriers to entry in the advanced technology security market.
We must obtain access to high-level governmental decision makers. Although our
technology may be an improvement over existing technology, political
considerations and strong lobbying by competitors must be overcome. We must
conduct a vigorous public relations and marketing campaign to convince
governmental decision makers of the important technical innovations that we have
made. We must achieve a number of certifications in order to be successful in
the sales of our products, including FAA (now TSA) certification of our systems
for use in airports, DoD approval for use in military applications, and U.S.
Customs approval for use at ports of entry. Additionally, we must be granted
certifications for use of high-energy neutrons in public settings.
Intellectual Property
We have filed patent applications that are currently in the prosecution process.
We have filed a total of six patent applications in various jurisdictions:
o United States Patent Office - "Method and Apparatus for Detecting,
Locating and Analyzing Chemical Compounds Using Subatomic Particle
Activation" (filed on February 20, 2001);
o United States Patent Office - "Method and Apparatus for Neutron
Microscopy with Stoichiometric Imaging" (filed on June 18, 2001);
o Patent Cooperation Treaty - "Method and Apparatus for Neutron
Microscopy with Stoichiometric Imaging" (filed on June 18, 2002);
o Canada - "Method and Apparatus for Detecting, Locating and Analyzing
Chemical Compounds Using Subatomic Particle Activation" (filed on
August 14, 2000);
o Japan - "Method and Apparatus for Detecting, Locating and Analyzing
Chemical Compounds Using Subatomic Particle Activation" (filed on
August 18, 2000); and
o Europe - "Method and Apparatus for Detecting, Locating and Analyzing
Chemical Compounds Using Subatomic Particle Activation" (filed on
September 14, 2000).
The neutron microscope is a special version of the SuperSenzor that magnifies
images and combines a chemically specific analysis designed to identify
"inclusions" in gemstones, making it possible to determine their origins.
We are not aware of any other functional stoichiometric confirmation detector in
the world today. We have not identified any such detector being sold in the
various markets we seek to exploit.
27
To date, we have not received any notification that our technology infringes the
proprietary rights of third parties. Third parties could however make such
claims of infringement in the future. Any future claims that do occur may have a
material adverse affect on us and our prospects.
Prior to the reverse take-over transaction, SLW's initial efforts focused on
establishing a web-based nutritional supplement sales business. We still own a
license to pursue this business, but we believe the financial needs of our
detection technology business and the uncertainty surrounding the licensor's
ability to perform counsel against allocating resources to exploit the license
at the present time. From time to time we will assess the economic viability of
this line of business to determine whether we will allocate resources to
pursuing it.
Government Regulation
Our operations are subject to compliance with regulatory requirements of
federal, state and local authorities. While compliance with applicable
regulations has not adversely affected our operations in the past, there can be
no assurance that we will continue to be in compliance in the future or that
these regulations will not change. Current costs of compliance have not been
material to us, but we anticipate that they will be material as we commercialize
our technology into products. We expect to incur some nonmaterial costs in
connection with complying with environmental regulations related to our products
under development, but we are not aware of the exact amount of the costs at this
time.
Because our technology and its applications are so new, we are not certain of
all of the potential government regulation that may affect us. We believe that
certain applications of our technology will require approvals from various
government organizations. Examples of government agencies that may regulate
applications of our technology include the Federal Aviation Administration (now
the Transportation Security Administration), the Department of Defense, the U.S.
Customs Service, and the Food and Drug Administration in the case of potential
quality assurance applications for food and drugs. We expect that our technology
will require various potential environmental use approvals, particularly as it
relates to using fast neutrons in public settings. The Nuclear Regulatory
Commission may also regulate our use of fast neutrons. Where regulation is
coordinated between federal, state and local authorities, we expect the state
and local equivalents of these federal agencies to regulate us as well. The
approvals from government organizations may take longer and be more difficult to
obtain than expected. There is no assurance that any governmental approval that
might be required will ever be obtained, which could affect our ability to
commercialize and sell our technology.
We plan to have government agencies as customers for the products we develop. At
the federal level, this will subject our contracting to the Federal Acquisition
Regulations, a comprehensive set of regulations governing how vendors do
business with the federal government. We also apply for grants, which are
subject to regulation by the granting agencies. Here again, where our customers
or grantors are state or local governments, we will be subject to similar state
and local contracting and grant regulations.
Employees
As of February 21, 2003, we had 10 full-time employees and 1 part-time employee
classified as follows: 4 full-time executive officers; 3 full-time technical
personnel; and 3 full-time and 1 part-time administrative personnel. We also had
5 consultants as follows: 1 of the consultants assists with sales and marketing,
3 assist with technical projects, and 2 assist with administrative matters.
We believe that our ability to attract, hire, and retain qualified personnel now
and in the future is important to our success. While sourcing and recruiting
appropriate technical personnel is often difficult and competitive, we expect
that our need to recruit additional personnel in the future will not negatively
affect our operations. We believe that our employee relations are good. None of
our employees are represented by a collective bargaining unit.
Research and Development
Our future success will depend on our research and development efforts to
enhance our existing technologies and on development of applications for our
detection technology. For the fiscal years ended April 30, 2002 and 2001, we
spent approximately $558,000 and $165,000, respectively, on research and
development of our technology.
28
Facilities
On September 30, 2002, we relocated our offices to 1601 Alton Parkway, Unit B,
Irvine, California 92606. Our new offices consist of approximately 6,600 square
feet. The lease term is three years, with payments due at a monthly lease rate
of $8,000. The facilities are close to all necessary services, including
laboratories at the University of California, Irvine, which are currently used
for certain developmental work. We pay $1,000 per month to use a nuclear reactor
laboratory at the University of California, Irvine for purposes of developing
and testing the detectors. The term of the contract to use the laboratory is
from June 1, 2002 to December 31, 2003. We do not anticipate that while we are
in the development stage we will require significant facilities over and above
those that are currently leased or available.
Legal Proceedings
In March, 2002, Keith Cowan, a former CEO and President of HiEnergy
Microdevices, filed a lawsuit against HiEnergy Microdevices, Dr. Maglich, and
Mr. Richard Alden in the Superior Court of the State of California, County of
Orange, Central Justice Center. The plaintiff served as the CEO and President of
HiEnergy Microdevices from December 2001 through March 9, 2002. The plaintiff
had an employment agreement with HiEnergy Microdevices. The Complaint contains
the following claims: (A) failure to pay wages due in violation of the Labor
Code against HiEnergy Microdevices and Dr. Maglich; (B) breach of contract
against HiEnergy Microdevices and Dr. Maglich; (C) false representation
regarding the kind and character of the work against all three defendants; and
(D) fraud against all three defendants. In the prayer for relief, the plaintiff
seeks damages in the amount of $873,455, plus interest, penalties, attorney's
fees, and costs. The parties to the lawsuit executed a settlement agreement on
January 15, 2003. The settlement agreement provides that HiEnergy Technologies
will pay Mr. Cowan $50,000: $25,000 in the form of wages that will be subject to
payroll taxes and $25,000 in the form of a reimbursement for moving expenses and
legal fees. In addition, Mr. Cowan received 80,000 shares of restricted common
stock of HiEnergy Technologies with registration rights. If the 80,000 shares
are not sold through a registered offering before April 1, 2003, then Mr. Cowan
has the option of tendering the shares to HiEnergy Technologies and demanding
payment of $125,000. In the alternative, if Mr. Cowan receives less than
$125,000 upon the sale of the 80,000 shares within 30 days of the effective date
of the registration statement, he is entitled to payment of the difference
between $125,000 and the amount he received from the sale of the stock. Once
HiEnergy Technologies has fulfilled its obligations under the settlement
agreement, Mr. Cowan has agreed to request dismissal, with prejudice, of the
lawsuit.
We received a letter dated December 5, 2002, from an attorney representing
Richard T. Eckhouse, a consultant, demanding payment for accounting services
allegedly performed by Mr. Eckhouse pursuant to a Letter Agreement dated
November 7, 2001, between Mr. Eckhouse and HiEnergy Microdevices. The Letter
Agreement provides that Mr. Eckhouse was to be paid $350 per hour, which was to
be paid as follows: (i) one-third or $117 in cash; (ii) one-third or $117 paid
by a Promissory Note at 10% annual interest, maturing when HiEnergy Technologies
receives government funding of $900,000 or an investment totaling $300,000 or
more; and (iii) one-third or $117 paid by Class A (common stock) of HiEnergy
Microdevices at $5.00 per share. The demand letter received by us does not
specify a specific amount of damages but states that such amount is
"considerable". No lawsuit has been filed by Mr. Eckhouse as of February 1,
2003.
As discussed more fully above under Management's Discussion and Analysis of
Financial Condition and Results of Operations, we have included in our financial
statements an accrued liability of $350,000 at April 30, 2002, in connection
with tax returns our subsidiary HiEnergy Microdevices is delinquent in filing.
Except as described above, to the knowledge of our executive officers and
directors, neither we nor our subsidiaries are party to any legal proceeding or
litigation and none of our property is the subject of a pending legal proceeding
and our executive officers and directors know of no other threatened or
contemplated legal proceedings or litigation.
MANAGEMENT
Directors and Executive Officers
29
The directors and executive officers of HiEnergy Technologies and their ages,
positions, business experience and education as of January 13, 2002 are as
follows:
Name Age Position
- --------------------------------- --------- -----------------------------------------------------
Dr. Bogdan C. Maglich 64 Chairman of the Board and Chief Scientific Officer
- --------------------------------- --------- -----------------------------------------------------
Tom Pascoe 47 Director, CEO, President and Treasurer
- --------------------------------- --------- -----------------------------------------------------
Barry Alter 47 Director
- --------------------------------- --------- -----------------------------------------------------
Gregory F. Gilbert 53 Director
- --------------------------------- --------- -----------------------------------------------------
Harb S. Al Zuhair 64 Director
- --------------------------------- --------- -----------------------------------------------------
Michal Levy 30 Corporate Secretary and Vice President
- --------------------------------- --------- -----------------------------------------------------
Dr. Bogdan Maglich, Mr. Gregory Gilbert, Mr. Harb Al Zuhair and Mr. Richard
Alden were appointed to the board of directors on April 25, 2002. Mr. Barry
Alter was appointed to the board of directors on February 20, 2002. Mr. Tom
Pascoe was appointed to the board of directors on September 25, 2002.
All of the above named directors are divided into three classes of two directors
as follows: Class I consists of Barry Alter and Richard Alden; Class II consists
of Greg Gilbert and Harb Al Zuhair; and Class III consists of Dr. Bogdan Maglich
and Tom Pascoe. The three classes have staggered terms of one, two and three
years. All directors hold office until their respective successors are elected
or until their earlier death, resignation or removal. Each officer of HiEnergy
Technologies serves at the discretion of the board of directors. There are no
family relationships between or among any of our directors or executive
officers.
The following information with respect to the principal occupation or
employment, other affiliations and business experience during the last five
years of our directors and executive officers has been furnished to us by each
director and executive officer.
Dr. Bogdan C. Maglich. As HiEnergy Technologies' Chairman and Chief Scientific
Officer, Dr. Maglich has primary responsibility for technology strategy,
technology development and technical proposal development. Dr. Maglich is a
respected scientist in his field. He received the White House Citation from
President John F. Kennedy and was named an honorary citizen in Switzerland by
the President of the Swiss Confederation for his discovery of the omega meson.
In addition to his research discoveries and inventions in particle physics,
instrumentation, and detection devices, Dr. Maglich has played a role in
reducing weapons in areas such as Yugoslavia and Russia and working on safety
measures for Soviet reactors in Europe. Currently, Dr. Maglich is involved in
the development and testing of three detectors based on his stoichiometric
technology.
Dr. Maglich has served as a professor of physics at University of Pennsylvania
and has also worked at Rutgers and at the Joint Faculty, Princeton-Penn
Accelerator Laboratory. Dr. Maglich also worked in various leadership capacities
on a variety of projects, including the following: the CERN European Center for
High Energy (nuclear) Physics in Geneva, Switzerland; the U.S. National
Laboratories, the Air Force Weapons Laboratory (now known as the Air Force
Phillips Laboratory); and the British-Swedish-American Consortium for the design
of the King Abdulaziz Energy Research Center in Saudi Arabia. Dr. Maglich
received a Ph.D. in high-energy physics and nuclear engineering from the
Massachusetts Institute of Technology (MIT), a Master of Science from Britain's
University of Liverpool, and a Bachelor of Science from the University of
Belgrade.
Tom Pascoe. Mr. Pascoe replaced Mr. Alter as HiEnergy Technologies' President,
CEO and Treasurer on September 25, 2002. From January 1, 2001 through August
2002, Mr. Pascoe was an independent consultant providing growth, technology and
turn-around consulting services to a variety of clients through his consulting
company The Polarity Group. During this time, he served as Interim CEO for RFID
Technologies and repositioned the company from a single market technology
provider to multiple markets. Mr. Pascoe also provided strategic fit assessment
and growth by acquisition strategies to a software provider with more than
13,000 clients, and strategic consulting services to a major publishing company.
Prior to working as an independent consultant, from June 2000 through October
2000, Mr. Pascoe served as President and CEO of Web Symmetry, and from October
1996 through May 2000, he served as COO and Executive Vice President of
Tickets.com. Prior to working at Tickets.com, Mr. Pascoe served as
Vice-President-Manufacturing of Iwerks Entertainment. Mr. Pascoe has an MBA from
Pepperdine University.
30
Barry Alter. Prior to becoming an officer and director of HiEnergy Technologies
and during the period from November 2000 through December 2001, Mr. Alter served
as Chief Operating Officer of SBS Interactive Inc., a private Nevada corporation
in the business of developing, marketing and licensing consumer electronic
products, including the use of the television as an interactive medium. Since
1998, Mr. Alter has also worked through his own consulting company, Challure
Capital Investment Corporation, to provide business management expertise and
assistance with raising working capital to companies in financial difficulty,
including Indian Motorcycle, a private California corporation in the motorcycle
production business, and xseeksy.com, a private Delaware corporation online
relationship dot.com company. From 1983 to 1998, Mr. Alter served as President
of Sweet Expressions Inc., a private Ontario company in the business of
distributing confectionery.
Gregory Gilbert. Mr. Gilbert has diverse legal, accounting, business, science
and engineering skills. He has been a member of the board of directors of
HiEnergy Microdevices since 1996 and served as HiEnergy Microdevices' CEO and
President from March, 2002 to September 25, 2002. He is a licensed attorney in
California with 25 years of extensive experience in international law, banking,
corporate law, and business. Currently, he is the CEO of Metabolic Industries,
and Hamilton-Biophile, a public company that manufactures creams and lotions,
Hamilton-Clarke, a private company and Hamilton-May, a private company. He is
also the Administrative Director of the Diabetes Research Institute in
Sacramento, California. In addition to the above companies, he is also on the
boards of World Medical Organizations, Nevada Pacific Lands, and Xentrol Pharma.
He has engineering company experience as a past officer and director of L&H
Airco, Hamilton-Detroit, and Sunrise Systems. Prior to his career in business,
he practiced law as an international lawyer, representing many foreign companies
and entities, including OPEC, TTI and Novartis. He is currently admitted to
practice and has practiced in the California Courts of Appeal, the California
Supreme Court, the U.S. District Courts, U.S. Court of Appeals, Federal
Bankruptcy Courts, the U.S. Court of Claims, the U.S. Tax Court and the U.S.
Supreme Court. He remains a member of each bar. He is the recipient of the
American Diabetes Association volunteer of the year award (Northern California)
and the U.S. Air Force ROTC Outstanding Service Award for 1993, and was
nominated for Philanthropist of the Year (1995), Central California, for
charitable work to benefit mankind.
Harb S. Al Zuhair. Born on July 4, 1938, Mr. Al Zuhair received his primary
education in Beirut and obtained a degree in civil engineering from the
Portsmouth College of Technology, U.K. in 1961. In 1971, he established
Electronics Equipment Marketing Co. as a division of SADCO, a company run by his
family. Electronics Equipment Marketing Co. is one of the leading high-tech
companies in Saudi Arabia. Presently Mr. Al Zuhair wholly owns or has
investments in a variety of businesses, among them: construction, industrial,
banking, mining, aviation and trading companies. Mr. Al Zuhair is also serving
as chairman, member of the board of directors and founding member of various
companies in the Saudi Kingdom and abroad.
Michal Levy. As Vice President and Corporate Secretary, Ms. Levy handles
Investor Relations, Public Relations and maintains HiEnergy Technologies'
records. Originally from Israel, Ms. Levy served as Vice President and Corporate
Secretary for seven years at Tapuz Enterprises, Inc., a California construction
corporation. Prior to her employment with HiEnergy Technologies, Ms. Levy worked
with prize-winning writer Arthur A. Ross as an administrative assistant and was
a managing partner at a California LLC dedicated to film production. Ms. Levy
has studied at Ben-Zvi, Israel, LAVC and UCLA Extension.
Compensation of Executive Officers
The following table sets forth the compensation that we have paid to our Named
Executive Officers for the three fiscal years ended April 30, 2002, 2001 and
2000, respectively. With the exception of Dr. Maglich, no executive officers
received more than $100,000 in annual salary and bonus during the fiscal year
ended April 30, 2002. We do not currently have a long-term compensation plan and
do not grant any long-term compensation to our executive officers. No other
compensation was granted for the periods covered. Mr. Pascoe assumed the
position of President and CEO in September 2002.
31
- ----------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------- ----------------------------------
Awards Pay-Outs
--------------------- ------------
Other Securities All
Annual Restricted Under- Other
Name and Fiscal Compen- Stock lying LTIP Compen-
Principal Year Salary Bonus sation Award(s) Options/ Payouts sation
Position Ended ($) ($) ($) ($) SARs (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------
BOGDAN 2002 $80,734 $50,000 $24,952 $196,148 2,482,011 -0- -0-
MAGLICH 2001 $20,140 -0- $26,666 $25,000 -0- -0- -0-
Chairman and 2000 $11,430 -0- $19,792 $41,300 -0- -0- -0-
Chief Scientific
- ----------------------------------------------------------------------------------------------------------------
Officer (1)
BARRY 2002 -0- -0- -0- -0- -0- -0- -0-
ALTER
Former CEO
- ----------------------------------------------------------------------------------------------------------------
and President
SUZANNE 2002 -0- -0- -0- -0- -0- -0- -0-
WOOD 2001 -0- -0- -0- -0- -0- -0- -0-
Former President
- ----------------------------------------------------------------------------------------------------------------
(1) Dr. Maglich served as Chairman and Chief Scientific Officer of HiEnergy
Microdevices during the three fiscal years covered. He was appointed Chairman
and Chief Scientific Officer of HiEnergy Technologies on April 25, 2002. The
Other Annual Compensation amounts paid to Dr. Maglich consisted of the following
personal expense reimbursements:
Expense Category: Fiscal Year Ended 2002 Fiscal Year Ended 2001 Fiscal Year Ended 2000
- ---------------- ---------------------- ---------------------- ----------------------
Auto Lease $6,705 $15,745 $8,454
Auto Insurance $1,438 $2,017 $1,267
Auto Expenses (other) $500 $471 $150
Home Rent $13,750 $6,500 $6,925
Medical Insurance $2,559 $1,933 $2,996
TOTAL $2 $ $
Dr. Maglich also received compensation in the form of shares of restricted
common stock of HiEnergy Microdevices as follows: 196,149 shares with an
estimated value of $196,149 during the fiscal year ended April 30, 2002; 35,000
shares with an estimated value of $25,000 during the fiscal year ended April 30,
2001; and 51,500 shares with an estimated value of $41,300 during the fiscal
year ended April 30, 2000. These shares were subsequently converted by Dr.
Maglich into shares of HiEnergy Technologies common stock through participation
in the voluntary share exchange transaction with HiEnergy Technologies. In
connection with the renegotiation of Dr. Maglich's employment agreement with
HiEnergy Microdevices, he received a signing bonus in the form of a $100,000
promissory note subject to HiEnergy Technologies meeting specific financing
goals. Dr. Maglich received $50,000 of the signing bonus upon receipt by
HiEnergy Technologies of $1,000,000 raised through equity financing during
April, 2002. Since we have raised over $1,000,000 through private placement
offerings that closed in October 2002, we paid him the remaining $50,000 in
February 2003.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options granted
to each Named Executive Officer during our most recent fiscal year ended April
30, 2002. We never have granted any stock appreciation rights.
32
Number of Percent of Total
Securities Options/SARs Exercise or Base
Underlying Granted to Price
Options/SARs Employees in ($/Share)
Name Granted Fiscal Year Expiration Date
- ----------------------------------------------------------------------------------------------------------
BOGDAN 2,482,011 (1) 100% $0.134/share November 30, 2008
MAGLICH Chairman and
Chief Scientific Officer
- ----------------------------------------------------------------------------------------------------------
(1) Option was granted on April 24, 2002 and was fully-vested and exercisable on
the date of grant.
EXERCISES OF STOCK OPTIONS AND YEAR-END OPTION VALUES
The following table sets forth information with respect to fiscal year-ended
April 30, 2002 option values. No stock options were exercised by our Named
Executive Officers during the fiscal year ended April 30, 2002.
Number of Value of unexercised
Unexercised in-the-money
options/SARs at options/SARs at
Shares FY-end (#) FY-end ($)
acquired on Value Realized exercisable / exercisable /
Name on exercise (#) ($) unexercisable unexercisable (1)
- ------------------------------------------------------------------------------------------------------------------
BOGDAN ---- ---- 2,482,011/0 $4,854,814/$0
MAGLICH Chairman and Chief
Scientific Officer
- ------------------------------------------------------------------------------------------------------------------
(1) The value of Dr. Maglich's options has been calculated based on the
difference between the closing price of our stock on the OTC Bulletin Board(R)
on April 30, 2002 ($2.09 per share) and the exercise price of the stock options
($0.134 per share).
Compensation of Directors
To date, our directors have not been compensated for their service as directors.
We plan to compensate our directors with stock options for their service as
directors. All directors are reimbursed for any reasonable expenses incurred in
the course of fulfilling their duties as a director of HiEnergy Technologies.
Effective September 25, 2002, we agreed to pay Barry Alter $5,000 per month in
connection with consulting services he provides to HiEnergy Technologies. The
consulting agreement had a term of one year. Mr. Alter was reimbursed for
reasonable expenses associated with performing consulting services for HiEnergy
Technologies. The consulting agreement was terminated by the mutual written
consent of both parties effective February 21, 2003.
Board Committees
Our board of directors has a Compensation Committee. Due to changes in the
composition of the board of directors, the full board of directors currently
serves as the audit committee. We anticipate forming an audit committee once the
composition of our board of directors contains the requisite number of
independent directors. Our board of directors does not have a nominating
committee. The entire board of directors selects nominees for our board of
directors.
The Compensation Committee was formed in August 2002 and is responsible for
making recommendations to our board of directors concerning salaries and
incentive compensation for our employees and consultants, preparing stock option
plans, selecting the persons entitled to receive stock options and establishing
the number of shares, exercise price, vesting period and other terms of the
options granted under stock option plans. The Compensation Committee also will
administer any stock option plans that are approved. The entire board of
directors also may perform these functions. The Compensation Committee currently
consists of Dr. Bogdan Maglich, Mr. Barry Alter, Mr. Greg Gilbert and Mr. Harb
Al Zuhair. The Compensation Committee has not held a meeting yet. No executive
officer of HiEnergy Technologies serves as a director or member of the
compensation committee of any other entity whose executive officers serve as a
director of HiEnergy Technologies.
33
As the Audit Committee, the full board of directors selects our independent
auditors, reviews the results and scope of the audit and other services provided
by our independent auditors, reviews our financial statements for each quarterly
period and reviews and evaluates our internal control functions. The Audit
Committee is governed by a written charter, a copy of which charter was filed
with the Securities and Exchange Commission as an exhibit to our definitive
proxy statement for our special meeting held on October 10, 2002. The Audit
Committee, as previously comprised of Mr. Alter and Mr. Alden, a former
director, held two meetings during June and July 2002.
Employment Contracts
In March 2002, HiEnergy Microdevices entered into an employment agreement with
Dr. Maglich, its Chairman and Chief Scientific Officer. On July 16, 2002, the
employment agreement was assigned by HiEnergy Microdevices to HiEnergy
Technologies pursuant to an Assignment and Assumption Agreement approved by the
boards of directors of HiEnergy Technologies and HiEnergy Microdevices at
meetings held on July 16, 2002 and executed by HiEnergy Microdevices, HiEnergy
Technologies and Dr. Maglich. At our October 10, 2002 annual meeting, our
stockholders (excluding Dr. Maglich) ratified Dr. Maglich's employment
agreement. The material terms of the employment agreement are summarized in the
footnotes to our Consolidated Financial Statements, Note 7, pages F-23 to F-24
herein.
In connection with his hiring, Mr. Tom Pascoe entered into an employment
agreement with HiEnergy Technologies. He will receive a salary of $135,000
initially. Based on achieving milestones involving bringing revenues or
financing to HiEnergy Technologies, Mr. Pascoe's salary will increase to
$175,000 and then to $250,000. Mr. Pascoe will also be entitled to a $250,000
bonus when HiEnergy Technologies achieves two consecutive quarters of positive
cash flow. The bonus is payable according to a formula out of excess cash. Mr.
Pascoe and a Committee of the board of directors will propose a more
comprehensive bonus plan to the board of directors by March 24, 2003.
Mr. Pascoe received stock options pursuant to his employment agreement. His
options entitle him to purchase 3,005,038 underlying common shares, representing
an amount equal to approximately ten percent (10%) of our outstanding common
stock on a fully diluted basis, based on our equity structure on September 30,
2002. With respect to 75% of the underlying shares, the option shall vest
one-twelfth (1/12) with respect to such shares on each of the dates that is the
following number of months after September 25, 2002: 3, 6, 9, 12, 15, 18, 21,
24, 27, 30, 33, 36. With respect to 25% of the underlying shares, the option
shall vest with respect to such shares, on the earlier of (a) the date when the
closing sale price of HiEnergy Technlogies' common stock has equaled or exceeded
$1.75 on every trading day in a period of 90 consecutive calendar days, (b) the
date immediately preceding a sale of HiEnergy Technologies (whether by merger,
share exchange or sale of assets) for $1.75 per share of common stock or more,
or (c) if HiEnergy Technologies' common stock ceases to be publicly traded, on
the date following the closing of an offering at a deemed price per share of
common stock of $1.75 or more. The 25% portion of the option has vested, because
the condition has been met. The exercise price to purchase an underlying share
shall be fixed on the date six months after September 25, 2002, as the lesser of
(a) $1.00 per share; or (b) for any offering that closes within six months of
September 25, 2002 (other than HiEnergy Technologies' offering of its Series A
Preferred Stock), the following percentage of the price per unit of the issuer's
equity securities (or the price per share at which a series of the issuer's
preferred stock is convertible into the issuer's common stock): (i) for
preferred with warrants, 70%, (ii) for preferred without warrants, 80%, (iii)
for common with warrants, 90%, and (iv) for common, without warrants, 100%.
In February 2002, HiEnergy Microdevices executed a letter employment agreement
with Michal Levy, its Corporate Secretary and Vice President. On September 17,
2002, HiEnergy Technologies assumed the employment agreement with Ms. Levy. The
employment agreement has a one year term commencing on February 24, 2002 and
provides that Ms. Levy will receive a salary of $1,750 per week, a car allowance
of $100 per week, a stock award of up to 22,356 shares of common stock issued in
the amount of 5,589 per quarter commencing on February 24, 2002, and a
non-qualified stock option to purchase 89,410 shares of common stock at $0.157
per share vesting immediately and having a term of 5 years.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
34
Transactions with Management and Others
It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates be entered into only if they are approved by a
majority of the disinterested directors, are on terms no less favorable to
HiEnergy Technologies than could be obtained from unaffiliated parties and are
reasonably expected to benefit HiEnergy Technologies.
Loans from Executive Officers and Directors
- -------------------------------------------
During the fiscal years ended April 30, 2002 and 2001, HiEnergy Microdevices
incurred the following material notes payable to current and former officers and
directors:
o HiEnergy Microdevices had unsecured notes totaling $59,083 payable to
Dr. Maglich for past due employment compensation with interest payable
at 6% per annum, maturing in December 2002. Subsequent to April 30,
2002, the notes were paid in full.
o HiEnergy Technologies had an unsecured note totaling $100,000 payable
to Dr. Maglich as a signing bonus pursuant to his employment
agreement. The amount is non-interest-bearing, $50,000 payable upon
receipt of $1,000,000 or more from any source, and $50,000 payable
upon revenue in excess of $500,000 or $1,000,000 of additional funds
from any source. Subsequent to April 30, 2002, $50,000 was paid to Dr.
Maglich by HiEnergy Technologies. Subsequent to October 31, 2002, we
paid the remaining $50,000 to Dr. Maglich.
o During March, 2002, Barry Alter, a director and former officer of
HiEnergy Technologies, made a non-interest-bearing loan to HiEnergy
Microdevices of $50,000. Subsequent to April 30, 2002, the note was
paid in full.
o During March and April, 2002, Rheal Cote, a former director of
HiEnergy Technologies, made several non-interest-bearing loans to
HiEnergy Microdevices totaling $150,000. Subsequent to April 30, 2002,
the notes were paid in full. In consideration for paying the notes
late, in May 2002, we issued to Mr. Cote a warrant to purchase 150,000
shares of our common stock at an exercise price of $1.00 with a three
year term.
o HiEnergy Microdevices has a secured note totaling $10,400 payable to
Edward Finch, a former director of HiEnergy Technologies, interest
payable at 8% per annum, and due in July 2001. The note is secured by
the patent applications for Europe, Canada, and Japan. The holder of
the note has the option to convert the principal and interest into
shares of common stock. As of April 30, 2002, the note was in default.
o HiEnergy Microdevices had a secured note totaling $5,000 payable to
Gregory Gilbert, a director of HiEnergy Technologies, with interest
payable at 8% per annum, and due in July 2001. Subsequent to April 30,
2002, the note was paid in full.
o HiEnergy Microdevices had an unsecured note totaling $5,000 payable to
Hamilton-Clarke, a corporation in which Mr. Gilbert is a stockholder,
director and officer. Subsequent to April 30, 2002, the note was paid
in full.
o In July, 2002, we issued 11,218 shares of common stock to Harb Al
Zuhair, a director of HiEnergy Technologies, valued at $1.00 per share
to retire the principal and interest owing to Mr. Al Zuhair on two
notes payable in the amounts of $5,780 and $5,438, respectively. The
notes are considered paid in full.
o In July, 2002, we issued 11,678 shares of common stock to Richard
Alden, a director of HiEnergy Technologies, valued at $1.00 per share
to retire the principal and interest owing to Mr. Alden on a note
payable totaling $11,678. The note is considered paid in full. In
July, 2002, we issued 15,000 shares of common stock to Rimar
Investments, Inc., a California corporation, valued at $1.00 per share
to retire the principal and interest owing to Rimar Investments, Inc.
on a note payable totaling $15,000. The note is considered paid in
full. Mr. Alden is one of three stockholders and directors of Rimar
Investments, Inc.
35
We are or have been a party to various employment, consulting and compensation
arrangements with related parties, as more particularly described above under
the headings "Compensation of Executive Officers," "Compensation of Directors,"
and "Employment Contracts and Termination of Employment and Change-in-Control
Arrangements."
Certain Business Relationships
Except with respect to the reverse take-over transaction that occurred on April
25, 2002, no director or nominee for director is or has been during the fiscal
year ended April 30, 2002, or the six months ended October 31, 2002, an
executive officer or beneficial owner of more than 10% of any other entity that
has engaged in a transaction with HiEnergy Technologies in excess of 5% of
either the company's revenues or assets.
Indebtedness of Management
There are no persons who are directors, executive officers of HiEnergy
Technologies, nominees for election as a director, immediate family members of
the foregoing, corporations or organizations (in which the foregoing are
executive officers or partners, or 10% of the shares of which are directly or
beneficially owned by the foregoing), trusts or estates (in which the foregoing
have a substantial beneficial interest or as to which the foregoing serve as a
trustee or in a similar capacity) that are indebted to HiEnergy Technologies in
an amount in excess of $60,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
To our knowledge, the following table sets forth information with respect to the
beneficial ownership of our outstanding shares of common stock as of January 13,
2003, by: (i) each person known by us to beneficially own more than 5% of our
outstanding shares of common stock; (ii) each of our executive officers; (iii)
each of our directors; and (iv) all of our executive officers and directors as a
group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o HiEnergy Technologies, Inc., 1601 Alton Parkway, Unit B,
Irvine, California 92606. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes those shares
of common stock underlying options held by such persons that are exercisable
within 60 days of January 13, 2003, but excludes shares of common stock
underlying options and warrants held by any other person. The number of shares
of common stock outstanding as of January 13, 2003 was 24,076,269. Except as
otherwise noted, the amounts reflected below are based upon information provided
to us and in filings with the Securities and Exchange Commission.
- -------------------------------------------------------------------- ---------------------- ------------------
Percent of
Name of Beneficial Owner Number of Shares Outstanding
- -------------------------------------------------------------------- ---------------------- ------------------
Dr. Bogdan C. Maglich, Chairman of the Board and Chief Scientific 11,251,772 (1) 41.7%
Officer
- -------------------------------------------------------------------- ---------------------- ------------------
Tom Pascoe, President, CEO, Treasurer and Director 938,815 (2) 3.8%
- -------------------------------------------------------------------- ---------------------- ------------------
Michal Levy, Secretary and Vice President 110,588 (3) *
- -------------------------------------------------------------------- ---------------------- ------------------
Barry Alter, Director (4) 1,542,500 6.4%
- -------------------------------------------------------------------- ---------------------- ------------------
Gregory F. Gilbert, Director (5) 0 *
- -------------------------------------------------------------------- ---------------------- ------------------
Harb S. Al Zuhair, Director 828,422 (6) 3.4%
- -------------------------------------------------------------------- ---------------------- ------------------
Maglich Family Holdings, Inc., Shareholder 3,345,601 13.9%
- -------------------------------------------------------------------- ---------------------- ------------------
Advanced Projects Group, Inc., Shareholder 1,236,735 5.14%
- -------------------------------------------------------------------- ---------------------- ------------------
Maglich Innovations Fund, Inc., Shareholder 1,500,000 6.23%
- -------------------------------------------------------------------- ---------------------- ------------------
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP
(6 Persons) (7) 14,672,097 52.4%
- -------------------------------------------------------------------- ---------------------- ------------------
* Less than 1%.
(1) Includes 2,270,708 shares owned directly by Dr. Maglich, 1,236,735 shares
owned by Advanced Projects Group, Inc., a Delaware corporation, of which Dr.
Maglich is a director, officer and greater than ten percent stockholder,
36
3,345,601 shares owned by Maglich Family Holdings, Inc., a Delaware corporation,
of which Dr. Maglich is a director, officer and greater than ten percent
stockholder, and 1,500,000 shares owned by Maglich Innovations Fund Inc., a
Delaware corporation, of which Dr. Maglich is sole director, officer and
stockholder. Dr. Maglich disclaims beneficial ownership of the stock held by
Maglich Family Holdings, Inc. and Advanced Projects Group, Inc. beyond his
pecuniary interest. Also includes 2,898,728 shares of Common Stock issuable upon
the exercise of currently exercisable stock options.
(2) Represents 938,815 shares of common stock issuable upon the exercise of
currently exercisable stock options.
(3) Includes 89,410 shares of common stock issuable upon the exercise of
currently exercisable stock options.
(4) Mr. Alter's business address is 488 Melrose Avenue, Toronto, Ontario, Canada
M5M 2A2.
(5) Mr. Gilbert's business address is 4318 Dudley Blvd., McClellan Park,
Sacramento, California 95652.
(6) Includes 17,882 shares of common stock issuable upon the exchange of 800
shares of HiEnergy Microdevices Common Stock held by Mr. Al Zuhair. The 800
shares of HiEnergy Microdevices common stock are subject to payment of a
promissory note in the amount of $3.50 per share, or a total of $2,800.
(7) The group consists of our five directors, Ms. Levy. The number of shares
beneficially owned takes into account the details set forth in the preceding
footnotes.
SELLING SECURITY HOLDERS
As of January 13, 2003, a total of 24,076,269 shares of our common stock were
outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock both before and
immediately after the offering, assuming each selling stockholder sells all of
their shares listed in the table.
Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by
the Securities and Exchange Commission, and generally includes voting or
investment power with respect to securities. Except as indicated in the
footnotes to the table, we believe each holder possesses sole voting and
investment power with respect to all of the shares of common stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock subject to options or warrants or shares of
Series A Convertible Preferred Stock, or Series A Preferred, held by that holder
that are currently exercisable or convertible or are exercisable or convertible
within 60 days after the date of the table are deemed outstanding. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person or group.
We have agreed to register for resale an aggregate of 1,175,441 shares of common
stock in connection with the Series A Preferred offering:
o an aggregate of 851,755 shares of common stock that may become
issuable upon the conversion of the shares of Series A Preferred;
o an aggregate of 255,536 shares of common stock, which is the number of
shares underlying warrants held by the Series A Preferred stockholders
that may become issuable upon conversion of the warrants at an
exercise price of $1.50 per share; and
o an aggregate of 68,150 shares of common stock issued to the Series A
Preferred holders as a stock dividend.
Because the registration statement that includes this prospectus has not been
declared effective by the Securities and Exchange Commission on or prior to
February 4, 2003, and because we did not request the SEC to declare our initial
filing of November 6, 2002 effective, we may incur penalties to the Series A
Preferred investors that we may choose to pay in additional securities that will
be registered to be sold in this offering. The terms of the Series A Preferred
and investor warrants whose underlying shares of common stock are included for
resale under this prospectus prohibit conversion of the preferred shares and
37
exercise of the warrants to the extent that conversion of the shares would
result in the holder, together with its affiliates, beneficially owning in
excess of 4.999% or 9.999% of our outstanding shares of common stock, and to the
extent that exercise of the warrants would result in the holder, together with
its affiliates, beneficially owning in excess of 4.999% of our outstanding
shares of common stock. A holder may waive the 4.999% limitation upon 60 days'
prior written notice to us. Also, these limitations do not preclude a holder
from converting or exercising Series A Preferred shares or warrants and selling
shares underlying the shares or warrants in stages over time where each stage
does not cause the holder and its affiliates to beneficially own shares in
excess of the limitation amounts.
We have also agreed to register for resale an aggregate of 1,619,924 shares of
common stock in connection with the common stock private placement offering that
closed on October 29 and 31, 2002:
o an aggregate of 1,349,934 shares of common stock; and
o an aggregate of 269,990 shares of common stock, which is the number of
shares underlying warrants held by the private placement investors
that may become issuable upon conversion of the warrants at an
exercise price of $2.50 per share.
Because the registration statement that includes this prospectus is not declared
effective by the Securities and Exchange Commission on or prior to February 26,
2003, and because we did not request the SEC to declare our initial filing of
November 6, 2002 effective, we may incur penalties to the common stock investors
that they may choose to have us pay in additional securities registered to be
sold in this offering.
If we pay penalties in shares of common stock to be sold in this offering, we
will allocate additional shares to investors from the Series A and common stock
offerings according to the respective terms of their registration rights
agreements. To provide for this contingency, the registration statement that
includes this prospectus registers more shares than the prospectus offers for
sale. We do not believe any penalties that we pay in registered shares will
materially alter the size of the offering. If we pay penalties in registered
shares, the relevant details will be set forth in a supplement or revisions to
this prospectus.
We have also agreed or determined to register for resale the following shares of
common stock:
o an aggregate of 1,725,000 shares of common stock held by investors in
our common stock private placement offering that closed on June 24,
2002;
o an aggregate of 1,872,770 shares of common stock that may be issuable
upon exercise of options and warrants held by consultants and
advisors; and
o An aggregate of 80,000 shares of common stock issued in connection
with the settlement of a lawsuit and 33,909 shares of common stock
issued upon exercise of warrants held by a consultant.
The shares of common stock being offered under this prospectus may be offered
for sale from time to time during the period the registration statement of which
this prospectus is a part remains effective, by or for the accounts of the
selling security holders described below.
38
- -------------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering Shares Being After the Offering (1)
----------------------------
-------------------------------
Name of Beneficial Owner Number % of Class Offered Number % of Class
- -------------------------------------------------------------------------------------------------------------------
Nathan Freund and Lila Freund 133,930(2) * 133,930(2) 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert A. Melnick 80,359(3) * 80,359(3) 0 *
- -------------------------------------------------------------------------------------------------------------------
Jacob Bar Lev and Zvia Bar Lev 66,968(4) * 66,968(4) 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert J. Neborsky, M.C., Inc.
Combined Retirement Trust 66,968(5) * 66,968(5) 0 *
- -------------------------------------------------------------------------------------------------------------------
David Wiener Revocable Trust - 96 40,180(6) * 40,180(6) 0 *
- -------------------------------------------------------------------------------------------------------------------
James Enright 33,442(7) * 33,442(7) 0 *
- -------------------------------------------------------------------------------------------------------------------
Ioannis Korologos 40,180(8) * 40,180(8) 0 *
- -------------------------------------------------------------------------------------------------------------------
Ruth Arbel-Magid and Eliezer Magid 33,442(9) * 33,442(9) 0 *
- -------------------------------------------------------------------------------------------------------------------
Richard Melnick 311,247(10) * 311,247(10) 0 *
- -------------------------------------------------------------------------------------------------------------------
Kris S. Pogoloff 13,377(11) * 13,377(11) 0 *
- -------------------------------------------------------------------------------------------------------------------
Mark W. Collins 34,655(12) * 34,655(12) 0 *
- -------------------------------------------------------------------------------------------------------------------
William I Schoenfeld and Rosalie G.
Schoenfeld 13,395(13) * 13,395(13) 0 *
- -------------------------------------------------------------------------------------------------------------------
Morrie Lieb 13,377(14) * 13,377(14) 0 *
- -------------------------------------------------------------------------------------------------------------------
Mark Capital LLC 38,457(15) * 38,457(15) 0 *
- -------------------------------------------------------------------------------------------------------------------
Andrew J. Maffey 66,878(16) * 66,878(16) 0 *
- -------------------------------------------------------------------------------------------------------------------
Karma Kapital LLC 153,508(17) * 153,508(17) 0 *
- -------------------------------------------------------------------------------------------------------------------
Global Medicine, Inc, MPPP 133,751(18) * 133,751(18) 0 *
- -------------------------------------------------------------------------------------------------------------------
Angeliki Frangou 66,745(19) * 66,745(19) 0 *
- -------------------------------------------------------------------------------------------------------------------
Jan H. Stahl & Cynthia M. Ruggero 13,352(20) * 13,352(20) 0 *
- -------------------------------------------------------------------------------------------------------------------
1057111 Ontario Ltd. 25,000(21) * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
William S. Gaskey 25,000 * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Richard Bertea Separate Property Trust 100,000(22) * 100,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Don Brennan 25,000 * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Croft Investments Limited Partnership 100,000(23) * 100,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert S. Davimos 25,000 * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Peter DiMatteo 50,000 * 50,000 0 *
- -------------------------------------------------------------------------------------------------------------------
J.R. Fishman 100,000 * 100,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Fribourg Enterprises Inc. 100,000(24) * 100,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert Galorenzo 50,000 * 50,000 0 *
- -------------------------------------------------------------------------------------------------------------------
C. Boyden Gray 270,877 1.2% 25,000 245,877 1.1%
- -------------------------------------------------------------------------------------------------------------------
Pam Gulla 50,000 * 50,000 0 *
- -------------------------------------------------------------------------------------------------------------------
The Ed W. Hennings Revocable Trust 25,000(25) * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Brian Kane 300,000 1.3% 300,000 0 *
- -------------------------------------------------------------------------------------------------------------------
David Kaplan 200,000 * 200,000 0 *
- -------------------------------------------------------------------------------------------------------------------
SLR Limited 195,000(26) * 195,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Ajaib Limited 5,000(27) * 5,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Gion Limited 50,000(28) * 50,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Maraline International Ltd 150,000(29) * 150,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Dean Rose 25,000 * 25,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Vertigo Trading Inc. 100,000(30) * 100,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Yeffet, Isaac 500,000(31) 2.2% 1,000,000(32) 0 *
- -------------------------------------------------------------------------------------------------------------------
Primoris Group Inc. 400,000(33) 1.8% 400,000 0 *
- -------------------------------------------------------------------------------------------------------------------
H.C. Wainwright & Co., Inc. 25,000(34) * 0 25,000 (34) *
- -------------------------------------------------------------------------------------------------------------------
39
- -------------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering Shares Being After the Offering (1)
----------------------------
-------------------------------
Name of Beneficial Owner Number % of Class Offered Number % of Class
- -------------------------------------------------------------------------------------------------------------------
Wolfe Axelrod Weinberger
Associates LLC 250,000(35) 1.0% 250,000(35) 0 *
- -------------------------------------------------------------------------------------------------------------------
Vertical Ventures Investments, LLC 444,446(36) 1.9% 444,446(36) 0 *
- -------------------------------------------------------------------------------------------------------------------
North Bar Capital Inc. 44,446(37) * 44,446(37) 0 *
- -------------------------------------------------------------------------------------------------------------------
Michael Kirsh 22,223(38) * 22,223(38) 0 *
- -------------------------------------------------------------------------------------------------------------------
John Zanotti 22,223(39) * 22,223(39) 0 *
- -------------------------------------------------------------------------------------------------------------------
Tomer Vardi 22,223(40) * 22,223(40) 0 *
- -------------------------------------------------------------------------------------------------------------------
1530403 Ontario Inc. 177,779(41) * 177,779(41) 0 *
- -------------------------------------------------------------------------------------------------------------------
1513549 Ontario Ltd. 133,200(42) * 133,200(42) 0 *
- -------------------------------------------------------------------------------------------------------------------
Brian Gruson 120,000(43) * 120,000(43) 0 *
- -------------------------------------------------------------------------------------------------------------------
Starfield International S.A. 180,000(44) * 180,000(44) 0 *
- -------------------------------------------------------------------------------------------------------------------
Perry Wolfman 177,779(45) * 177,779(45) 0 *
- -------------------------------------------------------------------------------------------------------------------
Nathan Alsheh 36,000(46) * 36,000(46) 0 *
- -------------------------------------------------------------------------------------------------------------------
Nardo Zaias, IRA-SEP 18,000(47) * 18,000(47) 0 *
- -------------------------------------------------------------------------------------------------------------------
Hilda & Manuel Zaiac 12,000(48) * 12,000(48) 0 *
- -------------------------------------------------------------------------------------------------------------------
Albert V. & Jennifer H. Skiba 22,223(49) * 22,223(49) 0 *
- -------------------------------------------------------------------------------------------------------------------
William G. Salatich 9,600(50) * 9,600(50) 0 *
- -------------------------------------------------------------------------------------------------------------------
Daniel A. Haigh 88,890(51) * 88,890(51) 0 *
- -------------------------------------------------------------------------------------------------------------------
John S. Haigh & Janette T. Blainey 22,223(52) * 22,223(52) 0 *
- -------------------------------------------------------------------------------------------------------------------
Jeff Berwick 44,446(53) * 44,446(53) 0 *
- -------------------------------------------------------------------------------------------------------------------
Jeff Hermanson 22,223(54) * 22,223(54) 0 *
- -------------------------------------------------------------------------------------------------------------------
Jason T. Adelman 73,909(55) * 33,909 40,000 (57) *
- -------------------------------------------------------------------------------------------------------------------
Sherbrooke Partners LLC 186,000(56) * 106,000(56) 80,000 (56) *
- -------------------------------------------------------------------------------------------------------------------
Scott Weisman 7,770(57) * 7,770(57) 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert Nathan 24,000(57) * 24,000(57) 0 *
- -------------------------------------------------------------------------------------------------------------------
Steven Markovich 10,000(57) * 5,000(57) 5,000 (57) *
- -------------------------------------------------------------------------------------------------------------------
Keith Cowan 80,000 * 80,000 0 *
- -------------------------------------------------------------------------------------------------------------------
Shaun Corrales 40,000(57) * 40,000(57) 0 *
- -------------------------------------------------------------------------------------------------------------------
Robert W. Bellono 40,000(57) * 40,000(57) 0 *
- -------------------------------------------------------------------------------------------------------------------
* Less than 1.0%.
(1) Assumes all shares being offered by all beneficial owners are sold.
(2) Includes 91,732 shares underlying shares of Series A Preferred, 27,520
shares underlying warrants, 7,339 shares issued as a stock dividend in
advance on October 7, 2002, and an additional 7,339 shares that may be
issued as a stock dividend in advance on October 7, 2003.
(3) Includes 55,039 shares underlying shares of Series A Preferred, 16,512
shares underlying warrants and 4,404 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 4,404 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(4) Includes 45,867 shares underlying shares of Series A Preferred, 13,761
shares underlying warrants and 3,670 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 3,670 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(5) Includes 45,867 shares underlying shares of Series A Preferred, 13,761
shares underlying warrants and 3,670 shares issued as a stock dividend
40
in advance on October 7, 2002, and an additional 3,670 shares that may
be issued as a stock dividend in advance on October 7, 2003. Power to
vote or dispose of the securities beneficially owned by the Robert J.
Neborsky, M.C., Inc. Combined Retirement Trust is held by Robert J.
Neborsky as Trustee.
(6) Includes 27,520 shares underlying shares of Series A Preferred, 8,256
shares underlying warrants and 2,202 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 2,202 shares that may
be issued as a stock dividend in advance on October 7, 2003. Power to
vote or dispose of the securities beneficially owned by the David
Wiener Revocable Trust - 96 is held by David Wiener as Trustee.
(7) Includes 22,904 shares underlying shares of Series A Preferred, 6,872
shares underlying warrants and 1,833 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 1,833 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(8) Includes 27,520 shares underlying shares of Series A Preferred, 8,256
shares underlying warrants and 2,202 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 2,202 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(9) Includes 22,904 shares underlying shares of Series A Preferred, 6,872
shares underlying warrants and 1,833 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 1,833 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(10) Includes 137,414 shares underlying shares of Series A Preferred,
151,845 shares underlying warrants and 10,994 shares issued as a stock
dividend in advance on October 7, 2002, and an additional 10,994
shares that may be issued as a stock dividend in advance on October 7,
2003.
(11) Includes 9,162 shares underlying shares of Series A Preferred, 2,749
shares underlying warrants and 733 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 733 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(12) Includes 23,736 shares underlying shares of Series A Preferred, 7,121
shares underlying warrants and 1,899 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 1,899 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(13) Includes 9,174 shares underlying shares of Series A Preferred, 2,753
shares underlying warrants and 734 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 734 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(14) Includes 9,162 shares underlying shares of Series A Preferred, 2,749
shares underlying warrants and 733 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 733 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(15) Includes 26,339 shares underlying shares of Series A Preferred, 7,902
shares underlying warrants and 2,108 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 2,108 shares that may
be issued as a stock dividend in advance on October 7, 2003. Power to
vote or dispose of the securities beneficially owned by Mark Capital
LLC is held by Evan Levine as Managing Member.
(16) Includes 45,806 shares underlying shares of Series A Preferred, 13,742
shares underlying warrants and 3,665 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 3,665 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(17) Includes 105,141 shares underlying shares of Series A Preferred,
31,543 shares underlying warrants and 8,412 shares issued as a stock
dividend in advance on October 7, 2002, and an additional 8,412 shares
that may be issued as a stock dividend in advance on October 7, 2003.
Power to vote or dispose of the securities beneficially owned by Karma
Kapital LLC is held by Satanay Koushbay an officer.
41
(18) Includes 91,610 shares underlying shares of Series A Preferred, 27,483
shares underlying warrants and 7,329 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 7,329 shares that may
be issued as a stock dividend in advance on October 7, 2003. Power to
vote or dispose of the securities beneficially owned by Global
Medicine, Inc., MPPP is held by Eugene Seymour, M.D., as Trustee.
(19) Includes 45,714 shares underlying shares of Series A Preferred, 13,715
shares underlying warrants and 3,658 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 3,658 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(20) Includes 9,144 shares underlying shares of Series A Preferred, 2,744
shares underlying warrants and 732 shares issued as a stock dividend
in advance on October 7, 2002, and an additional 732 shares that may
be issued as a stock dividend in advance on October 7, 2003.
(21) Power to vote or dispose of the securities beneficially owned by
1057111 Ontario Ltd. is held by Leonard P. Latchman as President.
(22) Power to vote or dispose of the securities beneficially owned by
Richard Bertea Separate Property Trust is held by Richard Bertea as
Trustee.
(23) Power to vote or dispose of the securities beneficially owned by Croft
Investments Limited Partnership is held by Milton H. Barbarosh as
President.
(24) Power to vote or dispose of the securities beneficially owned by
Fribourg Enterprises Inc. is held by Cristina Venus Sasso de Hoos as
President.
(25) Power to vote or dispose of the securities beneficially owned by The
Ed W. Hennings Revocable Trust is held by Ed W. Hennings as Trustee.
(26) Power to vote or dispose of the securities beneficially owned by SLR
Limited is held by Derek Ryan as a director.
(27) Power to vote or dispose of the securities beneficially owned by Ajaib
Limited is held by Derek Ryan as a director.
(28) Power to vote or dispose of the securities beneficially owned by Gion
Limited is held by Derek Ryan as a director.
(29) Power to vote or dispose of the securities beneficially owned by
Maraline International Ltd. is held by Derek Ryan as a director.
(30) Power to vote or dispose of the securities beneficially owned by
Vertigo Trading Inc. is held by A.W. Boggs as President.
(31) Represents 500,000 shares underlying stock options that have vested.
(32) Represents 1,000,000 shares underlying stock options.
(33) Represents 400,000 shares underlying warrants. Power to vote or
dispose of the securities beneficially owned by Primoris Group Inc. is
held by Joe Carusone as President.
(34) Represents 25,000 shares underlying warrants. Power to vote or dispose
of the securities beneficially owned by H.C. Wainwright & Co., Inc. is
held by Scott A. Weisman as President.
42
(35) Represents 250,000 shares underlying warrants. Power to vote or
dispose of the securities beneficially owned by Wolfe Axelrod
Weinberger Associates LLC is held by Donald C. Weinberger as Managing
Partner.
(36) Includes 370,371 shares of common stock and 74,075 shares underlying
warrants. Power to vote or dispose of the securities beneficially
owned by Vertical Ventures Investments, LLC is held by Joshua
Silverman as a partner.
(37) Includes 37,038 shares of common stock and 7,408 shares underlying
warrants. Power to vote or dispose of the securities beneficially
owned by North Bar Capital Inc. is held by Jared Shaw as Vice
President.
(38) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(39) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(40) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(41) Includes 148,149 shares of common stock and 29,630 shares underlying
warrants. Power to vote or dispose of the securities beneficially
owned by 1530403 Ontario Inc. is held by Julie Eisenstat as Secretary.
(42) Includes 111,000 shares of common stock and 22,200 shares underlying
warrants. Power to vote or dispose of the securities beneficially
owned by 1513549 Ontario Ltd. is held by Mark Silver as President.
(43) Includes 100,000 shares of common stock and 20,000 shares underlying
warrants.
(44) Includes 150,000 shares of common stock and 30,000 shares underlying
warrants. Power to vote or dispose of the securities beneficially
owned by Starfield International S.A. is held by Martin Christen as a
director.
(45) Includes 148,149 shares of common stock and 29,630 shares underlying
warrants.
(46) Includes 30,000 shares of common stock and 6,000 shares underlying
warrants.
(47) Includes 15,000 shares of common stock and 3,000 shares underlying
warrants.
(48) Includes 10,000 shares of common stock and 2,000 shares underlying
warrants.
(49) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(50) Includes 8,000 shares of common stock and 1,600 shares underlying
warrants.
(51) Includes 74,075 shares of common stock and 14,815 shares underlying
warrants.
(52) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(53) Includes 37,038 shares of common stock and 7,408 shares underlying
warrants.
(54) Includes 18,519 shares of common stock and 3,704 shares underlying
warrants.
(55) Includes 33,909 shares of common stock and 40,000 shares underlying
warrants.
(56) Represents shares underlying warrants. Power to vote or dispose of the
securities beneficially owned by Sherbrooke Partners LLC is held by
Matthew Balk.
(57) Represents shares underlying warrants.
Change in Control
43
There are no arrangements known to us, the operation of which may result in a
change of control of HiEnergy Technologies.
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees, assignees and
other successors-in-interest may, from time to time, sell any or all of their
shares of our common stock being offered under this prospectus on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock that
the seller does not own, or certificates for which are not within the
seller's control, so as to be available for delivery at the time when,
under applicable rules, delivery must be made;
o transactions to cover short sales;
o broker-dealers may agree with the selling security holders to sell a
specified number of shares at a stipulated price per share;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to time.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may also engage in short sales against the box,
which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in securities of
HiEnergy Technologies or derivatives of HiEnergy Technologies securities and may
sell or deliver shares in connection with these trades. The selling security
44
holders may pledge their shares to their brokers under the margin provisions of
customer agreements. If a selling security holder defaults on a margin loan, the
broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling security holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling security holders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling security holders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with these sales. In that event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling security holders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, the relevant details will be set forth in a
supplement or revisions to this prospectus.
The selling security holders and any other persons participating in the sale or
distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations under that act, including
Regulation M. These provisions may restrict activities of, and limit the timing
of purchases and sales of any of the shares by, the selling security holders or
any other such person. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and other activities with respect to those securities for a specified
period of time prior to the commencement of such distributions, subject to
specified exceptions or exemptions. All of these limitations may affect the
marketability of the shares.
This prospectus does not cover the sale or other transfer of derivative
securities held by the selling security holders or the issuance of shares of
common stock to the holders of those derivative securities upon conversion or
exercise of those derivative securities. If a selling security holder transfers
its derivative securities prior to conversion or exercise, the transferee of
those derivative securities may not sell the shares of common stock issuable
upon conversion or exercise of those of derivative securities under the terms of
this prospectus unless we amend or supplement this prospectus to cover such
sales.
For the period a holder holds our derivative securities, the holder has the
opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon conversion or exercise of those derivative securities. The terms on which
we could obtain additional capital during the period in which those derivative
securities remain outstanding may be adversely affected. The holders of the
derivative securities are most likely to voluntarily convert or exercise those
derivative securities when the conversion price or exercise price is less than
the market price for our common stock.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock, par
value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share. Of the 20,000,000 authorized shares of preferred stock, 345
shares have been designated as Series A Convertible Preferred Stock, or Series A
Preferred, and the remaining 19,999,655 shares are undesignated. As of January
13, 2003, we had 24,076,269 shares of common stock outstanding and 97.93 shares
of Series A Preferred outstanding. The following is a summary description of our
capital stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to receive
dividends out of assets legally available at times and in amounts as the board
of directors may from time to time determine, subordinate to any preferences
45
that may be granted to the holders of preferred stock. Holders of common stock
are entitled to one vote per share on all matters on which the holders of common
stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be redeemed or
converted. Upon our liquidation, dissolution or winding up, the assets legally
available for distribution to our stockholders are divided among the holders of
the common stock in proportion to the number of shares of common stock held by
each of them, after payment of all of our debts and liabilities and fulfillment
of the rights of any outstanding class or series of preferred stock that has
priority to distributed assets. The rights of holders of common stock are
subordinate to those of holders of any series of preferred stock.
Because the holders of shares of our common stock do not have cumulative voting
rights, the holders of more than 50% of the outstanding shares, voting for the
election of directors, can elect all of the directors to be elected, if they so
choose. In such event, the holders of the remaining shares will not be able to
elect any of the directors.
Under our certificate of incorporation, only the board of directors has the
power to call a special meeting of the stockholders, which limits the ability of
stockholders to effect a change in control of the company by changing the
composition of its board.
All of the issued and outstanding shares of common stock are duly authorized,
validly issued, fully paid, and non-assessable. To the extent that additional
shares of our common stock are issued, the relative interests of existing
stockholders may be diluted.
Preferred Stock
Preferred stock may be issued from time to time in one or more series, and our
board of directors, without action by the holders of common stock, may fix or
alter the voting rights, redemption provisions, dividend rights, dividend rates,
claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without stockholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Preferred stock can be used as an anti-takeover measure. The board of directors
has exclusive discretion to issue preferred shares with rights that may trump
those of its common stock. The board of directors could use an issuance of
preferred stock with dilutive or voting preferences to delay, defer or prevent
common stockholders from initiating a change in control of the company or reduce
the rights of common stockholders to the net assets upon dissolution. Preferred
stock issuances may also discourage takeover attempts that may offer premiums to
holders of the company's common stock.
Series A Convertible Preferred Stock
- ------------------------------------
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of
HiEnergy Technologies, after payment or provision for payment of the debts and
other liabilities of HiEnergy Technologies, the holders of shares of the Series
A Preferred then outstanding will be entitled to receive, out of the assets of
HiEnergy Technologies, an amount equal to $10,000 per share of the Series A
Preferred plus any accrued and unpaid dividends before any payment will be made
or any assets distributed to the holders of common stock or any other stock that
is junior to the Series A Preferred. If the assets of HiEnergy Technologies are
insufficient to cover what is owed to the Series A Preferred holders, whatever
assets exist are to be distributed on a pro rata basis among the holders of
Series A Preferred. No cash will be paid to holders of common stock unless the
holders of the outstanding shares of Series A Preferred have been paid in cash
the full amount due to them.
Dividends
46
The holders of Series A Preferred are entitled to receive, when and as declared
by the board of directors, dividends at the rate of 8% of the price paid for
each share held, or $800 per share in advance for each of the first two years.
The dividends may be in cash or common stock, at the election of the board of
directors. If shares of common stock are paid, the resale of the shares must be
registered by HiEnergy Technologies. As long as shares of the Series A Preferred
are outstanding, HiEnergy Technologies may not pay dividends to holders of its
common stock, unless all of the dividends owed to the Series A Preferred holders
have been paid.
Class Voting Rights
The Series A Preferred has the following class voting rights. Without the
affirmative vote or consent of the holders of at least three-fourths (3/4) of
the shares of the Series A Preferred outstanding at the time, HiEnergy
Technologies shall not: (i) authorize, create, issue or increase the authorized
or issued amount of any class or series of stock ranking prior to the Series A
Preferred, with respect to the distribution of assets on liquidation,
dissolution or winding up; (ii) amend, alter or repeal the provisions of the
Series A Preferred, whether by merger, consolidation or otherwise, so as to
adversely affect any right, preference, privilege or voting power of the Series
A Preferred Stock (except for the creation and issuance of another series of
stock junior to the Series A Preferred); (iii) repurchase, redeem or pay
dividends on shares of HiEnergy Technologies common stock, or any other stock
that is junior to the Series A Preferred; (iv) amend the certificate of
incorporation or bylaws of HiEnergy Technologies so as to affect materially and
adversely any right, preference, privilege or voting power of the Series A
Preferred (except for the creation and issuance of another series of stock
junior to or on parity with the Series A Preferred); effect any distribution
with respect to stock that is junior to the Series A Preferred; or (vi)
reclassify HiEnergy Technologies' outstanding securities.
General Voting Rights
Except as provided in the previous section regarding Class Voting Rights, the
Series A Preferred will not have voting rights. The common stock into which the
Series A Preferred is convertible will, upon issuance, have all of the same
voting rights as other issued and outstanding common stock of HiEnergy
Technologies.
Voluntary Conversion
At any time on or after being issued shares of Series A Preferred, the holder of
such shares may, at the holder's option, elect to convert all or any portion of
the shares into a number of shares of common stock equal to $10,000 divided by
$1.15, the conversion price, or 8,695 shares of Common Stock per share of Series
A Preferred Stock. The conversion price is subject to adjustment due to changes
in the number of outstanding shares of Common Stock of HiEnergy Technologies
from stock splits, stock dividends or distributions, reclassifications,
exchanges or substitutions, reorganization, merger, consolidation or sales of
assets. If all 97.93 shares of Series A Preferred Stock that were sold are
converted, HiEnergy Technologies will issue 851,755 shares of common stock to
the holders of the shares of Series A Preferred.
Mandatory Conversion
On October 7, 2004, the shares of Series A Preferred not previously converted
will be automatically converted into common stock at the conversion rate
disclosed above.
Redemption Option Upon Major Transaction
A holder of Series A Preferred shall have the right to require the corporation
to redeem all or a portion of the holder's shares of Series A Preferred at a
price per share equal to $10,000 per share plus accrued but unpaid dividends and
liquidated damages if any of the following occurs: (i) HiEnergy Technologies
consolidates, mergers or combines with another entity, except for a merger to
change the domicile of the corporation or where the stockholders of HiEnergy
Technologies continue to hold the voting power of the surviving entity necessary
to elect a majority of the members of the board of directors of the surviving
entity; (ii) the sale or transfer of all or substantially all of HiEnergy
Technologies' assets; or (iii) consummation of a purchase, tender or exchange
offer made to the holders of more than 30% of the outstanding shares of common
stock.
47
Redemption Option Upon Triggering Event
A holder of Series A Preferred shall have the right to require the corporation
to redeem all or a portion of the holder's shares of Series A Preferred at a
price per share equal to $10,000 per share plus accrued but unpaid dividends and
liquidated damages if any of the following occurs: (i) the effectiveness of the
registration statement, filed to register the offer and sale of the Common Stock
underlying the Series A Preferred Stock, lapses for any reason or is unavailable
to the holder of Series A Preferred Stock for sale of the shares of Common
Stock, unless the lapse or unavailability is due to factors solely within the
control of the holder of the Series A Preferred Stock; (ii) the suspension from
listing or the failure of the Common Stock to be listed on the OTC Bulletin
Board(R) for a period of five (5) consecutive days; (iii) HiEnergy Technologies'
notice to any holder of Series A Preferred Stock of its inability to comply with
proper requests for conversion of any Series A Preferred Stock into shares of
Common Stock; (iv) HiEnergy Technologies' failure to comply within ten (10)
business days to a notice to convert received from a holder of Series A
Preferred Stock; or (v) HiEnergy Technologies breaches any representation,
warranty, covenant or other term or condition of any agreement, document,
certificate or other instrument delivered in connection with the transaction to
acquire shares of Series A Preferred Stock.
Sunset Provision
Upon conversion of all shares of Series A Preferred Stock, the provisions
pertaining to the Series A Preferred Stock in the certificate of incorporation
shall be deemed completely performed and discharged. HiEnergy Technologies will
be empowered to restate its certificate of incorporation as though the Series A
Preferred Stock provisions had never existed.
Restrictions Upon Conversion
At no time may a holder of shares of Series A Preferred Stock convert shares of
the Series A Preferred if the number of shares of common stock to be issued
pursuant to such conversion would exceed, when aggregated with all other shares
of Common Stock owned by such holder at such time, the number of shares of
common stock which would result in such holder owning more than 4.99% of all of
the common stock outstanding at such time; provided, however, that upon a holder
of Series A Preferred providing the corporation with sixty-one (61) days notice
(the "Waiver Notice") that such holder would like to waive this restriction with
regard to any or all shares of common stock issuable upon conversion of Series A
Preferred, this restriction shall be of no force or effect with regard to those
shares of Series A Preferred referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Mandatory Conversion Date.
At no time may a holder of shares of Series A Preferred convert shares of the
Series A Preferred if the number of shares of common stock to be issued pursuant
to such conversion would exceed, when aggregated with all other shares of common
stock owned by such holder at such time, would result in such holder
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules thereunder) in excess of 9.999% of the then issued
and outstanding shares of common stock outstanding at such time; provided,
however, that upon a holder of Series A Preferred providing the corporation with
a Waiver Notice that such holder would like to waive this restriction with
regard to any or all shares of common stock issuable upon conversion of Series A
Preferred, this restriction shall be of no force or effect with regard to those
shares of Series A Preferred referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Mandatory Conversion Date.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common and preferred stock is Signature
Stock Transfer, Inc. Its telephone number is (972) 612-4120.
Effective March 17, 2003, Mellon Investor Services will be the transfer agent
and registrar for our common stock. Mellon's telephone number is (213) 553-9730.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The dismissal of Manning Elliott, Chartered Accountants, and the hiring of
Singer Lewak Greenbaum & Goldstein LLP by the board of directors was previously
reported in a report on Form 8-K, as amended, dated April 25, 2002 and filed on
May 10, 2002.
48
INTEREST OF EXPERTS AND COUNSEL
The consolidated financial statements of HiEnergy Technologies as of and for the
years ended April 30, 2002 and 2001 included in this prospectus and in the
registration statement of which this prospectus is a part have been audited by
Singer Lewak Greenbaum & Goldstein, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report, which
report contains an explanatory paragraph regarding HiEnergy Technologies'
ability to continue as a going concern and appears elsewhere in this prospectus,
and are incorporated in this prospectus in reliance upon the report given upon
the authority of Singer Lewak Greenbaum & Goldstein, LLP as experts in auditing
and accounting.
On September 25, 2002, the members of our corporate and securities counsel, QED
Law Group, P.L.L.C., were issued stock options to purchase an aggregate of
45,454 shares of our common stock, valued at $50,000 on the date of grant, as an
accommodation to adjust balances due for legal services rendered. On December
19, 2002, the members of our corporate and securities counsel, QED Law Group,
P.L.L.C., were issued stock options to purchase an aggregate of 27,272 shares of
our common stock, valued at $15,000 on the date of grant, as an accommodation to
adjust balances due for legal services rendered.
Neither Singer Lewak Greenbaum & Goldstein, LLP nor QED Law Group, P.L.L.C. was
employed on a contingent basis in connection with the registration or offering
of our common stock.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus will be
passed upon by QED Law Group, P.L.L.C. of Seattle, Washington.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act, and the rules and regulations
promulgated under the Securities Act, with respect to the common stock offered
under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered under
this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet website that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's website address is
http://www.sec.gov. Our website address is http://www.hienergyinc.com. You
should not consider the information on our website either to be a part of or to
be incorporated by reference into this prospectus or the registration statement
that includes it.
All trademarks or tradenames referred to in this prospectus are the property of
their respective owners.
49
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Pages
Independent Auditor's Report F-1
Consolidated balance sheets as of April 30, 2002
and October 31, 2002 (unaudited) F-2 to F-3
Consolidated statements of operations for the years ended
April 30, 2002 and 2001 (audited), for the six months
ended October 31, 2002 and 2001 (unaudited), and for the F-4 to F-5
period from August 21, 1995 (inception) to October 31, 2002 (unaudited)
Consolidated statements of shareholders' equity for the period from August 21,
1995 (inception) to October 31, 2002
(unaudited) F-6 to F-10
Consolidated statements of cash flows for the years
ended April 30, 2002 and 2001 (audited), for the six
months ended October 31, 2002 and 2001 (unaudited), and F-11 to F-13
for the period from August 21, 1995 (inception) to
October 31, 2002 (unaudited)
Notes to the consolidated financial statements April 30, 2002 F-14 to F-36
and October 31, 2002 (unaudited)
50
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
HiEnergy Technologies, Inc.
(formerly SLW Enterprises, Inc.)
and subsidiaries
We have audited the accompanying consolidated balance sheet of HiEnergy
Technologies, Inc. (formerly SLW Enterprises, Inc.) and subsidiaries
(development stage companies) as of April 30, 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended April 30, 2002, and the period from August 21,
1995 (inception) to April 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HiEnergy
Technologies, Inc. (formerly SLW Enterprises, Inc.) and subsidiaries as of April
30, 2002, and the results of their operations and their cash flows for each of
the two years in the period ended April 30, 2002, and the period from August 21,
1995 (inception) to April 30, 2002 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, during the year ended April 30, 2002, the Company incurred
a net loss of $1,389,530, and it had negative cash flows from operations of
$652,585. In addition, the Company had an accumulated deficit of $2,724,564 and
was in the development stage as of April 30, 2002. These factors, among others,
as discussed in Note 2 to the financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 5, 2002
F-1
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
April 30, 2002 and October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------
ASSETS
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Current assets
Cash and cash equivalents $ 1,949,408 $ 1,078,136
Accounts receivable 70,000 29,166
Subscription receivable 184,000 -
Other current assets 220,721 7,500
---------------- -----------------
Total current assets 2,424,129 1,114,802
Property and equipment, net 496,427 114,568
--------------- -----------------
Total assets $ 2,920,556 $ 1,229,370
=============== ================
The accompanying notes are an integral part of these financial statements.
F-2
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
April 30, 2002 and October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Current liabilities
Accounts payable $ 525,533 $ 209,895
Accrued expenses 72,885 151,567
Accrued payroll and payroll taxes 350,000 350,000
Accrued interest 30,661 29,767
Notes payable - related parties 312,608 621,691
Convertible notes payable - related parties 10,400 35,400
--------------- -----------------
Total current liabilities 1,302,087 1,398,320
--------------- -----------------
Minority interest in subsidiary 18,923 18,923
--------------- -----------------
Commitments and contingencies
Redeemable, convertible preferred stock
Series A convertible, redeemable preferred stock
8% dividends, voting rights, liquidation preference
$10,000 per share, 345 shares authorized
98 (unaudited) and 0 shares issued and outstanding 1 -
Additional paid-in capital 800,398 -
--------------- ----------------
Total redeemable convertible preferred stock 800,399 -
--------------- ----------------
Shareholders' equity (deficit)
Preferred stock, $0.001 par value
20,000,000 shares authorized
0 (unaudited) and 0 issued and outstanding - -
Common stock, $0.001 par value
100,000,000 shares authorized
24,042,360 (unaudited) and 22,075,200 shares
issued and outstanding 24,042 22,075
Additional paid-in capital 10,233,514 2,514,616
Committed shares, 45,759 (unaudited) and 0 outstanding 7,164 -
Deferred compensation (3,981,993) -
Deficit accumulated during the development stage (5,483,580) (2,724,564)
--------------- ----------------
Total shareholders' equity (deficit) 799,147 (187,873)
--------------- ----------------
Total liabilities and shareholders' equity (deficit) $ 2,920,556 $ 1,229,370
=============== ================
The accompanying notes are an integral part of these financial statements.
F-3
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 2002 and 2001,
for the Six Months Ended October 31, 2002 and 2001 (unaudited), and
for the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Six Months Ended For the Year Ended (Inception) to
October 31, April 30, October 31,
---------------------------- ----------------------------
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited)
Contract revenues $ 40,834 $ 117,000 $ 148,166 $ 80,000 $ 366,750
Operating expenses
General and administration 1,764,302 271,359 1,525,276 358,432 4,773,521
------------- ------------- ------------- ------------- ----------------
Loss from operations (1,723,468) (154,359) (1,377,110) (278,432) (4,406,771)
------------- ------------- ------------- ------------- ---------------
Other income (expense)
Interest income 3,358 - - - 3,135
Interest expense (5,405) (1,164) (10,486) (7,089) (35,460)
Financing expense (223,710) - - - (223,710)
Forgiveness of accounts payable 36,000 - - - 36,000
------------- ------------- ------------- ------------ ----------------
Total other income (expense) (189,757) (1,164) (10,486) (7,089) (220,035)
------------- ------------- ------------- ------------- ---------------
Loss before provision for
income taxes (1,913,225) (155,523) (1,387,596) (285,521) (4,626,806)
Provision for income taxes - - 1,934 2,546 10,983
------------- ------------- ------------- ------------- ----------------
The accompanying notes are an integral part of these financial statements.
F-4
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 2002 and 2001,
for the Six Months Ended October 31, 2002 and 2001 (unaudited), and
for the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Six Months Ended For the Year Ended (Inception) to
October 31, April 30, October 31,
---------------------------- ----------------------------
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited)
Net loss $ (1,913,225) $ (155,523) $ (1,389,530) $ (288,067) $ (4,637,789)
Beneficial conversion feature
granted on preferred stock (767,431) - - - (767,431)
Preferred stock dividends (78,360) - - - (78,360)
-------------- ------------- ------------- ------------- ----------------
Net loss available to common
shareholders $ (2,759,016) $ (155,523) $ (1,389,530) $ (288,067) $ (5,483,580)
============== ============== ============== ============== ================
Basic and diluted loss available
to common shareholders per
share $ (0.12) $ (0.01) $ (0.08) $ (0.02) $ (0.45)
============= ============== ============= ============= ===============
Basic and diluted weighted-
average common shares
outstanding 22,783,343 15,833,315 17,783,760 14,693,224 12,173,702
============= ============= ============= ============= ===============
The accompanying notes are an integral part of these financial statements.
F-5
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional Deferred during the
Common Stock Paid-In Committed Compen- Development
----------------------------
Shares Amount Capital Shares sation Stage Total
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, August 21, 1995
(inception) - $ - $ - $ - $ - $ - $ -
Recapitalization upon reverse
merger 6,470,000 6,470 (6,456) 14
Issuance of common stock for
services 734,771 735 7,495 8,230
Net loss (39,387) (39,387)
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 1996 7,204,771 7,205 1,039 - - (39,387) (31,143)
Issuance of common stock for
services 3,219 3 33 36
Net loss (110,004) (110,004)
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 1997 7,207,990 7,208 1,072 - - (149,391) (141,111)
Issuance of common stock for
cash 596,589 597 143,955 144,552
Issuance of common stock for
services 1,451,928 1,452 15,598 17,050
Net loss (293,019) (293,019)
--------------- ----------- --------------- --------- --------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
F-6
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional Deferred during the
Common Stock Paid-In Committed Compen- Development
----------------------------
Shares Amount Capital Shares sation Stage Total
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 1998 9,256,507 $ 9,257 $ 160,625 $ - $ - $ (442,410) $ (272,528)
Issuance of common stock for
cash 264,852 265 150,965 151,230
Issuance of common stock for
services 2,167,620 2,167 47,592 49,759
Net loss (272,426) (272,426)
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 1999 11,688,979 11,689 359,182 - - (714,836) (343,965)
Issuance of common stock for
cash 638,548 638 295,008 295,646
Issuance of common stock for
services 1,914,570 1,915 83,322 85,237
Net loss (332,131) (332,131)
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 2000 14,242,097 14,242 737,512 - - (1,046,967) (295,213)
Issuance of common stock for
cash 465,437 465 109,265 109,730
Issuance of common stock for
services 371,035 371 36,097 36,468
Net loss (288,067) (288,067)
--------------- ----------- --------------- --------- --------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
F-7
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional Deferred during the
Common Stock Paid-In Committed Compen- Development
----------------------------
Shares Amount Capital Shares sation Stage Total
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 2001 15,078,569 $ 15,078 $ 882,874 $ - $ - $(1,335,034) $ (437,082)
Issuance of common stock for
cash 712,071 712 180,857 181,569
Issuance of common stock for
services 5,059,560 5,060 227,110 232,170
Issuance of common stock in
private placement 1,225,000 1,225 1,223,775 1,225,000
Net loss (1,389,530) (1,389,530)
--------------- ----------- --------------- --------- --------- ----------- ------------
Balance, April 30, 2002 22,075,200 22,075 2,514,616 - - (2,724,564) (187,873)
Issuance of common stock in
private placement (unaudited) 500,000 500 499,500 500,000
Issuance of common stock in
private placement (unaudited) 1,349,934 1,350 1,821,057 1,822,407
Offering costs (unaudited) (196,793) (196,793)
The accompanying notes are an integral part of these financial statements.
F-8
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional Deferred during the
Common Stock Paid-In Committed Compen- Development
----------------------------
Shares Amount Capital Shares sation Stage Total
--------------- ----------- --------------- --------- --------- ----------- ------------
Dividends on preferred stock
(unaudited) 68,150 $ 68 $ 78,292 $ $ $ (78,360) $ -
Beneficial conversion feature
granted in connection with
issuance of preferred stock
(unaudited) 767,431 (767,431) -
Issuance of common stock to
an employee for a bonus
(unaudited) 11,178 11 21,339 21,350
Conversion of notes payable
into common stock (unaudited) 37,898 38 37,858 37,896
Financing expense in connection
with issuance of warrants
(unaudited) 223,710 223,710
Deferred compensation in
connection with issuance of
stock options to consultant
(unaudited) 761,007 (761,007) -
The accompanying notes are an integral part of these financial statements.
F-9
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional Deferred during the
Common Stock Paid-In Committed Compen- Development
----------------------------
Shares Amount Capital Shares sation Stage Total
--------------- ----------- --------------- --------- ----------- ----------- ------------
Deferred compensation in
connection with issuance
of stock options to
employee (unaudited) $ $ 3,305,542 $ $(3,305,542) $ $ -
Stock options issued to a
consultant in exchange for
accounts payable (unaudited) 50,000 50,000
Warrants issued to a consultant
for services rendered or to be
rendered (unaudited) 349,955 349,955
Amortization of deferred
compensation (unaudited) 84,556 84,556
Exercise of stock options in
subsidiary (unaudited) 7,164 7,164
Net loss (unaudited) (1,913,225) (1,913,225)
--------------- ----------- --------------- --------- ----------- ----------- ------------
Balance, October 31, 2002
(unaudited) 24,042,360 $ 24,042 $ 10,233,514 $ 7,164 $(3,981,993)$(5,483,580) $ 799,147
=============== =========== =============== ========= =========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-10
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 2002 and 2001,
for the Six Months Ended October 31, 2002 and 2001 (unaudited), and
for the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Six Months Ended For the Year Ended (Inception) to
October 31, April 30, October 31,
----------------------------- ----------------------------
2002 2001 2002 2001 2002
------------- -------------- ------------- ------------- --------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (1,913,225) $ (155,523) $ (1,389,530) $ (288,067) $ (4,637,789)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 40,262 2,281 5,469 968 47,694
Compensation expense
relating to issuance of
common stock in exchange
for services rendered - 47,030 232,170 36,468 428,954
Compensation expense relating
to issuance of common stock
in exchange for services
rendered to minority
shareholders - - 4,000 - 18,923
Warrants issued for services
rendered 349,955 - - - 349,955
Common stock issued to an
employee for a bonus 21,350 - - - 21,350
Additional compensation
to officer - - 42,171 - 42,171
Amortization of deferred
compensation 84,556 - - - 84,556
Financing expense 223,710 - - - 223,710
Forgiveness of accounts
payable (36,000) - - - (36,000)
Increase in
Accounts receivable (40,834) - (29,166) - (70,000)
Other current assets (213,221) - (7,500) - (220,721)
Increase (decrease) in
Accounts payable 401,644 22,779 185,027 24,546 611,536
Accrued expenses (78,682) (5,254) 119,579 2,227 72,885
Accrued payroll and
payroll taxes - 15,000 175,000 35,000 350,000
Accrued interest 3,790 2,549 10,195 7,090 33,557
------------- -------------- ------------- ------------- ---------------
Net cash used in operating activities (1,156,695) (71,138) (652,585) (181,768) (2,679,219)
------------- -------------- ------------- ------------- --------------
The accompanying notes are an integral part of these financial statements.
F-11
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 2002 and 2001,
for the Six Months Ended October 31, 2002 and 2001 (unaudited), and
for the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Six Months Ended For the Year Ended (Inception) to
October 31, April 30, October 31,
----------------------------- ----------------------------
2002 2001 2002 2001 2002
------------- -------------- ------------- ------------- --------------
(unaudited) (unaudited) (unaudited)
Cash flows from investing activities
Purchase of property and equipment $ (422,121) $ (44,818) $ (118,510) $ - $ (544,121)
------------- -------------- ------------- ------------- --------------
Net cash used in investing activities (422,121) (44,818) (118,510) - (544,121)
------------- -------------- ------------- ------------- --------------
Cash flows from financing activities
Book overdraft - 1,772 - - -
Proceeds from issuance of common
stock in private placement 2,122,407 - 1,225,000 - 3,347,407
Offering costs on common stock (180,793) - - - (180,793)
Proceeds from issuance of preferred
stock 979,300 - - - 979,300
Offering costs on preferred stock (178,901) - - - (178,901)
Proceeds from issuance of common
stock - 95,000 181,569 109,730 882,723
Recapitalization of reverse merger - - 14 - 14
Exercise of stock options in
subsidiary 7,164 - - - 7,164
Proceeds from notes payable -
related parties - 40,000 443,007 39,456 579,517
Payments on notes payable -
related parties (279,803) (15,057) - - (279,803)
Proceeds from convertible notes
payable - related parties - - 5,400 25,000 55,400
Payments on convertible notes
payable - related parties (19,280) (9,280) (9,280) (10,720) (39,280)
------------- -------------- ------------- ------------- --------------
Net cash provided by financing
activities 2,450,094 112,435 1,845,710 163,466 5,172,748
------------- -------------- ------------- ------------- --------------
Net increase (decrease) in cash
and cash equivalents 871,272 (3,521) 1,074,615 (18,302) 1,949,408
Cash and cash equivalents,
beginning of period 1,078,136 3,521 3,521 21,823 -
------------- -------------- ------------- ------------- --------------
Cash and cash equivalents, end
of period $ 1,949,408 $ - $ 1,078,136 $ 3,521 $ 1,949,408
============= ============= ============= ============= ==============
The accompanying notes are an integral part of these financial statements.
F-12
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 2002 and 2001,
for the Six Months Ended October 31, 2002 and 2001 (unaudited), and
for the Period from August 21, 1995 (Inception) to October 31, 2002 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Six Months Ended For the Year Ended (Inception) to
October 31, April 30, October 31,
----------------------------- ----------------------------
2002 2001 2002 2001 2002
------------- -------------- ------------- ------------- --------------
(unaudited) (unaudited) (unaudited)
Supplemental disclosures of
cash flow information
Interest paid $ 4,511 $ - $ - $ - $ 4,799
============= ============== ============= ============= ==============
Income taxes paid $ - $ - $ 1,934 $ 2,546 $ 10,983
============= ============== ============= ============= ===============
Supplement schedule of non-cash financing activities
During the years ended April 30, 2002 and 2001, the six months ended October 31,
2002 and 2001, and the period from August 21, 1995 (inception) to October 31,
2002, the Company converted $0, $0, $37,896 (unaudited), $0 (unaudited), and
$37,896 (unaudited), respectively, of notes payable, including principal and
interest, into 0, 0, 37,898 (unaudited), 0 (unaudited), and 37,898 (unaudited)
shares, respectively, of common stock.
During the years ended April 30, 2002 and 2001, the six months ended October 31,
2002 and 2001, and the period from August 21, 1995 (inception) to October 31,
2002, the Company converted $0, $0, $50,000 (unaudited), $0 (unaudited), and
$50,000 (unaudited), respectively, of accounts payable to a consultant into
stock options to purchase 0, 0, 45,454 (unaudited), 0 (unaudited), and 45,454
(unaudited) shares, respectively, of common stock.
During the years ended April 30, 2002 and 2001, the six months ended October 31,
2002 and 2001, and the period from August 21, 1995 (inception) to October 31,
2002, the Company issued 0, 0, 148,151 (unaudited), 0 (unaudited), and 148,151
(unaudited) shares, respectively, of common stock in a private placement in
exchange for a subscription receivable of $0, $0, $184,000 (unaudited), $0
(unaudited), and $184,000 (unaudited), respectively. The full amount was
collected in November 2002.
The accompanying notes are an integral part of these financial statements.
F-13
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
HiEnergy Technologies, Inc. (the "Company" or "HiEnergy") was
incorporated on March 24, 2000 under the laws of the state of
Washington. In October 2002, HiEnergy reincorporated under the laws of
the state of Delaware.
HiEnergy and its subsidiaries (collectively, the "Company") are
development stage companies that were organized to develop the
"Atometer," commercially known as the "SuperSenzor," which is
technology for numerous governmental and commercial applications and
markets, including airport security screening; border patrol/customs
control drug and contraband detection; bomb, biological, and chemical
weapons detection, including landmine clearance; detecting of
impurities in crude oil, coal, and natural gas; and "fingerprinting"
of diamonds and other gemstones. This leading edge detection
technology can remotely and non-intrusively decipher (including
through metal) the chemical formulas of concealed biological agents,
explosives, drugs, and other substances and their locations.
Merger
------
On April 25, 2002, HiEnergy Microdevices, Inc. ("Microdevices")
entered into a voluntary share exchange agreement, whereby it acquired
92% of the outstanding common stock of HiEnergy in exchange for
14,380,200 shares of newly issued common stock. For accounting
purposes, the transaction has been treated as a recapitalization of
HiEnergy, with Microdevices as the accounting acquirer (reverse
acquisition), and has been accounted for in a manner similar to a
pooling of interests.
Microdevices was incorporated on August 21, 1995 in the state of
Delaware. HiEnergy had minimal assets and liabilities at the date of
the acquisition and did not have significant operations prior to the
acquisition. Therefore, pro forma information is not presented.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going
concern. However, during the years ended April 30, 2002 and 2001, the
six months ended October 31, 2002 and 2001, and the period from August
21, 1995 (inception) to October 31, 2002, the Company incurred net
losses of $1,389,530, $288,067, $1,913,225 (unaudited), $155,523
(unaudited), and $4,637,789 (unaudited), respectively, and it had
negative cash flows from operations of $652,585, $181,768, $1,156,695
(unaudited), $71,138 (unaudited), and $2,679,219 (unaudited),
respectively. In addition, the Company had an accumulated deficit of
$5,483,580 (unaudited) and was in the development stage as of October
31, 2002. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
F-14
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN (Continued)
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company achieving a level
of sales adequate to support the Company's cost structure. In
addition, realization of a major portion of the assets in the
accompanying balance sheets is dependent upon the Company's ability to
meet its financing requirements and the success of its plans to
develop and sell its products. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
In addition to the capital raised as of October 31, 2002 through a
private placement, the Company is currently negotiating with certain
investors about raising capital through additional private placement
offerings. Unless the Company raises additional funds, either by debt
or equity issuances, management believes that its current cash on hand
will be insufficient to cover its working capital needs until the
Company's sales volume reaches a sufficient level to cover operating
expenses.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of HiEnergy
and its wholly owned subsidiaries, Microdevices and VWO II, Inc. All
significant inter-company accounts and transactions are eliminated in
consolidation.
Development Stage Enterprise
----------------------------
The Company is development stage companies as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
all of its present efforts to its formation and to fundraising, and
its planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
Interim Financial Information
-----------------------------
The financial information as of October 31, 2002 and 2001, and for the
six months then ended, is unaudited, but in the opinion of management,
includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair
presentation of the financial position, operating results, and cash
flows for such periods. Results for the six months ended October 31,
2002 are not necessarily indicative of results for the year ended
April 30, 2003.
F-15
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
--------------------
The Company presents comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities. Comprehensive income is not presented in the Company's
financial statements since the Company did not have any of the items
of comprehensive income in any period presented.
Cash and Cash Equivalents
-------------------------
The Company maintains its cash deposits at several banks located
throughout California. Deposits at each bank are insured by the
Federal Deposit Insurance Corporation up to $100,000. As of April 30,
2002 and October 31, 2002, uninsured portions of the balances at those
banks aggregated to $1,125,206 and $1,852,625 (unaudited),
respectively. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk on
cash and cash equivalents.
For the purpose of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Accounts Receivable
-------------------
Accounts receivable at April 30, 2002 and October 31, 2002 consisted
of an amount due from a governmental contract. The total accounts
receivable balance at October 31, 2002 of $70,000 (unaudited) was
collected in December 2002.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated or
amortized using the straight-line method over an estimated useful life
of five years.
Patents
-------
The Company has filed several patent applications within and outside
the United States. The outcome is indeterminable.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, subscription receivable,
accounts payable, accrued expenses, accrued payroll and payroll taxes,
and accrued interest, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for notes payable -
related parties and convertible notes payable - related parties also
approximate fair value because current interest rates offered to the
Company for debt of similar maturities are substantially the same.
F-16
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeds the exercise price. The Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, the Company must disclose certain
pro forma information related to employee stock option grants as if
the fair value-based method defined in SFAS No. 123 had been applied.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Loss per Share
--------------
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic loss per share is computed by dividing the
loss available to common shareholders by the weighted-average number
of common shares outstanding. Diluted loss per share is computed
similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Because the Company
has incurred net losses, basic and diluted loss per share are the
same.
F-17
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss per Share (Continued)
--------------------------
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented
because the effect would have been anti-dilutive:
For the Six Months Ended For the Year Ended
October 31, April 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
Stock options outstanding 6,621,913 - 2,482,011 -
Warrants outstanding 1,815,686 - - -
Redeemable, convertible
Series A preferred
stock 851,565 - - -
Microdevices minority
shareholders 459,222 459,222 459,222 369,709
Microdevices option and
warrant holders 997,272 720,856 1,086,682 385,543
--------------- ---------------- --------------- ----------------
Total 10,745,658 1,180,078 4,027,915 755,252
=============== ================ =============== ================
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." This statement addresses
financial accounting and reporting for business combinations and
supersedes Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for
Pre-Acquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of this statement are to be accounted for
using one method, the purchase method. The provisions of this
statement apply to all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method for those business
combinations is prohibited. This statement also applies to all
business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001 or later. This statement
is not applicable to the Company.
F-18
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously.
The Company does not expect adoption of SFAS No. 142 to have a
material impact, if any, on its financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal
operation of long-lived assets, except for certain obligations of
lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The Company does not expect adoption of SFAS No. 144 to
have a material impact, if any, on its financial position or results
of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies, and
simplifies existing accounting pronouncements. This statement rescinds
SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in
APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has
been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change
accounting practice. This statement is not applicable to the Company.
F-19
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit
cost, as defined, was recognized at the date of an entity's commitment
to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002
with earlier application encouraged. This statement is not applicable
to the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit
cost, as defined, was recognized at the date of an entity's commitment
to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002
with earlier application encouraged. This statement is not applicable
to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 removes the requirement
in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize
any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." In addition, this statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to
include certain financial institution-related intangible assets. This
statement is not applicable to the Company.
F-20
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at April 30, 2002 and October 31, 2002
consisted of the following:
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Micro sensor $ 53,115 $ 42,127
Laboratory equipment 401,572 -
Web site development 14,400 14,400
Computer equipment 17,034 7,473
Neutron generator 58,000 58,000
--------------- ----------------
544,121 122,000
Less accumulated depreciation 47,694 7,432
--------------- ----------------
Total $ 496,427 $ 114,568
=============== ================
Depreciation expense for the years ended April 30, 2002 and 2001, the
six months ended October 31, 2002 and 2001, and the period from August
21, 1995 (inception) to October 31, 2002 was $5,469, $968, $40,262
(unaudited), $2,281 (unaudited), and $47,694 (unaudited),
respectively.
NOTE 5 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at April 30, 2002 and October 31, 2002
consisted of the following:
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Unsecured notes to a majority shareholder/officer/ director of
the Company, interest payable at 6% per annum, maturing in
December 2002. During the six months ended October 31,
2002, the notes
were paid in full (unaudited). $ - $ 59,083
Unsecured note to a majority shareholder/officer/ director of
the Company as a signing bonus. Amount is
non-interest-bearing, $50,000 payable upon receipt of
$1,000,000 or more from any source, and $50,000 payable
upon revenue in excess of $500,000 or $1,000,000 of
additional funds from any source. During the six months
ended October 31, 2002, $50,000
(unaudited) was paid. 50,000 100,000
F-21
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE - RELATED PARTIES (Continued)
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Unsecured notes to a shareholder of the Company, interest
payable at 10.5% per annum, or 15% per annum if in
default, and due in November 1997. As of October 31, 2002,
the notes were in
default (unaudited). $ 40,000 $ 40,000
Unsecured notes to a prior officer of the Company, interest
payable at 6% per annum, and payable in February and March
2002. The Company entered into a settlement agreement
regarding these amounts (see Note 7). As of October 31,
2002, these notes
were in default (unaudited). 27,608 27,608
Secured note to an officer/director of the Company,
non-interest-bearing, and due in March 2002. The note is
secured by 7,857 shares of common stock. As of April 30,
2002, the note was in default. During the six months ended
October 31, 2002, the note was paid in full
(unaudited). - 50,000
Secured notes to a shareholder/prior officer and director of
the Company, non-interest-bearing, and due in March 2002.
The notes are secured by 23,571 shares of common stock. As
of April 30, 2002, the notes were in default. During the
six months ended October 31, 2002, the notes were paid in
full. In addition, since the notes were in default and the
principal balance of $150,000 was paid late, the Company
issued the holder of the notes a warrant to purchase
150,000
shares of common stock (unaudited). - 150,000
Unsecured amount to a prior officer of the Company as
severance, non-interest-bearing, and payable upon demand.
The Company entered into a settlement agreement regarding
this amount (see Note 7). As of October 31, 2002, this
amount was in default (unaudited). 150,000 150,000
F-22
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE - RELATED PARTIES (Continued)
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Unsecured notes to an unrelated party, non-interest-
bearing, and payable upon demand. $ 45,000 $ 45,000
--------------- ----------------
312,608 621,691
Less current portion 312,608 621,691
--------------- ----------------
Long-term portion $ - $ -
=============== ================
NOTE 6 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Convertible notes payable - related parties at April 30, 2002 and
October 31, 2002 consisted of the following:
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Secured note to a shareholder/director of the Company,
interest payable at 8% per annum, and due in July 2001.
The note is secured by the patent application for Europe,
Canada, and Japan. The holder of the note has the option
to convert the principal and interest into shares of
common stock. During the six months ended October 31,
2002, this note plus accrued interest of $780 was
converted into
5,780 shares of common stock (unaudited). $ - $ 5,000
Secured notes to a shareholder/director of the Company,
interest payable at 8% per annum, $5,000 due in July 2001,
and $5,400 due in July 2002. The notes are secured by the
patent application for Europe, Canada, and Japan. The
holder of the notes has the option to convert the
principal and interest into shares of common stock. As of
October 31, 2002, the
notes were in default (unaudited). 10,400 10,400
F-23
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES (Continued)
October 31, April 30,
2002 2002
--------------- ----------------
(unaudited)
Secured note to a shareholder/director of the Company,
interest payable at 8% per annum, and due in July 2001.
The note is secured by the patent application for Europe,
Canada, and Japan. The holder of the note has the option
to convert the principal and interest into shares of
common stock. During the six months ended October 31,
2002, this note plus accrued interest of $1,678 was
converted into 11,678 shares of
common stock (unaudited). $ - $ 10,000
Secured note to a shareholder/director/prior officer of the
Company, interest payable at 8% per annum, and due in July
2001. The note is secured by the patent application for
Europe, Canada, and Japan. The holder of the note has the
option to convert the principal and interest into shares
of common stock. During the six months ended October 31,
2002, the
note was paid in full (unaudited). - 5,000
Unsecured note to a shareholder/director/prior officer of the
Company, interest payable at 7% per annum, and due in
January 2002. The holder of the note has the option to
convert the principal and interest into shares of common
stock. During the six months ended October 31,
2002, the note was paid in full (unaudited). - 5,000
--------------- ----------------
10,400 35,400
Less current portion 10,400 35,400
--------------- ----------------
Long-term portion $ - $ -
=============== ================
F-24
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Employment Agreement
--------------------
In March 2002, the Company entered into an employment agreement with
its Chief Scientist/Chairman of the Board. Major terms of the
agreement are as follows:
o The Company must pay a signing bonus of $100,000, of which
$50,000 (unaudited) was paid during the six months ended October
31, 2002.
o The Company must pay an annual bonus, which must not be less than
20% of the total amount of bonuses paid to officers of the
Company. If the pretax profit in any fiscal year exceeds $0.20
per share, then his bonus in that year must not be less than
$50,000.
o The Company granted options to purchase 2,482,011 shares of
common stock at an exercise price of $0.134, vesting immediately,
and which are exercisable from time to time within the period
ending November 30, 2008.
o The Company will grant its Chief Scientist/Chairman of the Board
annually during the term of five years 1% per annum of the
Company's stock issued and outstanding with an exercise price of
the average price for the preceding 30 days. He must not receive
less than 10% of the total number of options granted by the
Company for services in that year. As of October 31, 2002, the
Company is required to grant options to purchase 405,492
(unaudited) shares of common stock.
o The Company will provide its Chief Scientist/Chairman of the
Board a car, pay his and his family's health insurance, provide
life and disability insurance and will reimburse him for
reasonable out-of-pocket expenses, not to exceed $20,000 in any
one year, and reimburse him for any personal tax liabilities
arising up to $75,000. During the six months ended October 31,
2002, the Company paid $17,500 (unaudited) for an automobile
deposit on behalf of its Chief Scientist/Chairman of the Board.
o The Company must pay a base salary payable in cash as follows:
o January 1, 2002 to December 31, 2002 $125,000 per year
o January 1, 2003 to December 31, 2003 $137,500 per year
o January 1, 2004 to December 31, 2004 $151,250 per year
o January 1, 2005 to December 31, 2005 $166,375 per year
o January 1, 2006 to December 31, 2006 $283,013 per year
o In December 2002, the Company increased its Chief
Scientist/Chairman of the Board's base salary to $175,000
(unaudited) per year, effective November 2002.
o If the agreement is terminated by the Company without cause, the
Company must pay its Chief/Scientist/Chairman of the Board, on
the termination date, an amount equal to two years of the minimum
annual base salary.
F-25
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (unaudited)
---------------------------------
In September 2002, the Company entered into a three-year employment
agreement with its President/Chief Executive Officer. Major terms of
the agreement are as follows:
o The Company must pay a base salary as follows:
o $135,000 per year
o $175,000 per year when the Company receives new revenue
and/or new financing in excess of $2,000,000
o $250,000 per year when the Company receives new revenue
and/or new financing in excess of $4,000,000
o The officer is entitled to a bonus equal to $250,000 once the
Company achieves two consecutive quarters of positive cash flows
from operations.
o The Company granted options to purchase 3,005,038 shares of
common stock, which represents an amount equal to 10% of the
Company's outstanding common stock on a fully diluted basis as of
September 30, 2002. Of these options, 75% vest 1/12 on a
quarterly basis over the next 36 months. The remaining 25% vest
on the earlier of a) the date when the Company's closing price of
its common stock has equaled or exceeded $1.75 for 90 consecutive
calendar days, b) the date immediately preceding a sale of the
Company for $1.75 per share of common stock or more, or c) if the
Company's common stock ceased to be publicly traded on the date
following the closing of an offering at a deemed price per share
of common stock of $1.75 or more.
The exercise price is fixed six months after September 25, 2002
at the lesser of a) $1 per share, b) for any offering of
preferred or common stock that closes within six months from
September 25, 2002, the following percentage of price per unit:
(i) for preferred with warrants - 70%, (ii) for preferred without
warrants - 80%, (iii) for common with warrants - 90%, (iv) for
common without warrants - 100%. The Company granted the stock
options below the fair market on the date of grant. As none of
the stock options vested as of October 31, 2002, the Company
recorded deferred compensation of $3,305,542, which will be
expensed as the options vest.
o If the agreement is terminated without cause, the Company must
pay its President/Chief Executive Officer an amount equal to the
executive's annual salary, payable in 12 monthly installments
following the termination date, and health insurance benefits for
12 months.
F-26
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (unaudited) (Continued)
---------------------------------------------
In February 2002, Microdevices entered into a one-year employment
agreement with its Vice President/Corporate Secretary. In May 2002,
the Company assumed the employment agreement. Under the agreement, the
Company will pay a salary of $91,000 per year, a car allowance of $100
per week, a quarterly bonus of 5,589 shares of the Company's common
stock, starting May 2002, and a non-qualified stock option to purchase
89,410 shares of common stock at $0.157 per share, vesting immediately
and having a five-year term. As of October 31, 2002, the 11,178 shares
of common stock issued under this agreement were valued at $21,350,
which approximates the fair value of the shares.
Consulting Agreements (unaudited)
---------------------------------
In July 2002, the Company entered into a three-year consulting
agreement, whereby the consultant will assist the Company with
business development, product and corporate image advertising, and
access to government grants and purchases. The Company will pay the
consultant $20,000 per month, plus 5% of any gross revenues collected
in cash from government grants or business and other third-party
business that the consultant produces for the Company. Furthermore,
the consultant was issued options to purchase 1,000,000 shares of
common stock. Of these options, 500,000 vested immediately, and the
remaining 500,000 vest one year after the Company's Minisenzor product
is operational and ready to be shown. The stock options have an
exercise price of $1 per share and are exercisable for six years from
the date of grant.
The Company recorded deferred compensation of $761,007 related to the
vested options, which will be amortized over three years, which
represents the term of the consulting agreement. During the six months
ended October 31, 2002, $84,556 was expensed and is included in
general and administration expenses on the accompanying statement of
operations.
In August 2002, the Company entered into a one-year consulting
agreement with an investor and media relations firm. Under the terms
of the agreement, the Company will pay $10,000 per month, plus
approved expenses. In addition, upon execution of the agreement, the
Company issued a warrant to purchase 400,000 shares of common stock,
vesting immediately at an exercise price of $2 per share, exercisable
for two years. The warrants were valued at $187,163, of which $46,791
was expensed and is included in general and administration expenses in
the accompanying statement of operations. The remaining balance of
$140,372 is included in other current assets, which will be amortized
over the term of the consulting agreement. Either party may terminate
the agreement six months after the commencement of this agreement.
In September 2002, the Company entered into a one-year consulting
agreement with its prior Chief Executive Officer. Under the terms of
the agreement, the Company will pay $5,000 per month, plus
out-of-pocket expenses.
Lease Agreement (unaudited)
---------------------------
In September 2002, the Company entered into a three-year operating
lease agreement for its corporate offices in Irvine, California. The
lease provides for monthly rent of $8,000, expiring in October 2005.
F-27
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Placement Agent Agreement (unaudited)
-------------------------------------
In August 2002, the Company entered into an exclusive, one-year
agreement with a placement agent to arrange the sale of debt or equity
securities. Major terms of the agreement are as follows:
o Upon execution of the agreement, the Company issued warrants to
purchase 100,000 shares of common stock, exercisable at $0.01 per
share. The warrants vest immediately and expire five years from
date of grant.
o The Company paid a placement fee equal to 8% of any gross
proceeds received by the Company.
o The Company issued a warrant to purchase 10% of the amount of
securities issued to investors. The exercise price of the warrant
will be equal to the price at which the security was issued. The
warrant vests immediately and expires five years from the date of
grant. Upon the closing of the preferred and common stock private
placements in October 2002, the Company issued a warrant to
purchase 117,994 and 161,994 shares of common stock,
respectively, at an exercise price of $1.15 per share and $1.35
per share, respectively.
o In December 2002, to cancel the remainder of the terms of this
agreement, the Company issued a warrant to purchase 150,000
shares of common stock. The warrant vests immediately, with an
exercise price of $2.48 per share, and expires five years from
the date of grant.
Delinquent Tax Returns
----------------------
The Company has not filed its federal and state tax returns for the
years ended April 30, 1995 through 2001; however, management reports
that the minimum tax for the state of California has been paid. While
the estimated tax owed has been accrued, the Company will not be in
compliance until such reporting is made. The Board of Directors has
approved the Company filing these tax returns.
In addition, the Company has not filed certain of its 1099's, W-2's,
and payroll tax returns for the calendar years ended December 31, 1995
through 2001. As of April 30, 2002 and October 31, 2002, the Company
has accrued $350,000 and $350,000 (unaudited), respectively, for
payroll taxes, penalties, and interest. The Board of Directors has
approved the Company filing these items.
F-28
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
----------
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material effect on the
Company's financial position or results of operations.
Furthermore, the Company is being sued by a prior officer of the
Company for failure to pay wages, breach of contract, false
representations, and fraud. In January 2003, the Company entered into
a settlement agreement with this prior officer. The settlement
agreement provides that the Company will pay its prior officer
$50,000, plus issue to the prior officer 80,000 shares of the
Company's restricted common stock. The shares are to be included in
the next registration statement filed by the Company. If the 80,000
shares are not sold through the registered offering before April 1,
2003, then the prior officer has the option of tendering the shares to
the Company and demanding payment of $125,000. Furthermore, if the
prior officer receives less than $125,000 upon the sale of the 80,000
shares within 30 days of the effective date of the registration
statement, he is entitled to payment of the difference between
$125,000 and the amount he received from the sale of the stock.
Minority Shareholders
---------------------
Microdevices has 20,540 minority shares issued and outstanding. The
Company has agreed that in the event of any merger or other
consolidation of Microdevices with HiEnergy, each remaining
Microdevices shareholder will receive the greater of the market value
of his/her Microdevices shares or shares in the Company on the same
terms as the voluntary share exchange. If all minority shareholders
convert, the Company will be required to issue 459,222 additional
shares of common stock to the minority shareholders.
Warrant and Option Holders
--------------------------
Microdevices has granted stock options and warrants to purchase 12,365
and 32,247 shares, respectively, of common stock. These stock options
and warrants are exercisable at $3.50 per share. If the stock option
and warrant holders exercise their stock options and warrants, the
Company has agreed to allow these stock option and warrant holders to
voluntarily exchange their shares in Microdevices for shares in
HiEnergy at an exchange rate of 22.3524 per share (or $0.157 per
share). If these stock option and warrant holders exercise and convert
their shares, the Company will be required to issue 997,272
additional shares of common stock to the stock option and warrant
holders.
During the six months ended October 31, 2002, 2,047 (unaudited) of the
above stock options were exercised via a cash payment of $7,164
(unaudited), or $3.50 per share. The Company has agreed to exchange
these shares in Microdevices for shares in HiEnergy at an exchange
rate of 22.3524 per share, or 45,755 (unaudited) shares of common
stock.
During the six months ended October 31, 2002, options to purchase
4,000 (unaudited) shares of Microdevices' common stock were assumed by
the Company at an exchange rate of 22.3524 per share (or $0.157 per
share). Therefore, the Company issued options to purchase 89,410
shares of its common stock at an exercise price of $0.157 per share.
F-29
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - REDEEMABLE, CONVERTIBLE PREFERRED STOCK (UNAUDITED)
In August 2002, the Board of Directors approved an amendment to the
Company's Articles of Incorporation to establish Series A convertible
preferred stock (the "Series A"), par value $0.001 per share. The
Company is authorized to issue 345 shares of the Series A. Each share
is convertible on either of these events a) any time at the option of
the holder at $1.15 per share or b) mandatorily convertible two years
following the issuance date at $1.15 per share. Under certain
circumstances, the conversion price is subject to adjustment.
Furthermore, upon a certain major transaction or triggering event, the
holder of the Series A has the right to require the Company to redeem
all or a portion of the Series A at a price per share equal to the
liquidation preference, plus any accrued but unpaid dividends and
liquidated damages.
The liquidation preference is $10,000 per share. The holders of the
Series A are entitled to receive, when and as declared by the Board of
Directors, dividends at a rate of 8%, or $800 per share in advance for
each of the first two years. The dividends may be paid in cash or
common stock at the election of the Board of Directors. The Series A
has certain class voting rights and general voting rights.
In October 2002, the Company sold 98 shares of the Series A for net
cash proceeds of $800,399. At the time of issuance, the conversion
price of the preferred stock was less than the fair market value of
the common stock. Since the Series A was convertible immediately, the
Company recorded a beneficial conversion feature upon issuance of
$767,431.
As of December 2002, the Company may be in default with a triggering
event; therefore, the holders of the Series A may be able to request
the Company to redeem their shares in cash at $10,000 per share. If
all holders were to request redemption, the Company would be required
to make a cash payment of $979,300.
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Issued for Cash
----------------------------
During the years ended April 30, 2002 and 2001, the six months ended
October 31, 2002 and 2001, and the period from August 21, 1995
(inception) to October 31, 2002, the Company issued 712,071, 465,437,
0 (unaudited), 344,255 (unaudited), and 2,677,497 (unaudited) shares,
respectively, of common stock in exchange for cash of $181,569,
$109,730, $0 (unaudited), $95,000 (unaudited), and $882,727
(unaudited), respectively.
Common Stock Issued for Services Rendered
-----------------------------------------
During the years ended April 30, 2002 and 2001, the six months ended
October 31, 2002 and 2001, and the period from August 21, 1995
(inception) to October 31, 2002, the Company issued 5,059,560,
371,035, 0 (unaudited), 1,051,318 (unaudited), and 11,702,703
(unaudited) shares, respectively, of common stock in exchange for
services rendered valued at the fair market value of the stock issued
of $232,170, $36,468, $0 (unaudited), $47,030 (unaudited), and
$428,950 (unaudited), respectively.
F-30
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
Notes Payable Converted into Common Stock
-----------------------------------------
During the years ended April 30, 2002 and 2001, the six months ended
October 31, 2002 and 2001 and the period from August 21, 1995
(inception) to October 31, 2002, the Company issued 0, 0, 37,898
(unaudited), 0 (unaudited), and 37,898 (unaudited) shares,
respectively, of common stock for principal and accrued interest of
$0, $0, $37,896 (unaudited), $0 (unaudited), and $37,896 (unaudited),
respectively.
Common Stock Issued in Private Placement
----------------------------------------
In April 2002, the Company completed its first closing of its private
placement, whereby 1,225,000 shares of common stock were issued in
exchange for cash of $1,225,000. The private placement offering was
originally slated to close at the same time as the voluntary share
exchange. HiEnergy extended the term of the offering and increased the
size to a maximum of 2,000,000 shares of common stock at $1 per share.
In June 2002, the Company completed its second closing of its private
placement, whereby 500,000 shares (unaudited) of common stock were
issued in exchange for cash of $500,000 (unaudited). The private
placement has been closed.
In October 2002, the Company completed a private placement, issuing
1,349,934 shares (unaudited) of common stock in exchange for net cash
proceeds of $1,625,614 (unaudited), of which $184,000 (unaudited) was
recorded as a subscription receivable and collected in November 2002.
Common Stock Issued for Dividends (unaudited)
---------------------------------------------
In October 2002, the Company issued 68,150 shares of common stock for
$78,360 of dividends accrued on the Series A.
Common Stock Issued for Employee Bonus (unaudited)
--------------------------------------------------
The Company issued 11,178 shares of common stock to an employee of the
Company in lieu of a cash bonus. The shares were valued at $21,350,
which approximates the fair value of the shares.
Accounts Payable Converted into Common Stock (unaudited)
--------------------------------------------------------
During the years ended April 30, 3002 and 2001, the six months ended
October 31, 2002 and 2001, and the period from August 21, 1995
(inception) to October 31, 2002, the Company converted accounts
payable due to a consultant of $0, $0, $50,000 (unaudited), $0
(unaudited), and $50,000 (unaudited), respectively, into options to
purchase 0, 0, 45,454 (unaudited), 0 (unaudited), and 45,454
(unaudited) shares, respectively, of common stock. The options are
exercisable at $1 per share, vest over a one-year period, and expire
in September 2012.
Stock Splits
------------
In September 1998 and May 1999, the Company effectuated 2-for-1 stock
splits. All share and per share data have been retroactively restated
to reflect these stock splits.
F-31
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
Stock Options and Warrants
--------------------------
The following summarizes the stock options transactions:
Weighted- Weighted- Weighted-
Average Stock Average Average
Stock Granted Options Granted Granted
Options Price Non- Price Total Price
Employee per Share Employee per Share Options per Share
------------- ------------- -------------- ------------- ------------- --------------
Outstanding,
August 21,
1995
(inception) to
April 30,
2001 - $ - - $ - - $ -
Granted 2,482,011 $ 0.13 - $ - 2,482,011 $ 0.13
------------- -------------- -------------
Outstanding,
April 30,
2002 2,482,011 $ 0.13 - $ - 2,482,011 $ 0.13
Granted
(unaudited) 3,005,038 $ 1.00 1,045,454 $ 1.00 4,050,492 $ 1.00
Transferred
from
subsidiary
(unaudited) 89,410 $ 0.16 - $ - 89,410 $ 0.16
------------- -------------- -------------
Outstanding,
October
31, 2002
(unaudited) 5,576,459 $ 0.60 1,045,454 $ 1.00 6,621,913 $ 0.66
============= ============== =============
Exercisable,
October
31, 2002
(unaudited) 2,571,421 $ 0.13 500,000 $ 1.00 3,071,421 $ 0.28
============= ============== =============
F-32
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
Stock Options and Warrants (Continued)
--------------------------------------
The following summarizes the warrant transactions:
Weighted-
Average
Warrants Granted Price
Non-Employee per Share
Outstanding, August 21, 1995 (inception) to April 30, 2002 - $ -
Granted (unaudited) 1,815,686 $ 1.68
---------------
Outstanding, October 31, 2002 (unaudited) 1,815,686 $ 1.68
===============
Exercisable, October 31, 2002 (unaudited) 1,815,686 $ 1.68
===============
NOTE 10 - FINANCING EXPENSE - RELATED PARTY (UNAUDITED)
In May 2002, the Company issued warrants to purchase 150,000 shares of
common stock to a shareholder/prior director of the Company. The
warrants vest immediately, are exercisable at $1 per share, and expire
on May 31, 2005. Since the Company was in default on the note payable
for $150,000 to this shareholder/prior officer/director of the
Company, the Company granted these warrants. Accordingly, the Company
recorded financing expense of $223,710 during the six months ended
October 31, 2002.
NOTE 11 - INCOME TAXES
The following table presents the current and deferred income tax
provision for federal and state income taxes for the years ended April
30, 2002 and 2001:
2002 2001
--------------- ----------------
Current
Federal $ - $ -
State 1,934 2,546
--------------- ----------------
1,934 2,546
--------------- ----------------
Deferred
Federal - -
State - -
--------------- ----------------
- -
--------------- ----------------
Provision for income taxes $ 1,934 $ 2,546
=============== ================
F-33
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The provision for income taxes differs from the amount that would
result from applying the federal statutory rate for the years ended
April 30, 2002 and 2001 as follows:
2002 2001
--------------- ----------------
Statutory regular federal income benefit rate 34.00% 34.00%
State taxes 5.74 5.70
Change in valuation allowance (39.77) (39.19)
Other (0.09) (0.78)
----------- ------------
Total (0.12)% (0.27)%
=========== ============
The tax effects of temporary differences which give rise to the
deferred tax provision at April 30, 2002 consisted of the following:
Deferred tax assets
Compensation $ 150,000
Net operating loss carryforwards 1,012,000
----------------
Total deferred tax assets 1,162,000
Deferred tax liability
State taxes (45,000)
----------------
1,117,000
Less valuation allowance 1,117,000
----------------
Net deferred tax asset $ -
================
As of April 30, 2002, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $2,360,000
each, which expire through 2022. The utilization of net operating loss
carryforwards may be limited due to the ownership change under the
provisions of Internal Revenue Code Section 382 and similar state
provisions.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the years ended April 30, 2002 and 2001, the six months ended
October 31, 2002 and 2001, and the period from August 21, 1995
(inception) to October 31, 2002, the Company purchased $0, $0, $4,767
(unaudited), $0 (unaudited), and $4,767 (unaudited), respectively, of
property and equipment from a Board member.
See Notes 5, 6, and 10 for related party transactions.
F-34
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED)
Consulting Agreement
--------------------
In November 2002, the Company entered into a four-month consulting
agreement with a public relations firm. Under the terms of the
agreement, the Company will pay $12,500 per month, plus out-of-pocket
expenses.
Effective February 21, 2003, the Company terminated by mutual written
consent the consulting agreement with its prior Chief Executive
Officer.
Placement Agent Agreement
-------------------------
In December 2002, the Company entered into an exclusive one-year
agreement with a placement agent to arrange for the sale of debt or
equity securities. Major terms of the agreement are as follows:
o Upon execution of the agreement, the Company paid a retainer fee
of $25,000 and will pay an additional $25,000 on March 1, 2003.
o The Company will pay a placement fee equal to 8% of any gross
proceeds received by the Company.
o The Company will issue warrants to purchase 10% of the amount of
securities issued to investors. The exercise price of each
warrant will be equal to the price at which the corresponding
security was issued. The warrants vest immediately, expire five
years from the date of grant, and include piggyback registration
rights.
o The placement agent has the right to participate in any equity
transaction under the same terms as other investors. Its
investment will be limited to 10% of the total capital raised.
o The placement agent will act as a financial advisor to the
Company with respect to any potential business combinations. Upon
the closing of such business combination, the Company will pay a
minimum transaction fee of $250,000.
Common Stock, Stock Options and Warrants
----------------------------------------
In December 2002, 47,000 stock options were exercised via a cashless
exercise, whereby the Company issued 33,909 shares of common stock.
In December 2002, the Company converted accounts payable of $15,000
into options to purchase 27,272 shares of common stock.
In February 2003, the Company, in connection with a settlement
agreement, issued warrants to purchase 80,000 shares of common stock
at $1.50 per share.
F-35
HIENERGY TECHNOLOGIES, INC.
(formerly SLW ENTERPRISES, INC.)
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002 and October 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED) (Continued)
Department of Defense Contract
------------------------------
In January 2003, the Company was selected by the Department of Defense
Small Business Innovation Research program to receive up to $780,000
in funding over two years for the testing and development of an
anti-tank landmine detection system. The Company has commenced work on
part one of the contract, valued at $415,000. The second year of the
contract, valued at approximately $365,000, is under an option that
may be exercised by the Department of Defense at the end of the first
year.
Employment Agreement
---------------------
In February 2003, the Company paid $50,000 due on a promissory note to
its Chairman and issued 416,712 stock options in connection with his
employment agreement.
F-36
Subject to Completion - February 25, 2003
PROSPECTUS
HIENERGY TECHNOLOGIES, INC.
8,055,034 SHARES
COMMON STOCK
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or a
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made after the date of this prospectus shall create an implication that
the information contained in it or the affairs of HiEnergy Technologies have not
changed since the date of this prospectus.
Until [ _____ ] (90 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
THE DATE OF THIS PROSPECTUS IS [_______________], 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
In accordance with Delaware General Corporation Law, Section 145, Article XI of
our certificate of incorporation, filed as Exhibit 3.1 hereto, provides that the
company will indemnify its directors to the full extent permitted by applicable
corporate law, except that such indemnity will not apply if the director did not
(a) act in good faith and in a manner the director reasonably believed to be in
or not opposed to the best interests of the company, and (b) with respect to any
criminal action or proceeding, have reasonable cause to believe the director's
conduct was unlawful. The certificate of incorporation also provides that the
company will advance expenses for such persons pursuant to the terms set forth
in the company's bylaws, or in a separate board of directors resolution or
contract. Delaware law requires a corporation to indemnify any such person who
is successful on the merits or defense of such action against costs and expenses
actually and reasonably incurred in connection with the action.
Article X of our bylaws, filed as Exhibit 3.2 hereto, provides that the company
will indemnify its officers and directors for costs and expenses incurred in
connection with the defense of actions, suits, or proceedings against them on
account of their being or having been directors or officers of the company,
absent a finding of negligence or misconduct in office. Section 10.6 of our
bylaws, as well as Section 11.3 of our certificate of incorporation, also
permits the company to maintain insurance on behalf of our officers, directors,
employees and agents against any liability asserted against and incurred by that
person whether or not the company has the power to indemnify such person against
liability for any of those acts.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of HiEnergy Technologies pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth estimated expenses over the course of the
offering. Our estimates are subject to change, except for the SEC registration
fee.
-------------------------------------------------------------------- --------------------
Item Amount ($)
-------------------------------------------------------------------- --------------------
SEC registration fee $ 4,100
-------------------------------------------------------------------- --------------------
NASD Fees ---
-------------------------------------------------------------------- --------------------
Accounting fees and expenses 50,000
-------------------------------------------------------------------- --------------------
Legal fees and expenses 100,000
-------------------------------------------------------------------- --------------------
Blue Sky fees and expenses 10,000
-------------------------------------------------------------------- --------------------
Printing costs 5,000
-------------------------------------------------------------------- --------------------
Miscellaneous fees and expenses 6,500
-------------------------------------------------------------------- --------------------
Total $ 175,600
-------------------------------------------------------------------- --------------------
The selling security holders will pay for their own legal expenses in connection
with the offering.
Item 26. Recent Sales of Unregistered Securities
Set forth below is information regarding the issuance and sales of our
securities without registration during the past three years.
o In February 2003, we issued warrants to purchase 40,000 shares of common
stock, with an exercise price of $1.50 and a term of three years, to
the two principals of Columbus Group/cFour Partners, an employment
placement agency, as compensation for services rendered to HiEnergy
Technologies. We believe the issuance of securities was exempt under Rule
506 of Regulation D and/or Section 4(2) under the Securities Act.
II-1
o In January 2003, we issued 80,000 shares of common stock to Keith Cowan, a
former director and executive officer of HiEnergy Microdevices, in
connection with a settlement agreement. Mr. Cowan is an accredited
investor. We believe the issuance of securities was exempt under Rule 506
of Regulation D and/or Section 4(2) under the Securities Act.
o As an accommodation to adjust amounts owing to QED Law Group, P.L.L.C., on
December 19, 2002, we issued stock options to Shea Wilson and Derek
Woolston to purchase an aggregate of 27,272 shares of common stock at $2.24
per share. December 19, 2002 was the third trading day following our filing
of a report on Form 10-QSB for the quarterly period ended October 31, 2002.
The closing sales price on December 19, 2002 was $2.79. We believe the
issuance of securities was exempt under Rule 506 of Regulation D and/or
Section 4(2) under the Securities Act.
o In December 2002, we issued warrants to purchase 250,000 shares of common
stock, with an exercise price of $2.12 and a termination date of May 1,
2007, to Wolfe Axelrod Weinberger Associates in connection with the
termination of a consulting agreement with HiEnergy Technologies. We
believe the issuance of securities was exempt under Rule 506 of Regulation
D and/or Section 4(2) under the Securities Act.
o In October 2002, we issued 1,349,934 shares of common stock and 269,990
warrants in connection with a private placement offering of our common
stock at $1.35 per unit for aggregate gross proceeds from the offering of
approximately $1.8 million. The warrants have an exercise price of $2.50
and a term of 3 years. An offering memorandum was distributed to each
investor. Fees consisting of approximately $146,000 and warrants to
purchase approximately 162,000 shares of common stock, with an exercise
price of $1.35 per share and a term of five years, were paid to H.C.
Wainwright & Co., Inc., our placement agents, in connection with this
offering. All of the investors who purchased shares of common stock through
the private placement were accredited investors. We believe that the offer
and sale of the securities through the private placement offering were
exempt from registration under Rule 506 of Regulation D and/or Section 4(2)
under the Securities Act. In addition, for those investors who reside
outside the United States and are not United States citizens, comprising
$887,350 of the offering, we believe that the offer and sale of securities
was exempt pursuant to Regulation S under the Securities Act.
o In October 2002, we issued approximately 98 shares of Series A Convertible
Preferred Stock, approximately 68,000 shares of common stock, and
approximately 256,000 warrants in connection with the closing of a private
placement offering of our Series A Convertible Preferred Stock at a face
value of $10,000 per share for aggregate gross proceeds of approximately
$930,000. The shares of Series A Preferred are convertible into common
stock at an exchange rate of $1.15 per share. The warrants have an exercise
price of $1.50 per share and a term of two years. On December 9, 2002, an
additional 110,620 warrants were issued to Richard Melnick, one of the
Series A Preferred investors, in connection with consulting services
provided to HiEnergy Technologies by Mr. Melnick. Those warrants have the
same terms as the warrants previously issued to the Series A Preferred
investors. Fees consisting of approximately $74,000 and warrants to
purchase approximately 118,000 shares of common stock, with an exercise
price of $1.15 per share and a term of five years, were paid to H.C.
Wainwright & Co., Inc., our placement agents, in connection with this
offering. All of the investors who purchased Series A Preferred shares and
warrants through the private placement were accredited investors. We
believe that the offer and sale of the securities through the private
placement offering were exempt from registration under Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act. In addition, for
those investors who reside outside the United States and are not United
States' citizens, comprising $190,000 of the offering, we believe that the
offer and sale of securities were exempt pursuant to Regulation S under the
Securities Act.
o In September 2002, we issued a stock option to Tom Pascoe, our President
and CEO and a director, to purchase 3,005,038 shares of common stock in
connection with his employment agreement with us. Mr. Pascoe is an
accredited investor. We believe the issuance of securities was exempt under
Rule 506 of Regulation D and/or Section 4(2) under the Securities Act.
o As an accommodation to adjust amounts owing to QED Law Group, P.L.L.C., on
September 25, 2002, we issued stock options to Shea Wilson and Derek
II-2
Woolston to purchase an aggregate of 45,454 shares of common stock at $1.00
per share. September 25, 2002 was the third trading day following our
filing of a report on Form 10-QSB for the quarterly period ended July 31,
2002. The closing sales price on September 25, 2002 was $2.10. We believe
the issuance of securities was exempt under Rule 506 of Regulation D and/or
Section 4(2) under the Securities Act.
o In September 2002, we issued a stock option to Michal Levy, our Corporate
Secretary and Vice President, to purchase 89,410 shares of common stock at
$0.157 per share pursuant to her employment agreement with us. In September
2002, we also issued 11,178 shares of common stock to Ms. Levy pursuant to
her employment agreement with us. Ms. Levy is an accredited investor. We
believe the issuances of securities were exempt under Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act.
o In August 2002, we issued warrants to purchase 100,000 shares of common
stock, with an exercise price of $0.01 per share and a term of five years,
to H.C. Wainwright & Co., Inc. as a retainer fee in connection with a
placement agent letter agreement. In December 2002, we issued warrants to
purchase 150,000 shares of common stock, with an exercise price of $2.48
per share and a term of five years, to H.C. Wainwright & Co. in connection
with the termination of the placement agent letter agreement. We believe
the issuance of securities was exempt under Rule 506 of Regulation D and/or
Section 4(2) under the Securities Act.
o In August 2002, we issued a warrant to Primoris Group Inc. to purchase
400,000 shares of common stock at $2.00 per share with a term of 2 years in
connection with a consulting agreement. Primoris Group Inc. provides
investor relations services to us. Since Primoris Group Inc. is an Ontario
corporation and has its headquarters in Toronto, Ontario, we believe the
issuance of securities was exempt from registration under Regulation S
under the Securities Act.
o In July 2002, we issued 11,678 shares of common stock, par value $0.001 per
share, to Richard Alden, a director of HiEnergy Technologies, valued at
$1.00 per share to retire the principal and interest owing to Mr. Alden on
a note payable totaling $11,678. The note is considered paid in full. In
July 2002, we also issued 15,000 shares of common stock, par value $0.001
per share, to Rimar Investments, Inc., a California corporation, valued at
$1.00 per share to retire the principal and interest owing to Rimar
Investments, Inc. on a note payable totaling $15,000. The note is
considered paid in full. Mr. Alden is one of three stockholders and
directors of Rimar Investments, Inc. We believe the issuances of stock to
Mr. Alden and to Rimar Investments, Inc. were exempt from registration
pursuant to Rule 506 of Regulation D and/or Section 4(2) under the
Securities Act. Mr. Alden and Rimar Investments, Inc. are accredited
investors.
o In July 2002, we issued and granted a non-qualified stock option to Isaac
Yeffet to purchase up to 1,000,000 shares of our common stock with an
exercise price of $1.00 per share. The stock option was issued in
connection with a consulting agreement between Yeffet Security Consultant,
Inc., of which Mr. Yeffet is the sole principal, and HiEnergy Technologies.
One half of the shares are exercisable immediately and the other half are
exercisable beginning one year after our Minisenzor product is operational
and ready to be shown for approval to appropriate authorities. The stock
option agreement was amended and restated in September 2002 to add a
cashless exercise provision. We believe the issuance of the stock option to
Mr. Yeffet was exempt from registration pursuant to Rule 506 of Regulation
D and/or Section 4(2) under the Securities Act. Mr. Yeffet is an accredited
investor.
o In July 2002, we issued 11,218 shares of common stock, par value $0.001 per
share, to Mr. Al Zuhair, a director of HiEnergy Technologies, valued at
$1.00 per share to retire the principal and interest owing to Mr. Al Zuhair
on two notes payable in the amounts of $5,780 and $5,438, respectively. The
notes are considered paid in full. We believe the issuance of the stock to
Mr. Al Zuhair was exempt from registration pursuant to Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act. Alternatively,
the offer and sale of the stock may be exempt pursuant to Regulation S
under the Securities Act. Mr. Al Zuhair is an accredited investor and
resides outside of the United States.
o In May 2002, we issued a warrant to Rheal Cote, a former director, to
purchase 150,000 shares of common stock at an exercise price of $1.00 and
with a term of three (3) years. Mr. Cote is an accredited investor. We
II-3
believe that the issuance of the warrant and underlying common stock was
exempt from registration under Rule 506 of Regulation D and/or Section 4(2)
under the Securities Act. Since Mr. Cote is a Canadian citizen, we believe
the issuance of securities was also exempt from registration under
Regulation S under the Securities Act.
o In May 2002, we agreed to issue a warrant to Wolfe Axelrod Weinberger
Associates LLC to purchase 250,000 shares of common stock at an exercise
price of $2.09 and with a term of five (5) years. The issuance of the
Warrant is subject to resolution of a contract dispute and board of
directors' approval. We believe that the issuance of the warrant and
underlying common stock will be exempt from registration under Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act.
o In April 2002, we issued 1,225,000 shares of common stock in connection
with the initial closing of a private placement offering of our common
stock at $1.00 per share. The initial closing was contingent upon closing
the reverse acquisition of HiEnergy Microdevices by SLW Enterprises through
the voluntary share exchange. In June 2002, we issued an additional 500,000
shares of common stock at $1.00 per share in connection with the final
closing of the private placement for aggregate gross proceeds of
$1,725,000. An offering memorandum was distributed to each prospective
investor. All of the investors who purchased shares of common stock through
the private placement were accredited investors. We believe that the
private placement offering was exempt under Rule 506 of Regulation D and/or
Section 4(2) under the Securities Act. In addition, for those investors who
reside outside the United States and are not United States' citizens,
comprising $750,000 of the offering, we believe that the offer and sale of
common stock was exempt pursuant to Regulation S under the Securities Act.
o In April 2002, we issued 14,380,200 shares of common stock to the
stockholders of HiEnergy Microdevices in connection with a voluntary share
exchange offering between SLW Enterprises and the stockholders of HiEnergy
Microdevices. An offering memorandum was distributed to all of the HiEnergy
Microdevices stockholders 20 business days before the offering closed. We
believe that the private placement offering was exempt under Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act. In addition, for
those HiEnergy Microdevices stockholders who reside outside the United
States and are not United States citizens, comprising 1,444,606 shares of
the offering, we believe that the offer and sale of common stock was exempt
pursuant to Regulation S under the Securities Act.
o In April 2002, SLW Enterprises' board of directors authorized and approved
the grant and issuance of a stock option to Dr. Bogdan Maglich to purchase
2,482,011 shares of common stock at an exercise price of $0.134 per share.
The option will terminate on November 30, 2008. The stock options were
granted and issued in exchange for Dr. Maglich's agreement to cancel
111,040 HiEnergy Microdevices stock options issued to him prior to the
acquisition of HiEnergy Microdevices by HiEnergy Technologies. The
2,482,011 shares underlying the stock option were calculated at the same
rate as the voluntary share exchange transaction, or 22.3524 per HiEnergy
Microdevices share and the option price was adjusted accordingly from $3.00
per share to $0.134 per share. We believe that the offer and sale of the
stock options and underlying common stock was exempt from registration
under Rule 506 of Regulation D and/or Section 4(2) under the Securities
Act. Dr. Maglich is an executive officer and director of both HiEnergy
Microdevices and HiEnergy Technologies. The stockholders of HiEnergy
Technologies, excluding Dr. Maglich and shares beneficially attributed to
him, ratified the grant of the stock option at our Annual Meeting of
Stockholders held on October 10, 2002.
o In April 2000, SLW Enterprises issued 1,600,000 shares of common stock to
Suzanne L. Wood, the company's founder and sole director and officer at the
time, in satisfaction of expenses paid on behalf of the company by Ms. Wood
in the amount of $16,000. We believe the issuance of the shares was exempt
from registration under Rule 506 of Regulation D under Sections 3(b) and
4(2), respectively, of the Securities Act and/or under Regulation S of the
Securities Act because Ms. Wood resides outside the U.S. and is a Canadian
citizen.
II-4
Item 27. Exhibits
Exhibit
Number Description
- ------------------ ---------------------------------------------------------------------------------------------------
2.1 Voluntary Share Exchange Agreement dated March 22, 2002 between the Registrant and HiEnergy
Microdevices, Inc. (1)
2.2 Agreement and Plan of Merger dated October 18, 2002 by and between the Registrant and its wholly
owned subsidiary, HiEnergy Technologies, Inc., a Delaware corporation (4)
3.1 Certificate of Incorporation filed on October 17, 2002 (4)
3.2 Bylaws adopted on October 18, 2002 (4)
4.1 Specimen Common Stock Certificate (4)
4.2 Specimen Series A Convertible Preferred Stock Certificate (4)
4.3 Designation of Relative Rights and Preferences of the Series A Convertible Preferred Stock (see
Exhibit 3.1)
4.4 Form of Registration Rights Agreement between the Registrant and each June 2002 Private Placement
Common Stock investor (4)
4.5 Registration Rights Agreement dated July 12, 2002 between the Registrant and Isaac Yeffet (4)
4.6 Registration Rights Agreement dated August 19, 2002 between the Registrant and Primoris Group
Inc. (4)
4.7 Form of Registration Rights Agreement dated October 7, 2002 between the Registrant and the Series
A Convertible Preferred Stock investors (4)
4.8 Form of Warrant Certificate dated October 7, 2002 issued by the Registrant to each Series A
Convertible Preferred Stock investor (4)
4.9 Form of Registration Rights Agreement between the Registrant and each October 2002 Private
Placement Common Stock Investor (4)
4.10 Form of Warrant Certificate issued by the Registrant to each October 2002 Private Placement
Common Stock investor (4)
5.1 Opinion of QED Law Group, P.L.L.C.
10.1 Lease Agreement dated August 15, 2002 between the Registrant and Del Mar Avionics (4)
10.2 Lease Agreement dated December 13, 1996 between HiEnergy Microdevices, Inc. and TESLAco (2)
10.3 Award Contract dated February 12, 2002 by the U.S. Department of Defense to the Registrant (2)
10.4 Employment Agreement dated March 6, 2002 between HiEnergy Microdevices, Inc. and Dr. Bogdan C.
Maglich (2)
10.5 Nonqualified Stock Option dated April 24, 2002 issued by the Registrant to Bogdan C. Maglich (2)
10.6 Assignment and Assumption of Employment Agreement dated July 6, 2002 by and among the Registrant,
HiEnergy Microdevices, Inc. and Dr. Bogdan C. Maglich (2)
II-5
10.7 Warrant Certificate dated June 3, 2002 issued by the Registrant to Rheal Cote (2)
10.8 Consulting Agreement dated July 12, 2002 between the Registrant and Yeffet Security Consultant,
Inc. (2)
10.9 Amended and Restated Nonqualified Stock Option dated July 12, 2002 issued by the Registrant to
Isaac Yeffet (4)
10.10 Placement Agent Letter Agreement dated August 8, 2002 between the Registrant and H.C. Wainwright
& Co., Inc. (3)
10.11 Consulting Agreement dated August 1, 2002 between the Registrant and Primoris Group Inc. (4)
10.12 Amendment No. 1 to the Consulting Agreement dated August 19, 2002 between the Registrant and
Primoris Group Inc. (4)
10.13 Nonqualified Stock Option [Warrant] dated August 1, 2002 issued by the Registrant to Primoris
Group Inc. (4)
10.14 Form of Warrant Certificate dated August 11, 2002 issued by the Registrant to H.C. Wainwright &
Co., Inc. and Assigns (5)
10.15 Letter Employment Agreement dated February 26, 2002 between HiEnergy Microdevices, Inc. and
Michal Levy (4)
10.16 Assignment, Assumption and Amendment of Employment Agreement dated September 17, 2002 by and
among the Registrant, HiEnergy Microdevices, Inc. and Michal Levy (4)
10.17 Nonqualified Stock Option dated September 17, 2002 issued by the Registrant to Michal Levy (4)
10.18 Nonqualified Stock Option dated September 25, 2002 issued by the Registrant to Chapin E. Wilson
(4)
10.19 Nonqualified Stock Option dated September 25, 2002 issued by the Registrant to Derek W. Woolston
(4)
10.20 Employment Agreement dated September 25, 2002 between the Registrant and Tom Pascoe (4)
10.21 Nonqualified Stock Option effective September 25, 2002 issued by the Registrant to Tom Pascoe (4)
10.22 Form of Series A Convertible Preferred Stock Purchase Agreement dated October 7, 2002 between the
Registrant and the investors named therein (4)
10.23 Consulting Agreement dated September 25, 2002 between the Registrant and Barry Alter (4)
10.24 Form of Subscription Agreement between the Registrant and each April 2002 Private Placement
Common Stock investor (4)
10.25 Form of Subscription Agreement between the Registrant and each October 2002 Private Placement
Common Stock investor (4)
10.26 Warrant Certificate dated December 9, 2002 issued by the Registrant to Wolfe Axelrod Weinberger
Associates LLC
II-6
10.27 Form of Warrant Certificate dated October 7, 2002 issued by the Registrant to H.C. Wainwright &
Co., Inc. and Assigns (5)
10.28 Form of Warrant Certificate dated October 31, 2002 issued by the Registrant to H.C. Wainwright &
Co., Inc. and Assigns (5)
10.29 Termination Agreement dated November 27, 2002 between the Registrant and H.C. Wainwright & Co.,
Inc.
10.30 Termination Agreement dated December 2, 2002 between the Registrant and Wolfe Axelrod Weinberger
Associates LLC
10.31 Form of Warrant Certificate dated December 9, 2002 issued by the Registrant to H.C. Wainwright &
Co., Inc. and Assigns
10.32 Placement Agent Agreement dated December 16, 2002 between the Registrant and Seabury
Transportation Advisors LLC
10.33 Nonqualified Stock Option dated December 19, 2002 issued by the Registrant to Chapin E. Wilson
10.34 Nonqualified Stock Option dated December 19, 2002 issued by the Registrant to Derek W. Woolston
10.35 Settlement Agreement dated January 15, 2003 between the Registrant and Keith Cowan
10.36 Settlement Agreement dated February 14, 2003 among the Registrant, Columbus Group/cFour
Partners, Robert W. Bellano and Shaun Corrales
10.37 Form of Warrant Certificate dated February 17, 2003 between the Registrant and the principals
of Columbus Group/cFour Partners
10.38* Award contract dated January 15, 2003 by the U.S. Department of Defense to the Registrant
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein, LLP, Independent Auditors
23.2 Consent of QED Law Group, P.L.L.C. (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on the signature page to this registration statement)
* Confidential treatment requested.
(1) Filed on May 10, 2002 as an exhibit to HiEnergy Technologies' report on Form
8-K dated April 25, 2002 and incorporated herein by reference.
(2) Filed on July 29, 2002 as an exhibit to HiEnergy Technologies' annual report
on Form 10-KSB for the fiscal year ended April 30, 2002 and incorporated herein
by reference.
(3) Filed on September 20, 2002 as an exhibit to HiEnergy Technologies'
quarterly report on Form 10-QSB for the three-month period ended July 31, 2002
and incorporated herein by reference.
(4) Filed on November 6, 2002 as an exhibit to HiEnergy Technologies'
registration statement on Form SB-2 (Registration No. 333-101055) and
incorporated herein by reference.
(5) Filed on December 16, 2002 as an exhibit to HiEnergy Technologies' quarterly
report on Form 10-QSB for the three-month period ended October 31, 2002 and
incorporated herein by reference.
II-7
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
Registration Statement; and
(iii) include any additional or changed material information on the plan of
distribution.
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. (3)
To file a post-effective amendment to remove from registration any of the
securities being registered that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act 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 Securities 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
Securities Act and will be governed by the final adjudication of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunder
duly authorized, in the City of Irvine, State of California, on the 24th day of
February, 2003.
HIENERGY TECHNOLOGIES, INC.
By: /s/ Tom Pascoe
--------------------------------------
Tom Pascoe, President and CEO
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes Bogdan C.
Maglich and Tom Pascoe, or either of them, as attorneys-in-fact with full power
of substitution, to execute in the name and on the behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments, and any related Rule 462(b) registration statement and any amendment
thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated below on the 24th day of February, 2003.
Signature Title
--------- -----
/s/ B. C. Maglich Chairman of the Board and Chief Scientific Officer
---------------------------------
Bogdan C. Maglich
/s/ Tom Pascoe Chief Executive Officer, President,
---------------------------------
Tom Pascoe Treasurer and Director (principal executive officer and
principal financial officer)
/s/ Barry Alter Director
---------------------------------
Barry Alter
/s/ Gregory F. Gilbert Director
---------------------------------
Gregory F. Gilbert
/s/ Harb S. Al Zuhair Director
---------------------------------
Harb S. Al Zuhair
II-9
EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit
Number Description
- ------------------ ---------------------------------------------------------------------------------------------------
5.1 Opinion of QED Law Group, P.L.L.C.
10.26 Warrant Certificate dated December 9, 2002 issued by the Registrant to Wolfe Axelrod Weinberger
Associates LLC
10.29 Termination Agreement dated November 27, 2002 between the Registrant and H.C. Wainwright & Co.,
Inc.
10.30 Termination Agreement dated December 2, 2002 between the Registrant and Wolfe Axelrod Weinberger
Associates LLC
10.31 Form of Warrant Certificate dated December 9, 2002 issued by the Registrant to H.C. Wainwright &
Co., Inc. and Assigns
10.32 Placement Agent Agreement dated December 16, 2002 between the Registrant and Seabury
Transportation Advisors LLC
10.33 Nonqualified Stock Option dated December 19, 2002 issued by the Registrant to Chapin E. Wilson
10.34 Nonqualified Stock Option dated December 19, 2002 issued by the Registrant to Derek W. Woolston
10.35 Settlement Agreement dated January 15, 2003 between the Registrant and Keith Cowan
10.36 Settlement Agreement dated February 14, 2003 among the Registrant, Columbus Group/cFour
Partners, Robert W. Bellano and Shaun Corrales
10.37 Form of Warrant Certificate dated February 17, 2003 between the Registrant and the principals
of Columbus Group/cFour Partners
10.38* Award contract dated January 15, 2003 by the U.S. Department of Defense to the Registrant
21.1 Subsidiaries of the Registrant (2)
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein, LLP, Independent Auditors
23.2 Consent of QED Law Group, P.L.L.C. (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on the signature page to this registration statement)
* Confidential treatment requested.