SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
Commission file number [ ]
EUROTECH, LTD.
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(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA 33-0662435
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1101 30th Street, N.W.
Suite 500
Washington, D.C. 20007-3772
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (202) 625-4382
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $0.00025 par value N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |X|
As of March 31, 1998 the Registrant had 18,932,834 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Company's Registration Statement on Form
S-1, file number 333-26673 are incorporated by reference into Part IV.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY............................................ 12
ITEM 3. LEGAL PROCEEDINGS.................................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................ 14
ITEM 6. SELECTED FINANCIAL DATA............................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................ 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 24
ITEM 11. EXECUTIVE COMPENSATION............................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
ON FORM 8-K........................................................ 32
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PART I
Item 1. Business
General
Eurotech, Ltd. (the "Company" or "Registrant") was incorporated in May,
1995 under the laws of the District of Columbia, and is a development stage,
technology transfer, holding and management company formed to commercialize new,
existing but previously unrecognized, and previously "classified" technologies,
with a particular current emphasis on technologies developed by prominent
research institutes and individual researchers in the former Soviet Union and in
Israel, and to commercialize those and other Western technologies for business
and other commercial applications principally in Western and Central Europe,
Ukraine, Russia, and North America. Since the Company's formation it has
acquired development and marketing rights to a number of technologies by
purchase, assignments, and licensing arrangements. Although the Company intends
to continue identifying, monitoring, reviewing and assessing new technologies,
its primary emphasis is marketing and sales of four of its present technologies
that it deems to be ready for commercialization (the "Principal Technologies").
To that end, the Company recently has initiated discussions with a number of
potential end-users of those technologies, with a view towards the future
negotiation and execution of licensing and/or joint venture marketing
agreements. Additionally, the Company is proceeding with the marketing and
potential application of its silicon-organic ("EKOR") compound technology (which
is one of the Principal Technologies) in connection with nuclear contamination
remediation projects at the Chernobyl Nuclear Power Plant ("ChNPP") in Ukraine,
and in the United States, Russia and Germany. See "Business - Principal
Technologies," and "Management's Discussion and Analysis of Results of Operation
and Financial Condition - Plan of Operation." The Company intends to operate its
business by licensing its technologies to end-users and through development and
operating joint ventures and strategic alliances. To date, the Company has not
generated any significant revenues from operations.
Acquisition of Israeli Technologies
Incubator Technologies
The Company has informally agreed in principle with three Israeli
technology incubators, the Technion Entrepreneurial Incubator Co., Ltd. ("TEI"),
the Ofek Le-Oleh Foundation ("Ofek") and the Incubator for Technological
Entrepreneurship-Kiryat Weizmann, Ltd. ("Weizmann") (collectively, the
"Incubators"), to participate in certain technology research and development
projects which the Incubators individually sponsor. Pursuant to such informal
arrangement, the Company would provide 15%-20% of the financing required for,
and would receive a 20% equity interest in, research and development projects
selected by the Company and such Israeli corporations as are formed for the
purpose of owning, developing and commercializing the technologies resulting
from those selected projects (each, an "Israeli Technology Company"). In
furtherance of this, the Company has opened an office at the premises of TEI in
Haifa, Israel. See "Description of Property." The Company has not entered into a
written agreement with any of the Incubators memorializing any such agreement in
principal, and the only written agreements between the Company and any Incubator
are those disclosed herein in connection with Chemonol, Ltd. ("Chemonol"),
Separator, Ltd. ("Separator"), Remptech, Ltd. ("Remptech"), and Comsyntech, Ltd.
("Comsyntech"), each of which is an Israeli corporation. None of the Incubators
are legally obligated to enter into any further such agreements with the
Company, and as a result there is no assurance that the Company will be able to
invest in or acquire any additional Incubator-sponsored technologies.
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Pursuant to agreements with each of Chemonol, Ofek and Weizmann, the
Company has invested in four Israel Technology Companies, to wit: (i) Chemonol,
which has developed materials and processes for manufacturing non-isocyanate
polyurethane ("NIPU") industrial coatings (see "Business -- Principal
Technologies -- Non-isocyanate Polyurethane"); (ii) Separator, which is
developing a process for the electromagnetic separation and production of high
temperature superconductive metallic powders; (iii) Remptech, which is
developing processes for the production of extra-fine cobalt and nickel powders;
and, (iv) Comsyntech, which is developing a process for the continuous
combustion synthesis of ceramic, composite and intermetallic powders. See
"Business-Other Technologies." Under those agreements the Company will receive
20% of each Israeli Technology Company's common equity, and will invest U.S.
$60,000 in each such corporation. In connection with these investments, the
Company also has obtained: (i) options to purchase Ofek's 20% common equity
interest in each of Remptech and Comsyntech, each of which is exercisable for a
period of 90 days commencing on November 6, 1999 at an exercise price to be
established by the parties; (ii) options to acquire from the holders of a
majority of the outstanding common equity (the "Principal Shareholders") of each
of Chemonol, Separator, Remptech and Comsyntech an additional 31% of each
corporation's common equity, which are exercisable for a period of 6 months
commencing on May 4, 1998 in the case of Chemonol, 12 months commencing on
September 4, 1998 in the case of Separator, and 12 months commencing on May 6,
1998 in the cases of Remptech and Comsyntech, each at an exercise price of
U.S.$93,000, and (iii) the perpetual right to direct the voting of the common
equity of the Principal Shareholders' of each company, giving the Company voting
control in each case.
In the event the Company exercises the foregoing equity purchase options,
it will own 51% of each of Chemonol's and Separator's common equity and 71% of
the common equity of each of Remptech and Comsyntech, and for financial
reporting purposes will consolidate each of those corporation's balance sheets
and other financial statements with the Company's. Although the Company
presently anticipates it will exercise the Chemonol option, there is no
assurance that it or any other of the foregoing options will be exercised. There
is no assurance that when such options become exercisable the Company will have
sufficient funds to exercise any of them.
For a period of two years commencing on the date of its registration as an
Israeli corporation, the sale or other transfer of 25% or more of the
outstanding common equity of each of Chemonol, Separator, Remptech and
Comsyntech requires the consent of the Chief Scientist of the Israeli Ministry
of Commerce and Technology. The Company's options to acquire additional common
equity of the above Israeli Technology Companies are exercisable within such two
year periods and any acquisition of the common equity purchasable thereunder
will, therefore, require the Chief Scientist's consent. Although the Company
presently expects that if requested such consent would be given, there is no
assurance that such consent will be obtained. Accordingly, the Company plans to
seek to amend the terms of those options to extend their respective exercise
periods beyond the applicable two-year periods during which the Chief
Scientist's consent is required, prior to the times they each first commence.
Technologies Acquired from Prof. Oleg L. Figovsky
Pursuant to three Technology Purchase Agreements, each dated January 1,
1998, the Company has acquired from Oleg L. Figovsky, Ph.D. ("Prof. Figovsky")
(who is a consultant to the Company) all right, title and interest in and to the
following three technologies developed by him, inclusive of future improvements
thereto: (i) a group of related technologies collectively known as
"Interpenetrated Network Polymers" ("INPs"), (ii) "Liquid Ebonite Material"
("LEM") and (iii) "Rubber Concrete" ("RubCon") for purchase prices of $75,000,
$15,000 and $35,000, respectively (each, a "Purchase Price"). Pursuant to each
such Technology Purchase Agreement, during the 15-year period commencing on
January 1, 1998, the
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Company is also obligated to pay to Prof. Figovsky royalties equal to 49% of the
Company's net revenues from the sales or licensing of any products incorporating
the applicable technology, subject to the Company's right to deduct from the
first royalties otherwise payable under each agreement an aggregate sum equal to
the Purchase Price paid thereunder. The Company has prepared patent applications
for these technologies and plans to file the same during the second quarter of
1998 in the U.S., Canada, China, Korea, Russia, Ukraine, Germany, Japan and the
countries of the European Patent Agreement.
The Company believes that two of these technologies, RubCon and LEM, are
ready for commercialization, and has included them in the Principle Technologies
which the Company intends to be the focus of its marketing and sales program.
RubCon is a rubberized concrete which the Company believes is superior to
presently available similar concretes and to conventional cement-based concretes
for applications in, among other things, the manufacture of industrial
floorings, equipment operating in aggressive chemical media, building
foundations, concrete pipes and outdoor structures. LEM is a synthetic, liquid
rubber having enhanced mechanical, permeability and anti-corrosive qualities,
that the Company believes can be applied successfully as a protective covering
for such objects as small-diameter piping, and the intricate parts of pumps,
fans and centrifuge rotors. See "Business - Principal Technologies."
The INP technology consists of a related group of technological processes
to produce a variety of polymeric compounds, including polyurethanes, that is
based on modifying the molecular structure of olygomeric cyclocarbonates. The
INP constituent technologies presently are in their respective research and
development phases. No assurance can be given that any INP constituents will be
successfully developed or, if developed, will result in commercially saleable or
profitable products or processes.
Principal Technologies
Silicon-Organic (EKOR) Compound. The Company's silicon-organic (EKOR)
compound technology was jointly developed by scientists at the I.V. Kurchatov
Institute ("Kurchatov") in Moscow and the Euro-Asian Physical Society ("EAPS")
for the conservation and containment of ecologically hazardous radioactive
materials. The EKOR compound is based on radiation-resistant compounds produced
from silicon-organic elastomers. Kurchatov is a physics and scientific research
institute, which in the former Soviet Union enjoyed a position of prestige,
sophistication and importance roughly equivalent to that of the
Lawrence-Livermore National Laboratory in the United States. EAPS is a
professional society of over 5,000 scientists, physicists, and engineers in the
former Soviet Union. Until August 1, 2014, the Company is the exclusive licensee
of all right, title and interest (inclusive of all patent and other intellectual
property rights) in and to the EKOR technology in Canada, China, Japan, the
Republic of Korea, the United States of America, Ukraine, and all member
countries of the European Patent Agreement. See "Certain Relationships and
Related Transactions."
In testing conducted at Kurchatov, the EKOR compound has been shown to be
highly resistant to radiation and structural degradation from exposure to
radiation, highly fire-resistant, water-proof, and capable of being formulated
in densities that display considerable structural strength and weight-bearing
properties (based on testing to date) of 100 lbs. per square inch. The Company
believes that the EKOR compound is the most technologically advanced material
for comprehensively containing both solid and liquid radioactive materials,
suppressing radioactive dust and preventing such materials and dust from
escaping into the atmosphere or leaching into and contaminating ground-water
supplies.
The Company expects that one of the first commercial uses of its EKOR
compound technology will be to contain and stabilize the extensive radioactive
debris and dust that continues to accumulate and
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contaminate the environment at Reactor 4 of the Chernobyl Nuclear Power Plant in
Ukraine, the site of a disastrous explosion and near-reactor core meltdown in
1986, and to help structurally support the concrete and steel "sarcophagus" that
was built over Reactor 4 as an interim containment measure after the accident.
The rapid deterioration of the "sarcophagus," caused by the intense radiation
persisting at Reactor 4, has occasioned international concern that without the
implementation of effective site containment measures, a second nuclear disaster
and possible melt-down may occur. In high dosage radiation tests EKOR compound
has met or exceeded all specifications established by the ChNPP authorities for
containment materials. In April 1997 the equipment for synthesizing and applying
the EKOR compound was successfully demonstrated for officials of ChNPP and other
entities.
The G-7 group of industrialized nations (the United States, United
Kingdom, Italy, France, Canada, Japan and Germany) has pledged up to U.S. $3.1
billion to assist in a multi-step project of remediating and closing the plant,
with approximately U.S. $300 million budgeted for the project's first
containment and site stabilization phase. In September 1997, pursuant to a joint
bidding agreement with Duke Engineering & Services, Inc. ("DES"), a business
unit of Duke Power Company (the "Company-DES Agreement"), DES and the Company
gave formal notice of their intent to bid on the ChNPP Reactor 4 remediation
project to the European Bank of Reconstruction and Development ("EBRD").
Pursuant to an agreement with Kurchatov Research Holdings, Ltd., ("KRH") a
Delaware corporation jointly owned by ERBC Holdings, Limited, a British Virgin
Islands corporation ("ERBC"), and CIS Development, Inc., a Delaware corporation
("CIS"), 50% of the net profits derived from the sale or licensing of the EKOR
compound will be retained by the Company, and 50% will be remitted to KRH. One
present employee and one former business representative of ERBC are beneficial
owners of shares of the Company's Common Stock, and the chief executive officer
and sole shareholder of ERBC is the beneficial owner of 6.9% of the Company's
outstanding Common Stock. Peter Gulko, who is a former director, and presently
is the President and Secretary of the Company, is the sole record owner of CIS.
Pursuant to an agreement between CIS and EAPS (as representative of individual
Russian scientists, researchers and academics affiliated with Kurchatov and
EAPS), the shares of KRH common stock registered to CIS are being held by CIS
for the benefit of EAPS. From June, 1997 until February 13, 1998, Dr. Randolph
A. Graves (who served as the Chairman, Chief Executive Officer and a director of
the Company until January 23, 1998) also served as a director and Secretary of
KRH. See "Certain Relationships and Related Transactions."
In addition to remediation of ChNPP Reactor 4, the Company's near- and
mid-term commercialization and marketing efforts relative to the EKOR compound
principally are directed at nuclear waste remediation projects in the U.S.,
Russia and Germany. Pursuant to the Company-DES Agreement, the Company and DES
have submitted a successful, first-round demonstration project bid on the U.S.
Department of Energy's ("DoE") reactor decommissioning technology program at
DoE's Hanford, Washington, reactor facility. Joint Company-DES bids presently
are being prepared for other DoE demonstration projects. The Company also has
entered into an agreement with the Research Center Julich, a German governmental
research institution, providing for its assistance with certifying the EKOR
compound for use in Germany. Additionally, the Company is in the process of
identifying potential licensees of the EKOR technology, and has commenced
initial licensing discussions with a Japanese corporation. No assurance can be
given that the EKOR compound will be certified for use in Germany, that the
Hanford, Washington DoE demonstration will be successful or that if successful
it will result in a project contract being awarded to the Company, or that such
licensing discussions will successfully result in the execution of an EKOR
license.
In addition, further applications of the EKOR technology are being
reviewed for several sites in Russia: Chelyabinsk Mayak (a plutonium production
site), Kola (a disposal site for nuclear fuel from atomic-powered
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ships and submarines), and Krasnoyarsk (a uranium mining and enrichment
facility). To this end, at nominal cost to it, the Company has provided EKOR
documentation and material samples to these sites, and has arranged for
personnel from Kurchatov and EAPS to be available to provide technical advice
regarding pertinent applications of the EKOR compound. To date, the Company has
not entered into any agreements pertaining to either the testing or application
of the EKOR compound at these sites.
Non-isocyanate Polyurethane. NIPU is a modified polyurethane that does not
contain the toxic isocyanates used in the production of conventional
polyurethane, and has lower permeability and greater chemical resistance
qualities as compared to conventional polyurethane. The Company believes that
these advanced characteristics make NIPU superior to conventional polyurethanes
in connection with their use in a number of industrial application contexts such
as manufacturing automotive bumpers, paints, plastics and truck beds; airplane
and rocket sealants, interior components and seating; construction adhesives,
coatings, flooring, glues and rooftops; industrial equipment and machinery; and
consumer goods such as appliances, footwear, furniture and plastic products.
NIPU was developed by Chemonol. Pursuant to a voting agreement with the Company,
Chemonol's Principal Shareholder has agreed to vote his common equity as
directed by the Company. See "Business - Acquisition of Israeli Technologies -
Incubator Technologies."
The Company intends to market and sell NIPU through one or more license
and/or joint venture agreements with major chemical companies, and has recently
commenced initial discussions with several such companies with a view towards
negotiating one or more licenses and/or joint venture agreements. Such
discussions are in their initial stages, only, and no assurance can be given
that all or any of them will result in an NIPU license or joint venture
agreement, or that such license or agreement, if concluded, will be on terms
favorable to the Company.
Liquid Ebonite Material. LEM is a synthetic liquid rubber with enhanced
mechanical, permeability and anti-corrosive qualities as compared to
conventional sheet rubber coverings. In laboratory testing, coverings made with
LEM, as compared to conventional sheet rubber coverings, have displayed greater
resistance to harsh chemicals such as acids, alkalis and benzene, and have been
successfully applied to intricate and complex surfaces such as sieve meshing.
Based on the physical and chemical properties of LEM, and on such tests, the
Company believes that LEM coverings are capable of providing superior protection
to small-diameter piping, and to the intricate parts of pumps, fans and
centrifuge rotors. LEM can be applied to form surface coverings using standard
coating techniques, including spraying and dipping.
LEM was independently developed by Prof. Figovsky and was acquired by the
Company pursuant to a Technology Purchase Agreement dated January 1, 1998, for a
purchase price of $15,000, plus royalties equal to 49% of the Company's net
revenues from sales or licenses of any products incorporating LEM, payable for a
period of 15 years commencing on January 1, 1998. To date, the Company has not
derived any such revenues and does not expect to derive any such revenues in
1998. Prof. Figovsky is a consultant to the Company. See "Business Acquisition
of Israeli Technologies - Technologies Acquired from Prof.
Oleg L. Figovsky."
A major international chemical company has expressed interest in
potentially licensing LEM for production and world-wide distribution and sales.
At such company's request, the Company is preparing evaluation samples of LEM.
No assurance can be given that such chemical company or any chemical or other
company will determine that LEM is suitable or economically viable for its
business purposes or that any production/distribution license for LEM will be
negotiated or executed. See "Business - General," and "Management's Discussion
and Analysis of Results of Operation and Financial Condition - Plan of
Operation."
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RubCon. "RubCon" is a technologically advanced, polymer-based, rubberized
concrete that utilizes polybutadiene (a polymer derived from liquid rubber) as a
binding material for the various aggregates that, together with binders,
constitute concrete. In laboratory testing RubCon has exhibited high degrees of
compression, bending and tensile strength, a high degree of water-resistance and
a high degree of resistance to aggressive, corrosive chemicals as compared to
conventional "cement" concrete. The Company believes that RubCon has significant
potential utility in the manufacture of industrial flooring, equipment operating
in aggressive chemical media such as galvanic and electrolysis "baths,"
foundations, concrete pipes and other underground structures, seismic
reinforcement materials, and outdoor structures such as bridges that are
routinely exposed to harsh weather, climatic and corrosive conditions.
RubCon was independently developed by Prof. Figovsky, and was acquired by
the Company pursuant to a Technology Purchase Agreement dated January 1, 1998,
for a purchase price of $35,000, plus royalties equal to 49% of the Company's
net revenues from sales or licenses of any products incorporating LEM, payable
for a period of 15 years commencing on January 1, 1998. To date, the Company has
not derived any such revenues and does not expect to derive any such revenues in
1998. See "Business - General Acquisition of Israeli Technologies - Technologies
Acquired from Prof. Oleg L. Figovsky."
The Company currently anticipates that it will enter into discussions with
one or more of four major chemical companies that presently are evaluating
RubCon, with a view towards negotiating product purchase and/or license
agreements. No assurance can be given that any of those or any other companies
will determine that RubCon is suitable or economically viable for its business
purposes, that the Company will enter into discussions or negotiations with any
of those companies, or that, if entered into, they will result in product
purchases or license agreements. See "Business - General," and "Management's
Discussion and Analysis of Results of Operation and Financial Condition - Plan
of Operation."
Other Technologies
The Company also is engaged in the continuing research and development of
other technologies it believes to be of potential, future commercial
significance.
Electromagnetic Separation ("EMS") Technology. The Company is
participating in the further research and development of a process to
electromagnetically separate high temperature superconducting ("HTSC") metal
powders, that has been developed by Separator. The Company is the holder of 20%
of Separator's common equity and has an option to purchase an additional 31% of
such common equity. Pursuant to a voting agreement with the Company, Separator's
Principal Shareholders have agreed to vote their common equity as directed by
the Company. See "Business - General - Acquisition of Israeli Technologies
Incubator Technologies." There can be no assurance that such equity purchase
option will be exercised, which will principally depend upon the results of
further research and development activities and later expressions of commercial
interest, if any, in the EMS technology.
The electromagnetic separation of HTSC powdered metals is based on the
interaction of HTSC particles with alternating magnetic fields at temperatures
approaching the level required for "HTSC transition," i.e., the point at which a
substance becomes superconducting. The research and testing data provided by
Separator indicates that the EMS technology allows for the extraction of
powdered metal particles having optimal electrophysical qualities, and in the
production of HTSC metallic powders with a critical electrical current that
exceeds those of HTSC powders produced using conventional technologies. Based on
demonstration testing conducted by Separator, the Company believes that the EMS
process for HTSC metallic powder can be used with a variety of powdered metals,
and can be configured either as a small
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bench testing device for laboratory applications at universities and research
and development companies, or as an industrial-scale device with the capacity to
produce up to 8 kilograms per hour of HTSC powdered metal. The Company believes
that the EMS technology can be commercially applied in the production of
underground electric transmission cables, transformers, electric power system
control and protection systems, motors, generators, magnetic resonance imaging
equipment and cellular telephone base stations.
Powdered Metallurgy Technology. The Company is participating in the
further research and development of a process developed by Remptech, to produce
extra fine cobalt and nickel powders by recycling materials containing cobalt
and nickel. Powdered metallurgy is generally acknowledged as being capable of
yielding product with superior structural, physical and mechanical properties.
The Company believes that the powdered metallurgy process developed by Remptech
is technologically advanced and, based on Remptech's research and testing data,
is capable of producing cobalt and nickel powders of 99.8% purity and a grain
size of 1-2 micro-centimeters. The Company believes that such purities and grain
sizes are significant factors in the manufacture of materials of high quality
and internal physical integrity from powdered cobalt and nickel. Cobalt and
nickel are among the three naturally occurring elements that display magnetic
properties at room temperature and are widely used in metal alloys. Powdered
cobalt and nickel are used in a wide variety of industrial applications,
including magnetic, electrical and electronic materials and products.
The Company is the holder of 20% of Remptech's common equity and has
options to purchase the 20% common equity interest in Remptech held by Ofek
which is partially sponsoring Remptech's research and development activities,
and an additional 31% of such common equity from Remptech's Principal
Shareholders. Pursuant to a voting agreement with the Company, Remptech's
Principal Shareholders have agreed to vote their common equity as directed by
the Company. See "Business - Acquisition of Israeli Technologies - Incubator
Technologies." There can be no assurance that such equity purchase options will
be exercised, which will principally depend upon the results of further research
and development activities and later expressions of commercial interest, if any,
in the Powdered Metallurgy technology.
Continuous Combustion Synthesis Technology. The Company also is
participating in the further research and development of a process for the
continuous combustion synthesis ("CCS") of ceramic, composite and intermetallic
powders, including titanium carbide powder, developed by Comsyntech. CCS is a
newly devised process utilizing the internal chemical energy of initial
reactants in a continuous action reactor, a device being developed by
Comsyntech. The Company believes this process offers competitive advantages
(such as increased productivity and lower production costs) over conventional
technology. Comsyntech research and testing data indicate that materials
produced with the CCS technology have exhibited superior high-thermomechanical
properties such as high strength, thermo and wear resistance and good corrosion
stability. Based on these properties, the Company believes that the CCS
technology is of potentially significant utility in producing ceramic, composite
and intermetallic powders with potential commercial application in the
production of metal-cutting tools and abrasives; metal alloys; aircraft and
automotive combustor, nozzle and turbine parts; piezo- and ferro-electric
materials; and surgical instruments.
The Company is the holder of 20% of Comsyntech's common equity and has
options to purchase the 20% common equity interest in Comsyntech held by Ofek,
which is partially sponsoring Comsyntech's research and development activities,
and an additional 31% of such common equity from Comsyntech's Principal
Shareholders. Pursuant to a voting agreement with the Company, Comsyntech's
Principal Shareholders have agreed to vote their common equity as directed by
the Company. See "Business Acquisition of Israeli Technologies - Incubator
Technologies." There can be no assurance that such equity purchase options will
be exercised, which will principally depend upon the results of further research
and
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development activities and later expressions of commercial interest, if any, in
the powdered metallurgy technology.
Silicon-Carbide "Wafer" Technology. The Company has participated in the
development of a silicon carbide "wafer" technology in conjunction with
Kurchatov and EAPS. Although no assurance can be given, the Company presently
expects that upon the successful completion of its development, all intellectual
property, marketing and sales rights in and to the silicon carbide "wafer"
technology will be assigned to the Company. While there is no assurance that
such technology will be successfully developed, based on reports from Kurchatov
the Company believes the silicon carbide technology will permit the production
of defect-free, radiation-resistant "wafers" (from which integrated circuit
chips are fabricated) that will be approximately twice the size of those
currently available. The Company expects that integrated circuit chips
fabricated from its silicon carbide wafers will have particular application in
high power environments such as automobile and aircraft engine control systems,
high power environments such as power control transistors, and environments
subject to ionizing radiation such as spacecraft.
Presently, the Company is not devoting any significant time or resources
to the further development of this technology. The Company anticipates that it
will resume such participation only after the completion of the ChNPP Reactor 4
remediation project. See "Business - Principal Technologies - Silicon- Organic
(EKOR) Compound".
Waste-to-Energy Technology. The Company's waste-to-energy technology is a
combination of "low-tech" mechanical technologies, "high-tech" combustion
controls, modern emissions abatement technology and effective operation
procedures configured into modules that produce steam energy from ordinary
municipal waste. The basic configuration was pioneered in 1980 by the U.S.
National Aeronautics and Space Administration ("NASA") and the city of Hampton,
Virginia, to provide steam power for NASA's Langley Research Center and the
Langley Air Force Base.
The Company has entered into a technology transfer and consulting
agreement with Eurowaste Management, Ltd., a Delaware corporation ("EuroWaste"),
under which Eurowaste will pay the Company a U.S. $2.4 million technology
transfer fee prior to the construction of the first waste-to-energy plant, and a
design and implementation consulting fee of U.S. $425,000 for each subsequent
plant. A shareholder of the Company who beneficially owns less than 1% of the
Company's Common Stock is the chairman, chief executive officer and a
shareholder of Eurowaste. See "Certain Relationships and Related Transactions."
The Company recently has de-emphasized its prior plans to introduce its
waste-to-energy technology in the city of Cherkassy, Ukraine principally because
neither the Ukrainian government, the city of Cherkassy nor Eurowaste has
obtained construction or other financing for the proposed Cherkassy
waste-to-energy facility, and because the Company believes that marketing its
Principal Technologies is more likely to result in near-to-mid-term revenues
than is the Cherkassy waste-to-energy project. If commenced, the Cherkassy
waste-to-energy facility will take approximately thirteen months to construct,
with an expected energy output of approximately seven megawatts per day, based
on an assumed consumption of approximately 240 tons of municipal waste per day.
There is no assurance that the necessary financing will be obtained or
that, if obtained, it will be on terms favorable to the venture. Neither is
there any assurance that the Ukrainian government will not abandon its support
of the proposed Cherkassy facility. In the absence of such financing and
governmental support the construction in Ukraine of any waste-to-energy
facilities utilizing the Company's technology cannot be expected to occur.
8
<PAGE>
Automated Parking Garages. Automated parking technology consisting of
computer-controlled, rotating carousels which can be configured to contain
varying numbers of automobile parking spaces, substantially reduces the
economically unproductive space devoted to ramps and maneuvering areas in
traditional, multi-story parking garages, and through the use of elevators and
multi-level "stacking" of the carousels, permits the erection of high-capacity
garages on parcels of land otherwise too small for such use. Essentially,
automobiles are raised by elevators to computer-controlled carousels which
rotate the vehicles to their respective parking slots. The Company believes that
its automated parking technology is particularly useful in congested urban areas
and in cities where available land for parking is scarce.
The Company contemplates that the automated parking technology will be
introduced in Moscow, Russia. Moscow has experienced a substantial increase in
automobile ownership and traffic congestion, and which has a relative scarcity
of existing parking spaces and construction sites of a size suitable for
traditionally designed parking garage facilities. The municipal government of
Moscow has allocated a suitable construction site for the Company's intended,
initial automated parking venture, located at Arbat 8-10. Arbat is one of the
City of Moscow's principal commercial districts.
The Moscow automated parking garage will be developed, and if completed
will be owned and operated, by "Cinema World on Arbat," a Russian joint stock
company, the equity of which is owned 50% by Arbat American Autopark, Ltd., a
Delaware corporation ("Arbat American"), 45% by "Soyuz Agat Fil," a Russian
company to which the Moscow municipal government has allocated the construction
site and which holds the necessary construction approvals and permits, and 5% by
a privately owned Russian affiliate of "Mosinterstroi," a quasi-governmental
entity of the City of Moscow. 40% of the equity of Arbat American is owned by
ERBC. One present employee and one former business representative of ERBC are
beneficial owners of shares of the Company's Common Stock, and the chief
executive officer of ERBC is the beneficial owner of 6.6% of the Company's
outstanding Common Stock. One of the directors of Arbat American is a
shareholder of the Company's Common Stock, and another individual, who is a
director and the president of Arbat American, is a shareholder of the Company's
Common Stock.
The Company has identified automated parking garage equipment, plant,
specifications and engineering documentation, adaptable to the multiple
applications required for garage sites in Moscow, for use by Arbat American.
Arbat American will purchase such equipment, plant, specifications and
documentation from MEPA-Sachisische Parksystemme GmbH, a German company.
Pursuant to a technology agreement entered into with Arbat American, the
Company has been paid a one-time fee of U.S. $225,000 in respect of the Arbat
parking garage ($1,250 for each parking space to be contained in the automated
parking facility), which constitutes the Company's sole compensation in respect
of that facility. That agreement also provides for the payment to the Company of
a one-time fee of U.S. $1,250 for each parking space to be contained in any
garage facilities that in the future are developed, owned and/or operated by
Arbat American and use the automated parking technology. Presently, the Company
is not aware of any plans of Arbat American for any further such parking
garages.
The Company has been advised that Arbat American has, to date, not
obtained project financing for the proposed Arbat facility, and that Arbat
American could for that reason be declared in default of its obligations under
its agreements with the Municipal Government of Moscow. If Arbat American is
declared to be in default, its ability to commence the project, and any other
similar project in Moscow, could be jeopardized. See "Certain Relationships and
Related Transactions."
Re-sealable Containers. Pursuant to a sublicense (the "Re-sealable
Container Sublicense") entered into in December 1997, the Company has acquired
from ERBC an exclusive, worldwide and perpetual license
9
<PAGE>
to commercialize, use, exploit and market two mechanical systems (the
"Re-sealable Container Systems") for re-sealing soft-drink (and other similarly
configured) beverage cans, and cardboard "TetraPak" beverage containers.
"TetraPak" containers are four-sided, pyramidical beverage containers widely
used in Europe, made of packaging material similar to milk "cartons" familiar to
the U.S. market. The "TetraPak" resealing system attaches to and re-seals opened
containers by creating an air-pocket between the containers outer surface and
the re-sealing device. The beverage can re-sealing device is designed to attach
to the top of the beverage can and provides a manually operated metal flap that,
when rotated into position over the opening in the can, creates a leak-proof,
gas-tight seal.
The Re-sealable Container Systems are each designed to integrate with the
"TetraPak" container or beverage can top, as the case may be, and permit
re-sealing without deforming the container's shape or diminishing its volume
capacity. The Company believes that the Re-sealable Container Systems more
effectively preserve the freshness and hygiene of the contents of opened
beverage cans and "TetraPak" containers, and (in the case of the beverage can
re-sealing system) more effectively prevents leakage and loss of carbonation,
than presently available re-sealing devices. The Company further believes that
the Resealable Container Systems have a variety of potential applications that
include carbonated and noncarbonated beverages, canned infant formula, canned
motor oil, and dry package contents such as breakfast cereals, coffee, flour and
sugar.
ERBC acquired an exclusive, worldwide and perpetual license to the
Re-sealable Container Systems pursuant to a license agreement, dated March 20,
1997, with Cetoni Unwelttechnologie-Emwik Lungs GmbH ("Cetoni"), a German
company that developed and held all right, title and interest in and to those
systems, in consideration of ERBC's payment to Cetoni of U.S. $495,000 plus 50%
of all royalties received by ERBC from sales of products and devices embodying
or otherwise using Re-sealable Container Systems. Under the Re-sealable
Container Sublicense the Company paid ERBC U.S. $495,000 in consideration of the
sub-license granted thereunder, and is obligated to pay to Cetoni 50% of all
royalties received by the Company from sales of such products and devices. ERBC
will not receive from the Company any portion of such royalties.
ERBC is the beneficial owner of 255,000 shares of the Company's Common
Stock. The chief executive officer and sole shareholder of ERBC is the
beneficial owner of 6.6% of the Company's Common Stock, and one present employee
and one former business representative of ERBC are beneficial owners of shares
of the Company's Common Stock. See "Certain Relationships and Related
Transactions."
Other technologies, including the "CORO" telephone technology (see note
9(d) to the Company's Financial Statements) are presently being evaluated by the
Company. Pending the results of those evaluations, the Company has no current
plans to develop or commercialize those technologies.
The Company is not a subsidiary of another corporation, entity or other
person. The Company does not have any subsidiaries.
Employees
The Company has five full-time employees and four part-time employees.
None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its employee relations to be satisfactory and
has not experienced any labor problems.
10
<PAGE>
Competition and Marketing
The near-term, primary markets for the Company's products and technologies
and chemical manufacturing and radioactive contamination containment,
remediation and transportation. Mid-term markets are expected to continue in
these industries. The Company has limited experience in marketing its products
and technologies and, other than in connection with the remediation of Reactor 4
at ChNPP, intends to rely on licenses and joint ventures with major
international chemical and other companies (and in the case of the EKOR
compound, upon its joint bidding agreement with DES) for the marketing and sale
of its Principal Technologies. In contrast, other private and public sector
companies and organizations have substantially greater financial and other
resources and experience than the Company. Competition in the Company's business
segments is typically based on product recognition and acceptance, price, and
marketing and sales expertise and resources. Any one or more of the Company's
competitors or other enterprises not presently known to the Company may develop
technologies and/or products which are superior to the Company's, significantly
underprice the Company's products and technologies, and/or more successfully
market existing or new competing products and technologies. To the extent that
the Company's ability to compete could be materially and adversely affected.
Regulation
The Company is not aware of any U.S. or foreign laws or regulations that
govern the marketing, sale or use of any of its present technologies, other than
U.S., Russian and various Western European environmental safety laws and
regulations pertaining to the containment and remediation of radioactive
contamination and the toxicity of materials used in connection therewith (in the
case of the EKOR compound), and local, Russian and Ukrainian site approval and
construction permit, and construction code compliance requirements (in the cases
of the Company's automated parking and waste-to-energy technologies). Based on
the results of tests conducted at Kurchatov, the Company believes that the EKOR
compound meets applicable U.S. and German regulatory standards. However, there
can be no assurance that more stringent standards may not in the future be
adopted, or that if adopted, they will not materially increase the cost to the
Company of licensing and using the EKOR compound, or prevent its use altogether.
Moreover, there can be no assurance that any or all jurisdictions in which the
Company presently or in the future conducts its business will not enact laws or
adopt regulations which increase the cost of or prevent the Company from
licensing its other technologies or otherwise doing business therein.
Particularly in the cases of Russia and Ukraine, the enactment of such laws or
the adoption of such regulations may have a presently unquantifiable,
substantial adverse impact on the Company's financial condition, business and
business prospects.
Intellectual Property
Of the Company's present technologies, patent protection has been sought
only for the EKOR compound material and the Re-sealable Container Systems.
Patent applications on EKOR have been filed by the Company and are pending in
the U.S., Ukraine and Japan, and two such patent applications have been filed by
EAPS in Russia, one of which is pending, and one of which has been granted.
Patent applications on the Re-sealable Container Systems have been filed and are
pending in Germany. The Company's success depends, in part, on its ability to
obtain and protect patents covering, and maintain trade secrecy protection of
its EKOR compound and other Principal Technologies, as well as other, future
technologies, and to operate without infringing on the proprietary rights of
third parties. Additionally, since the waste-to-energy technology is a
combination of existing, public domain technologies, it is uncertain whether the
waste-to-energy technology is patentable. Accordingly, such technology could be
subject to appropriation and use by any individual or entity that is so
inclined, for which the Company might not have legal recourse under any national
or
11
<PAGE>
international patent law. There can be no assurance that any of the Company's
pending or future patent applications will be approved, that the Company will
develop additional proprietary technology that is patentable, that any patents
issued to the Company will provide the Company with competitive advantages or
will not be challenged by third parties or that the patents of others will not
have an adverse effect on the Company's ability to conduct its business.
Furthermore, there can be no assurance that others will not independently
develop similar or superior technologies, duplicate any of the Company's
processes, or design around any technology that is patented by the Company. It
is possible that the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents of third parties relating to its
products. There can be no assurance that any license acquired under such patents
would be made available to the Company on acceptable terms, if at all, or that
the Company would prevail in any such contest. In addition, the Company could
incur substantial costs in defending itself in suits brought against the Company
on its patents or in bringing patent suits against other parties.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in part,
by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others.
Item 2. Description of Property
The Company's headquarters are located at 1101 30th Street, N.W., Suite
500, Washington, D.C. 20007 pursuant to a lease commencing March 1, 1998, and
ending August 31, 1998, for which the Company pays monthly rent of $3,350. The
Company believes that its current facilities are sufficient to meet its
requirements.
The Company also occupies office space at the premises of Technion
Entrepreneurial Incubator, Ltd., in Haifa, Israel, on a month-to-month tenancy
basis. The Company expects to commence rental payments for such Israeli office
in March, 1997 at the rate of $300 per month. Such office will be utilized by
the Company for its contemplated, Israeli technology development and marketing
activities. See "Business -- General."
Item 3. Legal Proceedings
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and David
Morris filed an action in the Supreme Court for the State of New York, County of
New York, against Eurotech Ltd. for breach of contract, seeking injunctive
relief, specific performance and monetary damages of nearly $5 million (the
"Dirks Litigation"). The Dirks Litigation arises solely from an agreement
between Eurotech and National Securities Corporation ("National") relating to
financial advisory services to be performed by National Securities Corporation,
a broker/dealer with which the plaintiffs were affiliated and of which Raymond
Dirks Research was a division. Eurotech granted National a warrant certificate
for 470,000 shares at $1.00 per share (as adjusted to reflect the June 1, 1996,
four-to-one forward split of the Company's Common Stock) as a retainer for
general financial advisory services. In conjunction with the separation of the
plaintiffs and Raymond Dirks Research from National Securities Corporation,
National assigned a significant portion of the warrant certificate to the
plaintiffs.
The plaintiffs allege among other things that they are entitled to damages
composed of both the value of the stock on the date of their purported exercise
of an alleged assignment of the warrant certificate, and
12
<PAGE>
the decrease in value of the price of the stock since the date of their
purported exercise. Eurotech believes that the plaintiffs have significantly
overstated their monetary damage claim and that, having sought monetary damages,
the plaintiffs are not entitled to any type of equitable relief.
Process was served upon Eurotech in late January 1998. Eurotech intends to
vigorously defend and believes that the plaintiffs' claims will be resolved
favorably to the Company. If the Company were to be adjudged liable in the Dirks
Litigation, the resolution of the litigation could have a material adverse
effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Trading Market
The Company's Common Stock trades on the NASD Electronic Bulletin Board
market under the symbol Euro.
Number of Shareholders of Record
As of March 31, 1998, the Company had 151 shareholders of record.
Dividends. To date the Company has not declared or paid dividends on its Common
Stock. The Company presently plans to retain earnings, if any, for use in its
business.
Market Price. Over the counter market quotations reflect inter-dealer prices
without markup, markdowns, or commissions and may not represent actual
transactions. The following table set forth the quarterly high and low closing
bid and closing asked prices (in U.S. dollars) for the Company's Common Stock,
since July 25, 1995.
CLOSING BID CLOSING ASKED
1995 HIGH LOW HIGH LOW
---- ---- --- ---- ---
JULY 25 (First Available) THRU SEPT. 29 .718 .531 .781 .593
OCT. 2 THRU DEC. 29 1.000 .562 1.125 .75
1996
----
JAN. 2 THRU MAR. 29 (Excluding Jan. 8) 1.343 1.000 1.467 1.125
APR. 1 THRU JUNE 21 2.312 .625 2.406 .75
JUNE 24 THRU JUNE 28 2.625 2.000 2.875 2.375
JULY 1 THRU SEPT. 30 2.500 1.325 2.625 1.40625
OCT. 1 THRU DEC. 31 10.000 1.9375 10.250 2.0625
1997
----
JAN. 2 THRU MAR. 31 12.25 5.625 12.500 6.000
APR. 1 THRU JUNE 30 9.625 4.000 9.750 4.250
JULY 1 THRU SEPT. 30 6.875 5.000 7.125 5.1875
OCT. 1 THRU DEC. 31 5.4375 1.875 5.5625 1.9375
1998
----
JAN. 2 THRU MAR. 31 3.3125 2.000 3.375 2.18725
14
<PAGE>
Recent Sales of Unregistered Securities
In December, 1995, the Company completed a private placement of
4,280,000(1) shares of its Common Stock for an aggregate offering price of
$305,000, of which: (i) 440,000 shares were issued in exchange for services
rendered in connection with that offering, valued by the Company at $27,500;
(ii) 600,000 shares were issued in exchange for certain legal, financial public
relations and investment banking services rendered to the Company and valued by
the Company at $75,000 in the aggregate; and (iii) 600,000 shares were issued in
exchange for a certain technology license, valued by the Company at $37,500. The
shares were offered and sold in reliance on an exemption from registration
pursuant to Rule 504 of Regulation D under the Securities Act of 1933 (the
"Act") and only to accredited investors within the meaning of Rule 501 of the
Regulation D under the Act. The proceeds of such offering have been used as
follows:
Purpose Amount
------- ------
Payment for services rendered $ 102,500
Acquisition of technology license $ 37,500
Technology development $ 165,000
In June, 1996, the Company completed a private placement of 2,718,0001
shares of its Common Stock for an aggregate offering price of $679,500. The
shares were offered and sold in reliance on an exemption from registration
pursuant to Rule 504 of Regulation D under the Act and only to accredited
investors within the meaning of Rule 501 of the Regulation D under the Act. The
proceeds of such offering have been used as follows:
Purpose Amount
------- ------
Bonuses $ 20,000
Accounting Fees 22,000
Technology Development 637,500
In December, 1996, the Company completed a private placement of 40 Units,
each consisting of the Company's one-year promissory note in the principal
amount of $50,000 and 25,000 shares of its Common Stock for an aggregate
offering price of $2,000,000. The Units were offered and sold in reliance on an
exemption from registration pursuant to Rule 506 of Regulation D under the Act,
and only to accredited investors within the meaning of Rule 501 of Regulation D
under the Act.
- ----------
(1) On June 1, 1996, the Company's Board of Directors authorized a
four-for-one forward split of the then outstanding shares of the Company's
Common Stock. The number of shares issued in this offering have been re-stated
adjusted to reflect such stock split.
15
<PAGE>
The proceeds of such offering have been used as follows:
Purpose Amount
------- ------
Legal fees $ 120,000
Accounting fees 5,000
Consulting fees 350,000
Repayment of loans 210,000
Salaries 100,000
Technology development 915,000
Reserved for working capital 300,000
In November 1997, the Company completed a private placement of $3,000,000
principal amount of its 8% Convertible Debentures due November 27, 2000 (the
"Debentures") and of Warrants to purchase up to 60,000 shares of the Company's
Common Stock (the "Warrants") (the Debentures and the Warrants, collectively,
the "Securities"). The Warrants were issued as additional consideration for the
purchase of the Debentures. The Securities were offered and sold in reliance on
an exemption from registration pursuant to Rule 506 of Regulation D under the
Act, and only to "accredited investors" within the meaning of Rule 501 of
Regulation D. See "Management's Discussion and Analysis of Results of Operation
and Financial Condition -- Liquidity and Capital Resources." The proceeds of
such offering have been and will be used as follows:
Purpose Amount
------- ------
Technology acquisition and development $ 1,000,000
Interest on debt 678,000
Working capital 1,000,000
In February 1998 the Company completed a private placement of $3,000,000
principal amount of its 8% Convertible Debentures due February 23, 2001 (the
"Debentures") and of Warrants to purchase up to 60,000 shares of the Company's
Common Stock (the "Warrants") (the Debentures and the Warrants, collectively,
the "Securities"). The Warrants were issued as additional consideration for the
purchase of the Debentures. The Securities were offered and sold in reliance on
an exemption from registration pursuant to Rule 506 under Regulation D under the
Act, and only to "accredited investors" within the meaning of Rule 501 of
Regulation D. See "Management's Discussion and Analysis of Results of Operation
and Financial Condition - Liquidity and Capital Resources." The proceeds of such
offering have been and will be used as follows:
Purpose Amount
------- ------
Retirement of Debt $ 2,000,000
Working Capital 765,000
16
<PAGE>
Item 6. Selected Consolidated Financial Information
The selected financial information set forth below is derived from the
Company's financial statements and should be read in conjunction with the
financial statements and related notes of the Company and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included under Item 7 of this Form 10-K.
17
<PAGE>
Statement of Operations Data:(2)
<TABLE>
<CAPTION>
For the Period
For the Period from For the Year from Inception
Inception (May 26, 1995) For the Year Ended Ended (May 26, 1995) to
to December 31, 1995 December 31, 1996 December 31, 1997 December 31, 1997
-------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT EXPENSES $ 212,061 $ 1,170,782 $ 1,007,671 $ 2,390,514
CONSULTING FEES 266,900 1,486,830 1,392,845 3,146,575
OTHER GENERAL AND ADMINISTRATIVE EXPENSES 34,265 547,447 1,262,067 1,843,799
INTEREST EXPENSE -- 43,422 270,740 314,162
AMORTIZATION OF DEFERRED AND UNEARNED FINANCE COSTS -- 228,502 8,507,919 8,736,421
------------ ------------ ------------ ------------
NET LOSS $ (513,226) $ (3,476,983) $(12,441,242) $(16,431,451)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.06) $ (0.23) $ (0.71)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,159,467 14,808,000 17,581,711
============ ============ ============
</TABLE>
Balance Sheet Data:
At December 31,
1995 1996 1997
--------- ----------- ------------
Working Capital (deficit) $ 42,000 $(1,809,237) $ (2,156,753)
Total assets $ 56,000 $ 617,492 $ 952,243
Total liabilities $ 13,000 $ 2,292,316 $ 5,801,966
Deficit accumulated during
the development stage $(513,000) $(3,990,209) $(16,431,451)
Total stockholders' equity
(deficiency) $ 43,000 $(1,674,824) $ (4,849,723)
- ----------
(2) Through December 31, 1997, and since that date, the Company has not
derived any significant sales revenues.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the selected
financial data and the financial statements and notes thereto appearing
elsewhere herein.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking statements
contained in this Form 10-K are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements contained
herein is the Company's ability to commercialize its technologies successfully,
which will be dependent on business, financial and other factors beyond the
Company's control, including, among others, market acceptance, ability to
manufacture on a large scale basis and at feasible costs, and all the risks
inherent in the establishment of a new enterprise and the marketing and
manufacturing of new products.
Plan of Operation
The Company is a development stage, technology transfer, holding and
management company formed to commercialize new, existing but previously
unrecognized, and previously "classified" technologies, with a particular
emphasis on those developed by prominent research institutes and individual
researchers in the former Soviet Union and in Israel, and to commercialize those
and other Western technologies for business and other commercial applications
principally in Central Europe, Ukraine, Russia and North America. Until recently
the Company had been principally engaged in identifying, monitoring, reviewing
and assessing technologies for their commercial applicability and potential, and
in acquiring selected technologies by equity investment, purchase, assignments,
and licensing arrangements. The Company believes that the Principal Technologies
are presently ready for commercialization and marketing. To that end, the
Company has decided to devote its business activities and resources principally
to the marketing and sale of the Principal Technologies, which include its EKOR
compound technology. The Company recently has initiated a marketing and sales
program for the Principal Technologies, and also has initiated discussions with
a number of prominent, potential users thereof, with a view towards the future
negotiation and execution of licensing and/or joint venture marketing and sales
agreements. The Company is proceeding with the marketing and potential
application of its EKOR compound technology in connection with nuclear
contamination remediation projects at the Chernobyl Nuclear Power Plant, and in
the U.S., Russia and Germany. See "Business." The Company intends to operate its
business by licensing its technologies to end-users and through development and
operating joint ventures and strategic alliances.
The Company was organized and commenced operation in May of 1995. The
Company is in the development stage and until recently its efforts have been
principally devoted to research and development activities and organizational
efforts, including the identification, review and acquisition of various
technologies, recruiting its scientific and management personnel and alliances
and raising capital.
The Company has not been profitable since inception and expects to incur
substantial operating losses over the next twelve months. For the period from
inception to December 31, 1996, the Company incurred a cumulative net loss of
$3,990,209, and for the period from inception to December 31, 1997, a cumulative
net loss of $16,431,451. The Company expects that it will generate losses until
at least such time as it can commercialize its technologies, if ever. No
assurances can be given that any of the Company's technologies can be
manufactured on a large scale basis or at a feasible cost. Further, no assurance
can be given that any technology will receive market acceptance. Being a
start-up stage entity, the Company is subject to all the risks inherent in the
establishment of a new enterprise and the marketing and manufacturing of a new
product, many of which risks are beyond the control of the Company.
The Company's plan of operation for the next twelve months will consist of
activities aimed at: (i) negotiating and executing license and/or joint venture
agreements with industrial end-users for the marketing and sale of "NIPs,"
"RubCon" and "LEM", Israeli technologies as to which the Company has acquired
equity participation and marketing rights see "Business"; (ii) continuing its
work with Kurchatov, EAPS and ChNPP with a view towards using the EKOR compound
in the remediation of ChNPP Reactor 4; and (iii) through an agreement entered
into in April, 1997 with DES, continue to bid jointly with DES on U.S. nuclear
waste transportation, contaminant and like projects utilizing the EKOR compound.
See "Business - Principal Technologies." To a lesser extent (and apart from the
Principal Technologies), the
19
<PAGE>
Company also intends to continue its efforts in connection with those of its
technologies that are not presently ready for commercialization and marketing.
See "Business - Other Technologies."
Results of Operation
For the Year Ended December 31, 1996 vs. the Period
from Inception (May 26 1995) to December 31, 1995:
The Company commenced operations on May 26, 1995. The Company has had no
significant revenues to date. Consulting and other general and administrative
expenses increased from $301,000 for the period ended December 31, 1995 to
$2,034,000 for the year ended December 31, 1996 principally as a result of
adding an executive secretary, a Director of Corporate Planning and a Market
Research Analyst as employees and increased marketing and research consulting
expenses. During 1996, the Company satisfied obligations under consulting
arrangements aggregating $1,210,000 by the issuance of 4,345,036 shares of
Common Stock.
The Company is focusing on the commercialization of its technologies.
Research and development expenses (consisting principally of expenses associated
with the final development of the EKOR compound, validation testing of the EKOR
compound and its application, and the fabrication of EKOR production equipment)
increased in the year ended December 31, 1996 to $1,171,000 from $212,000 for
the period ended December 31, 1995 as the Company funded the development of
additional technologies.
For the year ended December 31, 1996 and the period from inception (May
26, 1995) through December 31, 1995, the Company incurred operating losses of
$3,205,000 and $513,000, respectively. The losses are principally due to
expenses incurred in the development of the technologies, including
administrative expenses and consulting expenses.
Interest expense and amortization of deferred and unearned finance costs
increased from $-0- in 1995 to $272,000 in the year ended December 31, 1996.
This increase was attributable to financing costs related to promissory notes of
$341,000 and a bridge loan of $2,000,000. See Note 6 to the accompanying
financial statements.
For the Year Ended December 31, 1997
vs. the Year Ended December 31, 1996:
For the year ended December 31, 1997, consulting expenses decreased to
$1,392,845 from $1,486,830 for the year ended December 31, 1996. Other general
and administrative expenses for the year ended December 31, 1997, increased to
$1,262,067 from $547,447 for the year ended December 31, 1996 principally as a
result of an increase of $469,000 in legal fees, recording a charge against
operations of $75,000 in connection with the abandoned initial public offering,
and a $90,000 increase in salaries from additions to staff, in the 1997 period
as compared to the 1996 period.
Research and development expenses for the year ended December 31, 1997,
decreased to $1,007,671 from $1,170,782 for the year ended December 31, 1996,
attributable to the Company having completed research and development related to
its EKOR compound technology.
For the years ended December 31, 1997 and December 31, 1996, the Company
incurred operating losses of $3,662,583 and $3,205,059, respectively. These
losses are principally the result of expenses incurred in developing the
Company's EKOR technology and the lack of revenues.
Interest expense and amortization of deferred and unearned finance costs
increased from $271,924 for the year ended December 31, 1996, to an aggregate of
$8,778,659 for the year ended December 31, 1997 (of which, $270,740 represents
interest expense). This increase was attributable principally to $7,218,219 of
financing costs, exclusive of interest expense, related to the issuance of
2,000,000 additional shares of Common Stock to holders of promissory notes
issued in connection with a bridge financing completed in December 1996 as
penalties in connection with such holders' registration rights,
20
<PAGE>
$367,128 of financing costs related to the issuance on November 27, 1997, of
$3,000,000 principal amount of 8% Convertible Debentures, and $862,680 of
financing costs related to the issuance of warrants to purchase 364,000 shares
of Common Stock in repayment of certain shareholder loans.
The Company recorded an additional charge against income of approximately
$2,000,000 during the fourth quarter of 1997 related to shares of common stock
issued in connection with the bridge financing completed in December 1996. The
Company has only recently initiated marketing and sales efforts in connection
with its Principal Technologies (see "Business - General; - Principal
Technologies"), and, consequently, there can be no assurance that the company
will be profitable on quarterly or annual basis.
Liquidity and Capital Resources
The Company's principal sources of working capital have been net proceeds
of $842,000 from the offering of common stock under Rule 504 of Regulation D,
shareholder advances aggregating $761,440, the bridge financing discussed below,
completed in December 1996 of $2,000,000, and from the private placement of
$3,000,000 principal amount of 8% Convertible Debentures completed in November
1997. Of the shareholder advances, promissory notes evidencing approximately
$200,000 of shareholder indebtedness were exchanged for units in the bridge
financing and the balance was repaid from the proceeds of the bridge financing.
The net proceeds of the bridge financing reflect the cancellation of the notes
referred to above were used for repayment of accrued liabilities and funding the
development of certain technologies and for other working capital purposes. The
Company had a working capital deficiency and stockholders' deficiency of
$1,809,237 and $1,674,824, respectively, as of December 31, 1996 and $2,156,753
and $4,849,723, respectively, at December 31, 1997. The report of the Company's
independent certified public accountants contains an explanatory paragraph which
expresses substantial doubt as to the Company's ability to continue as a going
concern.
In December 1996, the Company entered into a purchase agreement for an
offering of up to an aggregate of 40 units to certain accredited investors as
defined by Rule 501 of Regulation D under the Act in reliance on an exemption
from registration under Rule 506 of Regulation D (the "Bridge Financing"). Each
unit consists of one promissory note (a "Bridge Note") issued by the Company in
the principal amount of $50,000 bearing interest at the rate of 12% per annum
and 25,000 shares of the Company's Common Stock. Under the agreement, the notes
were due one year from the issuance date. Gross proceeds received under this
offering were $2,000,000. Holders of the shares of common stock issued pursuant
to this agreement have, among other things, demand and mandatory registration
rights, including penalties, which require the Company to issue to the unit
holders up to 1,000,000 additional shares of common stock if such shares were
not registered under the Act within the specified time frame. As of December 31,
1996, the Company recorded an additional 500,000 shares of Common Stock to be
issued under the offering based on the Company's belief that it would not meet
one of the two filing deadlines. The Company did not meet either filing deadline
and, accordingly the 500,000 additional common shares recorded as of December
31, 1996, were issued to such holders in April, 1997, and a further 500,000
common shares were issued to such holders in August, 1997. See Note 6 to
accompanying financial statements. As of their maturity in December 1997, the
Company had insufficient funds to repay such notes and, accordingly, has
obtained the agreement of the noteholders to extend the notes' maturity until
March 18, 1998, in consideration of the issuance to the noteholders of an
aggregate of 1,000,000 shares of the Company's Common Stock. The Company has
agreed to register such shares of Common Stock under the Act, and they are
included in the shares offered hereby. Pursuant to the terms of the notes, as of
December 19, 1997 their interest rate has been increased to 15% per annum. The
Bridge Notes and all accrued interest thereon were repaid by the Company on
February 26, 1998.
In November 1997 and February 1998, the Company completed two private
placements, each of $3,000,000 principal amount of its 8% Convertible Debentures
due November 27, 2000 and February 23, 2001, respectively (the "Debentures"). In
each such private placement, warrants (the "Warrants") to purchase up to 60,000
shares of Common Stock (the Debentures and Warrants, collectively, the
"Securities," each offering of the Securities a "Debenture Offering," and the
offering of the Securities
21
<PAGE>
the "Debenture Offerings")were also issued. The Securities were offered and sold
only to accredited investors as defined by Rule 501 of Regulation D under the
Act, in reliance on an exemption from registration under Rule 506 of Regulation
D.
The Debentures may be converted by the holders thereof (each a "Debenture
Holder" and collectively the "Debenture Holders"), in whole or in part, at any
time and from time to time during the period beginning on the earlier of
February 25, 1998 (August 22, 1998 in the case of the Debentures issued in the
February 1998 Debenture Offering), or the date upon which a Registration
Statement under the Act covering the shares of Common Stock into which the
Debentures are convertible (the "Underlying Shares") is declared effective by
the Securities and Exchange Commission (the "SEC"), and ending on November 27,
2000 (February 23, 2001, in the case of the Debentures issued in the February
1998 Debenture Offering). The Debentures may be converted into a number of
shares of Common Stock equal to the quotient of (i) the outstanding principal
amount of Debentures to be converted (plus all accrued but unpaid interest
thereon), divided by (ii) the "Conversion Price" (determined as set forth
below). The Debentures may also be converted by the Company, in whole or in
part, at any time and from time to time on or after November 27, 1999 (February
23, 2000, in the case of the Debentures issued in the February 1998 Debenture
Offering) into a number of shares of Common Stock determined in accordance with
the foregoing calculation, subject to certain restrictions relating to the
registration of the Underlying Shares and the trading of the Company's Common
Stock. The "Conversion Price" in relation to conversion of the Debentures by
either the Debenture Holders or the Company is the lesser of (a) $5.38 or (b)
the average closing bid price per share of Common Stock for the five trading
days immediately preceding the conversion date, multiplied by (x) 80% in the
case of conversions effected prior to May 29, 1998 (August 22, 1998 in the case
of the February 1998 Debenture Offering), (y) 75% in the case of conversions
effected on or after May 29, 1998 (August 22, 1998 in the case of the February
1998 Debenture Offering) but prior to November 25, 1998 (February 8, 1999 in the
case of the February 1998 Debenture Offering) and (z) 70% in the case of
conversions effected on or after November 25, 1998 (February 8, 1999 in the case
of the February 1998 Debenture Offering). In the case of Debenture conversions
by Debenture Holders, the "Conversion Price" may not be less than a specified
"floor" initially set at $2.00 ($1.625 in the case of the February 1998
Debenture Offering).
The Warrants may be exercised by the holders thereof (each a "Warrant
Holder" and collectively the "Warrant Holders") at any time and from time to
time during the period beginning on November 27, 1997 (February 23, 1998, in the
case of the Warrants issued in the February 1998 Debenture Offering) and ending
at 5:30 p.m. New York time on November 27, 1999 (February 23, 2000, in the case
of the Warrants issued in the February 1998 Debenture Offering) at a per share
exercise price of $4.73 ($2.73 in the case of the February 1998 Debenture
Offering). The Warrant Holders have "piggy-back" registration rights with
respect to all or any portion of the Warrant Shares, pursuant to which the
Company, upon the request of any Warrant Holder, is obligated to include the
Warrant Holder's Warrant Shares (or any portion thereof as the Warrant Holder
may elect) in any Registration Statement under the Act that the Company files
with the SEC (other than Registration Statements on Form S-8 or Form S-4
covering securities issued by the Company pursuant to an employee benefit plan
or in connection with a merger, acquisition or similar transaction,
respectively), and naming the Warrant Holder as a selling shareholder therein.
Pursuant to the Debenture Offerings the Company agreed that if a
Registration Statement under the Act covering the Underlying Shares were either
not filed with the SEC on or prior to January 15, 1998 or, if filed, not
declared effective by the SEC on or prior to February 16, 1998, the Company will
be obligated to pay to the Debenture Holders liquidated damages equal to 1% of
the aggregate principle amount of the then outstanding Debentures, on the first
day of each month until such filing or effectiveness deficiency is cured.
Neither deadline was met, and the Company was obligated to make monthly
payments of $30,000 to the Debenture Holders until the Registration
Statement was declared effective.
The Company has agreed to fund the commercialization of certain
technologies developed in the former Soviet Union by scientists and researchers
at Kurchatov, other institutes associated therewith, and EAPS, collectively the
"Scientists". Kurchatov will provide the materials, facilities and personnel to
22
<PAGE>
complete the necessary work to commercialize such technologies. The Company also
has agreed to provide funding in connection with the marketing and sale of three
Israeli technologies (RubCon, LEM and NIPs, see "Business -- General; --
Principal Technologies") and to provide funding for the further research and
development of four other Israeli technologies. See "Business -- Other
Technologies." Total planned expenditures under these programs, including
related general and administrative expenses, are expected to approximate
$1,500,000 during fiscal year 1997 and $800,000 during fiscal year 1998. The
Company's principal sources of funding for these expenditures during fiscal 1997
were remaining cash from the Bridge Financing ($380,000 as of December 31, 1996
and $0 as of December 31, 1997) and loans from shareholders and other private
lenders, which for the period January 1, 1997, through December 31, 1997, have
totalled approximately $450,000. The Company's principal source of funding for
these expenditures during fiscal year 1998 will be the proceeds of the Debenture
Offerings. As the development of each technology is completed and the
technology's commercial applications are identified, the Company also will seek
joint venture partners to fund any further capital expenditures, including the
project financing.
As discussed above, the Company may require additional financing to
continue to fund research and development efforts, operating costs and complete
necessary work to commercialize its technologies. The Company has determined not
to proceed with a previously contemplated, initial public offering of 5,000,000
shares of cumulative convertible preferred stock. Costs in connection therewith,
aggregating $75,000, will be charged to expenses during fiscal year 1997.
The Company is exploring additional sources of working capital, including
further private sales of securities and joint ventures and licensing of
technologies. During the first three quarters of 1997 the Company relied on
shareholder loans and remaining Bridge Financing proceeds as its principal
sources of working capital. Through its joint bidding agreement with DES (see
"Business -- Principal Technologies -- Silicon-Organic Compound"), the Company
has successfully bid on a remediation demonstration project at the federal
nuclear facility in Hanford, Washington. While management believes that other
successful private placement and successful bids on U.S. nuclear remediation
demonstration projects are possible, there is no assurance that the its present
joint venture with Duke Engineering and Services will result in the award of any
further nuclear remediation contracts.
No assurance can be given that the Company can successfully obtain any
additional working capital or complete any additional offerings or, if obtained,
that such funding will not cause dilution to shareholders of the Company.
Further, no assurance can be given as to the completion of research and
development and the successful marketing of the Company's technologies.
Computer System - "Year 2000" Issues
The Company is not significantly dependent on customized or highly
sophisticated computer systems and software. Presently and for the foreseeable
future the Company utilizes and will utilize commercially available, "small
office" computers and commercially available "off-the-shelf" software. The
Company is not part of and is not interfaced or otherwise electronically
connected to any large or sophisticated industrial, financial or banking
computer networks or systems. Accordingly, the Company does not expect to be
faced with a "Year 2000 Problem," which refers to a design flaw in many computer
systems (and, particularly, in large, highly sophisticated or custom-designed
systems) whereby the system cannot distinguish between the year (or numbers)
1900 and 2000. The Company believes that appropriate "off-the-shelf" hardware
and software up-grades will be readily available, at reasonable cost, in time
for the Company to purchase, install and test them prior to the year 2000.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements are
included in Part IV, Item 14 of this Report beginning on page F-1.
23
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Set forth below for each Director and Officer is his name, age, the year
in which he became a Director or Officer of the Company, his principal
occupation during the last five years and any additional directorships in
publicly-held companies.
Executive Officers and Directors
Name Age Position with the Company
---- --- -------------------------
James D. Watkins 70 Director and Chairman
Maxwell Rabb 87 Director
Peter Gulko 48 President, Secretary and Principal Financial
Officer
Lawrence C. McQuade 70 Director
The Company has a Board of Directors comprised of three persons. Directors
are elected at the annual meeting of shareholders and hold offices until the
next annual meeting of shareholders or until their successors have been elected.
James D. Watkins is a retired Admiral of the U.S. Navy, and has served as
Director and Chairman of the Board of the Company since January 1998. Admiral
Watkins has also served the Company as a technology consultant since October,
1996. Since 1993, Admiral Watkins has served as the President of the Joint
Oceanographic Institutions, Inc., in Washington, D.C., and later, President,
Consortium for Oceanographic Research and Education (two non-profit consortia
that manage research projects). He is also a director of the International
Technology Corporation (IT Corp) and GTS-Duratek. From March 1989 until January
1993 Admiral Watkins served as the Secretary of the U.S. Department of Energy in
the administration of President Bush. Admiral Watkins was named Chief of Naval
Operations by President Reagan in June, 1982. Admiral Watkins is a 1949 graduate
of the U.S. Naval Academy, and received a Master's Degree in Mechanical
Engineering from the U.S. Naval Postgraduate School in 1958.
Maxwell Rabb has been a Director of the Company since January, 1998. Mr.
Rabb served as the U.S. Ambassador to Italy from 1981 to 1989, and has held many
U.S. government assignments. He is currently counsel to the law firm of Kramer,
Levin, Neftalis & Frankel. From 1953 to 1956, he served as Secretary of the
Cabinet of the President of the United States in the Eisenhower Administration.
Since then, Ambassador Rabb has served every President in each administration
thereafter in various government posts, including: Chairman of the U.S.
Delegation to UNESCO in Paris (1959-1960); U.S. Representative to the World Bank
and Member of the Conciliation Panel for the Settlement of International
Disputes (1967-1973); and the Panel for Relief Assistance for India, Pakistan
and Bangladesh. From 1937 to 1943, Ambassador Rabb served as Administrative
Assistant to U.S. Senator Henry Cabot Lodge and to U.S. Senator Sinclair Weeks
in 1944, prior to entering the Navy during World War II. In 1946, he became
legal and legislative counsel to Secretary of the Navy, Honorable James
Forestal, and a consultant to the U.S. Senate Rules Committee in 1952. In 1989,
Ambassador Rabb was awarded the Grand Cross of the Order of Merit of the Knights
of Malta in Rome. He received an LLB from Harvard Law School.
Lawrence C. McQuade has served as Director of the Company since January
1998. In 1997, Mr. McQuade was a founding partner of River Capital International
and continues as one of two partners
24
<PAGE>
engaged in the creation and execution of all phases of River Capital
International's financial services business, primarily in Russia. Since 1995,
Mr. McQuade has been the Chairman of Qualitas International, a financial
consulting business with business in Russia and South America. From 1996 to
1997, Mr. McQuade was a director of Country Baskets Index Fund, a director of
Applied Bioscience International from 1995 to 1996 and a director of the Czech &
Slovak American Enterprise Fund from 1994 to 1996 serving as chairman of the
board from 1995 to 1996. From 1988 to 1995, Mr. McQuade was the Vice Chairman of
Prudential Mutual Fund Management, Inc., where he was the President and a
director of 39 mutual funds. Mr. McQuade served as Assistant Secretary to the
U.S. Department of Commerce under President Lyndon Johnson. Mr. McQuade is a
1950 graduate of Yale University, received a B.A. and an M.A. from Oxford
University where he was a Rhodes Scholar and earned is law degree at Harvard Law
School.
Peter Gulko has been the President, Secretary and Principal Financial
Officer of the Company since February, 1998, and served as a Director of the
Company from its incorporation in May, 1995 until January, 1998. From May 1994
until February 1998 Mr. Gulko also acted as a business agent for ERBC
particularly with respect to that company's activities in the former Soviet
Union. From 1995 Mr. Gulko has also been the President of CIS Development, Inc.,
a consulting company of which he is the sole owner. From 1991 until 1994 Mr.
Gulko was the director of the Moscow, Russia, office of TMR, International, a
technology transfer company that specialized in oil refining. Mr. Gulko is a
1973 recipient of a Masters Degree in Civil Engineering from Novocherkassk
University in Russia.
On November 17, 1997, Karl J. Krobath resigned as a Director of the
Company. On January 23, 1998, Randolph Graves, Peter Gulko and Hans Joachim
Skrobanek resigned as Directors of the Company, and Randolph Graves and Hans
Joachim Skrobanek resigned as officers of the Company.
On January 23, 1998, Adm. James D. Watkins, Maxwell Rabb and Lawrence
McQuade were elected by the departing Directors to serve as Directors of the
Company.
Anticipated Officer
The Company anticipates that, subject to the execution of a definitive
employment agreement, John McNeil Wilkie will be appointed Senior Vice President
and Chief Financial Officer of the Company in or about May, 1998. From 1992 Mr.
Wilkie has served as the President of Telluride Music Co., Inc., which he
founded and which owns and operates a retail music store in Telluride, Colorado.
From 1990 through 1991 Mr. Wilkie was a managing director of The Consulting
Group, Ltd., an executive search firm, for which he developed and executed
executive searches for U.S., European and Japanese companies in the financial
services industry. From 1986 through 1989 he served as Vice Chairman of Morgan
Guaranty International Bank, where he served as Chairman of the Credit Policy
Committee and performed strategic planning and developed policy directed towards
high net worth individuals and international trade. During this period Mr.
Wilkie also served as Vice President and General Manager for Corporate Finance -
Latin America of Morgan Guaranty Trust Company, where he managed line units
responsible for sovereign debt, corporate and government lending, debt trading
and sales, and correspondent banking relationships with U.S. and Latin American
clients. From 1980 through 1986, Mr. Wilke served as General Manager of Morgan
Guaranty in Italy and Director of J.P. Morgan, SPA, where he worked extensively
with European capital markets. Mr. Wilkie received a B.A. degree in History from
Harvard University in 1960.
Key Consultants
Oleg L. Figovsky, Ph.D. has served as a technology and business
development consultant to the Company since April, 1996. From 1993 Prof.
Figovsky has served as the General Manager of Polyadd, Ltd., an Israeli
corporation. From 1992 until 1993, Prof. Figovsky was the Manager of Research
and Development at the Israeli Corrosion Research Institute. From 1990 until
1991 Prof. Figovsky served as the Director of Research Center of "Intercorr", an
Austrian-Russian joint venture, and from 1986 until 1991 he was the Head of the
Corrosion Protection Department of the All-Union Corrosion Protection Research
Institute in Moscow, Russia. Prof. Figovsky received a Masters of Science degree
in Materials Engineering from the All-Union Civil Engineering Institute, Moscow,
Russia, in 1964, a Ph.D in Materials Engineering from the Moscow Civil
Engineering Institute in 1971, and a Doctor of Science in Materials Engineering
from the Institute of Corrosion Protection, Moscow, in 1989.
Richard A. Wall acted as a financial and business development consultant
to the Company from its inception until December 1997. Since 1996 Mr. Wall has
been a U.S. Resident Partner in the Institute for Applied Social Sciences
(Dusseldorf, German - Zurick, Switzerland - LaJolla, California). Since 1983 he
has been engaged in private, international investment banking activities head
quartered in New York City.
In 1996 and 1997 Mr. Wall loaned an aggregate of $561,440 to the Company,
all of which, together with accrued interest, has been repaid. Mr. Wall is the
beneficial holder of 120,000 shares of the Company's Common Stock and of options
to purchase 364,000 shares of Common Stock. See "Certain Relationships and
Related Transactions."
Founder
Kurt Seifman, through ERBC Holdings, Limited (of which he is the chief
executive officer and sole shareholder), is the Founder of the Company. Mr.
Seifman is 85 years old, and is principally engaged
25
<PAGE>
in investment activities personally and through ERBC. For the past five years
Mr. Seifman has not been an executive employee, director or officer of any
business entity other than ERBC.
Mr. Seifman is the beneficial owner of 1,246,300 shares of the Company's
Common Stock. ERBC is the beneficial owner of 255,000 shares of the Company's
Common Stock. ERBC has sub-licensed to the Company the EKOR compound and the
Re-sealable Container Systems. See "Certain Relationships and Related
Transactions."
Item 11. Executive Compensation.
The following Summary Compensation Table table sets forth the compensation
paid by the Company for services rendered in all capacities during the calendar
years 1996 and 1997 to Randolph A. Graves, Jr., its chief executive officer
during 1996. No other executive officer or key employee was compensated in
excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Salary Bonus Compensation(1)
Name and Principal Position Year ($) ($) ($)
<S> <C> <C> <C> <C>
Randolph A. Graves, Jr, President & Chief 1997 $77,374 0 0
Executive Officer(2)......................... 1996 $77,374 $20,000 $243,109
</TABLE>
Compensation Arrangements
Compensation of Directors
The Company's directors do not receive any compensation for their service
as directors or on any committee of the Board.
1995 Incentive Stock Option Plan
The Company has adopted its 1995 Incentive Stock Option Plan ("Plan"). The
Board of Directors (the "Board") believes that the Plan is desirable to attract
and retain executives and other key employees of outstanding ability. Under the
Plan, options to purchase an aggregate of not more than 500,000 shares of Common
Stock may be granted from time to time to key employees, officers, directors,
advisors and consultants to the Company.
The Plan is currently administered by the Board which may empower a
committee to administer the Plan. The Board is generally empowered to interpret
the Plan, prescribe rules and regulations relating thereto, determine the terms
of the option agreements, amend them with the consent of the optionee, determine
the individuals to whom options are to be granted, and determine the number of
shares subject to each option and the exercise price thereof. The per share
exercise price for options granted under the Plan are determined by the Board
provided that the exercise price of incentive stock options ("ISOs") will not be
less than 100% of the fair market value of a share of the Common Stock on the
date the option
- ----------
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1996.
(2) Dr. Graves resigned as a Director, and as the Chairman, President and
Chief Executive Officer of the Company on January 23, 1998.
26
<PAGE>
is granted (110% of fair market value on the date of grant of an ISO if the
optionee owns more than 10% of the Common Stock of the Company). Upon exercise
of an option, the optionee may pay the purchase price with previously acquired
securities of the Company, or at the discretion of the Board, the Company may
loan some or all of the purchase price to the optionee.
Options will be exercisable for a term determined by the Board, which will
not be greater than ten years from the date of grant (five years in the case of
ISO's). Options may be exercised only while the original grantee has a
relationship with the Company which confers eligibility to be granted options or
within three months after termination of such relationship with the Company, or
up to one year after death or total and permanent disability. In the event of
the termination of such relationship between the original grantee and the
Company for cause (as defined in the Plan), all options granted to that original
optionee terminate immediately. In the event of certain basic changes in the
Company, including a reorganization, merger or consolidation of the Company, or
the purchase of shares pursuant to a tender offer for shares of Common Stock of
the Company, in the discretion of the Committee, each option may become fully
and immediately exercisable. ISOs are not transferable other than by will or the
laws of descent and distribution. Non-qualified stock options may be transferred
to the optionee's spouse or lineal descendants, subject to certain restrictions.
Options may be exercised during the holder's lifetime only by the holder, his or
her guardian or legal representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
that certain material modifications affecting the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
To date, no options have been granted pursuant to the Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
To the knowledge of the Company, the following table sets forth the
ownership of the Company's Common Stock as of March 31, 1998, by each person
owning more then 5% such Common Stock, by each officer and director and by all
officers and directors as a group.
Number of Shares Percentage of Shares
Name and Address (1) Beneficially Owned(2) Beneficially Owned
-------------------- --------------------- ------------------
Peter Gulko 1,110,000 5.9%
Maxwell Rabb 80,000 *
Kurt Seifman 1,246,300 6.6%
James D. Watkins 97,000 *
Lawrence McQuade 0 0
Directors and Officers
As a Group (4 Persons) 1,287,000 6.8%
- ----------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 1101 30th Street, N.W., Suite 500, Washington, D.C. 20007
(2) Unless otherwise indicated, each person has sole voting and investment
power with respect to all shares.
27
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Shareholder and Other Loans.
On June 30, 1996, Richard A. Wall Associates, Inc. a company controlled by
Richard A. Wall (who has acted as a consultant to the Company) loaned $128,300
to the Company, payable with accrued interest at the rate of 10% per anum, on
December 31, 1996.
On August 31, 1996, Richard A. Wall Associates, Inc., Chad Nellis (a
shareholder and the son of Mr. Wall) and D.K. Rogers (a shareholder and
consultant to the Company) loaned to the Company $13,000, $100,000, and
$100,000, respectively, each such loan being payable, with accrued interest at
the rate of 10% per annum, on December 31, 1996.
During 1997, Richard A. Wall Associates, Inc., loaned $420,140 to the
Company.
The loans made by Richard A. Wall Associates, Inc., in 1996 and in 1997
were repaid in full in fiscal years 1996 and 1997, respectively. The loans made
by Mr. Nellis and Ms. Rogers were fully converted into four Units in the
Company's third unregistered offering of Common Stock pursuant to Rule 506 of
Regulation D under the Securities Act.
In April 1997 ERBC Holdings, Limited, which is wholly-owned by Kurt
Seifman, a shareholder of the Company, loaned $30,000 to the Company, which
remains outstanding.
Issuance of Common Stock to Consultants and Advisors.
On October 10, 1995, the Company granted options to Richard A. Wall and
Kelly Capital Corporation to acquire 200,000(1) shares, each, of the Company's
Common Stock in exchange for past financial public relations and investment
banking services, respectively. The shares issuable upon exercise of those
options were part of the Company's first unregistered offering of Common Stock
pursuant to Rule 504 of Regulation D under the Securities Act of 1933. All such
options were exercised on January 18, 1996.
The services of Mr. Wall and Kelly Capital Corporation were each valued by
the Company at $25,000, which valuation the Company believes to be fair and
reasonable.
Acquisition of Technologies from Consultant
Prof. Figovsky who is a consultant to the Company, is the originator and
developer of three technologies, INP, LEM and RubCon, all right, title and
interest in which was purchased by the Company from Prof. Figovsky in January,
1998, for an aggregate purchase price of $125,000 plus royalties equal to 49% of
the company's net revenues from the sale and/or licensing of such technologies,
payable for a period of 15 years commencing on January 1, 1998. See "Business --
General -- Acquisition of Israeli Technologies -- Incubator Technologies
- -Technologies Purchased from Prof. Oleg L. Figovsky; - Principal Technologies."
Common Directors, Officers and Shareholders
ERBC Holdings, Limited. ERBC is the beneficial owner of 255,000 shares of
the Company's Common Stock. One present and one former employee of ERBC,
Hans-Joachim Skrobanek and Peter Gulko, respectively, are shareholders and
former directors of the Company, and Mr. Skrobanek is the
- ----------
(1) On June 1, 1996, the Company's Board of Directors authorized a
four-for-one forward split of the then outstanding shares of the Company's
Common Stock. The number of shares of Common Stock issuable upon exercise of the
foregoing options has been restated to reflect such stock split.
28
<PAGE>
former Secretary of the Company. Mr. Skrobanek is the beneficial owner of
145,000 shares, and Mr. Gulko is the beneficial owner of 1,110,000 shares, of
the Company's Common Stock. The chief executive officer and sole shareholder of
ERBC, Kurt Seifman, is the beneficial owner of 1,246,300 shares of the Company's
Common Stock. Mr. Gulko currently is the President, Secretary and Principal
Financial Officer of the Company.
Eurowaste Management, Ltd. Karl Krobath, the chairman and chief executive
officer of Eurowaste, is the beneficial owner of 25,000 shares of the Company's
Common Stock.
Arbat American Autopark, Ltd. Hans-Joachim Skrobanek, a shareholder and
former director and the Secretary of the Company, is a shareholder and president
of Arbat American. ERBC is the beneficial owner of 40% of the outstanding common
stock of Arbat American.
Kurchatov Research Holdings, Ltd. During the period of June, 1997, through
February 13, 1998, Dr. Graves (who until January 23, 1998, served as the
Chairman, Chief Executive Officer and a director of the Company) served as a
director and Secretary of KRH, which is entitled to receive 50% of the net
profits derived by the Company from the sale or licensing of the Company's EKOR
compound. During Dr. Grave's tenure as President of KRH, the Company did not
enter into any material agreements or commitments with KRH. See "Business -
Principal Technologies - Silicon - Organic (EKOR) Compound" and "Certain
Relationships and Related Transactions." The outstanding common stock of KRH is
owned of record by ERBC and by CIS. Such Stock is held by CIS for the benefit of
the EAPS in EAPS's capacity as representative of various individual Russian and
Ukrainian scientists, researchers and academics affiliated with EAPS and
Kurchatov. KRH is entitled to receive 50% of the net profits derived by the
Company from the sale and licensing of the EKOR compound, one of the Company's
Principal Technologies. Peter Gulko, the beneficial owner of 1,110,000 shares of
the Company's Common Stock, who served as a director of the Company until
January 23, 1998, and who presently is the President, Secretary and Principal
Financial Officer of the Company, is the sole shareholder of CIS. See "Business
- - Principal Technologies - Silicon - Organic (EKOR) Compound."
Transactions Involving ERBC, Eurowaste and Arbat American.
Business Structure; Inter-company Relationships. The business structure
and relationships between the Company, ERBC, Eurowaste and Arbat American
diagrammed and described below (i) separate the Company's business purpose of
developing and commercializing technologies from end-user business operations,
and from on-going research in Russia, and (ii) advance the Company's strategy of
commercializing technologies through joint ventures, license arrangements and
strategic alliances. Additionally, such structure reduces the Company's exposure
to the various risks of conducting on-going business operations in Russia and
Ukraine.
Re-sealable Containers. ERBC is the sub-licensor to the Company of the
Re-sealable Container Systems.
Silicon-Organic (EKOR) Compound. EAPS is the applicant under a pending
patent application in respect of the EKOR compound filed in Russia, and the
holder of a Russian EKOR patent. The Company is the applicant under pending
patent applications in respect of the EKOR compound filed in the U.S., Ukraine,
Japan and Germany. Pursuant to a License Agreement among EAPS (as Licensor), and
ERBC (as Licensee) dated September 6, 1996 (the "EAPS-ERBC License") ERBC became
the exclusive licensee of all right, title and interest in and to the EKOR
technology in Canada, China, Japan, the Republic of Korea, the United States of
America, Ukraine and all countries that are members of the European Patent
Agreement (the "Territory") for a term expiring on August 1, 2014. The EAPS-ERBC
License, among other things, grants ERBC the right to sub-license its rights and
interest thereunder. Pursuant to the License Agreement among ERBC and the
Company dated September 16, 1996 (the "ERBC-Eurotech License"), ERBC exclusively
sub-licensed all of its right, title and interest in and to the EKOR technology
to the Company for a term co-terminus with the term of the EAPS-ERBC License.
Pursuant to an agreement among KRH and the Company dated January 28, 1997, 50%
of the net profits the Company derives from the commercialization, sale or
29
<PAGE>
licensing of any technology developed by Kurchatov and EAPS (which includes the
EKOR compound) will be remitted to KRH. KRH's outstanding capital stock is owned
by ERBC and by CIS. Such stock is held by CIS for the benefit of EAPS (which in
such regard is acting as representative of individual Russian scientists,
researchers and academics affiliated with either or both Kurchatov and EAPS).
See "Certain Relationships and Related Transactions."
----------
| EAPS |
----------
|
|
Technology
License
v
----------
----------------| ERBC |--------------
| ---------- |
minority | |
shareholder | shareholder
| v v
| Sublicense |
| --------------- -------
| | EUROTECH, | | KRH |
------------->| LTD. | -------
--------------- ^
| |
| 50% of |
------>net EKOR----
profits
Waste-to-Energy Technology. Pursuant to a letter agreement among the
Company and Eurowaste dated September 18, 1996, Eurowaste has agreed to pay to
the Company $2,450,000 upon the initiation of construction of the first
waste-to-energy plant in which Eurowaste is involved, and to pay to the Company
$425,000 upon the initiation of construction of each additional waste-to-energy
plan in which Eurowaste is involved. The Company believes that the terms of this
agreement are fair and commercially reasonable.
------------------
| |
------------->| EUROTECH, LTD. |---------
| | | |
| ------------------ |
| v |
| Technology |
| License |
Technology v |
License & ------------------ |
Transfer | EUROWASTE -<--------
Fees ------------------
--<-------------
Automated Parking Garages. Pursuant to a letter agreement among the
Company and Arbat American dated January 28, 1997, Arbat American has agreed to
pay to the Company $1,250 per parking space in each parking garage erected by
Arbat American or any affiliate of Arbat American the design of which
substantially conforms to the technology, designs, renderings, blueprints and
plans previously furnished by the Company to Arbat American. The Company
believes that the terms of such agreement are fair and commercially reasonable.
30
<PAGE>
----------------
| EUROTECH, |
----------->| LTD. |<-------------
| ---------------- |
| v minority
| Technology shareholder
Technology License ^
fees | --------
| | | ERBC |
| | --------
v 40%
| -------------------- shareholder
----------| ARBAT AMERICAN | |
--------------------------------
v
50% shareholder
v
------------------------------
| CINEMA WORLD ON ARBAT (1)|
| (Russian operating entity) |
------------------------------
- ----------
(1) See "Business - Other Technologies - Automated Parking Garages."
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) (1) See Audited Financial Statements and supplementary data index
which appears on page F-1 herein.
(2) Schedules have been omitted because they are either not applicable or
the required information is shown in the financial statements or
notes thereto.
(3) Exhibits
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Certificate of Incorporation of the Company(1)
3.2 By-Laws of the Company(1)
4.1 Form of Common Stock Certificate(1)
10.1 Material Contracts(1)
10.2 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.3 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.4 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.5 Teaming Agreement between the Company and Duke Engineering
& Services, Inc.(1)
10.6 Form of Agreement between the Company, V. Rosenband and C.
Sokolinsky, and Ofek Le-oleh Foundation(1)
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband
and C. Sokolinsky(1)
10.6.3 Voting Agreement between the Company, V. Rosenband and C.
Sokolinsky(1)
10.7.1 Investment Agreement between the Company and Chemonol,
Ltd.(1)
10.7.2 Equity Sharing Agreement between the Company and Leonid
Shapovalov(1)
10.7.3 Voting Agreement between the Company and Leonid
Shapovalov(1)
10.8.1 Agreement between the Company and Separator, Ltd.(1)
10.8.2 Equity Sharing Agreement between the Company and Efim
Broide(1)
10.8.3 Voting Agreement between the Company and Efim Broide(1)
10.9.1 Form of Agreement between the Company, Ofek L-Oleh
Foundation and Y. Kopit(1)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit and
V. Rosenband(1)
10.9.3 Voting Agreement between the Company, Y. Kopit and V.
Rosenband(1)
10.10 Form of License Agreement between the Company and ERBC
Holdings, Ltd.(1)
10.11 Cooperation Agreement between the Company and
Forschungszentrum julich GmbH(1)
10.12.1 Convertible Debenture Purchase Agreement among the
Company, JNC Opportunity Fund, Ltd. and Diversified
Strategies Fund, L.P.(1)
10.12.2 Escrow Agreement among the Company, Inc. opportunity Fund,
Ltd., and Diversified Strategies Fund, L.P. and Robinson,
Silverman, Pearce, Aronsohn & Berman, LLP(1)
10.12.3 Registration rights Agreement among the Company the
Company, JNC Opportunity Fund, Ltd., and Diversified
Strategies Fund, L.P.(1)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and JNC Opportunity Fund, Ltd.(1)
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and Diversified Strategies Fund,
L.P.(1)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity
Fund, Ltd.(1)
10.12.7 Warrant No. 2 between the Company and Diversified
Strategies Fund, L.P.(1)
10.12.8 Warrant No. 3 between the Company and Diversified
Strategies Fund, L.P.(1)
32
<PAGE>
10.13.1 Convertible Debenture Purchase Agreement between the
Company and JNC Opportunity Fund, Ltd.(1)
10.13.2 Escrow Agreement among the Company, JNC Opportunity Fund,
Ltd. and Robinson, Silverman, Pearce, Aronshohn and
Berman, LLP(1)
10.13.3 Registration Rights Agreement between the Company and JNC
Opportunity Fund, Ltd.(1)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001
between the Company and JNC Opportunity Fund, Ltd.(1)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity
Fund(1)
23.1 Report of Tabb, Conigliaro & McGann(2)
(b) Reports on Form 8-k.
The Company filed a report on Form 8-k on December 2, 1997.
- ----------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 under the Securities Exchange Act of 1934, on file with the Commission,
file number 333-26673.
(2) Filed with this Form 10-K.
33
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page Nos.
---------
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS
At December 31, 1996 and December 31, 1997 F-3
STATEMENTS OF OPERATIONS F-4
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
For the Period from Inception (May 26, 1995) to December 31, 1997
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5 - F-6
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
STATEMENTS OF CASH FLOWS F-7
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
For the Period from Inception (May 26, 1995) to December 31, 1997
NOTES TO FINANCIAL STATEMENTS F-8 - F-34
F-1
<PAGE>
Board of Directors and Stockholders
Eurotech, Ltd.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Eurotech, Ltd. (the "
Company") (a development stage company) as of December 31, 1996 and 1997 and the
related statements of operations, stockholders' deficiency, and cash flows for
the period from inception (May 26, 1995) to December 31, 1995, the years ended
December 31, 1996 and 1997 and for the period from inception (May 26, 1995) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eurotech, Ltd. (a development
stage company) at December 31, 1996 and 1997 and the results of its operations
and its cash flows for the period from inception (May 26, 1995) to December 31,
1995, the years ended December 31, 1996 and 1997 and for the period from
inception (May 26, 1995) to December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered a loss from
operations in each of its three years of operations and, as of December 31,
1997, had a working capital deficiency of $2,156,753 and stockholders'
deficiency of $4,849,723. As discussed in Note 1 to the financial statements,
these factors 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 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
March 12, 1998
F-2
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
------
(Note 1)
<TABLE>
<CAPTION>
At December 31,
1996 1997
------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash (Note 2) $ 380,183 $ 617,756
Receivable from related parties (Note 6) 89,918 5,918
Prepaid expenses and other current assets 12,978 21,539
------------ ------------
TOTAL CURRENT ASSETS 483,079 645,213
PROPERTY AND EQUIPMENT - net of accumulated depreciation
(Notes 2 and 4) 10,556 14,050
OTHER ASSETS:
Organization and patent costs - net of accumulated amortization (Notes 2 and 5) 25,402 28,651
Deferred financing costs (Notes 2 and 10) 20,304 261,178
Deferred offering costs (Note 14) 75,000 --
Other assets 3,151 3,151
------------ ------------
TOTAL ASSETS $ 617,492 $ 952,243
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Notes payable - bridge notes (Notes 7, 10 and 15) $ 2,000,000 $ 2,000,000
Accrued liabilities (Note 12) 292,316 576,966
Deferred revenue (Notes 2 and 3) -- 225,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,292,316 2,801,966
------------ ------------
CONVERTIBLE DEBENTURES (Notes 8 and 15) -- 3,000,000
------------ ------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 1, 3, 7, 8, 10, 12, and 15)
STOCKHOLDERS' DEFICIENCY: (Notes 2, 7, 8, 10, 11, 12 and 15)
Preferred stock - $0.01 par value; 1,000,000 shares authorized;
-0- shares issued and outstanding -- --
Common stock - $0.00025 par value; 50,000,000 shares authorized;
17,233,836 and 18,928,836 shares issued and outstanding at December 31,
1996 and December 31, 1997, respectively 4,306 4,732
Additional paid-in capital 4,804,298 12,892,313
Unearned financing costs (2,493,219) (1,315,317)
Deficit accumulated during the development stage (3,990,209) (16,431,451)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (1,674,824) (4,849,723)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 617,492 $ 952,243
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from For the Period
Inception (May 26, For the Years Ended December 31, from Inception
1995) to (May 26, 1995) to
December 31, 1995 1996 1997 December 31, 1997
<S> <C> <C> <C> <C>
REVENUES $ -- $ -- $ -- $ --
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Research and development
(Notes 2 and 3) 212,061 1,170,782 1,007,671 2,390,514
Consulting fees (Notes 10 and 12) 266,900 277,353 553,295 1,097,548
Compensatory element of stock
issuances pursuant to consulting
agreements -- 1,209,477 839,550 2,049,027
Other general and administrative
expenses 34,265 547,447 1,262,067 1,843,779
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 513,226 3,205,059 3,662,583 7,380,868
---------------- ---------------- ---------------- ----------------
OPERATING LOSS (513,226) (3,205,059) (3,662,583) (7,380,868)
---------------- ---------------- ---------------- ----------------
OTHER EXPENSES:
Interest expense (Notes 6, 7 and 8) -- 43,422 270,740 314,162
Amortization of deferred and
unearned financing costs
(Notes 2, 7, 8 and 10) -- 228,502 8,507,919 8,736,421
---------------- ---------------- ---------------- ----------------
TOTAL OTHER EXPENSES -- 271,924 8,778,659 9,050,583
---------------- ---------------- ---------------- ----------------
NET LOSS $ (513,226) $ (3,476,983) $ (12,441,242) $ (16,431,451)
================ ================ ================ ================
NET LOSS PER COMMON SHARE $ (0.06) $ (0.23) $ (0.71)
================ ================ ================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 8,159,467 14,808,000 17,581,711
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Notes 2, 7, 8, 10, 11, 12 and 15)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Date of Paid-in Due from
Period Ended December 31, 1995: Transaction Shares Amount Capital Stockholders
- ------------------------------------------------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Founder shares issued ($0.00025 per share) 05/26/95 4,380,800 $ 1,095 $ (1,095) $ --
Issuance of stock for offering consulting
fees ($0.0625 per share) 08/31/95 440,000 110 27,390 --
Issuance of stock ($0.0625 and $0.25 per share) Various 4,080,000 1,020 5,23,980 (3,000)
Issuance of stock for license ($0.0625 per share) 08/31/95 600,000 150 37,350 --
Issuance of stock options for offering legal
and consulting fees -- -- 75,000 --
Offering expenses -- -- (105,398) --
Net loss -- -- -- --
----------- ------- ----------- -----------
Balance - December 31, 1995 9,500,800 2,375 557,227 (3,000)
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) Various 1,278,000 320 319,180 --
Exercise of stock options 01/18/96 600,000 150 -- --
Issuance of stock for consulting fees
($0.34375 per share) 03/22/96 160,000 40 54,960 --
Issuance of stock for consulting fees
($0.0625 per share) 05/15/96 2,628,000 657 163,593 --
Issuance of stock for consulting fees
($0.590625 per share) 06/19/96 1,500,000 375 885,563 --
Issuance of stock for consulting fees
($1.82 per share) 11/12/96 57,036 14 104,275 --
Issuance of stock pursuant to bridge financing
($1.81325 per share) 12/96 1,500,000 375 2,719,500 --
Amortization of unearned financing costs -- -- -- --
Repayment by stockholders -- -- -- 3,000
Net loss -- -- -- --
----------- ------- ----------- -----------
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298 $ --
=========== ======= =========== ===========
<CAPTION>
Deficit
Accumulated
Unearned During the
Financing Development
Period Ended December 31, 1995: Costs Stage Total
- ------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Founder shares issued ($0.00025 per share) $ -- $ -- $ --
Issuance of stock for offering consulting
fees ($0.0625 per share) -- -- 27,500
Issuance of stock ($0.0625 and $0.25 per share) -- -- 522,000
Issuance of stock for license ($0.0625 per share) -- -- 37,500
Issuance of stock options for offering legal
and consulting fees -- -- 75,000
Offering expenses -- -- (105,398)
Net loss -- (513,226) (513,226)
----------- ----------- -----------
Balance - December 31, 1995 -- (513,226) 43,376
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) -- -- 319,500
Exercise of stock options -- -- 150
Issuance of stock for consulting fees
($0.34375 per share) -- -- 55,000
Issuance of stock for consulting fees
($0.0625 per share) -- -- 164,250
Issuance of stock for consulting fees
($0.590625 per share) -- -- 885,938
Issuance of stock for consulting fees
($1.82 per share) -- -- 104,289
Issuance of stock pursuant to bridge financing
($1.81325 per share) (2,719,875) -- --
Amortization of unearned financing costs 226,656 -- 226,656
Repayment by stockholders -- -- 3,000
Net loss -- (3,476,983) (3,476,983)
----------- ----------- -----------
Balance - December 31, 1996 $(2,493,219) $(3,990,209) $(1,674,824)
=========== =========== ===========
</TABLE>
(1) Share amounts have been restated to reflect the 4 for 1 stock split on June
1, 1996.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Notes 2, 7, 8, 10, 11, 12 and 15)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Date of Paid-in Due from
Period Ended December 31, 1997: Transaction Shares Amount Capital Stockholders
- ---------------------------------------------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298 $ --
Issuance of stock for consulting fees
($2.50 per share) 03/97 64,000 16 159,984 --
Issuance of stock for consulting fees
($5.45 per share) 06/97 39,000 9 212,540 --
Issuance of stock for consulting fees
($5.00 per share) 09/97 59,000 15 294,986 --
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) 06/97 500,000 125 2,724,875 --
Value assigned to conversion feature of
Convertible Debentures 11/97 -- -- 1,337,143 --
Value assigned to issuance of 127,500 warrants
in consideration for interest and placement
fees in connection with Convertible
Debentures 11/97 -- -- 284,480 --
Value assigned to issuance of 35,000 warrants
to shareholder for consulting services 11/97 -- -- 39,588 --
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities 11/97 -- -- 862,680 --
Issuance of stock for consulting fees
($4.00 per share) 12/97 43,000 11 171,989 --
Accrual of stock issued January 1998 pursuant
to penalty provision of bridge financing
($2.00 per share) 12/97 1,000,000 250 1,999,750 --
Amortization of unearned financing costs -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ -------------
Balance - December 31, 1997 18,928,836 $ 4,732 $ 12,892,313 $ --
============ ============ ============ =============
<CAPTION>
Deficit
Accumulated
Unearned During the
Financing Development
Period Ended December 31, 1997: Costs Stage Total
- ---------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Balance - December 31, 1996 $ (2,493,219) $ (3,990,209) $ (1,674,824)
Issuance of stock for consulting fees
($2.50 per share) -- -- 160,000
Issuance of stock for consulting fees
($5.45 per share) -- -- 212,549
Issuance of stock for consulting fees
($5.00 per share) -- -- 295,001
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) (2,725,000) -- --
Value assigned to conversion feature of
Convertible Debentures (1,337,143) -- --
Value assigned to issuance of 127,500 warrants
in consideration for interest and placement
fees in connection with Convertible
Debentures (284,480) -- --
Value assigned to issuance of 35,000 warrants
to shareholder for consulting services (39,588) -- --
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities (826,680) -- --
Issuance of stock for consulting fees
($4.00 per share) -- -- 172,000
Accrual of stock issued January 1998 pursuant
to penalty provision of bridge financing
($2.00 per share) (2,000,000) -- --
Amortization of unearned financing costs 8,426,793 -- 8,426,793
Net loss -- (12,441,242) (12,441,242)
------------ ------------ ------------
Balance - December 31, 1997 $ (1,315,317) $(16,431,451) $ (4,849,723)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Period
from Inception from Inception
(May 26, 1995) to For the Years Ended December 31, (May 26, 1995) to
December 31, 1995 1996 1997 December 31, 1997
----------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (513,226) $ (3,476,983) $(12,441,242) $ (16,431,451)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 182 1,009 4,810 6,001
Amortization of deferred and unearned
financing costs -- 228,502 8,507,919 8,736,421
Stock issued for license 37,500 -- -- 37,500
Consulting fees satisfied by stock issuances -- 1,209,477 839,550 2,049,027
Cash provided by (used in) the change in assets
and liabilities:
(Increase) decrease in advances to related
parties -- (89,918) 84,000 (5,918)
(Increase) decrease in prepaid expenses (1,100) (11,878) (8,561) (21,539)
Increase in other assets -- (3,151) -- (3,151)
Increase in accrued liabilities 13,100 279,216 284,650 576,966
Increase in deferred revenue -- -- 225,000 225,000
----------------- ------------ ------------ -----------------
NET CASH USED IN OPERATING
ACTIVITIES (463,544) (1,863,726) (2,503,874) (4,831,144)
----------------- ------------ ------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs (1,557) (24,639) (5,162) (31,358)
Capital expenditures -- (10,953) (6,391) (17,344)
----------------- ------------ ------------ -----------------
NET CASH USED IN INVESTING
ACTIVITIES (1,557) (35,592) (11,553) (48,702)
----------------- ------------ ------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 150 -- 150
Proceeds from issuance of common stock 522,000 319,500 -- 841,500
Offering costs (2,898) (75,000) 75,000 (2,898)
Repayment by stockholders -- 3,000 -- 3,000
Proceeds from bridge notes -- 2,000,000 -- 2,000,000
Proceeds from Convertible Debentures -- -- 3,000,000 3,000,000
Borrowings from stockholders -- 141,000 420,140 561,140
Repayment to stockholders -- (141,000) (420,140) (561,140)
Deferred financing costs -- (22,150) (322,000) (344,150)
----------------- ------------ ------------ -----------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 519,102 2,225,500 2,753,000 5,497,602
----------------- ------------ ------------ -----------------
INCREASE (DECREASE) IN CASH 54,001 326,182 237,573 617,756
CASH - BEGINNING -- 54,001 380,183 --
----------------- ------------ ------------ -----------------
CASH - ENDING $ 54,001 $ 380,183 $ 617,756 $ 617,756
================= ============ ============ =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 8,127 $ 270,804 $ 278,931
================= ============ ============ =================
Income taxes $ -- $ -- $ -- $ --
================= ============ ============ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1- BUSINESS AND CONTINUED OPERATIONS
Eurotech, Ltd. (the "Company") was incorporated under the laws of the
District of Columbia on May 26, 1995. The Company is a development-stage,
technology transfer, holding and management company, formed to
commercialize new, existing but previously unrecognized, and previously
"classified" technologies, with a particular current emphasis on
technologies developed by prominent research institutes and individual
researchers in the former Soviet Union and in Israel, and to license those
and other Western technologies for business and other commercial
applications principally in Western and Central Europe, Ukraine, Russia
and North America. Since the Company's formation, it has acquired
development and marketing rights to a number of technologies by purchase,
assignments, and licensing arrangements. The Company intends to operate
its business by licensing its technologies to end-users and through
development and operating joint ventures and strategic alliances. To date,
the Company has not generated any revenues from operations.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, as shown in the
accompanying financial statements, the Company has incurred losses from
operations from inception. As of December 31, 1997, the Company has a
stockholders' deficiency of $4,849,723, a working capital deficiency of
$2,156,753 and an accumulated deficit since inception of $16,431,451. The
Company requires additional funds to commercialize its technologies and
continue research and development efforts. Until the commencement of
sales, the Company will have no operating revenues, but will continue to
incur substantial expenses and operating losses. No assurances can be
given that the Company can complete development of any technology, not yet
completely developed, or that with respect to any technology that is fully
developed, it can be manufactured on a large scale basis or at a feasible
cost. Further, no assurance can be given that any technology will receive
market acceptance. Being a start-up stage entity, the Company is subject
to all the risks inherent in the establishment of a new enterprise and the
marketing and manufacturing of a new product, many of which risks are
beyond the control of the Company. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Since inception, the Company has financed its operations through sale of
its securities, shareholder loans, a bridge financing totalling $2,000,000
completed in December of 1996, a Convertible Debenture financing of
$3,000,000 completed in November of 1997 and a Convertible Debenture
financing of $3,000,000 completed in February of 1998. The Company is
exploring additional sources of working capital, which include a private
offering of common stock, private borrowings and joint ventures.
F-8
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The $2,000,000 bridge financing was retired from proceeds of the February
1998 Convertible Debenture financing.
While no assurance can be given, management believes the Company can raise
adequate capital to keep the Company functioning during 1998. No assurance
can be given that the Company can successfully obtain any working capital
or complete any proposed offerings or, if obtained, that such funding will
not cause substantial dilution to shareholders of the Company. Further, no
assurance can be given as to the completion of research and development
and the successful marketing of the technologies.
These financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary as a
result of the above uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Equity Method of Accounting for Unconsolidated Foreign Affiliates
Investment in companies in which the Company has a 20% to 50% interest, in
which it has the ability to exercise significant influence over operating
and financial policies are accounted for on the equity method.
Accordingly, the Company's proportionate share of their undistributed
earnings or losses are included in the statement of operations.
At December 31, 1997, investments in companies accounted for under the
equity method consist of the following foreign companies which are located
in Israel:
Chemonol, Ltd. ("Chemonol") 20%
Separator, Ltd. ("Separator") 20%
Comsyntech, Ltd. ("Comsyntech") 20%
Remptech, Ltd. ("Remptech") 20%
F-9
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
The Company maintains cash balances at a bank which exceeded the Federal
Depository Insurance Corporation's ("FDIC") maximum balance of $100,000 by
$623,581 as of December 31, 1997.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of five years.
Organization and Patent Costs
Organization costs are being amortized on a straight-line basis over 5
years. Patent costs are being amortized on a straight-line basis over 17
years, which represent both the statutory and economic lives of the
patents.
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement 121 on January 1, 1996 and there was no effect to the Company.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Revenue Recognition
The Company expects that it will derive substantially all of its revenue
from the sale, licensing and sub-licensing of technology. Revenue from the
sale of technology will be recognized in the year of sale. Revenue from
licensing and sub-licensing will be recognized in the periods when the
fees have been earned.
F-10
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development expenditures are charged to expense as incurred,
unless they are reimbursed under specific contracts. Losses incurred on
the equity basis in the Company's interest in four Israeli research and
development companies are included in research and development. In
addition, expenditures in connection with a technology licensing agreement
concluded in December 1997, aggregating $495,000, were charged to research
and development during 1997 (see Note 3).
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires compensation expense to be recorded (i) using the new fair value
method, or (ii) using existing accounting rules prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25") and related interpretations with proforma disclosure
of what net income and earnings per share would have been had the Company
adopted the new fair value method. The Company intends to continue to
account for its stock-based compensation plans in accordance with the
provisions of APB 25.
Deferred and Unearned Financing Costs
Financing costs in connection with a one-year bridge loan completed in
December of 1996 are being amortized over the life of the promissory note.
Financing costs in connection with the November 1997 Convertible
Debentures offering are being amortized over the expectant life (180 days)
of the obligation. The expectant life was determined to be the conversion
date that was most beneficial to the note holder, in accordance with
Emerging Issues Task Force ("EITF") topic number D-60.
Stock Split
On June 1, 1996, the Board of Directors authorized four-for-one stock
split, thereby increasing the number of issued and outstanding common
shares to 14,166,800 and decreasing the par value of each common share to
$0.00025. The accompanying financial statements, notes and other
references to share and per share data have been retroactively restated to
reflect the stock split for all periods presented.
F-11
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Data
During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which changed certain
requirements for computing and disclosing earnings per share, retroactive
for all periods presented. Adoption of this statement had no effect on the
accompanying financial statements.
Basic net loss per common share has been computed based on the weighted
average number of shares of common stock outstanding during the periods
presented, which were retroactively adjusted to give recognition to the
stock split on June 1, 1996. Common stock equivalents, consisting of
warrants and Convertible Debentures discussed in Note 10, were not
included in the calculation of diluted loss per share because their
inclusion would have had the effect of decreasing the loss per share
otherwise computed.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information
at December 31, 1996 and December 31, 1997, as required by Statement of
Financial Accounting Standards 107, "Disclosures about Fair Value of
Financial Instruments". Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value
to the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Receivables and Payables: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Notes Payable: The carrying amounts of notes payable approximate fair
value due to the length of the maturities, the interest rates being tied
to market indices and/or due to the interest rates not being significantly
different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other
than trading.
F-12
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
a) Collaboration Agreements With Russian Organizations
Under various agreements, the Company has agreed to fund the
commercialization of certain technologies developed in the former
Soviet Union by scientists and researchers at the I.V. Kurchatov
Institute ("Kurchatov"), other institutes associated therewith, and
the Euro-Asian Physical Society ("EAPS"), collectively the
"Scientists". Kurchatov will provide the materials, facilities and
personnel to complete the necessary work to commercialize such
technologies. Disbursements made by the Company related to the
Kurchatov arrangement were charged to research and development
expenses and amounted to $174,561, $1,109,550 and $408,000,
respectively, during the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and
1997.
In addition, pursuant to an agreement with the Kurchatov Research
Holdings, Ltd. ("KRH"), a Delaware corporation, beneficially owned
by ERBC Holdings, Ltd. ("ERBC") and individual Russian scientists,
researchers and academics, who are affiliated with Kurchatov and
EAPS, the Company agreed to pay KRH 50% of the net profits derived
from the sale, license or commercialization of any technologies or
products based upon technologies developed by the scientists and
transferred to the Company or supplied by the scientists to the
Company. The managing director and one former business
representative of ERBC are shareholders of the Company.
In connection with the collaboration agreement discussed above, in
September 1996, the Company entered into a licensing agreement with
ERBC, whereby ERBC sublicensed its license to use and exploit
certain technologies and inventions relating to a silicon organic
("EKOR") compound technology in the United States, Ukraine, Canada,
China, Japan, Republic of Korea and all European countries who are
members of the European Patent Agreement. The term of the license
expires on August 1, 2014. Under the agreement, the Company shall
pay to ERBC a royalty equal to 3% of the cost of contracts made by
the Company on which the Company would have any income. In addition
to the royalty payment, pursuant to the collaboration agreement with
KRH, the Company will be required to remit 50% of the net profit
derived from the EKOR compound technology to KRH.
b) Investments in Israeli Technology Companies
During 1997, the Company acquired a 20% interest in four separate
Israeli technology, research and development companies. The
Company's share of losses incurred by these companies has been
accounted for on the equity basis and included in research and
development expenses. The amount charged to research and development
for 1997 approximated $102,000, which reduced the Company's
investment in these four companies to zero.
F-13
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
Technion Entrepreneurial Incubator, Ltd.
During April 1997, the Company entered into an informal agreement in
principal with the Technion Entrepreneurial Incubator, Ltd. ("TEI"), an
Israeli corporation, to participate in certain technology research and
development projects sponsored by the TEI, whereby the Company will
provide 15%-20% of the financing required for, and will receive a 20%
equity interest in, research and development projects selected by the
Company. In furtherance of this venture, the Company has opened an office
at the premises of TEI in Haifa, Israel, has identified three technology
development projects for investment, and has agreed to invest in a fourth
such project, involving certain polyurethane technology with potential use
in paints and coatings. Pursuant to that agreement, the Company agreed to
invest up to $60,000 in Chemonol, Ltd. ("Chemonol"), an Israeli
corporation established to own and develop that technology, in exchange
for 20% of Chemonol's voting equity. As of December 31, 1997, the Company
has made two payments totalling $30,000 to Chemonol. The remaining $30,000
is scheduled to be paid by November 1, 1998. The Company has also entered
into agreements with the holder of 50% of Chemonol's outstanding voting
equity (the "Principal Shareholder") granting to the Company an option to
acquire from the Principal Shareholder an additional 31% of Chemonol's
voting equity for $93,000, and the present right to direct the voting of
the Principal Shareholder's voting equity. There can be no assurance that
these or any other development projects will result in useful technologies
or that the same will be commercially saleable or profitable.
Incubator for Technological Entrepreneurship - Kiryat Weizmann, Ltd.
During July 1997, the Company entered into an informal agreement in
principal with the Incubator for Technological Entrepreneurship - Kiryat
Weizmann, Ltd. ("Kiryat Weizmann, Ltd.") to participate in certain
technology research and development projects sponsored by Kiryat Weizmann
Ltd.
Pursuant to that informal agreement, the Company agreed to invest,
pursuant to a written agreement, up to $60,000 in Separator, Ltd.
("Separator"), an Israeli corporation established to own and develop
technology, in exchange for 20% of Separator's voting equity. As of
December 31, 1997, the Company has made total payments of $30,000 to
Separator. The remaining $30,000 is scheduled to be paid by August 1,
1998. The Company has also entered into written agreements with the holder
of 50% of Separator's outstanding voting equity (the "Principal
Shareholder") granting to the Company an option to acquire from the
Principal Shareholder an additional 31% of Separator's voting equity for
$93,000, and the present right to direct the voting of the Principal
Shareholder's voting equity. There can be no assurance that these or any
other development projects will result in useful technologies or that the
same will be commercially saleable or profitable.
F-14
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
Ofek Le-Oleh Foundation
During August 1997, the Company entered into an informal agreement in
principal with the Ofek Le-Oleh Foundation ("Foundation") to participate
in certain technology research and development projects sponsored by the
Foundation.
Pursuant to that informal agreement, the Company agreed to invest,
pursuant to written agreements, up to $60,000 per company in Comsyntech,
Ltd. ("Comsyntech") and Remptech, Ltd. ("Remptech"), Israeli corporations
established to own and develop technology, in exchange for 20% of
Comsyntech's and Remptech's voting equity. As of December 31, 1997, the
Company has made its first payment of $21,000 per company to Comsyntech
and Remptech. The last scheduled payment of $13,000 is scheduled to be
made no later than February 1, 1999. In connection with these investments,
the Company obtained (I) an option to purchase a 20% common equity
interest owned by the foundation exercisable for a period of 90 days
commencing on November 6, 1999 at a price to be determined, (ii) an option
to acquire from the Principal Shareholders an additional 31% of
Comsyntech's and Remptech's voting equity for $93,000, and (iii) the
present right to direct the voting of the Principal Shareholders' voting
equity. There can be no assurance that these or any other development
projects will result in useful technologies or that the same will be
commercially saleable or profitable.
Equity Transfer Consents for Israeli Companies
For a period of two years commencing on the date of its registration as an
Israeli corporation, the sale or other transfer of 25% or more of the
outstanding common equity of each of Chemonol, Separator, Remptech and
Comsyntech requires the consent of the Chief Scientist of the Israeli
Ministry of Commerce and Technology. The Company's options to acquire
additional common equity of the above Israeli Technology Companies are
exercisable within such two-year periods and any acquisition of the common
equity purchasable thereunder will, therefore, require the Chief of
Scientist's consent. Although the Company presently expects that if
requested such consent would be given, there is no assurance that such
consent will be obtained.
F-15
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
c) Re-sealable Containers. Pursuant to a sublicense (the "Re-sealable
Container Sublicense") entered into in December 1997, the Company
has acquired from ERBC an exclusive, worldwide license to
commercialize, use, exploit and market two mechanical systems (the
"Re-sealable Container Systems") for resealing soft-drink (and other
similarly configured) beverage cans, and cardboard "TetraPak"
beverage containers. "TetraPak" containers are four-sided,
pyramidical beverage containers widely used in Europe, made of
packaging material similar to milk "cartons" familiar to the U.S.
market.
ERBC acquired an exclusive and worldwide license to the Re-sealable
Container Systems pursuant to a license agreement, dated March 20,
1997, with Cetoni Unwelttechnologie-Emwik Lungs GmbH ("Cetoni"), a
Germany company that developed and held all right, title and
interest in and to those systems, in consideration of ERBC's payment
to Cetoni of $495,000, plus 50% of all royalties received by ERBC
from sales of products and devices embodying or otherwise using
Resealable Container Systems. Under the Re-sealable Container
Sublicense, the Company paid ERBC $495,000 in consideration of the
sub-license granted thereunder, and is obligated to pay to Cetoni
50% of the Company's net revenues from the sale or licensing of such
products and devices.
The Company has accounted for this technology license fee as
acquired research and development and, in accordance with FASB
Interpretation No. 4, has charged the license fee of $495,000 to
research and development expenses for the year ended December 31,
1997.
d) On January 28, 1997, the Company entered into a technology transfer
consulting arrangement with American Autopark, Ltd. ("Arbat") to
license its technology, designs, renderings, blueprints and plans
for the construction and operation of vertical parking structures.
The Company is to receive a fee equal to $1,250 per parking space in
each garage erected by Arbat or any of its affiliates based upon the
technology transferred to Arbat by the Company. Certain shareholders
of the Company are shareholders of Arbat.
In August 1997, the Company received a $225,000 technology transfer
fee under this agreement related to a construction of a parking
structure in Moscow, Russia. The Company has deferred the
recognition of this revenue until such time when all initial
technology has been transferred to Arbat and the Company has no
remaining obligation once construction commences.
e) In September 1996, the Company entered into a technology transfer
and consulting agreement with Eurowaste, Ltd. ("Eurowaste"), a
related party, under which Eurowaste will pay the Company $2,450,000
upon the initiation of construction of the first waste to energy
plant, and a design and implementation consulting fee of $425,000
for each subsequent plant. A shareholder and director of the Company
is the Chairman, Chief Executive Officer and a shareholder of
Eurowaste.
F-16
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS (Continued)
The Company intends to recognize revenue from the initial fee of
$2,450,000 at the time when all initial technology has been
transferred to Eurowaste and the Company has no remaining
obligations once construction commences. Revenue from the $425,000
design and implementation and consulting fee will be recognized
during the construction period of each subsequent waste-to-energy
plant.
f) On May 1, 1995, the Company entered into a license agreement which
granted the Company an exclusive right to license certain
technologies for medical application systems in Russian/European
countries for the remaining life of the patent for $37,500. In lieu
of cash, the owner accepted 600,000 shares of the Company's common
stock. The agreement called for quarterly royalty payments equal to
5% of gross revenues earned and received by the Company with a
minimum annual royalty of $100,000. No minimum royalty payment was
to accrue or be payable until December 1, 1995. The Company
terminated the agreement on November 30, 1995 and expensed the cost
of the license. No products were developed or sold using the
licensed technology and no royalties were due the owner.
g) On May 29, 1995, the Company entered into a license agreement which
granted the Company, for the life of the patent, territorially
limited exclusive license to use technology marketed under the name
Coherent On Receive Only ("CORO") in Europe and the Near East. In
consideration for the grant of the license and the use of the
proprietary engineering, the Company agreed to pay the developer a
$200,000 initial license fee upon delivery of the technology, along
with an 8% royalty payable semi-annually on equipment gross sales.
If the technology is delivered, the Company intends to account for
the $200,000, an initial license fee and amortize over the shorter
of the economic life of the technology or remaining term of license
agreement.
Management is currently evaluating the viability of this technology
and its potential uses in various markets.
NOTE 4 - MACHINERY AND EQUIPMENT
Machinery and equipment consisted of the following:
December 31,
-------------------------
1996 1997
-------- --------
Cost
Accumulated depreciation $ 10,953 $ 17,344
(397) (3,294)
-------- --------
$ 10,556 $ 14,050
======== ========
F-17
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - MACHINERY AND EQUIPMENT (Continued)
Depreciation expense for the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and 1997
amounted to $-0-, $397 and $2,897, respectively.
NOTE 5 - ORGANIZATION AND PATENT COSTS
Organization and patent costs consisted of the following:
December 31,
-------------------------
1996 1997
-------- --------
Organization costs $ 1,557 $ 1,557
Costs of patents 24,639 29,801
Accumulated amortization (794) (2,707)
-------- --------
$ 25,402 $ 28,651
======== ========
Patent costs capitalized during 1996 and 1997 represent legal and other
costs related to filing of patent applications in various countries.
Amortization expense for the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and 1997
amounted to $182, $612 and $1,913, respectively.
NOTE 6 - NOTES PAYABLE TO/RECEIVABLES FROM RELATED PARTIES
Loans from Related Parties
During 1996, three shareholders of the Company loaned the Company $341,300
under four separate promissory note. The notes bear interest at the rate
of 10% per annum and were due on December 31, 1996. In December of 1996,
$141,300 of principal on such notes was repaid by the Company. The balance
of $200,000 was converted into four units of the bridge financing
discussed in Note 8. Interest expense related to these loans for 1996
amounted to $15,948.
During 1997, the Company borrowed $420,140 from a shareholder of the
Company. The loans were due on demand and provided for an interest rate of
10% per annum. As additional consideration, the shareholder received
warrants to purchase 364,000 shares of common stock at $5.02 exercisable
over the three-year period ending December 31, 2000 (see Note 10). As of
December 31, 1997, the Company repaid all of the shareholder's loans which
amounted to $420,140, plus applicable interest of $7,075.
F-18
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - NOTES PAYABLE TO/RECEIVABLES FROM RELATED PARTIES (Continued)
Loans to Related Parties
In December 1996, the Company advanced $84,000 to a consultant and
shareholder of the Company. The full amount, plus interest at 10% per
annum, was repaid during February 1997.
During 1996, the Company advanced $5,918 to Arbat Autopark, Ltd., a
company related by virtue of common shareholders. Said advance is
non-interest bearing and outstanding at December 31, 1997.
NOTE 7 - NOTES PAYABLE - BRIDGE LOAN
In December 1996, the Company completed a private placement of 40 Units,
each consisting of the Company's one-year promissory note in the principal
amount of $50,000, bearing interest at the rate of 12% per annum, and
25,000 shares of its common stock for an aggregate offering price of
$2,000,000. Of such Units sold, four Units were issued to two shareholders
in exchange for cancellation of promissory notes amounting to $200,000
(see Note 6).
The proceeds of such offering were used to pay accrued liabilities, repay
shareholders promissory notes of $141,000 and fund research and
development costs.
In December of 1997, the Company and the promissory note holders agreed to
extend the original maturity date from December 18, 1997 to March 18, 1998
and increase the interest rate from 12% to 15% per annum effective on
December 19, 1997. On March 6, 1998, the promissory notes were satisfied
by the Company from proceeds of a Convertible Debenture financing
completed in February of 1998.
See Note 10 for further discussion of this financing.
NOTE 8 - 8% CONVERTIBLE DEBENTURES
On November 27, 1997, the Company sold through a private placement
$3,000,000, 8% Convertible Debenture notes, due November 27, 2000. As
additional consideration, the Company issued separate warrants to the
purchasers to purchase 60,000 shares of the Company's common stock at 110%
of the market price, determined over the last five trading days prior to
November 27, 1997, or $4.73 per share. The warrants are exercisable over
two years.
See Note 10 for further discussion of the Convertible Debentures.
F-19
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES
For the period from inception (May 26, 1995) to December 31, 1995,
pursuant to Internal Revenue Service Code Section 195, the Company elected
to treat its expenditures as start-up costs. These costs totalling
approximately $510,000 were treated, for income tax purposes, as deferred
expenses to be amortized on a straight-line basis over five years.
The Company was not required to provide for a provision for income taxes
for the period ended December 31, 1995 and for the years ended December
31, 1996 and 1997 as a result of net operating losses incurred during
these periods.
The components of deferred tax assets and liabilities at December 31, 1996
and 1997 are as follows:
1996 1997
---------- ----------
Deferred Tax Assets:
Net operating loss carryforwards $ 803,902 $2,562,766
Start-up costs 138,728 104,045
Temporary differences, principally relates to tax
effects of compensatory element of stock
issuances 411,251 2,831,219
---------- ----------
Total Gross Deferred Tax Assets 1,353,881 5,498,030
Less: Valuation allowance (1,353,881) (5,498,030)
---------- ----------
Net Deferred Tax Assets $ -- $ --
========== ==========
The net change in the valuation allowance for deferred tax assets was an
increase of $4,144,149.
As of December 31, 1997, the Company had available approximately
$7,537,000 of net operating losses for income tax purposes that may be
carried forward to offset future taxable income, if any. These
carryforwards expire during the year 2015 through 2017. Pursuant to
Section 382 of the Internal Revenue Code, substantial restrictions are
imposed on the utilization of net operating loss carryforwards in the
event of an ownership change.
F-20
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES (Continued)
A reconciliation of income tax expense at the statutory rate to
income tax expense at the Company's effective rate is as follows:
1996 1997
----------- -----------
Computed tax at the statutory rate $(1,182,174) $(4,230,022)
Non-deductible expenses and losses 1,702 85,873
Tax effects of temporary differences 411,251 2,419,968
Start-up costs (34,681) (34,683)
Unutilized net operating loss 803,902 1,758,864
State income taxes -- --
----------- -----------
Income Tax Expense $ -- $ --
=========== ===========
NOTE 10 - STOCKHOLDERS' DEFICIENCY
Common Stock Transactions
In May 1995, the Company issued 4,380,800 shares to its founder.
Since inception (May 26, 1995) through December 31, 1997, the
Company completed two offerings of common stock under Rule 504 and
two offerings under 506 of the Securities Act of 1933 (the "Act") as
follows:
First Offering
Under the first offering, during the period from inception (May 26,
1995) to December 31, 1995, the Company sold 2,640,000 shares of
common stock at $0.0625 per share and derived aggregate proceeds of
$165,000, of which $3,000 was due from stockholders at December 31,
1995.
During August 1995, the Company issued 440,000 shares of common
stock, valued at $27,500, to two individuals and a financial
institution as consideration for assistance in the above offerings.
During August 1995, the Company issued 600,000 shares of common
stock in connection with its purchase of a license valued at
$37,500. The shares were issued as part of the first offering.
F-21
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
On October 10, 1995, the Company issued 600,000 non-qualified stock
options to acquire shares of common stock to three related parties
as consideration for financial public relations services, investment
banking services and legal services, valued at $75,000, in
connection with the above offerings. The options were issued outside
of the 1995 Stock Option Plan and had a term of one year commencing
January 1, 1996. All of the options were exercised on January 18,
1996 and the related 600,000 shares were issued as part of the first
offering.
Second Offering
Under the second offering, which commenced in October of 1995, the
Company sold 2,718,000 shares of common stock at $0.25 per share and
derived aggregate proceeds of $679,500. Of these 2,718,000 shares
sold, pursuant to the second offering, 1,440,000 shares were sold
during 1995 for aggregate proceeds of $360,000 and 1,278,000 shares
were sold during 1996 for aggregate proceeds of $319,500.
Third Offering/Bridge Financing
In December 1996, the Company completed a private placement (the
"Bridge Financing") of 40 Units, each consisting of the Company's
one-year promissory note in the principal amount of $50,000, bearing
interest at the rate of 12% per annum, and 25,000 shares of its
common stock for an aggregate offering price of $2,000,000, and
aggregate number of common shares of 1,000,000. Of such Units sold,
four Units were issued to two shareholders in exchange for
cancellation of promissory notes amounting to $200,000 (see Note 6).
The Units were offered and sold in reliance on an exemption from
registration pursuant to Rule 506 of Regulation D under the Act, and
only to accredited investors within the meaning of Rule 501 of
Registration D under the Act.
Under the agreement, the notes were due one year from the issuance
date. Holders of the shares of common stock issued pursuant to this
agreement have, among other things, demand and mandatory
registration rights, including penalties, which require the Company
to issue to the Unit holders up to 1,000,000 additional shares of
common stock if such shares were not registered under the Act within
the specified time frame. As of December 31, 1996, the Company
recorded an additional 500,000 shares of common stock to be issued
under the offering based on the Company's belief that it would not
meet one of the two filing deadlines. The Company did not meet
either filing deadline and, accordingly, the 500,000 additional
common shares recorded as of December 31, 1996, were issued to such
holders in April 1997, and a further 500,000 common shares were
issued to such holders in August 1997. As of their maturity in
December 1997, the Company had insufficient funds to repay such
notes and also had not yet registered the shares of common stock as
required under the agreement. Accordingly, the Company obtained the
agreement of the noteholders to extend the notes' maturity until
March 18, 1998, in consideration of the issuance to the noteholders
of an aggregate of 1,000,000 additional shares of the Company's
common stock. The Company agreed to register such shares of common
stock under the Act. Pursuant to the terms of the notes, as of
December 19, 1997, their interest rate has been increased to 15% per
annum.
F-22
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
Furthermore, under the terms of the December 1997 extension
agreement, if by April 1, 1998 a registration statement, which shall
include all shares issued to holders of bridge notes, is not
declared effective by the Securities and Exchange Commission (the
"SEC"), then the Company will issue to each Unit holder, 12,500
shares of the Company's common stock. Effective on April 2, 1998,
and for each of the three-month period thereafter, if the
registration statement is not declared effective by the SEC, the
Company and unit holders will negotiate the number of penalty shares
to be issued.
The 3,000,000 common shares issued under the December 1996 agreement
and December 1997 extension agreement are detachable shares and are
accounted for separately from the promissory notes as an addition to
paid-in capital for the value of the stock issued and as a charge to
stockholders' deficiency for the unearned portion. The value
assigned to the 3,000,000 shares was based on fair value and
amounted to $7,444,875, of which $2,719,875 was recorded in 1996
attributable to 1,500,000 shares, and $4,725,000 was recorded in
1997 attributable 1,500,000 shares. These amounts are being
amortized on the interest method over a 12-month period and charged
to financing costs. The amount charged to financing costs for the
years ended December 31, 1996 and 1997 amounted to $226,656 and
$7,218,219, respectively.
Costs associated with this offering allocated to the promissory
notes, which amounted to $22,150, have been capitalized and are
being amortized as financing costs over the life of the notes. For
the years ended December 31, 1996 and 1997, amortization related to
the promissory note costs amounted to $1,846 and $20,304,
respectively.
Fourth Offering/8% Convertible Debentures
On November 27, 1997, the Company sold through a private placement
$3,000,000, 8% convertible debenture notes, due November 27, 2000.
As additional consideration, the Company issued separate warrants to
the purchasers to purchase 60,000 shares of the Company's common
stock at 110% of the market price, determined over the last five
trading days prior to November 27, 1997, or $4.73 per share. The
warrants are exercisable over two years.
The debenture agreement permits the holders of the debentures to
convert the debt into shares of common stock at beneficial
conversion rates based on the timing of the conversions. The
conversion feature commences at the earlier of: (i) the date the
underlying shares to the convertible debentures are registered and
declared effected by the SEC; (ii) February 25, 1998. Shares of
common stock to be issued at the conversion date shall be equal to
the outstanding principal and accrued interest at the conversion
date, divided by the conversion price. The conversion price is the
lower of $5.38 or the average bid price per share of the Company's
common stock for five trading days immediately
F-23
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
preceding the conversion date, multiplied by (i) 80% in the case of
conversions effected prior to May 29, 1998, (ii) 75% in the case of
conversions effected on or after May 29, 1998, but prior to November
25, 1998, and (iii) 70% in the case of conversions effected on or
after November 25, 1998. Furthermore, the conversion price may not
be less than a specified "floor" initially set at $2.00. Commencing
on November 27, 1999, all or any portion of the remaining debt, at
the option of Eurotech, is convertible into common stock at the 70%
conversion rate.
The Convertible Debenture agreement obligates the Company to
register a number of common shares equal to the sum of (i) 200% of
the number of shares of common stock into which the debentures are
convertible, (ii) interest thereon and (iii) 127,500 shares of
common stock related to the warrants. Further, the Company has
agreed that if a registration statement covering the underlying
shares of the Convertible Debenture is either not filed with the SEC
on or prior to January 15, 1998, or, if filed, is not declared
effective by the SEC on or prior to February 16, 1998, the Company
will be obligated to pay to the debenture holders liquidated damages
equal to 1% of the aggregate principal amount of the then
outstanding notes on the first day of each month until such filing
or effectiveness deficiency is cured. As of March 12, 1998, such
registration statement has not been declared effective by the SEC.
Accordingly, the Company will be liable for such damages to the
purchasers of the Convertible Debentures.
The Company has assigned a value of $1,337,143 to the beneficial
conversion feature of the debentures and $134,400 to the 60,000
warrants issued the purchasers of the Convertible Debentures. These
amounts are accounted for separately from the Convertible Debentures
as an addition to paid-in capital and as a reduction of
stockholders' equity for the unearned portion. The unearned portion
is being amortized on the interest method over the 180-day period
commencing November 27, 1997 and is charged to financing costs. For
the year ended December 31, 1997, amortization of such unearned
financing cost amounted to $277,958.
Costs in connection with the $3,000,000 Convertible Debenture
offering allocated to the Convertible Debentures, amounted to
$472,080. Such costs were comprised of: (i) legal and professional
fees amounting to $22,000, (ii) a placement fee to an unrelated
party amounting to $300,000 and (iii) the placement agent received
non-cash consideration valued at $150,080 consisting of warrants to
purchase 67,500 shares of the Company's common stock at $4.73 per
share, or 110% of Company's average closing price, determined over
the last five trading days prior to November 27, 1997. The Company
is amortizing such costs over 180 days as a financing expense
commencing November 27, 1997. For the year ended December 31, 1997,
amortization related to such costs amounted to $89,170.
F-24
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
Other Issuances
During 1996, the Company issued 4,345,036 shares of common stock as
consideration for consulting services performed by various employees
and consultants, including related parties, through December 31,
1996. Shares issued under these arrangements were valued at
$1,209,477, which was all charged to operations during 1996. Of such
shares issued in 1996, 2,628,000 shares of common stock were issued
for start-up services rendered principally during 1995. Such shares
were assigned a value of $164,250, which represented the fair market
value for these services rendered at such time.
During 1997, the Company issued 205,000 shares of common stock as
consideration for consulting services performed by various
consultants, including related parties, during the year ended
December 31, 1997. Shares issued under these arrangements were
valued at $839,550, which was all charged to operations during 1997.
General
Shares of common stock and stock options issued for other than cash
have been assigned amounts equal to the fair value of the underlying
service or assets received in the exchange. The fair market value of
the shares issued were determined by taking into consideration
restrictions on future sale, risks associated with start-up of a new
business, lack of revenues, lack of working capital and equity and
other various economic risks.
Compensation to related parities paid in the form of shares of
common stock or stock options, materially approximate amounts that
would have been paid by unrelated parties.
Warrants
At December 31, 1997, the Company had outstanding warrants to
purchase 1,426,500 shares of the Company's common stock at prices
ranging from $1 to $5.02 as described below.
Pursuant to a financial consulting agreements, in April of 1996, the
Company agreed to issue warrants to purchase 600,000 shares of
common stock. The warrants are exercisable for a period of four
years commencing May 22, 1997 at an exercise price of $1.00 per
share. To date, the Company has issued warrants to purchase 130,000
shares of common stock. The Company has not issued the remaining
470,000 warrants due to the non-performance of services and for
other business reasons (see Note 12).
In October 1996, the Company entered into two-year consulting
agreements with two individuals for certain advisory services. As
full compensation for services to be rendered to the term of the
agreements, the Company issued warrants to purchase 150,000 shares
of common stock each exercisable for a period of five years
commencing October 1, 1996 at an exercise price of $1.50 per share.
For the years ended December 31, 1996 and 1997, no warrants were
exercised.
F-25
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
As additional consideration for monies advanced the Company during
1997 (Note 6), a shareholder received warrants to purchase 364,000
common shares at a price of 110% of the average market price over
the five-day period ending November 20, 1997, or $5.02 per share.
The warrants may be exercised commencing January 1, 1998 and expire
on December 31, 2000. The warrants were assigned a value of $862,680
which was all charged to operations as a financing expense during
1997.
Pursuant to a financial consulting agreement in December of 1997, a
consultant was issued warrants to purchase 35,000 shares of common
stock at $4.73 per share. The warrants may be exercised commencing
January 1, 1998 and expire on December 31, 2000. The warrants were
assigned a value of $39,588 which was all charged to operations as a
financing expense during 1997.
Pursuant to the Convertible Debenture financing completed in
November of 1997, the Company issued to the purchasers of the
debentures warrants to purchase 60,000 shares of common stock and
issued to the placement agent warrants to purchase 67,500 shares of
common stock at $4.73 per share. The warrants may be exercised over
the two-year period ending November 27, 1999. The warrants were
valued at $284,480 and said amount will be charged to operations as
a financing cost over the 180-day period commencing November 27,
1997.
In estimating the value of warrants pursuant to the accounting
provisions SFAS 123, the Company used the following assumptions:
December 31, 1996 December 31, 1997
----------------- -----------------
Risk-free interest rate 6% 5%
Expected life 3 years 2 years
Expected volatility 30% 99.61%
Dividend yield 0 0
If such accounting provisions of SFAS 123 were applied, then the
Company's net loss and the net loss per share would have been
$3,764,983 and $.25, respectively, for the year ended December 31,
1996. There is no proforma effect for 1997 because the warrants
issued during 1997 were to non-employees and were for financing
services. The value assigned to these warrants is being charged to
operations over the expectant life of the related debt.
Earnings Per Share
Securities that could potentially dilute basic earnings per share
("EPS") in the future that were not included in the computation of
diluted EPS because to do so would have been antidilutive for the
for the periods presented consist of the following:
F-26
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Warrants to purchase common stock 1,426,500
Convertible Debentures (assumed conversion at initial
floor price and at largest discount) 2,142,857
Options to purchase common stock 75,000
---------
Total as of December 31, 1997 3,644,357
=========
Substantial issuance after December 31, 1997 through
March 12, 1998:
Convertible Debentures issued February 1998 (assumed
conversion at initial floor price and at largest
discount) 2,900,000
=========
NOTE 11 - 1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors and stockholders of the Company on
November 12, 1995. Under the Option Plan, 500,000 shares of the
Company's common stock, subject to certain adjustments, are reserved
for issuance upon the exercise of options. Options granted under the
Option Plan may be either (i) options intended to constitute
incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, or any corresponding provisions of
succeeding law (the "Code") or (ii) non-qualified stock options.
Incentive stock options may be granted under the Option Plan to
employees (including officers) of the Company or a subsidiary
corporation (or any director of, or consultant or advisor to, the
Corporation, as may be selected by the committee) thereof on the
date of grant. Nonqualified options may be granted to (i)
non-employees of the Company or a subsidiary thereof on the date of
the grant, and (ii) consultants of advisors who do not provide
bonafide services, and such services must not be in connection with
the offer or sale of securities in a capital raising transaction.
By its terms, the Option Plan is to be administered by a committee
(the "Committee") appointed by the Board of Directors which shall
consist of either the entire Board of Directors, or by a committee
of two or more persons (who may or may not be directors), and who
serve at the discretion of the Board of Directors. Subject to the
provisions of the Option Plan, the Committee has the authority to
determine the persons to whom options will be granted, the exercise
price, the term during which options may be exercised and such other
terms and conditions as it deems appropriate.
Any options granted under the Option Plan will be at the fair market
value of the common stock on the date of the grant (or 110% of the
fair market value in the case of employees holding ten percent or
more of the voting stock of the Company). Options granted under the
Option Plan will expire not more than ten years from the date of the
grant subject to earlier termination under the Option Plan. The term
of an incentive stock option granted to a 10% shareholder shall be
no more than 5 years from the date of the grant. The Option Plan
will terminate on November 12, 2005.
As of December 31, 1997, no options were granted under the Option
Plan.
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations
In August 1996, the Company entered into a sublease agreement to
rent office space for a period of fourteen months. On November 1,
1997, the Company renewed its lease for a five-year period. Under
the lease agreement, annual rent will amount to $48,000 for each
year, commencing November 1, 1997, subject to certain expense
adjustments.
Commencing March 1997, the Company rented office space at the
premises of Technion Entrepreneurial Incubator, Ltd., in Haifa,
Israel, on a month-to-month tenancy basis at the rate of $300 per
month.
F-27
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Rent expense for all premise operating leases was approximately
$-0-, $11,000 and $42,000 for the period ended December 31, 1995,
and the years ended December 31, 1996 and 1997, respectively.
Employment Agreement
The Company terminated the employment agreement with the former
President of the Company effective on February 28, 1998. Pursuant to
the employment agreement, the former President received: (i) a base
salary of $77,374 per year; (ii) 255,000 shares of the Company's
common stock. The 255,000 shares issued pursuant to the contract was
valued at $152,000 and was charged to operations during 1996.
Consulting Agreements/Commitments
Commencing January 1, 1997, the Company agreed to pay a consultant
and advisor to the Company who is also a shareholder of the Company,
monthly consulting fees of $16,667. This agreement expired on
December 31, 1997.
The Company engages ERBC under an oral agreement to develop business
plans, develop business opportunities in the European Union, Russian
and Ukraine and for the evaluation of various technologies held by
former instrumentalities in the former Soviet Union. The Company
paid ERBC for consulting services $177,400, $16,200 and $-0- ,
respectively, during the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and
1997.
On April 15, 1996, the Company entered into a consulting agreement
with a director and, effective January 23, 1998, the Chairman of the
Company to evaluate technologies acquired by the Company for the
purpose of introducing such technologies to potential licensees. The
agreement calls for a payment of $10,000 and issuance of 20,000
shares of common stock as consideration for services performed
through September 15, 1996. Commencing October 15, 1996 through
April 15, 1998, the Company is obligated to pay $2,000 and issue
4,000 shares of common stock on a monthly basis as compensation for
the consulting services through the earlier of April 15, 1998 or the
termination date.
F-28
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
In July 1996, as amended, the Company entered into a consulting
agreement to provide financial public relations services for a term
of two years. The agreement can be terminated by the Company at the
end of any calendar quarter by providing one week's written notice
to the consultant. The agreement provided that the consultant
initially receive monthly payments of $2,500, increased to $5,000,
effective November 1996. Also, the consultant was granted an option
to acquire up to 12,500 shares of common stock in each calendar
quarter at an exercise price equal to the ask price per share on
July 1 of each year as reported by National Quotation Bureau. During
1996 and 1997, options to acquire up to 25,000 common shares at
$2.50 per share and 50,000 common shares at $6.75 per share,
respectively, have vested under this agreement, but have not been
exercised by the consultant. Each option shall has a term of one
year.
In November 1996, the Company entered into a consulting agreement
for certain technology advisory services, including the evaluation
of nuclear waste disposal technologies acquired by the Company for
the purpose of introducing such technologies to potential licensees,
for a term of two years. The Company is obligated to pay $4,000 and
issue 20,000 shares of common stock for services performed through
November 15, 1996. Commencing December 15, 1996, the consultant is
obligated to receive $4,000 and 4,000 shares of common stock on a
monthly basis as compensation during the term of the agreement.
In December 1996, the Company entered into a consulting agreement
for certain advisory services, including directing a technology
development branch in Israel, for a term of two years. The advisor
is obligated to be paid $2,000 and issued 5,000 shares of common
stock for services performed through November 15, 1996. In addition,
commencing January 1, 1997, on a monthly basis, the advisor will
receive as compensation $1,000 and 2,000 shares of common stock
during the term of the agreement. On December 1, 1997, the agreement
was revised for a term of two years commencing on December 1, 1997.
The revised agreement states that, on a monthly basis, the
compensation will increase to 3,000 and 4,000 shares of common
stock.
In December 1996, the Company entered into a consulting agreement
for certain services, including establishing a technology
development branch is Israel, for a period of two years. The Company
is obligated in January 1997 to pay $2,000 and issued 5,000 shares
of its common stock for services rendered through the date of the
agreement. In addition, commencing January 1, 1997, the advisor will
receive as compensation $1,000 and 1,000 shares of common stock
during the term of the agreement.
In December 1996, the Company entered into a consulting agreement
with a shareholder of the Company for certain technology advisory
services, including establishing a technology development branch in
Israel, for a term of two years. Under the agreement, on April 1,
1997, the Company will pay an introductory sum of $2,000 and issue
5,000 shares of common stock. Commencing April 1, 1997, the
shareholder will receive $1,000 on a monthly basis as compensation
during the term of the agreement.
F-29
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
In December 1996, the Company entered into a consulting agreement
for certain advisory services, including managing a technology
development branch in Israel, for a term of two years. The advisor
is obligated to be paid $2,000 and issued 5,000 shares of common
stock for services performed through November 15, 1996. In addition,
commencing January 1, 1997, on a monthly basis, the advisor will
receive as compensation $1,000 and 2,000 shares of common stock
during the term of the agreement. On December 1, 1997, the agreement
was revised for a term of two years commencing on December 1, 1997.
The revised agreement states that, on a monthly basis, the
compensation will increase to $3,000 and 4,000 shares of common
stock.
Compensation paid to related parties under the above listed
consulting and other arrangements materially approximated amounts
which would be assessed by unrelated parties.
International Operations
The Company has strategic alliances, collaboration agreements and
licensing agreements with entities which are based in Russia and
Ukraine. Both of these countries have experienced volatile and
frequently unfavorable economic, political and social conditions.
The Russian economy and the Ukraine economy are characterized by
declining gross domestic production, significant inflation,
increasing rates of unemployment and underemployment, unstable
currencies, and high levels of governmental debt as compared to
gross domestic production. The prospects of wide-spread insolvencies
and the collapse of various economic sectors exist in both
countries.
In view of the foregoing, the Company's business, earnings, asset
values and prospects may be materially and adversely affected by
developments with respect to inflation, interest rates, currency
fluctuations, government policies, price and wage controls, exchange
control regulations, taxation, expropriation, social instability,
and other political, economic or diplomatic developments in or
affecting Russia and Ukraine. The Company has no control over such
conditions and developments, and can provide no assurance that such
conditions and developments will not adversely affect the Company's
operations.
F-30
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Risk of Environmental Liability; Present Lack of Environmental
Liability Insurance
The Company's radioactive contaminant technology is subject to
numerous national and local laws and regulations relating to the
storage, handling, emission, transportation and discharge of such
materials, and the use of specialized technical equipment in the
processing of such materials. There is always the risk that such
materials might be mishandled, or that there might be equipment or
technology failures, which could result in significant claims for
personal injury, property damage, and clean-up or remediation. Any
such claims against the Company could have a material adverse effect
on the Company. The Company does not presently carry any
environmental liability insurance, and may be required to obtain
such insurance in the future in amounts that are not presently
predictable. There can be no assurance that such insurance will
provide coverage against all claims, and claims may be made against
the Company (even if covered by insurance policies) for amounts
substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on the Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash which is at
one bank. Future concentration of credit risk may arise from trade
accounts receivable. Ongoing credit evaluations of customers'
financial condition will be performed and, generally, no collateral
will be required.
Litigation
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and
David Morris filed an action in the Supreme Court for the State of
New York, County of New York, against Eurotech, Ltd. for breach of
contract, seeking injunctive relief, specific performance and
monetary damages of nearly $5 million (the "Dirks Litigation"). The
Dirks Litigation arises solely from an agreement between Eurotech
and National Securities Corporation ("National") relating to
financial advisory services to be performed by National Securities
Corporation, a broker/dealer with which the plaintiffs were
affiliated and of which Raymond Dirks Research was a division.
Eurotech granted National a warrant certificate for 470,000 shares
at $1.00 per share as a retainer for general financial advisory
services. In conjunction with the separation of the plaintiffs and
Raymond Dirks Research from National Securities Corporation,
National assigned a significant portion of the warrant certificate
to the plaintiffs.
The plaintiffs allege, among other things, that they are entitled to
damages composed of both the value of the stock on the date of their
purported exercise of an alleged assignment of the warrant
certificate, and the decrease in value of the price of the stock
since the date of their purported exercise. Eurotech believes that
the plaintiffs have significantly overstated their monetary damage
claim and that, having sought monetary damages, the plaintiffs are
not entitled to any type of equitable relief.
F-31
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Process was served upon Eurotech at its California office in late
January 1998. Eurotech intends to vigorously defend and believes
that the plaintiffs' claims will be resolved favorably to the
Company. If the Company were adjudged liable in the Dirks
Litigation, the resolution of the litigation could have a material
adverse effect on the Company.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Transactions
1995:
During the period from inception (May 26, 1995) to December 31,
1995, the Company issued 440,000 shares of common stock to settle
liabilities of $27,500 associated with stock offerings and issued
600,000 shares of common stock for the purchase of a license valued
at $37,500.
During the period from inception (May 26, 1995) to December 31,
1995, the Company issued stock options for 600,000 shares of common
stock to settle legal and consulting fee liabilities of $75,000
associated with stock offerings.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
1996:
During the year ended December 31, 1996, the Company issued
4,440,036 shares of common stock to settle liabilities of $1,381,736
associated with consulting services and financing costs.
1997:
During the year ended December 31, 1997, the Company issued 205,000
shares of common stock to settle liabilities of $839,550 associated
with consulting services.
NOTE 14 - ABORTED PROPOSED INITIAL PUBLIC OFFERING OF PREFERRED STOCK
In June of 1997, the Company had determined not to proceed with a
previously contemplated, initial public offering of 5,000,000 shares
of cumulative convertible preferred stock. Costs in connection
therewith, aggregating $75,000, were charged to operations during
the year ended December 31, 1997.
F-32
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - SUBSEQUENT EVENTS
Technologies Acquired
Pursuant to three Technology Purchase Agreements each dated January
1, 1998, the Company has acquired from Oleg L. Figovsky, Ph.D. , a
consultant to the Company, all right, title and interest in and to
the following three unpatented technologies developed by him,
inclusive of future improvements thereto: (i) a group of related
technologies collectively known as "Interpenetrated Network
Polymers" ("INPs"), (ii) "Liquid Ebonite Material" ("LEM") and (iii)
"Rubber Concrete" ("RubCon") for purchase prices of $75,000, $15,000
and $35,000, respectively (each, a "Purchase Price"). Pursuant to
each such Technology Purchase Agreement, during 15-year period
commencing on January 1, 1998, the Company is obligated to pay to
Dr. Figovsky royalties equal to 49% of the Company's net revenues
from the sale or licensing of any products incorporating the
applicable technology, subject to the Company's right to deduct from
the first royalties payable under each agreement an aggregate sum
equal to the Purchase Price paid thereunder.
Convertible Debenture Offering
On February 23, 1998, the Company sold through a private placement
$3,000,000, 8% convertible debenture notes, due February 23, 2001.
As additional consideration, the Company issued separate warrants to
purchase 60,000 shares of the Company's common stock at $2.30 per
share. The warrants are exercisable over two years.
The debenture agreements permit the holders of the debentures to
convert the debt into shares of common stock at beneficial
conversion rates based on the timing of the conversion. The notes
conversion feature commences at the earlier of: (i) the date the
underlying shares to the convertible debenture notes are registered
and declared effected by the SEC; (ii) 90 days after February 23,
1998. Shares of common stock to be issued at the conversion date
shall be equal to the outstanding principal and accrued interest at
the conversion date, divided by the conversion price. The conversion
price is the lower of $2.62 or the average bid price per share of
the Company's common stock for five trading days immediately
preceding the conversion date, multiplied by (i) 80% for any
conversion honored prior to the 180th day after February 23, 1998,
(ii) 75% for any conversion honored on or after the 180th day and
prior to the 360th after February 23, 1998, and (iii) 70% for any
conversion honored after the 360th day after February 23, 1998.
Furthermore, the conversion price may not be less than a specified
"floor" initially set at $1.625. Commencing on February 23, 2000,
all or any portion of the remaining debt due under this financing at
the option of Eurotech is convertible into shares of common stock at
the 70% conversion rate.
Furthermore, the Company has agreed that if a Registration Statement
covering the underlying shares of the convertible note is either not
filed with the SEC on or prior to March 2, 1998 or, if filed, is not
declared effective by the SEC on or prior to March 15, 1998, the
Company will be obligated to pay to the debenture holders liquidated
damages equal to 1% of the aggregate principal amount of the then
outstanding notes on the first day of each month until such filing
or effectiveness deficiency is cured.
F-33
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - SUBSEQUENT EVENTS (Continued)
The Company intends to assign a value to the debentures' beneficial
conversion feature and warrants amounting to $1,100,000, which will
be amortized over 180 days commencing February 23, 1998.
Proceeds from the sale of the 3,000,000, 8% convertible debenture
notes amounted to $2,765,000 net of costs which were comprised of:
(i) legal and professional fees amounting to $10,000, (ii) a
placement fee to an unrelated party amounting to $225,000. The legal
and placement fees of $235,000 will be recorded as deferred
financing costs and will be amortized over 180 days commencing
February 23, 1998.
Repayment of $2,000,000 Bridge Notes
On March 6, 1998, the Company repaid all of the $2,000,000 principal
due to the holders of the bridge notes from proceeds of the February
1998 Convertible Debenture offering.
F-34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
20, 1998.
EUROTECH, LTD.
By:/s/ Peter Gulko
-----------------------------------
Peter Gulko, President, Secretary and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/James D. Watkins Director and Chairman April 20, 1998
- ----------------------
James D. Watkins
/s/Maxwell Rabb Director April 20, 1998
- ----------------------
Maxwell Rabb
/s/Peter Gulko President, Secretary and April 20, 1998
- ---------------------- Principal Financial Officer
Peter Gulko
F-35
