Registration No. 333-26673
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EUROTECH, LTD.
(Exact name of registrant as specified in its charter)
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District of Columbia 873-8731 33-0662435
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1101 30th Street, N.W.
Suite 500
Washington, D.C. 20007-3772
(202) 625-4382
(Address and telephone number
of principal executive offices)
Peter Gulko
President and Secretary
1101 30th Street, N.W.
Suite 500
Washington, D.C. 20007-3772
(202) 625-4382
(Name, address, and telephone
number of agent for service)
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Copies to:
Vincent J. McGill, Esq.
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
(212) 977-9700
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Approximate dates of proposed sales to the public: From time to time after
this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective
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registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed
Proposed Maximum
Title of Each Amount Maximum Aggregate Amount of
Class of Securities To Be Offering Offering Registration
to be Registered Registered Price Per Share Price Fee
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<S> <C> <C> <C> <C>
Common Stock, par 4,321,249 shares $2.3125(1) $9,992,888(1) $2,947.90
value $.00025 per -----------------------------------------------------------------------------------
share 566,000 shares $1.9375(2) $1,096,625(2) 323.51
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Common Stock, par 127,500 shares $4.73(3) 603,075(3) 177.91
value $.00025 per -----------------------------------------------------------------------------------
share (underlying 60,000 shares 2.3125(3) 138,750(3) 40.93
warrants and options) -----------------------------------------------------------------------------------
430,000 shares 2.3125(3) 994,375(3) 293.34
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75,000 shares 6.75(3) 506,205(3) 149.34
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25,000 shares 2.50(3) 62,500(3) 18.44
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Common Stock, par
value $.00025 per
share (underlying 4,799,999 shares(4) $2.3125(3) $11,099,998(3) 3,275.00
Convertible -----------------------------------------------------------------------------------
Debentures) 5,907,692 shares(4) 2.3125(3) 13,661,538(3) 4,303.15
==========================================================================================================
TOTAL $11,256.52
-10,933.01
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$ 323.51
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</TABLE>
(1) The Shares are offered at prices not presently determinable. The offering
price is estimated pursuant to the provisions of Rule 457 solely for the
purpose of calculating the registration fee based on the average bid and
ask price for the Company's Common Stock on March 16, 1998, which was
$2.3125 per share.
(2) The Shares are offered at prices not presently determinable. The offering
price is estimated pursuant to the provisions of Rule 457 solely for the
purpose of calculating the registration fee based on the average bid and
ask price for the Company's Common Stock on April 9, 1998, which was
$1.9375 per share.
(3) The offering price is based on the higher of the conversion or exercise
price, or the average bid and ask price, for the Company's Common Stock on
March 16, 1998.
(4) The exact number of shares issuable upon conversion of the Convertible
Debentures is not presently determinable. The Company will rely on Rule
416 to cover any additional shares that are ultimately issuable upon such
conversion.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
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of the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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EUROTECH, LTD.
Cross reference sheet pursuant to Item 501(b) of Regulation S-K
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<CAPTION>
Registration Statement Items and Headings Location in Prospectus
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<S> <C> <C>
1. Forepart of the Registration Statement and Facing page of registration statement and outside
Outside Front Cover of Prospectus.......... front cover page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................. Inside front and outside back cover page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ *
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... Prospectus Summary; Principal Shareholders and
Selling Shareholders; Shares Eligible for Future
Sale
8. Plan of Distribution....................... Plan of Distribution
9. Description of Securities to Be Registered. Description of Securities
10. Interests of Named Experts and Counsel..... *
11. Information with Respect to the Registrant. Cover Page; Prospectus Summary; Summary Financial
Information; Risk Factors; Dividends; Capitalization;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business; Market
Price of Common Stock; Management; Certain Transactions;
Principal and Selling Shareholders; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Part II of the Registration Statement
</TABLE>
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* Not Applicable
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE __, 1998
16,347,440 SHARES OF COMMON STOCK
EUROTECH, LTD.
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This Prospectus relates to the resale of 16,347,440 shares (the "Shares")
of the Common Stock, par value $.00025 per share, of Eurotech, Ltd., a District
of Columbia corporation (the "Company"), from time to time for the account of
certain existing shareholders (the "Selling Shareholders") of the Company. The
Company will not receive any proceeds from any sale of the Shares.
The distribution of the Shares by the Selling Shareholders or by their
respective pledgees, donees, transferees or other successors in interest may be
effected from time to time in one or more transactions for their own accounts
(which may include block transactions) on the NASD Electronic Bulletin Board
("Bulletin Board"), or on any automated quotation system or exchange on which
the Shares may then be listed, in negotiated transactions, through the writing
of options on shares (whether such options are listed on an options exchange or
otherwise), through short sales, sales against the box, puts and calls and other
transactions in securities of the Company or other derivatives thereof, or a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. The Selling Shareholders may effect such transactions by selling Shares
to or through broker-dealers, including broker-dealers who may act as
underwriters, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders or the
purchasers of Shares for whom such broker-dealers may act as agent, or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Selling
Shareholders may also sell Shares pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), or may pledge Shares
as collateral for margin accounts and such Shares could be resold pursuant to
the terms of such accounts. The Selling Shareholders and any other participating
brokers and dealers may be deemed to be "underwriters" as defined in Section
2(11) of the Securities Act. See "PRINCIPAL AND SELLING SHAREHOLDERS" and "PLAN
OF DISTRIBUTION."
The Common Stock of the Company is traded on the Bulletin Board under the
symbol "EURO." The last sale price for the Company's Common Stock, as reported
on the Bulletin Board on June 9, 1998 was 1.00.
None of the proceeds from the sale of the Shares by the Selling
Shareholders will be received by the Company. The Company has agreed to bear all
expenses, other than selling commissions and fees, in connection with the
registration and sale of the Common Stock being offered by the Selling
Stockholders. See "PLAN OF DISTRIBUTION."
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June __, 1998
1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all share and per share information in this Prospectus gives effect
to the June 1, 1996, four-to-one forward split of the then outstanding shares of
the Company's Common Stock, and does not give effect to (i) the issuance of
717,500 shares of Common Stock issuable upon exercise of stock options and
warrants outstanding at the date of this Prospectus, which shares have been
registered under the Registration Statement of which this Prospectus is a part;
(ii) the issuance of up to an additional 869,000 shares of Common Stock issuable
upon exercise of stock options and warrants outstanding as of the date of this
Prospectus, (iii) the issuance of up to 10,707,692 shares of Common Stock upon
the conversion of outstanding convertible debentures, (iv) the issuance of up to
500,000 additional shares of Common Stock reserved for issuance under the
Company's 1995 Stock Option Plan, and (v) any sale of any of the Shares
registered under the Registration Statement of which this Prospectus is a part.
See "Management -- 1995 Incentive Stock Option Plan" and "Principal and Selling
Shareholders."
THE COMPANY
GENERAL
Eurotech, Ltd. (the "Company") 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. 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.
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, and in testing conducted at Kurchatov has been
shown to be highly resistant to 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. 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
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2
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Agreement. See "Certain Transactions - Transactions Involving ERBC, Eurowaste
and Arbat American; - Silicon-Organic (EKOR) Compound."
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 contaminate the environment at
Reactor 4 of the Chernobyl Nuclear Power Plant ("ChNPP") 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.
Non-isocyanate Polyurethane ("NIPU"). 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 polyurethanes. 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. 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.
Liquid Ebonite Material ("LEM"). 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. The Company is preparing
evaluation samples of LEM for a major international chemical company that has
expressed interest in potentially licensing LEM for production and world-wide
distribution and sales.
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. The
Company 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 the EKOR compound will be selected for use
in remediating ChNPP Reactor 4 or any other radiation remediation project. No
assurance can be given the companies that have expressed interest in NIPU, LEM
or RubCon, or any other companies, will determine that any of those technologies
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
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3
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product purchases or license agreements. See "Business - General; - Principal
Technologies," "Risk Factors - Uncertainty of Sales Revenues and of Technology
Transfer Fee, Consulting Fee and Royalty Payments; - No Assurance of Joint
Venture Licenses, Further Collaborative Agreements or Further Project Contracts;
- - - Uncertainty of Market Acceptance," 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. See "Business - General; - Other Technologies."
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4
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The Offering
Capital Stock Offered by
the Selling Shareholders....... 16,347,440 shares of Common Stock, $.00025
par value per share.
Capital Stock Outstanding
Before Offering................ 19,482,834 shares of Common Stock, par value
$.00025 per share.
Capital Stock Outstanding
After Offering (1)............. 30,908,026 shares of Common Stock, par value
$.00025 per share.
Use of Proceeds................... The Company will not receive any proceeds
from any sale of the Shares.
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(1) Gives effect to the issuance of 717,500 shares of Common Stock issuable
upon exercise of certain stock options and warrants, and of up to
10,707,692 shares of Common Stock issuable upon conversion of convertible
debentures, outstanding as of the date of this Prospectus, which shares
have been registered by the Company under the Registration Statement of
which this Prospectus is a part. Does not give effect to (i) the issuance
of up to 869,000 shares of Common Stock issuable upon exercise of certain
other stock options and of warrants outstanding as of the date of this
Prospectus, and (ii) the issuance of up to 500,000 additional shares of
Common Stock reserved for issuance under the Company's 1995 Stock Option
Plan. See "Management - 1995 Incentive Stock Option Plan."
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5
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SUMMARY FINANCIAL DATA
The following selected financial data has been derived from, and are
qualified by reference to, the Financial Statements of the Company. The
Company's Financial Statements as of December 31, 1995, 1996, and 1997, and for
the period from inception (May 26, 1995) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, and for the period from inception (May 26,
1995) to March 31, 1998, including the Notes thereto and the related auditors'
report (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern) of Tabb, Conigliaro & McGann, P.C.,
independent auditors, are included elsewhere in this Registration Statement. The
following data should be read in conjunction with such Financial Statements and
Management's Discussion and Analysis and Plan of Operation.
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6
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Statement of Operations Data:(1)
<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 March 31, 1998
---------------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT EXPENSES $ 212,061 $ 1,170,782 $ 1,007,671 $ 2,698,185
CONSULTING FEES 266,900 1,486,830 1,392,845 3,367,557
OTHER GENERAL AND ADMINISTRATIVE EXPENSES 34,265 547,447 1,262,067 2,403,160
INTEREST EXPENSE -- 43,422 270,740 447,787
AMORTIZATION OF DEFERRED AND UNEARNED FINANCE -- 228,502 8,507,919 9,982,649
------------ ------------ ------------ ------------
COSTS
NET LOSS $ (513,226) $ (3,476,983) $(12,441,242) $(18,896,338)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.06) $ (0.23) $ (0.71) (.13)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,159,467 14,808,000 17,581,711 18,950,336
============ ============ ============ ============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1995 1996 1997 March 31, 1998
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<S> <C> <C> <C> <C>
Working Capital (deficit) $ 42,000 $ (1,809,237) $ (2,156,753) $ (511,106)
Total assets $ 56,000 $ 617,492 $ 952,243 $ 911,233
Total liabilities $ 13,000 $ 2,292,316 $ 5,801,966 $ 7,077,970
Deficit accumulated during
the development stage $ (513,000) $ (3,990,209) $(16,431,451) $(18,896,338)
Total stockholders' equity
(deficiency) $ 43,000 $ (1,674,824) $ (4,849,723) $ (6,166,747)
</TABLE>
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(1) Through March 31, 1998, and since that date, the Company has not
derived any significant sales revenues.
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7
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RISK FACTORS
Investment in the Shares offered hereby involves a high degree of risk and
should be made only by those investors who can afford the loss of their entire
investment. Accordingly, prospective investors, before making an investment,
should carefully consider the following risk factors:
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of The Private Securities Litigation Reform Act of 1995
The United States Private Securities Litigation Reform Act of 1995
provides a new "safe harbor" for certain forward-looking statements. The
following factors set forth under "Risk Factors" among others, could cause
actual results to differ materially from those contained in forward-looking
statements made in this Registration Statement, in future filings by the Company
with the SEC, in the Company's press releases and in oral statements made by
authorized officers of the Company. When used in this Registration Statement,
the words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Limited Operating History; Net Losses; Future Losses;
Initial Commercialization Stage; Uncertainty of Continuation as a Going Concern
The Company's limited operations to date have consisted primarily of
activities related to identifying and financing the development of its products
and technologies, including conducting laboratory tests, and planning and
conducting on-site tests and demonstrations. The Company is subject to all of
the business risks associated with a new enterprise, including, but not limited
to, risks of unforeseen capital requirements, failure of market acceptance,
failure to establish business relationships, and competitive disadvantages as
against larger and more established companies. At March 31, 1998, the Company
had an accumulated stockholders' deficit of $6,167,000, a working capital
deficit of $511,000, and an accumulated deficit since inception of $18,896,338.
The Company anticipates that it will continue to incur significant
operating losses through 1998. The Company may incur additional losses
thereafter, depending upon its ability to consummate any or a sufficient number
of collaborative working arrangements or licenses with third parties and the
operation and financial success of any projects which the Company and its
potential working partners may be awarded. The Company has had no meaningful
revenues to date. Although management believes that the Company will recognize
revenues during 1998, based on expressions of interest from third parties to
acquire licenses to use the Principal Technologies, there can be no assurance as
to when or whether it will be able to commercialize its products and
technologies and realize any revenues therefrom. Its products and technologies
have never been utilized on a large-scale commercial basis. The Company's
ability to operate its business successfully will depend on a variety of
factors, many of which are outside the Company's control, including:
competition, cost and availability of raw material supplies, changes in
governmental (including foreign governmental) initiatives and requirements,
changes in domestic and foreign regulatory requirements, and the costs
associated with equipment repair and maintenance. See "Risk Factors-Competition;
- - - Risks Related to the Russian Federation and Ukraine - Political and Social
Risks - Economic Risks - Risks as to Availability and Cost of Materials,
Supplies and Equipment; Regulation."
The report of the Company's independent public accountants and the notes
to the Company's financial statements included elsewhere in this Prospectus
state that the continuation of the Company's business as a going concern
depends, among other things, on the obtaining of additional funds to continue
its research and development activities and to complete the commercialization of
its present technologies, the generation of significant future revenues and
income, and market acceptance of its technologies, none of which can be assured.
See "Financial Statements - Independent Auditor's Report, - Note 1" and "Risk
Factors -- Need for Additional Financing; Possibility of Future Dilution."
8
<PAGE>
Need for Additional Financing; Possibility of Future Dilution
The Company's future capital requirements could vary significantly and
will depend on certain factors, many of which are not within the Company's
control. These include the existence and terms of any collaborative
arrangements; the ongoing development and testing of its products; the existence
and terms of any licensing and/or joint venture agreements for the marketing and
sales of the Company's Principal Technologies; the nature and timing of
remediation and clean-up projects; and the availability of financing. The
Company`s lack of operational experience and limited capital resources could
make it difficult to successfully bid on major remediation or clean-up projects.
In such event, the Company's business development could be limited to smaller
projects with significantly lower potential for profit.
In addition, the expansion of the Company's business will require
significant capital resources for hiring technical and operational support
personnel, and to a lesser extent, for research and development activities.
Although based on the completion in November 1997 and in February 1998 of 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
Company believes it has adequate financing and capital through the end of fiscal
year 1998, there can be no assurance that additional capital requirements will
not arise, or that for periods following fiscal year 1998 the Company will
generate sufficient revenues to cover its expenses or generate profits. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its research and development programs and marketing
and sales programs, forego technology acquisition opportunities, or license
third parties to commercialize technologies that the Company would otherwise
seek to develop itself. To the extent the Company raises additional capital by
issuing equity securities, holders of its equity securities will be diluted. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
No assurance can be given that the Company will successfully obtain any
further working capital or complete any further offerings of its securities, or
that, if obtained or completed, that such funding will be sufficient or that it
will not cause substantial dilution to shareholders of the Company. Further, no
assurance can be given as to the completion of research and development
activities and the successful marketing of the Company's technologies. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition - Liquidity and Capital Resources."
Significant Leverage; Uncertain Ability to Repay Debt
As of February 23, 1998 the Company had $6,000,000 of long-term debt
outstanding, consisting of $3,000,000 principal amount of 8% Convertible
Debentures due November 27, 2000, issued pursuant to a private placement of such
debentures (and warrants to purchase shares of the Company's Common Stock)
completed in November 1997 (the "1997 Debenture Offering"), plus related annual
interest expense of $240,000; and $3,000,000 principal amount of 8% Convertible
Debentures due February 23, 2001, issued pursuant to a private placement of such
debentures (and warrants to purchase shares of the Company's Common Stock)
completed in February 1998 (the "1998 Debenture Offering"), plus related annual
interest expense of $240,000. As a result, the Company is highly leveraged and
has long-term indebtedness which is substantial in relation to its stockholders'
deficiency of ($6,167,000) at March 31, 1998.
In connection with the 1997 Debenture Offering, the Company agreed not to
use more than $1,000,000 of the proceeds thereof to repay outstanding
indebtedness. Consequently, at the maturity in December 1997 of $2,000,000
principal amount of promissory notes issued pursuant to a bridge financing
completed in December 1996 (the "Bridge Notes"), the Company had insufficient
funds to repay those Notes in full and the Company obtained the agreement of the
holders of the Bridge Notes (the "Bridge Holders") to extend their maturity to
March 18, 1998. In connection therewith, the Company also agreed to issue to the
Bridge Holders an aggregate of 1,000,000 shares of Common Stock as a penalty for
having failed to complete the registration of their Common Stock during 1997. In
accordance with the terms
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of the Bridge Notes, as of December 19, 1997, their annual interest rate was
increased from 12% to 15%.
The Company fully repaid all principal and outstanding accrued interest on
the Bridge Notes on February 28, 1998, from the combined proceeds of the 1997
and 1998 Debenture Offerings.
To date, the Company has not generated any significant operating revenues
and presently is not generating any operating revenues. Although the Company
believes that its recently initiated marketing program with respect to its
Principal Technologies will result in one or more revenue-producing licenses
and/or joint ventures, and in sales of the EKOR compound for use in the ChNPP
Reactor 4 remediation project, there is no assurance that any such license or
joint venture will be consummated, that the EKOR compound will formally be
selected for use at ChNPP, that any such license, joint venture or EKOR sales
will result in significant net revenues to the Company, or when, if ever, any of
the foregoing will occur. A failure of the Company to realize significant
near-to-mid-term operating revenues will have a material adverse impact on the
Company's financial condition, make it unlikely that the Company will be able to
borrow or otherwise raise necessary working capital and other funds, and may
cause the Company to defer, scale down or eliminate portions of its business.
If the Debentures are not fully converted to shares of Common Stock prior
to maturity, the Company will be obligated to pay to the Debenture Holders up to
$3,000,000 in principal (plus outstanding accrued interest) on November 27,
2000, and up to $3,000,000 in principal (plus outstanding accrued interest) on
February 23, 2001. Moreover, the terms of the Convertible Debentures grant the
Debenture Holders the right to require the Company to redeem the Convertible
Debentures for cash if, at any time, less than $400,000 of the Common Stock
trades on the OTC Bulletin Board in any one week. The trading volume of the
Common Stock has been below such minimum. Although the Company does not expect
the Debenture Holders to exercise this right, if they do so it is unlikely that
the Company will have sufficient funds to pay the redemption price.
Accordingly, the Company is highly dependent on the success of its present
marketing program in respect of the Principal Technologies to meet its mid-term
working capital requirements and to repay outstanding long-term debt at maturity
or upon redemption. If the Company is unable to repay such debt when due, the
Company could have no practical option other than to seek debtor's relief under
the U.S. Bankruptcy Code and/or other similar laws.
Uncertainty of Sales Revenues and of Technology Transfer Fee, Consulting Fee and
Royalty Payments
The Company's near-term revenues are expected substantially to derive from
royalties pursuant to potential licenses of its Principal Technologies, sales of
those technologies and of products produced thereby pursuant to potential
marketing and sales joint ventures, and the receipt of funds in connection with
U.S. nuclear waste remediation projects. Presently the Company does not expect
to derive near-term revenues from transfer and consulting fees in respect of
Ukrainian waste-to-energy facilities or from any further royalties in respect of
automated parking garages.
The Company has only recently determined to focus the majority of its
business activities and resources on the marketing and sale of its four
Principal Technologies (i.e., EKOR compound, "Non-isocayanate Polyurethane,"
"Liquid Ebonite Material," and "RubCon," see "Business -- General; - Principal
Technologies"). The Company's marketing and sales program, which presently
depends upon negotiating and entering into joint ventures with and licenses of
its technologies to major international chemical companies, and upon
successfully bidding on U.S. and foreign nuclear contamination remediation
projects (including the remediation of Reactor 4 at the Chernobyl Nuclear Power
Plant in Ukraine), is in its initial stage only, and to date the Company has not
entered into any such license or joint venture, and has successfully bid on only
one U.S., first-round, nuclear contamination remediation demonstration project.
Although based on the expressions of interest in the Principal Technologies
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received to date from such companies and on preliminary discussions with several
of those companies, the Company believes that it will enter into such licenses
and/or joint ventures and realize revenue from such licenses or joint ventures
during 1998, no assurance can be given that any such licenses or joint ventures
will be entered into or that if entered into they will result in revenues to the
Company.
Risks Relating to the Russian Federation and Ukraine
Political and Social Risks. In recent years, Russia and Ukraine each have been
undergoing a substantial political and social transformation from centralized
communism to the early stages of pluralist democracy. As part of this process,
the former centrally controlled, command economies of Russia and Ukraine have
been subject to various reforms intended to lead to generally capitalist,
market-oriented economies. There can be no assurance that the political and
economic reforms necessary to complete these transformations will continue, or
if they continue, will be successful. In their present stages of relative
infancy, the Russian and Ukrainian political and economic systems are
characterized by a proliferation of political parties, none of which hold a
legislative majority. The Russian and Ukrainian political and economic systems
are also vulnerable to their respective populations' dissatisfaction with
reform, economic dislocations, social and ethnic unrest, and changes in
governmental policies and decisions. Any of these factors could have a material
adverse effect on the private or governmental availability of hard currency,
currency exchange rates, the private ownership of businesses and other
enterprises, the social distribution of wealth, the private ownership and
alienality of tangible and intellectual property, and the availability of
construction materials and equipment. Any of such adverse effects could have a
materially adverse effect on the Company.
As part of the reforms being instituted in Russia and Ukraine, both
countries have enacted legislation to protect private property against
expropriation and nationalization. However, due to the lack of experience in
enforcing these provisions in the short time they have been in effect, and due
to the potential political changes that could occur in the future, no assurance
can be given that these protections will be enforced in the event of an
attempted expropriation or nationalization. The Company does not anticipate the
occurrence of such developments in respect of its presently contemplated
ventures involving Ukraine and Russia, because (i) in the case of the
application of the Company's EKOR compound technology to the remediation of
radioactive contamination at the Chernobyl Nuclear Power Plant ("ChNPP") Reactor
4, the increasing probability of a second, disastrous nuclear accident has made
the rapid containment of radioactive debris a matter of high Ukrainian and
international concern and, to the Company's knowledge, the EKOR compound is the
only material presently being considered by the Chernobyl authorities for such
purpose; (ii) the Company's waste-to-energy technology has been selected by the
Ukrainian government as the national standard for the production of energy from
municipal waste products; and (iii) the Company's high-tech, automated parking
garage technology can assist in relieving the City of Moscow's acute shortage of
automotive parking spaces and has received preferential site allocation
treatment from Moscow's municipal government. Nevertheless, expropriation or
nationalization of the EKOR foam intellectual property rights, the
waste-to-energy technology, the presently selected, Moscow parking garage site,
or the parking garage technology, would have a material adverse effect on the
Company. In particular, the EKOR compound technology was developed by the I.V.
Kurchatov Institute, a Russian, state-controlled scientific research and
development institute and the Euro-Asian Physical Society, a professional
society in Russia, which through a series of assignments have, ultimately,
assigned the EKOR compound intellectual property rights to the Company. All site
allocation and construction approvals for Ukrainian waste-to-energy facilities
are at the discretion of the respective Ukrainian municipal governments, whose
political autonomy from the national government (which has selected the
Company's waste-to-energy technology as the Ukrainian national standard for such
facilities) is in an unsettled state. The allocation of the Moscow site for the
automated parking garage is controlled by the City of Moscow. No assurance can
be given that any of these governmental, governmentally controlled, or
governmentally affiliated entities would legally resist an attempted
expropriation or nationalization, either of which, if successful, would have a
materially adverse impact on the Company.
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In both Russia and Ukraine governmental institutions and the relations
between them, as well as governmental policies and the political leaders who
formulate and implement them, are subject to rapid and potentially violent
change. The Constitution of the Russian Federation gives the President of the
Russian Federation substantial authority, and any major changes in, or rejection
of, current policies favoring political and economic reform by the President may
have a material adverse effect on the Company. The Constitution of Ukraine has
been only recently adopted, and contrary to President Leonid Kuchma's prior
expectation, substantially divides governmental power between the President and
Parliament. The relations between the Ukrainian President and Parliament often
have been characterized by factional infighting in which communist-oriented
members of Parliament have mounted vigorous campaigns against President Kuchma's
economic reform policies and programs to stimulate economic growth, curb
inflation, and stabilize foreign exchange rates. In the summer of 1996,
President Kuchma caused a widely reported "shake-up" of his cabinet, in which a
relatively aggressive reform-oriented Minister of Finance was replaced by one
who advocates a more gradualist approach. This relative political instability
could result in major changes in the Ukrainian government, present reform
policies or rejection of the same, any of which may have a material adverse
effect on the Company. No assurance can be given that such developments will not
occur either in Russia or Ukraine.
The Russian Federation is a federation of republics, territories, regions
(one of which is an autonomous region), cities of federal importance and
autonomous areas, all of which are equal members of the Russian Federation.
Ukraine is composed of twenty-four regions ("Oblasts"), an autonomous republic
and two municipalities, Cherkas'ka and Chernihiv'ka. The delineation of
authority in both Russia and Ukraine between these political subdivisions and
the national government is, in many instances, uncertain. In some cases in
Russia, it is, in fact, contested, most notably in Chechnya which has
experienced protracted military confrontation with the Russian federal
government. This lack of consensus in Russia and Ukraine between local and
regional authorities and the respective national governments may result in
political instability and negative economic effects which could be materially
adverse to the Company.
The political and economic changes that have occurred in Russia and
Ukraine in recent years have resulted in significant dislocations of political
and governmental authority caused by the collapse of their, respective, previous
governmental structures and political systems. New political and governmental
systems are only beginning to take form in Ukraine and Russia. Furthermore,
significant unemployment in Russia and Ukraine, the influx of unemployed persons
into major Russian cities, significant wage arrearages in Ukraine and Russia,
and the existence of poorly paid police forces in both countries have led to
significant increases in crime in Russia and Ukraine. Significant levels of
organized criminal activity exist in large metropolitan areas of both countries.
While President Yeltsin of Russia and President Kuchma of Ukraine have
instituted anti-crime and anti-corruption programs, such measures are of recent
origin and have achieved minimal and uncertain results. No assurance can be
given that the levels of crime and corruption in Russia and Ukraine will be
curbed or otherwise brought under control, and no assurance can be given that
the social and economic dislocations caused by high rates of organized and other
crime and of official corruption will not in the future have a material adverse
impact on the Company.
In both Ukraine and Russia state-controlled and, more recently,
privately-owned enterprises have often failed to pay full salaries to their
employees, and in some instances have not paid salaries at all for extended
periods of time. This, in conjunction with historically high rates of inflation
and escalating costs of living in both countries, could lead in the future to
labor and social unrest. Such unrest could have political, social and economic
consequences such as increased support for a return to centralized governments,
a climate hostile to foreign investment and increasing levels of violence, any
of which could have a material adverse impact on the Company.
Although the present, public policy initiatives of Russia are favorable to
the commercialization of the Company's automated parking garage technology in
Moscow, and those of Ukraine are favorable to the utilization of the Company's
EKOR compound technology to remediate ChNPP Reactor 4 and to the
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use of the Company's waste-to-energy technology for production of energy from
municipal waste products, the present political instability, social unrest and
dislocations of governmental authority in either or both countries could result
in changes in Russian and Ukrainian public policy that are adverse to the
commercialization of the Company's technologies or that favor other, competing
technologies for use in the same or similar projects for which the Company's
EKOR compound, automated parking garage and waste-to-energy technologies are
currently contemplated. No assurance can be given that such changes will not
occur, or, if they do occur, will not have a significant adverse impact on the
Company's financial condition, business and business prospects.
Economic Risks
Along with the institution of political reforms, the Ukrainian and Russian
governments have been attempting to create and implement policies of economic
reform and economic stabilization, and to create legal structures intended to
promote private, market-based activities, foreign trade and foreign investment.
Although these policies have met with some success in both countries, no
assurance can be given that they, or similar policies will continue to be
supported and pursued, or that if supported and pursued, will be successful.
Despite the implementation of economic reform policies, the Russian
economy and the Ukrainian 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 prospect of wide-spread insolvencies
and the collapse of various economic sectors exists in both countries.
Additionally, in both Russia and Ukraine there is a general lack of consensus as
to the rate, extent and substantive content of economic reform. No assurance can
be given that either Russia or Ukraine in the future will remain receptive to
foreign investment or market-oriented economies. Moreover, no assurance can be
given that the economy of either country will improve.
Ukraine and Russia presently receive substantial financial assistance from
several foreign governments and from international organizations. The
restriction or elimination of any or all such financial assistance could have
severe negative impacts on those countries' respective economies, and could
significantly decrease the availability of hard currency, the payment of which
in technology transfer and consulting fees the Company depends upon. In
particular, the Ukrainian government's planned remediation of radioactive
contamination at the Chernobyl Nuclear Power Plant substantially depends on
financial assistance from the G-8 nations, and the reduction or elimination of
such assistance could impair or prevent the Company's use of its EKOR technology
in that remediation, thereby reducing or eliminating a substantial amount of the
Company's presently expected revenues. No assurance can be given that any or all
such events will not occur.
Ukrainian and Russian businesses have limited experience operating in free
market conditions, and compared with Western businesses have limited experience
with entering into contracts and performing contractual obligations.
Additionally, Ukrainian and Russian governmental agencies, as well as Ukrainian
and Russian business enterprises, have limited experience with the substantive
content and detail typical of Anglo-American and other Western contracts.
Accordingly, the detailed agreement to perform specified contractual obligations
in many instances may be contained in a series of written approvals, consents
and the like from various governmental and quasi-governmental bodies, as well as
from business companies, that accompany a formal contract. Legal reforms have
only been recently instituted in Russia and Ukraine to interpret and enforce
contractual obligations on principles similar to those of the legal systems of
Western countries. The Company's expected near-term revenues substantially
depend upon technology transfer and consulting fees memorialized in written
contracts with Ukrainian and Russian entities. No assurance can be given that
such fees will be paid in the manner called for in such contracts or that
enforcement of such payment obligations, if not performed fully or at all, will
be successful in Russian or Ukrainian courts.
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Risks as to Availability and Cost of Materials, Supplies and Equipment
Presently, the development of the silicon-carbide "wafer" technology is
being conducted, and the Company's EKOR compound is being manufactured and
produced, in Russia by a Russian sub-contractor of the I.V. Kurchatov Institute
("Kurchatov"), which is a state-controlled entity. While most of the constituent
materials used in manufacturing the EKOR compound are commercially available at
competitive prices on a world wide basis, a key chemical catalyst - without
which the EKOR compound cannot be produced - is presently a trade secret of and
produced only by Kurchatov. Accordingly, without the continued cooperation of
Kurchatov, which is subject to the dictates and policies of the Russian
Government and over which the Company has no control, the Company will be unable
to produce, commercialize or sell the EKOR compound, or complete the development
of the silicon-carbide "wafer" technology. No assurance can be given that the
present, favorable policy of the Russian Government will continue (see "Risk
Factors-Risks Relating to the Russian Federation and Ukraine-Political and
Social Risks") or that Kurchatov's processes for producing such chemical
catalyst and the silicon-carbide "wafers" will at any time be made available to
the Company, or that if such processes are made available to the Company, their
respective costs to the Company will be reasonable.
Additionally, both Russia and Ukraine historically have experienced
persistent shortages of basic, industrial materials and goods, including piping,
pumps, machine tools, presses and the like, some or all of which are used in
manufacturing the EKOR compound and in producing the silicon-carbide "wafers".
No assurance can be given that such shortages will not occur, interfere with
and/or substantially increase the cost of either or both manufacturing the EKOR
compound in commercially saleable quantities, and completing the development of
the silicon-carbide "wafer" technology, either of which could have a presently
unquantifiable, substantial adverse impact on the Company's financial condition,
business and business prospects.
No Assurance of Joint Venture Licenses, Further Collaborative Agreements or
Further Project Contracts
The Company's business strategy presently is principally based upon
entering into joint ventures and licenses for the marketing and sale of its
Principal Technologies, collaborative agreements that allow the Company to bid
on nuclear waste and contamination remediation projects, the awarding of such
project contracts to the Company, and to a lesser extent collaborative joint
working arrangements with foreign governmental and quasi-governmental entities.
To date, the Company has entered into one such collaborative bidding agreement
(with Duke Engineering & Services, Inc.) which has resulted in one successful,
first-round demonstration project bid, and has not entered into any licenses or
joint ventures for the marketing and sale of its four Principal Technologies.
Duke Engineering and Services has submitted a letter of intent to bid, on behalf
of itself and the Company, to the European Reconstruction and Development Bank
in connection with studies for the remediation of Reactor 4 at the Chernobyl
Nuclear Power Plant ("ChNPP"). There can be no assurance that the Company will
enter into any further collaborative bidding agreements, will enter into
definitive project agreements, will successfully bid with respect to ChNPP, or
will enter into any licenses or joint ventures for the marketing and sale of its
Principal Technologies. There can be no assurance that, if entered into, any
such agreements will (in the case of projects in Russia and Ukraine) be similar
in form to Western agreements covering like activities, or (in the case of all
such agreements) will be on terms and conditions that are sufficiently
advantageous to the Company to enable it to generate profits.
There can be no assurance that the Company will be awarded further
contracts to perform decontamination, remediation or waste disposal projects.
Even if such contracts are awarded, there can be no assurance that these
contracts will be profitable to the Company. In addition, any project contract
which may be awarded to the Company and/or any of its working partners may be
curtailed, delayed, redirected or eliminated at any time. Problems experienced
on any specific project, or delays in the implementation and funding of
projects, could materially adversely affect the Company's business and financial
condition.
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The Company has been advised that Arbat American Autopak, Ltd. ("Arbat
American"), with which the company has entered into a technology license
agreement pertaining to Automated Parking Garage technology, has not obtained
project financing for the contemplated automated parking garage facility in
Moscow, Russia. See "Business - Other Technologies - Automated Parking Garages."
Such failure could constitute a default under Arbat American's agreements with
the Municipal Government of Moscow. If Arbat American is declared to be in
default its ability to commence such Moscow project, or any other project in
Moscow, could be jeopardized. In such a case, the Company might need to enter
into a technology agreement with another entity or entities in order to derive
any revenues from this technology, for which no assurance can be given.
Uncertainty of Acquisition of Additional Israeli Technologies
One of the Company's Principal Technologies ("Non-isocyanate
Polyurethane") and three of the Company's Other Technologies ("Electromagnetic
Separation Technology," "Powdered Metallurgy Technology" and "Continuous
Combustion Synthesis Technology") were acquired by the Company in accordance
with informal agreements in principal with three Israeli technology incubators
(the "Incubators" and, each, an "Incubator"), which generally provide for the
Company's investment in and receipt of equity in technology research and
development projects sponsored by the Incubator and selected by the Company. See
"Business - Acquisition of Israeli Technologies - Incubator Technologies."
Those agreements in principal are not in writing, are informal
arrangements between the Company and the Incubators, and are not enforceable as
against any of the Incubators. As a result, although the Company has entered
into written investment and other agreements in the case of each of the
foregoing technologies (see "Business -Acquisition of Israeli Technologies -
Incubator Technologies"), none of the Incubators is obligated to permit the
Company to invest in and/or acquire any further Incubator-sponsored research and
development projects. Accordingly, the Company's opportunities to acquire and
commercialize Incubator - sponsored technologies may be limited to the foregoing
technologies, only.
Uncertainty of Market Acceptance
Many prospective users of the Company's EKOR compound and waste-to-energy
technologies have already committed substantial resources to other forms of
radioactive contaminant remediation, municipal waste management and
environmentally clean energy production. The Company's growth and future
financial performance in large measure will depend on demonstrating to
prospective licensees, joint venturers, collaborative partners and users the
advantages of the EKOR compound, the Company's other Principal Technologies, and
(in light of the Company's recent decision to concentrate on marketing and
selling its Principal Technologies) to a significantly lesser extent its
waste-to-energy technology over alternative products and technologies. There can
be no assurance that the Company will be successful in any of these efforts. See
""Business--Principal Technologies,--Other Technologies."
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.
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Competition and Technological Alternatives
The near-term, primary markets for the Company's products and technologies
are 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 the Chernobyl Nuclear Power Plant, 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 Duke Engineering and
Services) 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 competitors are able
to accomplish any of the foregoing, the Company's ability to compete could be
materially and adversely affected. See "Business."
Uncertainty of Funding For Remediation of ChNPP Reactor 4
One of the first commercial uses of EKOR compound may be to contain and
stabilize the extensive radioactive debris and dust that continues to accumulate
and contaminate the environment at ChNPP Reactor 4 in the Ukraine. The Ukrainian
government's planned remediation of radioactive contamination at the ChNPP site
substantially depends on financial assistance from the G-8 nations, which
financial assistance remains uncertain. The inability of the Ukraine to obtain
such financial assistance could impair or prevent the Company's use of its EKOR
compound in that remediation project, thereby reducing or eliminating a portion
of the Company's anticipated revenues.
Unpredictability of Patent Protection and Proprietary Technology
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 (see "Business - Other
Technologies - Re-sealable Containers") 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 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
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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 its 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.
Factors Affecting Market Price of Common Stock
Prices for the Company's Common Stock will be influenced by many factors,
including the depth and liquidity of the market for the Common Stock, investor
perception of the Company and its products, and general economic and market
conditions. The market price of the Company's Common Stock may also be
significantly influenced by factors such as the announcement of new projects by
the Company or its competitors and quarter-to-quarter variations in the
Company's results of operations.
Applicability of Rules Relating to Low-Price Stocks or "Penny Stock"; Effect of
Failure to Qualify for Nasdaq Market Listing
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5.00 per share, subject to certain exceptions.
The Company's Common Stock presently is a "penny stock" and, accordingly, is
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors.There can be no assurance that the Common
Stock will trade for $5.00 or more per share, or if so, when. Consequently, the
"penny stock" rules may restrict the ability of broker/dealers to sell the
Company's Common Stock and may affect the ability of the Selling Shareholders in
this Offering (and their purchasers) to sell the Company's Common Stock in a
secondary market.
Although the Company desires to list the Common Stock on the Nasdaq
SmallCap Market, there can be no assurance that the Company will ever qualify
for the same, or that if the Company does so qualify that a listing application
will be approved.
In order to qualify for initial listing on the Nasdaq SmallCap Market a
company must, among other things, have at least $4,000,000 in net tangible
assets, a $5,000,000 "public float." and a minimum bid price for its securities
of $4.00 per share. For continued listing on the Nasdaq SmallCap Market, a
company must maintain $2,000,000 in net tangible assets, and a $1,000,00 market
value of the public float. In addition, continued inclusion requires two market
makers and a minimum bid of $1.00 per share. Failure to meet these maintenance
criteria may result in the discontinuance of Nasdaq SmallCap Market listing.
Absent Nasdaq SmallCap Market or other Nasdaq or stock exchange listing,
trading, if any, in the Company's Common Stock will (as it presently is) be
continued in the "Electronic Bulletin Board" administered by the National
Association of Securities Dealers, Inc. As a result, a shareholder may find it
difficult to dispose of or to obtain accurate quotations as to the market value
of the Common Stock.
Dependence on Certain Personnel
Until recently, the Company's business had been substantially dependent on
the services and business experience of Peter Gulko, Hans-Joachim Skrobanek, Dr.
Peter Graves, and of ERBC Holdings, Limited ("ERBC"). In January 1998 Dr. Graves
resigned as Chairman and CEO, and both Dr. Graves and Mr. Skrobanek resigned as
directors, though Mr. Skrobanek continues to serve the Company as its
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representative in the European market. Eurotech had been dependent on Dr. Graves
for administering the office in La Jolla, California during the first stage of
the Company's existence in which the key technologies were developed. The shift
of the Company's focus from development to marketing (see "Business"), and the
moving of the Company's executive offices from La Jolla to Washington, D.C.
substantially reduced the need for Dr. Graves' contributions. Accordingly, the
Company does not believe that the recent resignations of Dr. Graves as Chairman,
CEO and a director, or of Mr. Skrobanek and Mr. Gulko as directors, will have a
material adverse effect upon the Company. Peter Gulko has been appointed
President, Secretary and Principal Financial Officer of the Company, and
presently serves without an employment agreement. Mr. Gulko presently is not
covered by key-man life insurance. See "Management."
Conflicts of Interest
Certain shareholders, directors and officers of the Company are also
shareholders, directors, officers and/or employees of a number of companies with
which the Company has entered into contracts and expects to conduct business.
See "Certain Transactions." Specifically, Kurt Seifman, the beneficial owner of
1,246,300 shares of the Company's Common Stock, is the chief executive officer
and sole shareholder of ERBC which, in turn: (i) has licensed the
Silicon-Organic (EKOR) compound technology and the Re-sealable Container Systems
to the Company (see "Business - Principal Technologies - Silicon-Organic
Compound; Other Technologies - Re-sealable Containers"); (ii) is a principal
equity owner of Kurchatov Research Holdings, Ltd. ("KRH"), to which the Company
has agreed to remit 50% of all net profits from sales of the EKOR compound (see
"Business - Principal Technologies - Silicon-Organic Compound"); and (iii) owns
40% of the outstanding common stock of Arbat American Autopark, Ltd. ("Arbat
American") the owner of 50% of the equity in "Cinema World on Arbat," the
Russian joint stock company that is developing a Moscow, Russia, parking garage
utilizing the Company's automated parking technology. See "Business - Other
Technologies - Automated Parking Garages." In addition, Hans-Joachim Skrobanek,
who is the beneficial owner of 145,000 shares of the Company's Common Stock, is
an employee of ERBC and a shareholder and former President of Arbat American.
Peter Gulko, who until January, 1998, had been a Director of the Company and who
presently is the President, Secretary and Principal Financial Officer of the
Company and the beneficial owner of 1,110,000 shares of the Company's Common
Stock, has, at various times acted as a business agent of ERBC. See "Business
Other Technologies," "Management," and "Certain Transactions."
By virtue of its ownership interest in KRH, ERBC and Mr. Seifman will
derivatively benefit from any sales of EKOR compound by the Company to a greater
extent than they would by virtue of their ownership of Common Stock, alone.
Similarly, by virtue of its ownership interest in Arbat American, ERBC (and
Messrs. Seifman and Skrobanek) will derivatively benefit from the success, if
any, of parking garages constructed by Arbat American or its affiliates, which
may be disproportionate to the income derived by the Company from royalties paid
by Arbat American.
During the period of June, 1997, through February 13, 1998, Dr. Randolph
A. 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
Kurchatov Research Holdings, Ltd., a Delaware corporation ("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 Transactions."
In addition, Oleg L. Figovsky, Ph.D., a consultant to the Company, is the
originator and developer of three technologies, "Interpenetrated Network
Polymers," "Liquid Ebonite Material" and "Rubber Concrete," all right, title and
interest in which were 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 -
18
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- - - Incubator Technologies -- Technologies Purchased from Prof. Oleg L. Figovsky;
- - - Principal Technologies," "Management - Consultants," and "Certain
Transactions."
Proceeds Not Available to Company
The Company will not receive any proceeds from the sale of Shares offered
hereby.
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. See "Risk Factors - Risks Related to the Russian Federation
and Ukraine-Political and Social Risks, - Economic Risks; - Limited Operating
History; Net Losses; Future Losses; Initial Commercialization Stage; Uncertainty
of Continuation as a Going Concern."
Shares Eligible for Future Sale
Of the 30,908,026 shares of the Company's Common Stock to be outstanding
after the Offering(1), 16,347,440 shares are being registered by the Company
under, and will be eligible for sale upon the effectiveness of, the Registration
Statement of which this Prospectus is a part. 6,998,000 shares of the Company's
currently outstanding Common Stock were issued without registration pursuant to
Rule 504 of Regulation D under the Securities Act of 1933 (the "Securities
Act"), and are restricted securities and therefore may not be sold without
registration except in complaince with Rule 144. Of the shares of Common Stock
to be outstanding after the Offering1, 4,762,229 shares were issued without
registration in reliance on available exemptions under the Securities Act, will
be "restricted securities" as that term is defined in Rule 144 under the
Securities Act, and pursuant to that Rule, under certain circumstances may be
sold without registration, and 2,800,357 shares, which although issued without
registration in reliance on available exemptions under the Securities Act and
which for that reason are "restricted securities," presently are eligible for
sale without registration by reason either of having been sold to non-affiliates
of the Company pursuant to Rule 144 or having qualified for sale without
registration pursuant to Rule 701 under the Securities Act. All "restricted"
shares will become eligible for sale under Rule
- - --------
(1) Gives effect to the issuance of 717,500 shares of Common Stock
issuable upon exercise of certain stock options and warrants, and up to
10,707,692 shares of Common Stock issuable upon the conversion of convertible
debentures, outstanding at the date of this Prospectus. Does not give effect to
the issuance of (i) up to 869,000 shares of Common Stock issuable upon exercise
of certain other stock options and warrants outstanding at the date of the
Prospectus, and (ii) the issuance of up to 500,000 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Option Plan. See
"Management - 1995 Stock Option Plan."
19
<PAGE>
144, at various times, after the applicable holding period has expired, without
registration. See "Shares Eligible for Future Sale."
2,000,000 of the Shares offered hereby carry registration rights pursuant
to a Bridge Financing completed by the Company in December, 1996, and
10,895,192(2) of the shares offered hereby carry registration rights pursuant to
two private placements of the Company's 8% Convertible Debentures due November
27, 2000 and February 23, 2001, respectively. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources." The holders of those securities have exercised their
registration rights. Those Shares have been registered in this Offering, and are
free-trading.
1,586,500 shares of Common Stock are issuable upon the exercise of
outstanding options and warrants. 717,500 of those shares have been registered
in the Registration Statement of which this Prospectus is a part and will be
free-trading at the time of issuance.
The availability for sale, as well as actual sales, of currently
outstanding shares of Common Stock, and up to 12,259,192 shares of Common Stock
issuable upon the conversion of outstanding convertible debentures and upon the
exercise of outstanding options and warrants, may depress the prevailing market
price for the Common Stock and could adversely affect the terms upon which the
Company would be able to obtain additional equity financing.
Pursuant to the compensation provisions of outstanding consulting
agreements, the Company is obligated to issue to those consultants an aggregate
of 17,000 shares of Common Stock per month. Such shares, when issued, qualify as
shares issued pursuant to an "Employee Benefit Plan" under Rule 701 under the
Securities Act, and may be sold without registration 90 days after the date of
issuance.
USE OF PROCEEDS
The Shares are being offered by the Selling Shareholders for their own
accounts. The Company will not receive any proceeds from the sale of the Shares.
DIVIDENDS
To date the Company has not declared or paid any dividends on its Common
Stock and does not anticipate doing so in the foreseeable future.
- - --------
(2) Includes 187,500 shares of Common Stock issuable upon the exercise of
warrants granted in connection with the November 1997 and February 1998 private
placements of the Company's 8% Convertible Debentures.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization (capital deficiency) of
the Company as of March 31, 1998. This table should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
Registration Statement.
March 31, 1998
--------------
CONVERTIBLE DEBENTURES $ 6,000,000
============
STOCKHOLDERS' DEFICIENCY
Common stock - $0.0025 par value;
50,000,000 shares authorized;
18,971,836 shares issued and outstanding at
March 31, 1998 4,743
Additional paid-in capital 14,103,243
Unearned financing costs (1,378,395)
Deficit accumulated during the development stage (18,896,338)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (6,166,747)
------------
TOTAL CAPITAL DEFICIENCY $ (166,747)
============
21
<PAGE>
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.
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein.
PLAN OF OPERATION
Eurotech, Ltd. (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, four of which
(the "Principal Technologies") the Company believes to be 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 March 31, 1998 the Company incurred a cumulative net loss of
$18,896,338. 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
"Non-isocyanate Polyurethane," "RubCon" (a rubber-based concrete) and "Liquid
Ebonite Material" (a liquid rubber, protective coating material), Israeli
technologies as to which the Company has acquired equity participation and
marketing rights (see "Business"); (ii) continuing its work with the I.V.
Kurchatov Institute ("Kurchatov") in Moscow, Russia, the Euro-Asian Physical
Society ("EAPS"), and the Chernobyl Nuclear Power Plant ("ChNPP") with a view
towards using the EKOR
22
<PAGE>
compound in the remediation of ChNPP Reactor 4 (which experienced a catastrophic
near-meltdown in 1986); and (iii) through an agreement entered into in April,
1997 with Duke Engineering & Services, Inc. ("DES"), a business unit of Duke
Power Company, 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 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 three months ended March 31, 1998 vs. the three months ended March
31, 1997.
The Company commenced operations on May 26, 1995. The Company has had no
revenues since inception. Consulting and other general and administrative
expenses increased from $644,000 for the three months ended March 31, 1997 to
$780,000 for the three months ended March 31, 1998. The increase is principally
a result of $150,000 paid by the Company as interest and penalties to holders of
its 8% Convertible Debentures due November 27, 2000 and February 23, 2001, and
increased legal and accounting expenses related to developing the Company's
Principal Technologies. This overall increase was partially offset by a decrease
in consulting expneses attributable to a reduction in the number of consultants
engaged by the Company during the period.
Research and development expenses increased in the three months ended
March 31, 1998 to $308,000 from $259,000 for the three months ended March 31,
1997, principally attributable to amounts paid by the Company to Professor Oleg
L. Figovsky, Ph.D. in connection with the three technology purchase agreements
each dated Janaury 1, 1998 between the Company and Professor Figovsky for three
technologies.
For the three months ended March 31, 1998 and the three months ended March
31, 1997, the Company incurred operating losses of $1,088,000 and $903,000,
respectively. The losses are principally due to expenses incurred in the
acquisition and development of its technologies, including an overall increase
in general and administrative expenses.
Interest expenses and amortization of deferred and unearned finance costs
increased from $747,000 for the three months ended March 31, 1997 to $1,377,000
for the three months ended March 31, 1998. This increase was attributable to an
increase in the amount of debt outstanding, including the Company's 8%
Convertible Debentures.
The Company expects to incur significant losses during 1998. The Company
anticipates that any revenue recognized in 1998 will be substantially offset by
expenses incurred by the Company in its efforts to commercialize, sell and
market its Principal Technologies.
For the Year Ended December 31, 1996 vs. the Period
from Inception (May 26 1995) to December 31, 1995:
The Company has had no 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
23
<PAGE>
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, $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 four Principal Technologies (see "Business - General; - Principal
Technologies"). Although management believes that the Company will recognize
revenues during 1998 derived from one or more of its Principal Technologies,
there can be no assurance that the Company will recognize any such revenues or
that it will be profitable on a 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,
24
<PAGE>
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's working capital deficiency at March 31, 1998 and December
31, 1997 was $511,106 and $2,156,753, respectively, or a net favorable reduction
of $1,645,647. The net favorable reduction in the working capital deficiency was
the result of the December 1996 $2,000,000 bridge note loan being liquidated
from the proceeds of the February 23, 1998 $3,000,000 8% Convertible Debenture
debt obligation, as discussed below. 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 Securities Act of 1933, as amended
(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").
Pursuant to such private placements, JNC Opportunity Fund LTD acquired
$2,500,000 of the 8% Convertible Debentures due November 27, 2000 and $3,000,000
of the 8% Convertible Debentures due February 23, 2001, and Diversified
Strategies Fund, L.P. acquired $500,000 of the 8% Convertible Debentures due
November 27, 2000. 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 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.
25
<PAGE>
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 not declared effective
by the SEC on or prior to February 25, 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 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. The Company also
has agreed to provide funding in connection with the marketing and sale of three
Israeli technologies ("RubCon," "Liquid Ebonite Mixture" and
26
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Non-isocyanate Polyurethane, 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 Duke
Engineering & Services, Inc. (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. See
"Risk Factors - Need for Additional Financing; Possibility of Future Dilution; -
No Assurance of Collaborative Agreements, Licenses or Project Contracts; -
Uncertainty of Market Acceptance".
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.
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BUSINESS
GENERAL
Eurotech, Ltd. (the "Company"), which was incorporated in May, 1995 under
the laws of the District of Columbia, 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 and marketing (the "Principal
Technologies"). To that end, the Company recently 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 EKOR compound technology 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 Financial 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.
The Company's plan of operation for the next twelve months will consist of
activities principally aimed at: (i) negotiating and executing license and/or
joint venture agreements with industrial users for the marketing and sale of
coatings based on its "Non-isocyanate Polyurethane" technology, "Rub Con" (a
rubber-based concrete) and "Liquid Ebonite Material" (a liquid rubber,
protective coating material), which are Israeli technologies the Company has
acquired, and each of which is a Principal Technology; (ii) continuing its work
with the I.V. Kurchatov Institute ("Kurchatov") in Moscow, Russia, the
Euro-Asian Physical Society ("EAPS") and ChNPP with a view towards using the
EKOR compound in the remediation of ChNPP Reactor 4 (which experienced a
catastrophic near-meltdown in 1986); and (iii) through an agreement entered into
in April, 1997 with Duke Engineering & Services, Inc. ("DES"), a business unit
of Duke Power Company, jointly bidding with DES on U.S. nuclear waste
transportation, remediation and like projects utilizing the EKOR compound. To a
lesser extent (and apart from the Principal Technologies), the Company also
intends to continue its efforts in connection with those of its technologies
that are not presently ready for commercialization and marketing (the "Other
Technologies").
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
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Technology Company"). In furtherance of this, the Company has opened an office
at the premises of TEI in Haifa, Israel. The Company has not entered into a
written agreement with any of the Incubators memorializing such agreement in
principal, and the only written agreements between the Company and any Incubator
are those disclosed herein in connection with Chemonol, Ltd., Separator, Ltd.,
Remptech, Ltd., and Comsyntech, Ltd. 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. See "Risk Factors -
Uncertainty of Acquisition of certain Additional Israeli Technologies."
Pursuant to agreements with each of Chemonol, Ltd., an Israeli corporation
("Chemonol"), and with Ofek and Weizmann, the Company has invested in four
Israel Technology Companies, to wit: Chemonol, which has developed materials and
processes for manufacturing non-isocyanate polyurethane ("NIPU") industrial
coatings (see "Business -- Principal Technologies -- Non-isocyanate
Polyurethane"); Separator, Ltd. ("Separator"), which is developing a process for
the electromagnetic separation and production of high temperature
superconductive metallic powders; Remptech, Ltd. ("Remptech") which is
developing processes for the production of extra-fine cobalt and nickel powders;
and Comsyntech, Ltd. ("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 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. 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 of
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. (who is a consultant
to the Company) all right, title and interest
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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 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. Pursuant to agreements variously among
the Company, "Ukrstroj" (the Ukrainian State Construction Company), ChNPP,
Kurchatov and EAPS, the Company has provided financing for and has successfully
completed demonstration testing of its proprietary silicon-organic (EKOR)
compound technology for the purpose of remediating the severe radioactive
contamination problems that persist from the 1986 explosion of ChNPP Reactor 4
in Chernobyl, Ukraine. In September, 1997, pursuant to a joint-bidding agreement
between the Company and Duke Engineering & Services, Inc. ("DES"), a business
unit of Duke Power Company (the "Company-DES Agreement"), the Company and DES
submitted to the European Bank of Reconstruction and Development a letter of
intent to bid in "Early Biddable (Study) Projects for the Chernobyl Unit 4
Shelter Implementation Plan." The Company believes its EKOR compound technology
is the most effective existing technology and material for containing and
facilitating the disposal of radioactive dust and waste materials.
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 pre-eminent 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
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of America, Ukraine, and all member countries of the European Patent Agreement.
See "Certain Transactions - Silicon-Organic (EKOR) Compound."
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. In
high-dosage radiation tests the EKOR compound has met or exceeded all
specifications for containment materials developed by the Chernobyl authorities.
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 and from leaching into and contaminating
ground-water supplies. On November 28, 1997, the Ministry of Health of the
Russian Federation certified EKOR and its components as non-toxic, thereby
allowing for EKOR's production, delivery, sale and use in the Russian
Federation.
As a silicon-based elastomer, the EKOR compound has adhesive properties
that allow it to stick to a wide variety of surfaces and materials. When
applied, the EKOR compound surrounds and "glues down" nuclear debris ranging
from fine dust to broken fuel rods, and in combination with its fire-resistant
and water-proof properties, prevents such debris from migrating by water or as
air-borne particles. The EKOR compound can be applied by a number of methods,
but most generally will be sprayed onto contaminated areas using a hose and
nozzle arrangement. The foaming rate and "curing" time for the EKOR compound can
be varied, thereby allowing it to penetrate cracks and crevices before curing,
and providing a seal against the transport of radioactive particles and
water-soluble radionuclides. The application of the EKOR compound to nuclear
accident sites would constitute an interim containment measure, pending the
removal and permanent storage or other disposal of the radioactive contaminants.
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 contaminate the environment at
ChNPP Reactor 4 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.
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. To this end, the G-8 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.
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. Peter
Gulko, formerly a director of and presently the President, Secretary and
Principal Financial Officer of the Company, is the sole owner of CIS. The KRH
shares owned of record by CIS are being held for the benefit of EAPS which, in
turn, is acting as representative of individual scientists, researchers and
academics who are affiliated with Kurchatov and EAPS. One present employee and
one former business representative of ERBC are beneficial owners of shares of
the Company's Common Stock, and Kurt Seifman, the chief executive officer and
sole shareholder of ERBC, is the beneficial owner of 6.4% of the Company's
outstanding Common Stock. From June 1997 until February 13, 1998, Dr. Randolph
Graves (who served as a director, chairman and Chief Executive Officer of the
Company until January 23, 1998) served as a director and Secretary of KRH.
During the period June 1997 through January 23, 1998, the Company did not enter
into any material agreements or commitments with KRH. See "Principal and Selling
Shareholders," "Certain Transactions" and "Risk Factors - Conflicts of
Interest."
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Based on the properties demonstrated by the EKOR compound, ChNPP (an
industrial amalgamation of the State Committee of Ukraine on Atomic Energy),
Kurchatov, the Ukrainian State Construction Company ("Ukrstroj") and the Company
entered into a Memorandum of Intent (the "Chernobyl Memorandum of Intent") which
acknowledged the successful completion of the laboratory development of EKOR
compound for the purpose of its application to the radioactive contamination
remediation of ChNPP Reactor 4, and pursuant to which the Company, "Ukrstroj"
and EAPS entered into a co-operation Agreement whereby the Company has provided
financing for demonstrating the technical and mechanical feasibility of applying
the EKOR compound for ChNPP Reactor 4 remediation. In furtherance of the
foregoing, Ukrstroj and ChNPP entered into an agreement (the "Ukrstroj-ChNPP
Agreement") to conduct such demonstration testing of the EKOR compound as is
necessary to ascertain the specification requirements for its application to the
containment of ChNPP Reactor 4. The Ukrstroj-ChNPP Agreement also provides for
the Company's participation in and financing of the EKOR demonstration test.
On April 24, 1997, the demonstration of the equipment for synthesizing and
applying the EKOR compound was successfully conducted for officials of ChNPP and
"Ukrstroj" at the Sverdlosk Chimmash manufacturing facility in Ekaterinburg,
Russia. Following this successful demonstration, the Company, the management of
the ChNPP Reactor 4 Shelter Project, "Ukrstroj" and EAPS entered into a Joint
Working Group Agreement for the purpose of preparing the industrial-scale
equipment, machinery and other items that would be required to apply the EKOR
compound at ChNPP Reactor 4, if as and when the EKOR compound is ultimately
selected for that remediation project. Such activities are presently expected to
occur during the second quarter of 1998. In connection therewith, and at the
request of ChNPP, the Company presently is constructing industrial scale
machinery for application of the EKOR compound at ChNPP Reactor 4, based on the
application machinery successfully demonstrated on April 24, 1997. Financing
therefor is being provided by KRH. Although the Company expects such time-frames
will substantially be met, no assurance can be given that implementation of the
EKOR application machinery at ChNPP Reactor 4 will not experience delays, and
that if delays occur, the EKOR application machinery will be completed at the
time presently contemplated. The occurrence of substantial delays will adversely
affect the Company's generation of near-term revenues.
Coordination and management of the formal selection of contractors and
technologies for studies relating to the ChNPP Reactor 4 remediation project has
been delegated to the European Bank of Reconstruction and Development ("EBRD").
Contractors, as well as the technology to be used in connection with the
remediation project will be determined on the basis of submitted bids, to be
passed on by EBRD and ChNPP. EBRD has appointed a consortium of Bechtel,
Electricite de France and Batelle, a not for profit U.S. company which operates
Pacific Northwest National Laboratories, a research entity located in the State
of Washington and funded, in part, by the U.S. Department of Energy, to review
the technical aspects and feasibility of the various proposals and bids
received. It is presently expected that EBRD, through G-8 funds, will provide
the financing for the actual remediation project. Additionally, ChNPP is
authorized to initiate further, independent studies. In September, 1997, DES on
its and the Company's behalf, submitted to EBRD and ChNPP a letter of intent to
bid on the ChNPP Reactor 4 remediation project. Although no assurance can be
given, based on the Chernobyl Memorandum of Intent, the Ukrstroj - ChNPP
Agreement, the Co-operation Agreement, the Joint Working Group Agreement, the
results of the April 24, 1997 EKOR application demonstration test, and ChNPP's
role in the Reactor 4 remediation selection process, the Company believes that
the EKOR compound will be selected for the ChNPP Reactor 4 remediation project
and that the Company will be selected as the contract vendor of EKOR for that
purpose.
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.
Separately from its contemplated ChNPP bid, the Company-DES Agreement provides
for joint bidding on U.S. nuclear waste transportation, containment, storage and
burial projects utilizing the EKOR compound technology. The Company also has
entered into an agreement with the Research Center Julich, a German governmental
research institution, providing for
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its assistance with certifying the EKOR compound for use in 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, utilizing the EKOR compound. Additionally, joint Company-DES bids
presently are being prepared for other DoE demonstration projects. The Company
is also 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 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"). NIPU was developed by Chemonol, Ltd.
("Chemonol"), an Israeli corporation which is one of the four Israeli Technology
companies in which the Company has invested. See "Business-Acquisition of
Israeli Technologies-Incubator Technologies." NIPU is a modified polyurethane
that does not contain the toxic isocyanates used in the production of
conventional polyurethane. NIPU has lower permeability and greater chemical
resistance qualities as compared to conventional polyurethane. The Company
believes that these advanced qualities of NIPU, which are based on hydrogen
bonds within NIPU's molecular structure, make NIPUs 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.
At the date hereof, the Company is the holder of 20% of Chemonol's common
equity, has an option to purchase an additional 31% of such common equity from
Chemonol's Principal Shareholder, and controls the right to vote the Principal
Shareholder's common equity. See "Business - Acquisition of Israeli Technologies
- - - Incubator Technologies." There can be no assurance that the Company will
complete its investment in Chemonol (which, if completed would total $60,000),
or that such equity purchase option will be exercised, both of which will
principally depend upon the results of the Company's efforts to commercially
market and sell NIPU to industrial users.
Consistent with its general plan of operation, the Company intends to
market and sell NIPU through one or more license and/or joint venture agreements
with major chemical companies. In September 1997, the Company presented NIPU at
the World Congress on Polyurethanes (the "WCP"), in Amsterdam, Netherlands. As a
result of the expressions of interest shown at the WCP, the Company has recently
commenced initial discussions with several major international chemical
companies with a view towards negotiating one or more licenses and/or joint
venture agreements for the marketing and sale of NIPU. Such discussions are in
their initial stages, only, and no assurance can be given that all or any of
them will result in a NIPU license or joint venture agreement, or that such
license or agreement, if concluded, will be on terms favorable to the Company.
To date, the Company has incurred expenses of $30,000 in connection with
Chemonol, and through the end of fiscal year 1998 the Company presently expects
to incur an aggregate of $30,000 in additional
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such expenses. See "Management's Discussion and Analysis of Results of Operation
and Financial Condition - Liquidity and Capital Resources."
Liquid Ebonite Material ("LEM"). 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 have, as compared to conventional sheet rubber coverings, 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 Oleg L. Figovsky, Ph.D., who is a
consultant to the Company, 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 until the third quarter
of 1998, at the earliest. See "Business General - Acquisition of Israeli
Technologies - Technologies Acquired from Prof. Oleg L. Figovsky; "Risk Factors
- - - Conflicts of Interest," "Management Consultants," and "Certain Transactions."
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 with that company. See "Business - General," "Risk
Factors - Uncertainty of Sales Revenues and of Technology Transfer Fee,
Consulting Fee and Royalty Payments - No Assurance of Joint Venture Licenses,
Further Collaborative Agreements or Further Project Contracts - Uncertainty of
Market Acceptance," and "Management's Discussion and Analysis of Results of
Operation and Financial Condition - Plan of Operation."
To date, the Company has incurred $15,000 in expenses in connection with
the LEM acquisition. Through the end of fiscal year 1998, the Company expects to
incur an aggregate of approximately $25,000 in additional, LEM-related expenses,
of which approximately $15,000 is expected to be incurred in connection with
further research and development activities, and $10,000 is expected to be
incurred in connection with marketing and sales efforts.
RubCon. "RubCon" is a technologically advanced, polymer-based concrete
that utilizes polybutadiene (a polymer derived from liquid rubber) as a binding
material for the various aggregates that, together with binders, constitute
concrete. The fabrication of RubCon results in a rubberized concrete that in
laboratory testing 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. RubCon is applied in the same manner as conventional
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. Oleg L. 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
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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 until the third quarter of 1998, at the earliest.
See "Business - General - Acquisition of Israeli Technologies - Technologies
Acquired from Prof. Oleg L. Figovsky," "Risk Factors - Conflicts of Interest,"
"Management - Consultants," and "Certain Transactions."
The Company has provided samples of RubCon to four major chemical
companies which have, variously, expressed interest in direct purchases of
RubCon and in licensing RubCon for production and commercial sale. These
chemical companies presently are evaluating RubCon. The Company currently
anticipates that it will enter into discussions with one or more of these
companies with a view towards negotiating product purchase and/or license
agreements, as the case may be. No assurance can be given that any of those or
other chemical or 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," "Risk Factors - Uncertainty of Sales Revenues and of Technology
Transfer Fee, Consulting Fee and Royalty Payments - No Assurance of Joint
Venture Licenses, Further Collaborative Agreements or Further Project Contracts
- - - Uncertainty of Market Acceptance," and "Management's Discussion and Analysis
of Results of Operation and Financial Condition - Plan of Operation."
To date, the Company has incurred $35,000 in expenses in connection with
the RubCon acquisition, $5,000 in connection with RubCon research and
development activities and $3,000 in marketing and sales activities related to
RubCon. Through the end of fiscal year 1998, the Company expects to incur an
aggregate of approximately $35,000 in additional, RubCon-related expenses,
principally in connection with marketing and sales efforts.
OTHER TECHNOLOGIES
In addition to the foregoing Principal Technologies, with respect to which
the Company has commenced initial marketing and sales efforts, 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 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, Ltd. ("Separator"), an Israeli corporation, which is one of the
four Israeli Technology Companies in which the Company has invested. At the date
hereof the Company is the holder of 20% of Separator's common equity, has an
option to purchase an additional 31% of such common equity from Separator's
Principal Shareholders, and controls the voting rights with respect to the
Principal Shareholders' common equity. See "Business - General - Acquisition of
Israeli Technologies - Incubator Technologies." The electromagnetic separation
("EMS") 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 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.
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To date, the Company has invested $30,000 in Separator, and pursuant to
its agreement with the Incubator for Technological Entrepreneurship - Kiryat
Weizmann, Ltd., an Israeli technology incubator, and the individual originators
of the EMS technology, the Company expects to invest an additional $30,000
during 1998. Assuming the completion of the contemplated $60,000 investment, if
the Company exercises its equity purchase option, the Company will own 51% of
Separator's voting equity. Although the Company presently intends to complete
the $60,000 investment in Separator and expects to exercise its equity purchase
option, there can be no assurance that the investment will be completed or that
the equity purchase option will be exercised, both of 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.
Powdered Metallurgy Technology. The Company is participating in the
further research and development of a process developed by Remptech, Ltd.
("Remptech") an Israeli corporation, to produce extra fine cobalt and nickel
powders by recycling materials containing cobalt and nickel. Remptech is one of
the four Israeli Technology Companies in which the Company has invested. At the
date hereof the Company is the holder of 20% of Remptech's common equity, has
options to purchase the 20% common equity interest in Remptech held by the Ofek
Le-Oleh Foundation ("Ofek"), an Israeli technology incubator that is partially
sponsoring Remptech's research and development activities, and an additional 31%
of such common equity from Remptech's Principal Shareholders, and controls the
right to vote with respect to the Principal Shareholders' common equity. See
"Business - Acquisition of Israeli Technologies - Incubator Technologies."
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 very high purity and very
small grain size. The powdered metallurgy technology is based on recycling
cobalt and nickel-containing materials using internal hydrogen in composition
with cobalt and nickel fluoride salts. Remptech data presently indicates that
the resulting cobalt and nickel powders have a purity of 99.8% and a grain size
of 1-2 microcentimeters. 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.
To date, the Company has invested $21,000 in Remptech and pursuant to its
agreement with Ofek and the individual originators of the Powdered Metallurgy
technology, the Company expects to invest an additional $39,000 during 1998.
Assuming completion of the contemplated $60,000 investment, if the Company
exercises its equity purchase options, the Company will own 71% of Remptech's
voting equity. Although the Company presently intends to complete the $60,000
investment in Remptech and expects to exercise its equity purchase options,
there can be no assurance that the investment will be completed or that either
of the equity purchase options will be exercised, each of 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, Ltd.,
("Comsyntech"), an Israeli corporation which is one of the four Israeli
Technology Companies in which the Company has invested. At the date hereof the
Company is the holder of 20% of Comsyntech's common equity, 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 Principle Shareholders,
and controls the right to vote with respect to the Principal Shareholders'
common equity. See "Business - Acquisition of Israeli Technologies - Incubator
Technologies." CCS is a newly devised process for the production of ceramic,
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composite and intermetallic powders based on utilizing the internal chemical
energy of initial reactants, performed in a continuous action reactor, a device
being developed by Comsyntech.
Presently, ceramic, composite and intermetallic powders generally are
manufactured with the use of electrical and melting furnaces, high-temperature
sprayers and crushing and grinding equipment, in closed reactors which entails a
cyclical manufacturing process of loading, synthesis, cooling and unloading. The
Company believes that the CCS technology using the Comsyntech continuous reactor
potentially 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.
To date, the Company has invested $21,000 in Comsyntech and pursuant to
its agreement with Ofek and the individual originators of the CCS technology,
expects to invest an additional $39,000 during 1998. Assuming completion of the
contemplated $60,000 investment, if the Company exercises its equity purchase
options, the Company will own 71% of Comsyntech's voting equity. The Company
presently intends to complete the $60,000 investment in Comsyntech and expects
to exercise its equity purchase option. However, there can be no assurance that
the investment will be completed or that the equity purchase option will be
exercised, both of 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.
Silicon-Carbide "Wafer" Technology. The Company is participating in the
development of a silicon carbide "wafer" technology in conjunction with
Kurchatov and EAPS. To date, the Company has provided approximately $40,000 in
financing to Kurchatov in connection with this technology, and while the Company
is not obligated to provide any further financing, it presently expects to
provide approximately $10,000 in additional financing during fiscal year 1998.
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 temperature
environments such as automobile and aircraft engine control systems, 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.
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.
Steam energy produced by the waste-to-energy technology is clean,
efficient and environmentally "friendly". A typical modular unit burns 120 tons
of refuse per day and produces 33,000 pounds of
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steam per hour at 400 psi. Pollutant levels are below present U.S. Environmental
Protection Agency minimums, and each modular unit reduces the volume of raw
waste to ash at a ratio of 10:1.
Through a consulting agreement with Hunter Taylor, the President of Power
Development Associates, Inc., the original designer of the NASA City of Hampton
facility, the Company has obtained the engineering and implementation know-how,
and has identified willing suppliers of component equipment for the
waste-to-energy technology, including Detroit Stoker Company, a leading
manufacturer of waste-to-energy stokers and a leading project management company
for the engineering and construction of waste-to-energy plants. Detroit Stoker
has informally agreed to act as the engineering project lead for the Company's
waste-to-energy projects, which the Company believes will enable it to
efficiently design and construct waste-to-energy plants customized to meet the
varying energy generation needs of disparate municipalities. Mr. Taylor will be
compensated on a per diem consulting fee basis, which presently is being
negotiated. Based on those discussions, the Company expects that Mr. Taylor's
consulting fees will be approximately $1,000 per day. Detroit Stoker will be
compensated on the basis of phased, project engineering fees which, based on its
fees for similar projects, are expected to approximate $50,000 per
waste-to-energy plant.
The Company had intended to first introduce its waste-to-energy technology
in the city of Cherkassy, Ukraine, where the National Government selected this
technology as the national standard for waste-to-energy facilities, and approved
the construction of ten such facilities using the waste-to-energy technology.
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 is the chairman, Chief Executive Officer and a
shareholder of Eurowaste. See "Management," "Risk Factors - Conflicts of
Interest," and "Certain Transactions." The initial, Cherkassy waste-to-energy
facility will take approximately thirteen months to construct. Its operational,
energy output is expected to be approximately seven megawatts per day, based on
an assumed consumption of approximately 240 tons of municipal waste per day.
Although the necessary Ukrainian governmental approvals for the Cherkassy
waste-to-energy facility have been obtained, including local site allocation and
construction approvals and a large fertilizer production enterprise, "AZOZ", in
Cherkassy has agreed to purchase the entire output of the Cherkassy
waste-to-energy facility at rates of U.S. $.04-$.06 per kilowatt hour, neither
the Ukrainian government, the city of Cherkassy nor Eurowaste has obtained
construction or other financing for the proposed Cherkassy waste-to-energy
facility. The Company is not obligated to finance or arrange for the financing
of the Cherkassy facility. However, the Company has paid the $15,000 cost of a
financial feasibility study for the proposed Cherkassy waste-to-energy facility,
which in November, 1997 was submitted by "Ukrstroj", the Ukrainian State
Construction company, to an Austrian financial institution as part of an
application for construction financing. 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 waste-to-energy
facilities in Ukraine. In the absence of such governmental support the
construction of any waste-to-energy facilities utilizing the Company's
technology cannot be expected to occur. See "Risk Factors -- Risks Relating to
the Russian Federation and Ukraine."
The Company has reduced its level of activity in connection with the
proposed introduction of its waste-to-energy technology in Ukraine, due to the
present lack of adequate project funding among the project co-venturers and the
Company's belief that the commencement of marketing and sales activities in
connection with the Principal Technologies is more likely to result in the
near-to-mid-term generation of revenues than is the existing, Ukrainian
waste-to-energy venture.
Automated Parking Garages. Automated parking technology consisting of
computer-controlled, rotating carousels which can be configured to contain
varying numbers of automobile parking spaces,
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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. Since the collapse of the former Soviet Union and
the subsequently increased pace of political and economic reforms, Moscow has
experienced a substantial increase in automobile ownership and traffic
congestion. Additionally, there is a relative scarcity of existing parking
spaces and construction sites of a size suitable for traditionally designed
parking garage facilities in Moscow. 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 Company presently expects the Arbat
parking garage to be completed in or about December, 1998.
The Moscow automated parking garage will be developed by 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". "Mosinterstroi" is 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 and sole shareholder of ERBC is the
beneficial owner of 6.4% of the Company's outstanding Common Stock. A
shareholder and former director of the Company is the president and a
shareholder of Arbat American.
The Company has identified automated parking garage equipment, plant,
specifications and engineering documentation, adoptable 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 is declared to
be default, its ability to commence the project, and any other similar project
in Moscow, could be jeopardized. See "Risk Factors - Conflicts of Interest,"
Principal and Selling Shareholders," "Certain Transactions," and "Risk Factors -
No Assurance of Joint Venture Licenses, Further Collaborative Agreements or
Further Project Contracts."
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
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license 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" re-sealing 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 Re-sealable 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, all of which shares have been registered and are being offered by this
Prospectus. The Chief Executive Officer and sole shareholder of ERBC is the
beneficial owner of 6.4% 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 "Principal and Selling Shareholders," "Risk
Factors -Conflicts of Interest" and "Certain Transactions."
Other technologies, including the "CORO" telephone technology (see note
9(d) to 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.
EXECUTIVE OFFICE
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
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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."
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 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 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 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.
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MARKET PRICE OF COMMON STOCK
Trading Market
The Company's Common Stock trades on the NASD Electronic Bulletin Board
market.
Principal Market-Makers
Following are the principal market-makers in the Company's Common Stock:
Cantor Fitzgerald Securities, Grady & Hatch, Olson & Company, Sherwood
Securities, Fahnstock & Co., Paragon Capital Corporation, and Nash Weiss & Co.
Number of Shareholders of Record
The following table sets forth the approximate number of holders of record
of the Company's Common Stock at the end (December 31) of fiscal years 1996 and
as of June 9, 1998. The Common Stock is the only class of the Company's equity
securities share of which are outstanding.
-------------------------------------------------------------
Title of Class Number of Record Holders
--------------------------------------------
As of As of
December 31, 1996 June 9, 1998
-------------------------------------------------------------
Common Stock 59 151
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. The following table set forth the quarterly high and low closing
bid and closing ask prices (in U.S. dollars) for the Company's Common Stock,
since July 25, 1995:
CLOSING BID CLOSING ASK
1995 HIGH LOW HIGH LOW
---- ----------------------- --------------------------
JULY 25
(First Available)
THRU .718 .531 .781 .593
SEPT. 29
OCT. 2
THRU 1.000 .562 1.125 .75
DEC. 29
1996
----
JAN. 2
THRU
MAR. 29 1.343 1.000 1.467 1.125
(Excluding Jan. 8)
APR. 1
THRU 2.312 .625 2.406 .75
JUNE 21
JUNE 24
THRU 2.625 2.000 2.875 2.375
JUNE 28
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JULY 1
THRU 2.500 1.325 2.625 1.40625
SEPT. 30
OCT. 1
THRU 10.000 1.9375 10.250 2.0625
DEC. 31
1997
----
JAN. 2
THRU 12.25 5.625 12.500 6.000
MAR. 31
APR. 1
THRU 9.625 4.000 9.750 4.250
JUNE 30
JULY 1
THRU 6.875 5.000 7.125 5.1875
SEPT. 30
OCT. 1
THRU 5.4375 1.875 5.5625 1.9375
DEC. 31
1998
----
JAN. 2
THRU 3.3125 2.000 3.375 2.125
MAR. 31
APR. 1
THRU 2.125 .9375 2.156 1.031
JUNE 9
The foregoing data represents prices between dealers and does not include
retail mark-ups, mark-downs or commissions, nor does such data represent actual
transactions or adjustments for stock-splits or dividends.
Source: National Quotation Bureau, LLC
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MANAGEMENT
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
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 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 his law
degree at Harvard Law School.
44
<PAGE>
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. See "Risk Factors - Conflicts of Interest," and "Certain Transactions."
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.
ANTICIPATED OFFICER
The Company anticipates that, subject to the execution of a definitive
employment agreement, John McNeil Wilkie, age 59, 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. Wilkie 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.
The Company and Mr. Wilkie are currently negotiating the terms of a
definitive employment agreement. The Company anticipates that the definitive
employment agreement with Mr. Wilkie will include the following terms: (i) an
annual base salary of approximately $120,000; (ii) inclusion in any pension,
medical, dental, life insurance, long-term disability or other benefit plan of
the Company now in effect or which may hereafter be provided generally to
management personnel; and (iii) options to purchase shares of the Company's
stock. Currently, Mr. Wilkie owns no shares of the Company's stock.
KEY CONSULTANTS
Name Age
---- ---
Oleg L. Figovsky, Ph.D. 57
Richard A. Wall 56
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.
45
<PAGE>
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, Germany - Zurich, Switzerland - LaJolla, California). Since 1983 he
has been engaged in private, international investment banking activities
headquartered 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 340,000 shares of Common Stock.
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 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 a the Company
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 "Principal and Selling Shareholders," "Risk
Factors - Conflict of Interest" and "Certain Transactions."
Executive Compensation
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the calendar years 1997, 1996 and
1995 to Randolph A. Graves, Jr., its chief executive officer during 1996. No
other executive officer or key employee was compensated in excess of $100,000.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- - ------------------------------------------------------------------------------------------------------
Annual Compensation
- - ------------------------------------------------------------------------------------------------------
Other Annual
Salary Bonus Compensation(1)
Name and Principal Position Year ($) ($) ($)
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Randolph A. Graves, Jr, President & Chief Executive 1997 $77,374 0 0
Officer........................................... 1996 $77,374 $20,000 $243,109
1995 0 0 $ 10,500
- - ------------------------------------------------------------------------------------------------------
</TABLE>
Board of Directors
All Directors hold office until the next annual meeting of shareholders
of the Company or until their successors have been elected. All officers are
appointed annually by the Board of Directors and serve at the discretion of the
Board. Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. It is expected that Directors who are not
employees of the Company will receive
- - --------
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1995 and 1996, respectively.
Dr. Graves resigned as a Director, and as the Chairman and Chief Executive
Officer of the Company on January 23, 1998.
46
<PAGE>
compensation for their services in an amount to be determined. All Directors are
reimbursed by the Company for any expenses incurred in attending Director's
meetings. The Company has obtained Officers and Directors liability insurance.
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
Skrobenek resigned as Directors 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.
Until recently the Company had been principally engaged in identifying,
monitoring, reviewing and assessing technologies for their commercial
applicability and potential, and in acquiring such technologies. At this
juncture, the Company believes that its Principal Technologies are 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. To facilitate the transition to the sales and
marketing of its Principal Technologies, the Company deemed it advantageous to
replace certain management (whose experience was in the area of identifying,
monitoring, reviewing and assessing technologies) with individuals who are
experienced in international transactions, and may be better equipped to
facilitate the Company's sales and marketing efforts of its Principal
Technologies.
Audit Committee of the Board of Directors
The Board of Directors has established an Audit Committee, the membership
of which presently is vacant. The functions of the Audit Committee are to
recommend annually to the Board of Directors the appointment of the independent
auditors of the Company, discuss and review in advance the scope and the fees of
the annual audit and review the results thereof with the independent auditors,
review and approve non-audit services of the independent auditors, review
compliance with existing major accounting and financial reporting policies of
the Company, review the adequacy of the financial organization of the Company
and review management's procedures and policies relating to the adequacy of the
Company's internal accounting controls and compliance with applicable laws
relating to accounting practices. The Company expects to appoint one of its
Directors to fill the Audit Committee vacancy in the near future.
1995 Incentive Stock Option Plan
The Company has adopted its 1995 Incentive Stock Option Plan ("Plan"). 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 or to any of its subsidiaries.
The Plan is currently administered by the Board of Directors 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 of Directors 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 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
47
<PAGE>
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.
Compensation of Directors
The Company's directors do not receive any compensation for their service
as directors or on any committee of the Board.
Limitation on Officers' and Directors' Liability
The Company's Certificate of Incorporation provides that the Company
shall, to the full extent permitted by Section 29-304 of the District of
Columbia Business Corporation Act, as from time to time amended and in effect
(the "BCA"), indemnify any and all persons it has the power to indemnify under
said section. Section 29-304 of the BCA grants to the Company the power to
indemnify any and all of its directors or officers or former directors of
officers or any person who may have served at its request as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties or a party, by reason of being or having
been directors or officers or a director or officer of the Company, or of such
other corporation, except in relation to matters as to which any such director
or officer or former director or officer or person is adjudged in such action,
suit or proceeding to be liable for negligence or misconduct in the performance
of duty. Such indemnification is not deemed to be exclusive of any other rights
to which those indemnified may be entitled, under any bylaw, agreement, vote of
stockholders or otherwise. The foregoing provisions of the Company's Certificate
of Incorporation may reduce the likelihood of derivative litigation against the
Company's directors and officers for breach of their fiduciary duties, even
though such action, if successful, might otherwise benefit the Company and its
stockholders.
Additionally, the Company's By-Laws provide for the indemnification of
directors and officers. The specific provisions of the By-Laws related to such
indemnification are as follows:
ARTICLE VI
INDEMNIFICATION
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director, except with
48
<PAGE>
respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation
of law, (3) liability which may be specifically defined by law or
(4) a transaction from which the director derived an improper
personal benefit, it being the intention of the foregoing provision
to eliminate the liability of the corporation's directors of the
corporation's directors to the corporation or its stockholders to
the fullest extent permitted by law. The corporation shall indemnify
to the fullest extent permitted by law each person that such law
grants the corporation the power to indemnify.
The Company has obtained an officers' and directors' liability insurance
policy which will indemnify officers and directors for losses arising from any
claim by reason of a wrongful act under certain circumstances where the Company
does not indemnify such officer or director, and will reimburse the Company for
any amounts where the Company may by law indemnify any of its officers or
directors in connection with a claim by reason of a wrongful act.
49
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of this
Prospectus by (i) each person known by the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Company's executive officers, (iv) all officers and directors of the
Company as a group, and (v) each of the beneficial owners of the 16,347,440
shares of Common Stock registered in the Registration Statement covering the
Shares offered hereby (the "Selling Shareholders"). The Shares offered hereby
will be sold, if at all, solely by and at the discretion of the Selling
Shareholders, and the Company will not receive any proceeds from any such sales.
See "Plan of Distribution". Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, and have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
With respect to the number of shares listed as Beneficially Owned by
Selling Shareholders prior to the Offering, the Company has relied on statements
filed by Selling Shareholders with the SEC pursuant to Section 13D or 13G under
the Securities Exchange Act of 1934, as amended. The Company has no reason to
believe that such filings are inaccurate.
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Kurt Seifman
150 East 58th Street
New York, NY 10155 1,246,300 6.4% 370,000 876,300 2.8%(1)
Peter Gulko(3)
976 Rock Haven Drive
Rockville, Maryland 20852 1,110,000 5.7 -- 1,110,000 3.6%(1)
Maxwell Rabb(2)
480 Park Avenue
New York, NY 10016 80,000 -- -- 80,000 --(1)
Mr. John A. Kinard
919 Kay Street
Murfreesboro, TN 37130 277,500 1.4 277,500 -- --(1)
Ms. D.K. Rogers
20 West 86th Street Apt 5A
New York, NY 10024 490,000 2.5 620,000(4) -- --(1)
Mr. Chad Nellis
3316 Beach Avenue
Marina del Rey, Ca. 90292 350,000 1.8 350,000 -- --(1)
Mr. Simon Nemzov
301 Blackstone Blvd
Providence, RI 02906 131,250 .7 131,250 -- --(1)
Mr. Miguel N. Alexiades
375-21C South End Avenue
New York, NY 10280 15,625 -- 15,625 -- --(1)
Mr. James C. Buckner
402 Harbor Drive North
Indian Rocks Beach, Fla.33785 21,875 -- 21,875 -- --(1)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
CBB Office Furnishings
Defined Benefit Plan
34 Lincoln Drive
Sausalito, Ca 94965-1641 58,625 -- 58,625 -- --(1)
Mr. Charles D. Smith
4661 Cedar Grove Road
Murfreesboro, TN 37127 175,000 .8 175,000 -- --(1)
Mr. Colin Cody
1059 Ocotillo Drive
Sun City, AZ 85373 218,750 1.1 218,750 -- --(1)
Mr. Monni Weisberger
1016 East 18th Street
Brooklyn, New York 11230 337,500 1.7 117,500 220,000 .6%(1)
Mr. David Weisberger
1016 East 18th Street
Brooklyn, NY 11230 87,500 -- 87,500 -- --(1)
Mr. Richard D. Willey &
Linda Willey JTWRS
926 Keowee Avenue
Knoxville, TN 37919 43,750 -- 43,750 -- --(1)
Mr. John C. Trotter
4309 Topside Road
Knoxville, TN 37920 43,750 -- 43,750 -- --(1)
Mr. Patrick S. Martin
8916 Strawflower Drive
Knoxville, TN 37920 240,625 1.2 240,625 -- --(1)
Chad A. Verdi
100 Pheasant Drive
E. Greenwich, RI 02818 87,500 -- 87,500 -- --(1)
Ms. Pamela Kaweske(9)
P.O. Box 31457 SMB
Grand Cayman
Cayman Islands 93,750 -- 93,750 -- --(1)
Meriken Nominees Ltd.(9)
c/o Ms. Pamela Kaweske
P.O. Box 31457 SMB
Grand Cayman
Cayman Islands 15,625 -- 15,625 -- --(1)
Mr. Wesley Burdette
2733 Jersey Avenue, B-300
Knoxville, TN 37919 87,500 -- 87,500 -- --(1)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Mr. William T. Thompson
31 Ridge Road
Ridgewood, New Jersey 07450 175,000 .8 175,000 -- --(1)
Sherwood Securities
Attn: Michael Caedinale
10 Exchange Place Centre
Jersey City, N.J. 07302 125,000 .6 125,000 -- --(1)
David Wilkes
15 Sommerset Dr., South
Great Neck, NY 11020 87,500 -- 87,500 -- --(1)
B.V.H. Holdings
2125 Center Avenue,
Suite 508
Fort Lee, New Jersey 07024 100,000 -- 100,000 -- --(1)
Michael Krasnoff
PDK Labs, Inc.
750 Lexington Avenue, #2750
New York, NY 10022 62,500 -- 62,500 -- --(1)
Jeffrey Markowitz
7 Kensington Road
Scarsdale, NY 10583 125,000 .6 275,000(5) -- --(1)
Richard Friedman
49 Fort Royal Isle
Fort Lauderdale, Fla. 33308 250,000 1.3 400,000(5) -- --(1)
Chana Sasha Foundation
1 State Street Plaza,
29th Floor
New York, NY 10004
(Morris Wolfson, President) 87,500 -- 62,500 25,000 --(1)
Mr. Frank T. Rogers
20 West 86th Street Apt 5A
New York, NY 10024 32,811.5 -- 32,811.5 -- --(1)
Mr. Craig S. Rogers
20 West 86th Street Apt 5A
New York, NY 10024 32,811.5 -- 32,811.5 -- --(1)
Credit Suisse
c/o Nesbit Burns
Triftstrasse 4
80538 Munich
Germany
Attn: Rolf 10,000 -- 10,000 -- --(1)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Rene Carrel
c/o Nesbit Burns
Triftstrasse 4
80538 Munich
Germany
Attn: Rolf 5,000 -- 5,000 -- --(1)
NFC Services/ABW Trading
Eichelbrelte 1
82335 Berg II
Germany 50,000 -- 50,000 -- --(1)
Dionne Fedderson
7878 East Gainey Branch Road
#23
Scottsdale, Arizona 10,000 -- 10,000 -- --(1)
Yvonne Fedderson
6135 East McDonald Drive
Paradise Valley, Arizona
85253-5222 200,000 1.0 200,000 -- --(1)
Sara O'Meara
6135 East McDonald Drive
Paradise Valley, Arizona
85253-5222 5,000 -- 5,000 -- --(1)
James D. Watkins(2)
2021 Indian Circle
Saint Leonard, MD 20685 113,000 -- 41,000 72,000 --(1)
AIM Corporate Relations Inc.
5540 14B Avenue
Tsawwassen, British Columbia
V4M 2G6 Canada 50,000 -- 150,000(6) -- --(1)
ERBC Holdings, Ltd.
Weisbadner Strasse 1/A
D-12309 Berlin
Germany 255,000 1.3 255,000 -- --(1)
ABW Trading/NFC (Service) Ltd.
POB12 Budleigh Salterton
Devon FX96TA
England 119,000 .6 119,000 -- --(1)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Wolfgang Jastram
Apartado 6512
Comunicaciones SA
Avenida Francisco
de Maranda
Edificio Mene Grande
6 Piso
Caracas, Venezuela 44,500 -- 44,500 -- --(1)
Harald Block
POB 310
CH 8123 Ebmatengen
Zurich, Switzerland 30,500 -- 30,500 -- --(1)
Mindy Ackerman
1137 East 24th Street
Brooklyn, NY 11210 5,000 -- 5,000 -- --(1)
Gerald Bruno
c/o Tabb, Conigliaro &
McGaun
200 Madison Avenue
New York, NY 10016 40,000 -- 40,000 -- --(1)
EITZ Chaim Foundation
1505 Coney Island Avenue
Brooklyn, NY 11230
Richard Jedwab, Pres 5,000 -- 5,000 -- --(1)
David Lane
904 Benedict Canyon Dr.
Beverly Hills, CA 90210 35,000 -- 35,000 -- --(1)
Martin Spicer
2144 California St. #904
Washington, D.C. 20008 7,000 -- 3,000 4,000 --(1)
CDC Consulting, Inc.
19476 Dorado Dr.
Trabuco Canyon, CA 92679 67,500(6) -- 67,500(6) -- --(1)
JNC Opportunity Fund Ltd.
c/o Olympia Capital
(Bermuda) Ltd.
Williams House, 20 Reid St.
Hamilton HM 11, Bermuda 5,063,846(7) 25.9 10,017,692(7) -- --(1)
Diversified Strategies
Fund, L.P.
c/o Encore Capital
Management, L.L.C
12007 Sunrise Valley Dr.
Suite 460
Reston, VA 20191 410,000(8) 2.1 810,000(8) -- --(1)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Shares Beneficially(1)
Owned Prior to Offering Registered Owned After Offering
----------------------- ---------- --------------------
Name and Address of
Beneficial Owner Number Percent Number Number Percent
---------------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Directors and Officers
As a Group
(4 Persons) 1,303,000 6.7 41,000 1,262,000 3.5(1)
</TABLE>
- - ----------
(1) Gives effect to: (i) the issuance of 717,500 shares of Common Stock
issuable upon the exercise of stock options and warrants, and of up to
10,707,692 shares of Common Stock issuable upon the conversion of
convertible debentures, outstanding at the date of this Prospectus (which
shares have been registered under the Registration Statement of which this
Prospectus is a part; and (ii) the sale by the Selling Shareholders of all
of the Shares registered under the Registration Statement of which this
Prospectus is a part.
(2) Chairman and Member of the Company's Board of Directors.
(3) Executive Officer of the Company.
(4) 130,000 shares issuable upon exercise of warrants.
(5) 150,000 shares issuable upon exercise of warrants.
(6) 100,000 shares issuable upon exercise of warrants.
(7) 110,000 shares issuable upon exercise of warrants; 9,907,692 shares
issuable upon conversion of Convertible Debentures. The number of shares
of Common Stock issuable upon conversion of the Convertible Debentures
cannot be determined presently, because such number is dependent upon a
conversion price that is subject to the market price of the Common Stock
at the time of conversion, and a discount factor that is dependent on when
such conversion occurs. In light of this, the Company has agreed to
register 200% of the number of shares issuable upon conversion of the full
principal amount of and accrued interest on the Convertible Debentures,
assuming a conversion price that, as far as presently can be determined,
is most favorable to the Debenture Holder and conversion immediately prior
to the expiration of the conversion period. Encore Capital Management
L.L.C. ("Encore"), a registered investment manager under the Investment
Advisers Act of 1940, acts as investment adviser to JNC and Diversified.
(8) 10,000 shares issuable upon exercise of warrants; 800,000 shares issuable
upon conversion of Convertible Debentures. The number of shares of Common
Stock issuable upon conversion of the Convertible Debentures cannot be
determined presently, because such number is dependent upon a conversion
price that is subject to the market price of the Common Stock at the time
of conversion, and a discount factor that is dependent on when such
conversion occurs. In light of this, the Company has agreed to register
200% of the number of shares issuable upon conversion of the full
principal amount of and accrued interest on the Convertible Debentures,
assuming a conversion price that, as far as presently can be determined,
is most favorable to the Debenture Holder and conversion immediately prior
to the expiration of the conversion period. Encore acts as investment
adviser to Diversified and JNC. Encore and Diversified are parties to an
Investment Advisory Agreement, included as an Exhibit to the Schedule
13D filed by Diversified, pursuant to which, among other things, Encore
has the right to make certain investment decisions and exercise certain
voting rights with respect to the shares beneficially owned by
Diversified.
(9) Pamela Kaweske and Meriken Nominees Ltds. are affiliates.
55
<PAGE>
CERTAIN 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 200,0001 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.(1)
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
Oleg. L. Figovsky, Ph.D., who is a consultant to the Company, is the
originator and developer of three technologies, "Interpenetrated Network
Polymers," "Liquid Ebonite Material" 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,"
Risk Factors -- Conflicts of Interest," "Management --Consultants," and "Certain
Transactions."
Common Directors, Officers and Shareholders
See "Risk Factors - Conflicts of Interest."
- - --------
(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.
56
<PAGE>
ERBC Holdings, Limited. ERBC Holdings, Limited., a British Virgin Islands
corporation ("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 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 Management, Ltd., a Delaware corporation ("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 Autopark, Ltd., a Delaware corporation ("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. Randolph A. 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 Kurchatov Research Holdings, Ltd., a Delaware
corporation ("KRH"), which is entitled to receive 50% of the net profits derived
by the Company from the sale or licensing of the Company's silicon-organic
(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
Transactions." The outstanding common stock of KRH is owned of record by ERBC
and by CIS Development, Inc., a Delaware corporation ("CIS"). Such Stock is held
by CIS for the benefit of the Euro-Asian Physical Society ("EAPS") in EAPS's
capacity as representative of various individual Russian and Ukrainian
scientists, researchers and academics affiliated with EAPS and the I.V.
Kurchatov Institute. 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," "Risk
Factors - Conflicts of Interest," "Management" and "Principal and Selling
Shareholders."
Transactions Involving ERBC, Eurowaste and Arbat American.
See "Risk Factors - Conflicts of Interest."
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 Compan y'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. See "Risk Factors - Risks Relating to the Russian Federation and
Ukraine."
Re-sealable Containers. ERBC is the sub-licensor to the Company of the
Re-sealable Container Systems.
Silicon-Organic (EKOR) Compound. The Euro-Asian Physical Society ("EAPS"),
a professional society of scientists, physicists and engineers in the former
Soviet Union, 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
57
<PAGE>
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 Kurchatov Research Holdings, Ltd., a Delaware corporation
("KRH") and the Company dated January 28, 1997, 50% of the net profits the
Company derives from the commercialization, sale or licensing of any technology
developed by the I.V. Kurchatov Institute ("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 Development, Inc. ("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 Transactions Common Directors,
Officers and Shareholders."
----------
| EAPS |
----------
|
|
Technology
License
o
----------
----------------| ERBC |--------------
| ---------- |
minority | |
shareholder | shareholder
| o o
| Sublicense |
| --------------- -------
| | EUROTECH, | | KRH |
-------------o| LTD. | -------
--------------- o
| |
| 50% of |
------onet EKOR----
profits
Waste-to-Energy Technology. Pursuant to a letter agreement among the
Company and Eurowaste Management, Ltd., a Delaware corporation ("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.
58
<PAGE>
------------------
| |
-------------o| EUROTECH, LTD. |---------
| | | |
| ------------------ |
| o |
| Technology |
| License |
Technology o |
License & ------------------ |
Transfer | EUROWASTE -o--------
Fees ------------------
--o-------------
Automated Parking Garages. Pursuant to a letter agreement among the
Company and Arbat American Autopark, Ltd., a Delaware corporation ("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.
----------------
| EUROTECH, |
-----------o| LTD. |o-------------
| ---------------- |
| o minority
| Technology shareholder
Technology License o
fees | --------
| | | ERBC |
| | --------
o 40%
| -------------------- shareholder
----------| ARBAT AMERICAN | |
--------------------------------
o
50% shareholder
o
------------------------------
| CINEMA WORLD ON ARBAT (1)|
| (Russian operating entity) |
------------------------------
- - ----------
(1) See "Business - Other Technologies - Automated Parking Garages."
59
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company's authorized capital consists of 50,000,000 shares of Common
Stock, par value $.00025 per share, and 1,000,000 shares of "blank check"
Preferred Stock (the "Blank Check Preferred Stock"). As of March 31, 1998, there
were outstanding 18,932,834 shares of Common Stock, and no shares of Blank Check
Preferred Stock. See "Principal and Selling Shareholders." Set forth below is a
summary description of certain provisions relating to the Company's capital
stock contained in its Certificate of Incorporation and By-laws and under the
District of Columbia Business Corporation Act. Such summary is qualified in its
entirety by reference to the Company's Certificate of Incorporation and By-laws
and the District of Columbia Business Corporation Act.
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock. All
the issued and outstanding shares of Common Stock are validly issued, fully paid
and non-assessable. Each outstanding share of Common Stock has one vote on all
matters requiring a vote of the stockholders. There is no right to cumulative
voting; thus, the holders of fifty percent or more of the shares outstanding
can, if they choose to do so, elect all of the directors of the Company. In the
event of a voluntary or involuntary liquidation of the Company, all stockholders
are entitled to a pro rata distribution after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Common Stock. The holders of the Common Stock have no preemptive rights with
respect to the Company's offerings of shares of its Common Stock. Holders of
Common Stock are entitled to dividends if, as and when declared by the Board of
Directors out of the funds legally available therefor. It is the present
intention of the Company to retain earnings, if any, for use in its business.
Dividends are, therefore, unlikely in the foreseeable future. See "Dividend
Policy."
Blank Check Preferred Stock
Pursuant to its Certificate of Incorporation, the Company's Board of
Directors is authorized to issue, without any action on the part of its
stockholders, an aggregate of 1,000,000 shares of "blank check" preferred stock.
The Board of Directors has authority to divide the Blank Check Preferred Stock
into one or more series and has broad authority to fix and determine the
relative rights and preferences, including the voting rights of the shares of
each series. Such Blank Check Preferred Stock could be used as a method of
discouraging, delaying, or preventing a change in control of the Company or be
used to resist takeover offers opposed by management. Under certain
circumstances, the Board of Directors could create impediments to or frustrate
persons seeking to effect a takeover or otherwise gain control of the Company by
causing shares of Blank Check Preferred Stock with voting or conversion rights
to be issued to a holder or holders who might side with the Board of Directors
in opposing a takeover bid that the Board of Directors determines not to be in
the best interest of the Company and its stockholders. In addition, the
Company's ability to issue such shares of Blank Check Preferred Stock with
voting or conversion rights could dilute the stock ownership of such person or
entity. No shares of Blank Check Preferred Stock are currently issued and
outstanding and the Company has no plans to issues any shares of Blank Check
Preferred Stock at this time.
Transfer Agent
The Transfer Agent for the Common Stock of the Company is Interwest
Transfer Co., Inc., 1981 East Murray Holladay Road, Suite 100, Salt Lake City,
Utah 84117.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 30,908,026 shares of the Company's Common Stock to be outstanding
after the Offering(1), 16,347,440 shares are being registered by the Company
under, and will be eligible for sale upon the effectiveness of, the Registration
Statement of which this Prospectus is a part. 6,998,000 shares of the Company's
currently outstanding Common Stock were issued without registration pursuant to
Rule 504 of Regulation D under the Securities Act of 1933 (the "Securities
Act"), and pursuant to Rule 502(d) are not "restricted securities" and
therefore, may, with certain exceptions, be sold without registration. Of the
shares of Common Stock to be outstanding after the Offering1, 4,762,229 shares
were issued without registration in reliance on available exemptions under the
Securities Act, will be "restricted securities" as that term is defined in Rule
144 under the Securities Act, and pursuant to that Rule, under certain
circumstances may be sold without registration, and 2,800,357 shares, which
although issued without registration in reliance on available exemptions under
the Securities Act and which for that reason are "restricted securities,"
presently are eligible for sale without registration by reason either of having
been sold to non-affiliates of the Company pursuant to Rule 144 or having
qualified for sale without registration pursuant to Rule 701 under the
Securities Act. All "restricted" shares will become eligible for sale under Rule
144, at various times, after the applicable holding period has expired, without
registration.
2,000,000 of the Shares offered hereby carry registration rights pursuant
to a Bridge Financing completed by the Company in December, 1996, and
10,895,192(2) of the shares offered hereby carry registration rights pursuant to
two private placements of the Company's 8% Convertible Debentures due November
27, 2000 and February 23, 2001, respectively. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources." The holders of those securities have exercised their
registration rights. Those Shares have been registered in this Offering, and are
free-trading.
Pursuant to the compensation provisions of outstanding consulting
agreements, the Company is obligated to issue to those consultants an aggregate
of 17,000 shares of Common Stock per month. Such shares, when issued, qualify as
shares issued pursuant to an "Employee Benefit Plan" under Rule 701 under the
Securities Act, and may be sold without registration 90 days after the date of
issuance.
1,586,500 shares of Common Stock are issuable upon the exercise of
outstanding options and warrants. 717,500 of those shares have been registered
in the Registration Statement of which this Prospectus is a part and will be
free-trading at the time of issuance.
The availability for sale, as well as actual sales, of currently
outstanding shares of Common Stock, and shares of Common Stock issuable upon the
conversion of outstanding convertible debentures, upon the exercise of
outstanding options and warrants, and as compensation to consultants may depress
the prevailing market price for the Common Stock, and could adversely affect the
terms upon which the Company would be able to obtain additional financing.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner other than an affiliate)
is entitled to sell in "broker's transactions" or to market makers, within any
three-month period
- - --------
(1) Gives effect to the issuance of 717,500 shares of Common Stock
issuable upon exercise of certain stock options and warrants, and up to
10,707,692 shares of Common Stock issuable upon the conversion of convertible
debentures, outstanding at the date of this Prospectus. Does not give effect to
the issuance of (i) up to 869,000 shares of Common Stock issuable upon exercise
of certain other stock options and warrants outstanding at the date of the
Prospectus, and (ii) the issuance of up to 500,000 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Option Plan. See
"Management - 1995 Stock Option Plan."
(2) Includes 187,500 shares of Common Stock issuable upon the exercise of
warrants granted in connection with such private placements of the Company's 8%
Convertible Debentures.
61
<PAGE>
commencing 90 days after the effectiveness of the Form 10 Registration Statement
filed by the Company on February 12, 1997 pursuant to the Securities Exchange
Act of 1934, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding or (ii)
generally, the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, is entitled to sell such shares without compliance with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.
Registration Rights
In connection with the Bridge Financing completed in December, 1996, the
Company granted to the holders of an aggregate of 2,000,000 shares of the
Company's Common Stock mandatory and demand registration rights as to their
shares, which have been exercised. Pursuant to the exercise of such mandatory
registration rights, the Company has registered those 2,000,000 shares of Common
Stock in the Registration Statement of which this Prospectus is a part.
Additionally, in connection with two private placements, each of $3,000,000
principal amount of 8% Convertible Debentures due November 27, 2000 and February
23, 2001, respectively, the Company granted to the holders of those Debentures
and to the holders of warrants to purchase an aggregate of 187,500 shares of
Common Stock ( which warrants were also issued in connection with those private
placements) mandatory registration rights as to the shares underlying those
Debentures and warrants. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources".
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Shareholders or by their
respective pledgees, donees, transferees or other successors in interest may be
effected from time to time in one or more transactions for their own accounts
(which may include block transactions) on the NASD Electronic Bulletin Board or
any exchange on which the Shares may then be listed, in negotiated transactions,
through the writing of options on shares (whether such options are listed on an
options exchange or otherwise), through short sales, sales against the box, puts
and calls and other transactions in securities of the Company or other
derivatives thereof, or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Shareholders may effect such
transactions by selling Shares to or through broker-dealers, including
broker-dealers who may act as underwriters, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders and/or the purchasers of Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Shareholders may also sell Shares pursuant
to Rule 144 promulgated under the Securities Act or pledge Shares as collateral
for margin accounts, and such Shares could be resold pursuant to the terms of
such accounts. The Selling Shareholders and any participating brokers and
dealers may be deemed to be "underwriters" as defined in Section 2(11) of the
Securities Act.
In order to comply with certain state securities laws, if applicable, the
Shares will not be sold in a particular state unless such securities have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and complied with.
The Company has agreed to bear all expenses, other than selling
commissions and fees, in connection with the registration and sale of the Shares
being offered by the Selling Shareholders.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York.
62
<PAGE>
EXPERTS
The financial statements of the Company as of December 31, 1995, 1996 and
1997 and for each of the years then ended and for the period ended March 31,
1998, have been included in this Prospectus in reliance upon the report of Tabb,
Conigliaro & McGann, P.C., New York, New York, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
63
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and 5757 Wilshire Boulevard, Los
Angeles, California 90036; at the New York Regional Office of the Commission, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the registration of the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, which are
incorporated herein by reference, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus or in any document incorporated by reference as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement for such other
documents, which may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the fees prescribed by the Commission. Each
such statement is qualified in its entirety by such reference.
The Company's Registration Statement on Form S-1, as well as any reports,
proxy statements and other information filed under the Exchange Act, can also be
obtained electronically after the Company has filed such documents with the
Commission through a variety of databases, including among others, the
Commission's Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
program, Knight-Ridder Information, Inc., Federal Filings/Dow Jones and
Lexis/Nexis. Additionally, the Commission maintains a Website (at
http://www.sec.gov) that contains such information regarding the Company.
Any statement contained herein, or any document, all or a portion of which
is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein, or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of the Registration Statement or Prospectus. All information
appearing in this Prospectus is qualified in its entirety by the information and
financial statements (including notes thereof) appearing in the documents
incorporated herein by reference. This Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. These documents
(other than exhibits thereto) are available without charge, upon written or oral
request by any person to whom this Prospectus has been delivered, from
Secretary, Eurotech, Ltd., 1101 30th Street, N.W., Suite 500, Washington, D.C.
20007-3772 (telephone) (202) 625-4382).
64
<PAGE>
INDEX TO AUDITED FINANCIAL STATEMENTS
Page
----
Eurotech, Ltd.
Index to Audited Financial Statements.................................F-1
Report of Independent Accountants.................................... F-2
Financial Statements................................................. F-3
Notes to Financial Statements........................................ F-8
65
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or the Underwriters.
This Prospectus does not constitute an offer of any securities other than those
to which it relates or an offer to sell, or a solicitation of an offer to buy,
to any person in any jurisdiction where such offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
----------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary 2
Risk Factors 8
Use of Proceeds 20
Dividends 20
Capitalization 21
Selected Consolidated Financial Data 6
Management's Discussion and Analysis
of Results of Operations and
Financial Condition 22
Business 28
Market Price of Common Stock 42
Management 44
Principal and Selling Shareholders 50
Certain Transactions 56
Description of Securities 60
Shares Eligible for Future Sale 61
Plan of Distribution 62
Legal Matters 62
Experts 63
Additional Information 64
Index to Financial Statements 65
--------
EUROTECH, LTD.
16,347,440 Shares of Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below are the expenses expected to be incurred in
connection with the issuance and distribution of the securities registered
hereby. With the exception of the Securities and Exchange Commission
registration fee and the NASD filing fee, the amounts set forth below are
estimates.
Securities and Exchange Commission registration fee....................
-------
Printing and engraving expenses ........................................ *
Legal fees and expenses ................................................ *
Accounting fees and expenses ........................................... *
Blue Sky fees and expenses ............................................. *
Transfer agent fees and expenses ....................................... *
Miscellaneous Expenses ................................................. *
Total ..................................................... $ *
=======
- - ----------
* To be furnished by amendment.
Item 14. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that the Company
shall, to the full extent permitted by Section 29-304 of the District of
Columbia Business Corporation Act, as from time to time amended and in effect
(the "BCA"), indemnify any and all persons it has the power to indemnify under
said section. Section 29-304 of the BCA grants to the Company the power to
indemnify any and all of its directors or officers or former directors of
officers or any person who may have served at its request as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties or a party, by reason of being or having
been directors or officers or a director or officer of the Company, or of such
other corporation, except in relation to matters as to which any such director
or officer or former director or officer or person is adjudged in such action,
suit or proceeding to be liable for negligence or misconduct in the performance
of duty. Such indemnification is not deemed to be exclusive of any other rights
to which those indemnified may be entitled, under any bylaw, agreement, vote of
stockholders or otherwise. The foregoing provisions of the Company's Certificate
of Incorporation may reduce the likelihood of derivative litigation against the
Company's directors and officers for breach of their fiduciary duties, even
though such action, if successful, might otherwise benefit the Company and its
stockholders.
Additionally, the Company's By-Laws provide for the indemnification of
directors and officers. The specific provisions of the By-Laws related to such
indemnification are as follows:
II-1
<PAGE>
ARTICLE VI
INDEMNIFICATION
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director, except with respect to (1) a breach of the director's duty
of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) liability which may be
specifically defined by law or (4) a transaction from which the
director derived an improper personal benefit, it being the
intention of the foregoing provision to eliminate the liability of
the corporation's directors of the corporation's directors to the
corporation or its stockholders to the fullest extent permitted by
law. The corporation shall indemnify to the fullest extent permitted
by law each person that such law grants the corporation the power to
indemnify.
The Company has obtained an officers' and directors' liability insurance
policy which will indemnify officers and directors for losses arising from any
claim by reason of a wrongful act under certain circumstances where the Company
does not indemnify such officer or director, and will reimburse the Company for
any amounts where the Company may by law indemnify any of its officers or
directors in connection with a claim by reason of a wrongful act.
Item 15. 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
- - --------
(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.
II-2
<PAGE>
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
------- ------
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.
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 $ 1,000,000
development
Interest on debt 678,000
Working capital 1,000,000
II-3
<PAGE>
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
II-4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) 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)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP(2)
10.1 Material Contracts(1)
10.2 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(3)
10.3 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(3)
10.4 Technology Purchase Agreement between the Company and Oleg L.
Figovsky(3)
10.5 Teaming Agreement between the Company and Duke Engineering & Services,
Inc.(3)
10.6 Form of Agreement between the Company, V. Rosenband and C. Sokolinsky,
and Ofek Le-Oleh Foundation(3)
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband and C.
Sokolinsky(3)
10.6.3 Voting Agreement between the Company, V. Rosenband and C. Sokolinsky(3)
10.7.1 Investment Agreement between the Company and Chemonol, Ltd.(3)
10.7.2 Equity Sharing Agreement between the Company and Leonid Shapovalov(3)
10.7.3 Voting Agreement between the Company and Leonid Shapovalov(3)
10.8.1 Agreement between the Company and Separator, Ltd.(3)
10.8.2 Equity Sharing Agreement between the Company and Efim Broide(3)
10.8.3 Voting Agreement between the Company and Efim Broide(3)
10.9.1 Form of Agreement between the Company, Ofek Le-Oleh Foundation and
Y. Kopit(3)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit and
V. Rosenband(3)
10.9.3 Voting Agreement between the Company, Y. Kopit and V. Rosenband(3)
10.10 Form of License Agreement between the Company and ERBC Holdings,
Ltd.(3)
10.11 Cooperation Agreement between the Company and Forschungszentrum Julich
GmbH(3)
10.12.1 Convertible Debenture Purchase Agreement among the Company, JNC
Opportunity Fund, Ltd. and Diversified Strategies Fund, L.P.(3)
10.12.2 Escrow Agreement among the Company, JNC Opportunity Fund, Ltd.,
and Diversified Strategies Fund, L.P. and Robinson, Silverman, Pearce,
Aronsohn & Berman, LLP(3)
10.12.3 Registration rights Agreement among the Company the Company, JNC
Opportunity Fund, Ltd., and Diversified Strategies Fund, L.P.(3)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000 between the
Company and JNC Opportunity Fund, Ltd.(3)
- - ----------
1 Incorporated by reference to the Company's Registration Statement on
Form 10 under the Securities Exchange Act of 1934, on file with the
Commission.
2 Filed herewith.
3 Previously filed.
II-5
<PAGE>
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000 between the
Company and Diversified Strategies Fund, L.P.(3)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity Fund, Ltd.(3)
10.12.7 Warrant No. 2 between the Company and Diversified Strategies
Fund, L.P.(3)
10.12.8 Warrant No. 3 between the Company and Diversified Strategies
Fund, L.P.(3)
10.13.1 Convertible Debenture Purchase Agreement between the Company and JNC
Opportunity Fund, Ltd.(3)
10.13.2 Escrow Agreement among the Company, JNC Opportunity Fund, Ltd. and
Robinson, Silverman, Pearce, Aronshohn and Berman, LLP(3)
10.13.3 Registration Rights Agreement between the Company and JNC Opportunity
Fund, Ltd.(3)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001 between the
Company and JNC Opportunity Fund, Ltd.(2)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity Fund(3)
23.1 Consent of Tabb, Conigliaro & McGann(2)
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (included in Part II)
27 Financial Data Schedule(3)
(b) Financial Statement Schedules
All other financial statement schedules are omitted because the
information is not required, is not material or is otherwise included in the
financial statements or related notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers or
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be a part of this Registration Statement as of
the time it was declared effective.
(2) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the
II-6
<PAGE>
securities offered therein, and the Offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any acts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned in Washington, D.C., on June 11, 1998.
EUROTECH, LTD.
By: /s/ Peter Gulko
---------------
Peter Gulko
POWER OF ATTORNEY
Each of the undersigned does hereby constitute and appoint James D.
Watkins, and each of them acting singly, his attorneys-in-fact and agents, with
full power of substitution, to execute for him in his name, and in any and all
of his capacities, any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform every act and thing required or necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Titles Date
/s/ James D. Watkins Director and Chairman June 11, 1998
- - -------------------------
James D. Watkins
/s/ Maxwell Rabb Director June 11, 1998
- - -------------------------
Maxwell Rabb
/s/ Peter Gulko President, Secretary and June 11, 1998
- - -------------------------
Peter Gulko Principal Financial Officer
/s/ Lawrence C. McQuade Director June 11, 1998
- - -------------------------
Lawrence C. McQuade
<PAGE>
RIDER A
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO AUDITED FINANCIAL STATEMENTS
Page Nos.
---------
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
At December 31, 1996 and December 31, 1997
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
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO UNAUDITED FINANCIAL STATEMENTS
BALANCE SHEETS F-35
At December 31, 1996 and March 31, 1998
STATEMENTS OF OPERATIONS F-36
For the Three Months Ended March 31, 1997
For the Three Months Ended March 31, 1998
For the Period from Inception (May 26, 1995) to March 31, 1998
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY F-37 - F-39
For the Period from Inception (May 26, 1995) to December 31, 1997
For the Three Months Ended March 31, 1998
STATEMENTS OF CASH FLOWS F-40
For the Three Months Ended March 31, 1997
For the Three Months Ended March 31, 1998
For the Period from Inception (May 26, 1995) to March 31, 1998
NOTES TO FINANCIAL STATEMENTS F-41 - F-46
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
June 9, 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>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Note 2)
At December 31, 1997 At March 31, 1998
-------------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 617,756 $ 533,744
Receivable from related parties 5,918 5,918
Prepaid expenses and other current assets 21,539 27,192
------------ ------------
TOTAL CURRENT ASSETS 645,213 566,864
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 14,050 26,201
OTHER ASSETS:
Organization and patent costs - net of accumulated
amortization 28,651 28,135
Deferred financing costs 261,178 286,872
Other assets 3,151 3,151
------------ ------------
TOTAL ASSETS $ 952,243 $ 911,223
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable $ 2,000,000 $ --
Accrued liabilities 576,966 852,970
Deferred revenue 225,000 225,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,801,966 1,077,970
------------ ------------
CONVERTIBLE DEBENTURES 3,000,000 6,000,000
------------ ------------
COMMITMENTS AND OTHER MATTERS (Notes 1, 2, 5 and 6)
STOCKHOLDERS' DEFICIENCY:
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; 18,928,836 and 18,971,836 shares issued and
outstanding at December 31, 1997 and March 31, 1998,
respectively 4,732 4,743
Additional paid-in capital 12,892,313 14,103,243
Unearned financing costs (1,315,317) (1,378,395)
Deficit accumulated during the development stage (16,431,451) (18,896,338)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,849,723) (6,166,747)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 952,243 $ 911,223
============ ============
</TABLE>
See notes to financial statements.
F-35
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
For the Three Months Ended March 31, from Inception
(May 26, 1995) to
March 31, 1998
1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ -- $ -- $ --
------------ ------------ ------------
OPERATING EXPENSES: 258,732 307,671 2,698,185
Research and development 325,916 220,982 3,367,557
Consulting fees 318,022 559,381 2,403,160
Other general and administrative expenses ------------ ------------ ------------
902,670 1,088,034 8,468,902
------------ ------------ ------------
TOTAL OPERATING EXPENSES
(902,670) (1,088,034) (8,468,902)
------------ ------------ ------------
OPERATING LOSS
OTHER EXPENSES: 61,022 130,625 444,787
Interest expense
Amortization of deferred and unearned financing 685,506 1,246,228 9,982,649
costs ------------ ------------ ------------
746,528 1,376,853 10,427,436
------------ ------------ ------------
TOTAL OTHER EXPENSES
$ (1,649,198) $ (2,464,887) $(18,896,338)
============ ============ ============
NET LOSS
NET LOSS PER COMMON SHARE $ (.07) $ (.13)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 17,983,000 18,950,336
============ ============
</TABLE>
See notes to financial statements.
F-36
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Period Ended December 31, 1995: Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <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 1,020 523,980 (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 - (2,719,875)
Amortization of unearned financing costs - - - - 226,656
Repayment by stockholders - - - 3,000 -
Net loss - - - - -
---------- -------- ---------- --------- -----------
Balance - December 31, 1996 17,223,836 $ 4,306 $4,804,298 $ - $(2,493,219)
========== ======== ========== ========= ===========
</TABLE>
Deficit
Accumulated
During the
Development
Period Ended December 31, 1995: Stage Total
----------- -----------
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) - -
Amortization of unearned financing costs - 226,656
Repayment by stockholders - 3,000
Net loss (3,476,983) (3,476,983)
----------- -----------
Balance - December 31, 1996 $(3,990,209) $(1,674,824)
=========== ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
F-37
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Year Ended December 31, 1997 Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298 $ - $(2,493,219)
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 - (2,725,000)
Value assigned to conversion feature of
Convertible Debentures 11/97 - - 1,337,143 - (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 (284,480)
Value assigned to issuance of 35,000 warrants -
to shareholder for consulting services 11/97 - - 39,588 (39,588)
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities 11/97 - - 862,680 - (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 - (2,000,000)
Amortization of unearned financing costs - - - - 8,426,793
Net loss - - - - -
---------- -------- ----------- -------- -----------
Balance - December 31, 1997 18,928,836 $ 4,732 $12,892,313 $ - $(1,315,317)
========== ======== =========== ======== ===========
</TABLE>
Deficit
Accumulated
During the
Development
Year Ended December 31, 1997 Stage Total
----------- -----------
Balance - December 31, 1996 $ (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) - -
Value assigned to conversion feature of
Convertible Debentures - -
Value assigned to issuance of 127,500 warrants
in consideration for interest and
placement fees in connection with Convertible -
Debentures -
Value assigned to issuance of 35,000 warrants -
to shareholder for consulting services -
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities - -
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) - -
Amortization of unearned financing costs 8,426,793
Net loss (12,441,242) (12,441,242)
------------ -----------
Balance - December 31, 1997 $(16,431,451) $(4,849,723)
============ ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
F-38
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Additional Unearned
Date of Common Stock Paid-in Due from Financing
Transaction Shares Amount Capital Stockholders Costs
----------- ---------- -------- ---------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1998:
Balance - December 31, 1997 18,928,836 $ 4,732 $12,892,313 $ - $(1,315,317)
Issuance of stock for consulting fees
($2.58 per share) 03/98 43,000 11 110,930 - -
Value assigned to conversion feature of
Convertible Debentures and 60,000 warrants
issued as additional interest - - 1,100,000 - (1,100,000)
Amortization of unearned financing costs - - - - 1,036,922
Net loss - - - - -
---------- -------- ----------- -------- -----------
Balance - March 31, 1998 18,971,836 $ 4,743 $14,103,243 $ - $(1,378,395)
========== ======== =========== ======== ===========
</TABLE>
Deficit
Accumulated
During the
Development
Stage Total
----------- -----------
Three Months Ended March 31, 1998:
Balance - December 31, 1997 $(16,431,451) $(4,849,723)
Issuance of stock for consulting fees
($2.58 per share) - 110,941
Value assigned to conversion feature of
Convertible Debentures and 60,000 warrants
issued as additional interest - -
Amortization of unearned financing costs - 1,036,922
Net loss (2,464,887) (2,464,887)
------------ -----------
Balance - March 31, 1998 $(18,896,338) $(6,166,747)
============ ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on
June 1, 1996.
See notes to financial statements.
F-39
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Period
March 31, from Inception
---------------------------- (May 26, 1995) to
1997 1998 March 31, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in $ (1,649,198) $ (2,464,887) $(18,896,338)
operating activities:
Depreciation and amortization
Amortization of deferred and unearned financing costs 1,136 2,349 8,350
Accrued interest 685,506 1,246,228 9,982,649
Stock issued for license 61,022 91,175 91,175
Consulting fees satisfied by stock issuances -- -- 37,500
160,000 110,940 2,159,967
------------ ------------ ------------
Sub-total
(741,534) (1,014,195) (6,616,697)
Cash provided by (used in) the change in assets and
liabilities:
(Decrease) increase in advances to related parties
Increase in prepaid expenses 84,000 -- (5,918)
Increase in other assets (4,634) (5,653) (27,192)
Increase in accrued liabilities -- -- (3,151)
Increase in deferred revenue 173,358 184,830 761,795
-- -- 225,000
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES
(488,810) (835,018) (5,666,163)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs
Capital expenditures -- -- (31,358)
(3,391) (13,984) (31,328)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
(3,391) (13,984) (62,686)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options
Proceeds from issuance of common stock -- -- 150
Offering costs -- -- 841,500
Repayment by stockholders -- -- (2,898)
Proceeds from Convertible Debentures -- -- 3,000
Proceeds from bridge notes -- 3,000,000 6,000,000
Repayments of bridge notes -- -- 2,000,000
Borrowings from stockholders -- (2,000,000) (2,000,000)
Repayment to stockholders 126,000 -- 561,140
Deferred financing costs -- -- (561,140)
-- (235,000) (579,150)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES
126,000 765,000 6,262,602
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
(366,201) (84,002) 533,754
CASH - BEGINNING
380,183 617,756 --
------------ ------------ ------------
CASH - ENDING
$ 13,982 $ 533,754 $ 533,754
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 36,630 $ 315,561
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
See notes to financial statements.
</TABLE>
F-40
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited. These
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ( the
"SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect
all adjustments (which include only normal recurring
adjustments) necessary to state fairly the financial position
and results of operations as of and for the periods indicated.
These financial statements should be read in conjunction with
the Company's financial statements and notes thereto for year
ended December 31, 1997, included in the Company's Form 10 and
Form S-1 as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with
general 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 statement
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2- 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.
F-41
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 2 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The accompanying unaudited 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 March 31, 1998, the Company has a
stockholders' deficiency of $6,166,747, a working capital
deficiency of $511,106 and an accumulated deficit since
inception of $18,896,338. 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.
The December 1996 $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.
F-42
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 3 - NOTES PAYABLE
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. As of March 14, 1998, the Company has
filed a Registration Statement with the SEC, which has not
been declared effective.
The Company has assigned a value to the debentures' beneficial
conversion feature and warrants amounting to $1,100,000, and
is being 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 has been
recorded as deferred financing costs and is being amortized
over 180 days commencing February 23, 1998.
F-43
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 3 - NOTES PAYABLE (Continued)
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.
NOTE 4 - TECHNOLOGY TRANSFER AGREEMENT
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.
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 $125,000
to research and development expenses for the three months
ended March 31, 1998.
NOTE 5 - CONTINGENCIES AND OTHER MATTERS
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.
F-44
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 5 - CONTINGENCIES AND OTHER MATTERS (Continued)
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.
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.
F-45
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 5 - CONTINGENCIES AND OTHER MATTERS (Continued)
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. It is Eurotech's position that
the warrant certificate is voidable.
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.
Process was served upon Eurotech at its California office in
late January 1998. Based on the advice of its outside counsel,
Eurotech believes that the plaintiffs' claims will be resolved
favorably to the Company. However, it is possible that the
Company will be adjudged liable in the Dirks Litigation, and
if so, the resolution of the litigation could have a material
adverse effect on the Company.
NOTE 6 - 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
anti-dilutive for the periods presented consist of the
following:
Warrants to purchase common stock 1,426,500
Convertible Debentures (assumed conversion at initial
floor price and at largest discount) 2,142,857
Convertible Debentures issued February 1998 (assumed
conversion at initial floor price and at largest discount) 2,900,000
Options to purchase common stock 75,000
Total as of March 31, 1998 6,544,357
=========
F-46
<PAGE>
- - --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
between
EUROTECH, LTD.
and
JNC OPPORTUNITY FUND LTD.
-----------------------------
February 23, 1998
------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of February 23, 1998
(this "Agreement"), between Eurotech, Ltd., a corporation organized under the
laws of the District of Columbia (the "Company"), and JNC Opportunity Fund Ltd.,
a corporation organized under the laws of the Cayman Islands (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchaser and the Purchaser desires
to purchase an aggregate principal amount of $3,000,000 of the Company's 8%
Convertible Debentures, due February 23, 2001 (the "Debentures"), which are
convertible into shares of the Company's common stock, par value $.00025 per
share (the "Common Stock").
IN CONSIDERATION of the mutual covenants and agreements set forth herein
and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF DEBENTURES; CLOSING
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchaser and the
Purchaser shall purchase the Debentures for an aggregate purchase price of
$3,000,000. The closing of the purchase and sale of the Debentures (the
"Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn
& Berman LLP (the "Escrow Agent"), 1290 Avenue of the Americas, New York, New
York 10104, immediately following the execution hereof or such later date as the
parties shall agree. The date of the Closing is hereinafter referred to as the
"Closing Date."
(ii) Prior to the Closing, the parties shall deliver or shall
cause to be delivered to the Escrow Agent such items as are required to be
delivered by them in accordance with and subject to the terms and conditions of
the Escrow Agreement, dated as of the date hereof, by and among the Company, the
Purchaser and the Escrow Agent (the "Escrow Agreement"), including the
following: (A) the Company shall deliver (1) Debentures, registered in the name
of the Purchaser, with an aggregate principal amount of $3,000,000, (2) the
Warrant (as defined in Section 3.16), and (3) the legal opinions of Ruffa &
Ruffa, P.C. and Phillips Nizer Benjamin Krim & Ballon LLP, substantially in the
form of Exhibit C ("Legal Opinions"); (B)
<PAGE>
the Purchaser shall deliver $3,000,000; and (C) each party hereto shall deliver
all other executed instruments, agreements and certificates as are required to
be delivered hereunder by or on their behalf at the Closing.
1.2 Form of Debentures. The Debentures shall be in the form of
Exhibit A.
For purposes of this Agreement, "Average Price," "Business Day,"
"Conversion Price," "Original Issue Date," "Conversion Date" and "Trading Day"
shall have the meanings set forth in the Debentures.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The Company
hereby makes the following representations and warranties to the Purchaser:
(a) Organization and Qualification. The Company is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
District of Columbia, with the requisite corporate power and authority to own
and use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in Schedule
2.1(a) attached hereto (collectively, the "Subsidiaries"). Each of the
Subsidiaries is a corporation, duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, with the full
corporate power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of this Agreement, the Escrow Agreement, the
Debentures, the Warrant or the Registration Rights Agreement, dated the date
hereof, among the Company and the Purchaser (the "Registration Rights Agreement"
and, together with this Agreement, the Escrow Agreement, the Debentures and the
Warrant, the "Transaction Documents"), (y) have a material adverse effect on the
results of operations, assets, prospects, or financial condition of the Company
and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's
ability to perform fully on a timely basis
<PAGE>
its obligations under any Transaction Document (any of the foregoing, a
"Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company. Each of the Transaction Documents has been duly executed by
the Company and when delivered in accordance with the terms hereof shall
constitute the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective certificate of incorporation, by-laws or other
charter documents.
(c) Capitalization. The authorized, issued and outstanding capital
stock of the Company is set forth in Schedule 2.1(c). No shares of Common Stock
are entitled to preemptive or similar rights, nor is any holder of the Common
Stock entitled to preemptive or similar rights arising out of any agreement or
understanding with the Company by virtue of any of the Transaction Documents.
Except as disclosed in Schedule 2.1(c), there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the purchase and sale of the
Debentures and Warrant hereunder, securities, rights or obligations convertible
into or exchangeable for, or giving any person any right to subscribe for or
acquire any shares of Common Stock, or contracts, commitments, understandings,
or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Documents (as defined below) or
Schedule 2.1(c), no Person (as defined below) beneficially owns (as determined
pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) or has the right to acquire by agreement with or
by obligation binding upon the Company, beneficial ownership of in excess of 5%
of the Common Stock. Except as specified in Schedule 6(b) to the Registration
Rights Agreement, there are no agreements or arrangements under which the
Company or any Subsidiary is obligated to register the sale
<PAGE>
of any of their securities under the Securities Act of 1933, as amended (the
"Securities Act"). A "Person" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or subdivision
thereof) or other entity of any kind.
(d) Issuance of Debentures and Warrant. The Debentures and the
Warrant are duly authorized, and, when issued in accordance with the terms
hereof, shall be validly issued, fully paid and nonassessable, free and clear of
all liens, encumbrances and rights of first refusals of any kind (collectively,
"Liens"). The Company has and at all times while the Debentures and the Warrant
are outstanding will maintain an adequate reserve of duly authorized shares of
Common Stock to enable it to perform its conversion, exercise and other
obligations under this Agreement, the Warrant and the Debentures and in no
circumstances shall such reserved and available shares of Common Stock be less
than the sum of (i) two times the number of shares of Common Stock as would be
issuable upon conversion in full of the Debentures, assuming such conversion
were effected on the Original Issue Date or the Filing Date (as defined in the
Registration Rights Agreement), whichever yields a lower Conversion Price, (ii)
the number of shares of Common Stock as are issuable as payment of interest on
the Debentures, and (iii) the number of shares of Common Stock as are issuable
upon exercise in full of the Warrant. The shares of Common Stock issuable upon
conversion of the Debentures, as payment of interest in respect thereof and upon
exercise of the Warrant are sometimes referred to herein as the "Underlying
Shares," and the Debentures, Warrant and Underlying Shares are, collectively,
the "Securities." When issued in accordance with the terms of the Debentures and
the Warrant, the Underlying Shares will be duly authorized, validly issued,
fully paid and nonassessable, free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof) or (ii) subject to
obtaining the consents referred to in Section 2.1(f), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument (evidencing a Company debt or otherwise) to which the Company is a
party or by which any property or asset of the Company is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or
<PAGE>
other restriction of any court or governmental authority to which the Company is
subject (including Federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected, except in the
case of each of clauses (ii) and (iii), as could not, individually or in the
aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental authority, except for violations which, individually or in
the aggregate, do not have a Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth in
Schedule 2.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other Federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents other than
(i) the filing of a pre-effective amendment to the Company's Registration
Statement on Form S-1 promulgated under the Securities Act (Registration
Statement No. 333-26673) (the "Initial Registration Statement"), previously
filed with the Securities and Exchange Commission (the "Commission"), which
amendment shall register for resale by the Purchaser of the Underlying Shares
(such pre-effective amendment, the "Underlying Securities Registration
Statement"), provided, however that in the event the Initial Registration
Statement has been declared effective by the Commission on or prior to the
Filing Date (as such term is defined in the Registration Rights Agreement), the
term Underlying Securities Registration Statement shall mean a registration
statement on Form S-1 to be filed with the Commission which shall register the
Underlying Shares for resale by the Purchaser, (ii) the application for the
listing of the Underlying Shares on any national securities exchange or market
on which the Common Stock is then listed and (iii) in all other cases, where the
failure to obtain such consent, waiver, authorization or order, or to give or
make such notice or filing, could not have or result in, individually or in the
aggregate, a Material Adverse Effect (together with the consents, waivers,
authorizations, orders, notices and filings referred to in Schedule 2.1(f), the
"Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Materials (as hereinafter defined), there is no action, suit, notice
of violation, proceeding or investigation pending or, to the best knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (Federal, state,
county, local or foreign) which (i) adversely affects or challenges the
legality, validity or
<PAGE>
enforceability of any of the Transaction Documents or the Securities or (ii)
could, individually or in the aggregate, have or result in a Material Adverse
Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not individually or in the
aggregate, have or result in, individually or in the aggregate, a Material
Adverse Effect.
(i) Private Offering. Assuming the accuracy of the representations
and warranties of the Purchaser set forth in Section 2.2(b)-(f), the offer,
issuance and sale of the Securities to the Purchaser as contemplated hereby are
exempt from the registration requirements of the Securities Act. Neither the
Company nor any Person acting on its behalf has taken or will take any action
which might subject the offering, issuance or sale of the Securities to the
registration requirements of the Securities Act.
(j) SEC Documents. Except as set forth in Schedule 2.1(j), since
April 14, 1997, the Company has filed all reports required to be filed by it
under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof
(such reports, the "SEC Documents" and, together with the Schedules to this
Agreement and other documents and information furnished by or on behalf of the
Company at any time prior to the Closing, the "Disclosure Materials") on a
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Documents prior to the expiration of any such extension. As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Documents, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto. Such financial statements have
<PAGE>
been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved, except as
may be otherwise specified in such financial statements or the notes thereto,
and fairly present in all material respects the financial position of the
Company as of and for the dates thereof and the results of operations and cash
flows for the periods then ended, subject, in the case of unaudited statements,
to normal year-end audit adjustments. Since the date of the financial statements
included in the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997, (a) there has been no event, occurrence or development that
has had or that could have or result in a Material Adverse Effect, (b) the
Company has not incurred any liabilities (contingent or otherwise) other than
(x) liabilities incurred in the ordinary course of business consistent with past
practice and (y) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP, and (c) the Company has not altered its
method of accounting or the identity of its auditors.
(k) Investment Company. The Company is not, and is not an Affiliate
of an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(l) Certain Fees. Except for fees payable to CDC Consulting, Inc.,
no fees or commissions will be payable by the Company to any broker, financial
advisor, finder, investment banker, or bank with respect to the transactions
contemplated hereby. The Purchaser shall have no obligation with respect to such
fees or with respect to any claims made by or on behalf of other Persons for
fees of a type contemplated in this Section that may be due in connection with
the transactions contemplated hereby. The Company shall indemnify and hold
harmless the Purchaser, its respective employees, officers, directors, agents,
and partners, and its respective Affiliates (as such term is defined under Rule
405 promulgated under the Securities Act), from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees) and
expenses suffered in respect of any such claimed or existing fees.
(m) Solicitation Materials. The Company has not (i) distributed any
offering materials in connection with the offering and sale of the Securities
other than the Disclosure Materials and any amendments and supplements thereto
or (ii) solicited any offer to buy or sell the Securities by means of any form
of general solicitation or advertising.
(n) Exclusivity. The Company shall not issue and sell Debentures to
any Person other than the Purchaser.
<PAGE>
(o) Listing and Maintenance Requirements Compliance. The Company has
not in the two years preceding the date hereof received written notice from any
stock exchange, market or trading facility on which the Common Stock is or has
been listed or quoted to the effect that the Company is not in compliance with
the listing, maintenance or other requirements of such exchange, market, trading
or quotation facility. The Company has no reason to believe that it does not now
or will not in the future meet any such requirements.
(p) Patents and Trademarks. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights which are necessary for use
in connection with its business and which the failure to so have would have a
Material Adverse Effect (collectively, the "Intellectual Property Rights"). To
the best knowledge of the Company, there is no existing infringement of any of
the Intellectual Property Rights.
(r) Disclosure. All information relating to or concerning the
Company set forth in the Transaction Documents or provided to the Purchaser or
its respective representatives and counsel in connection with the transactions
contemplated hereby (including, without limitation, the letter, dated February
18, 1998, of Ruffa & Ruffa to the Purchaser regarding the use of the proceeds
from the issuance and sale of the Company's 8% Convertible Debentures due
November 27, 2000) is true and correct in all material respects and does not
fail to state any material fact necessary in order to make the statements herein
or therein, in light of the circumstances under which they were made, not
misleading. The Company confirms that it has not provided to the Purchaser or
any of its representatives, agents or counsel any information that constitutes
or might constitute material nonpublic information. The Company understands and
confirms that the Purchaser shall be relying on the foregoing representation in
effecting transactions in securities of the Company.
2.2 Representations and Warranties of the Purchaser. The Purchaser hereby
makes the following representations and warranties to the Company.
(a) Organization; Authority. The Purchaser is an entity organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents and to
carry out its obligations thereunder. The acquisition of the Securities to be
acquired hereunder by the Purchaser has been duly authorized by all necessary
action on the part of the Purchaser. Each of this Agreement, the Registration
Rights Agreement and the Escrow Agreement has been duly executed and
<PAGE>
delivered by the Purchaser and constitutes the valid and legally binding
obligation of the Purchaser, enforceable against it in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity.
(b) Investment Intent. The Purchaser is acquiring the Securities for
its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to the Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) Purchaser Status. At the time the Purchaser was offered the
Securities, it was, at the date hereof, it is, and at the Closing Date, it will
be, an "accredited investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. The Purchaser either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. The Purchaser
acknowledges that the Securities are speculative investments and involve a high
degree of risk and the Purchaser is able to bear the economic risk of an
investment in the Securities to be acquired hereunder by the Purchaser, and, at
the present time, is able to afford a complete loss of such investment.
(f) Access to Information. The Purchaser acknowledges receipt of the
Disclosure Materials and further acknowledges that it has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the offering of the Securities, and the merits and risks of investing in the
Securities, (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment, and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or
<PAGE>
expense that is necessary to make an informed investment decision with respect
to the investment and to verify the accuracy and completeness of the information
contained in the Disclosure Materials. Neither such inquiries nor any other
investigation conducted by or on behalf of the Purchaser or its representatives
or counsel shall modify, amend or affect the Purchaser's right to rely on the
truth, accuracy and completeness of the Disclosure Materials and the Company's
representations and warranties contained in the Transaction Documents.
(g) Reliance. The Purchaser understands and acknowledges that (i)
the Securities to be acquired by it hereunder are being offered and sold to it
without registration under the Securities Act in a private placement that is
exempt from the registration provisions of the Securities Act and (ii) the
availability of such exemption, depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the foregoing representations and the
Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchaser make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements thereof. In connection with any transfer of any
Securities other than pursuant to an effective registration statement or to the
Company, the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor, the form and substance
of which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities Act.
Notwithstanding the foregoing, the Company hereby consents to and agrees to
register any transfer by the Purchaser to an Affiliate of the Purchaser, or any
transfers among any such Affiliates provided in such case the transferee
certifies to the Company that it is an "accredited investor" as defined in Rule
501(a) under the Securities Act and that it is acquiring any such Securities in
accordance with the representation provided by the original Purchaser in Section
2.2(b). Each such transferee shall have the rights of the
<PAGE>
Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
[FOR DEBENTURES ONLY] THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON
CONVERSION SET FORTH IN SECTION 3.8 OF A CONVERTIBLE DEBENTURE PURCHASE
AGREEMENT, DATED AS OF FEBRUARY 23, 1998, BETWEEN EUROTECH, LTD. (THE
"COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
Underlying Shares shall not contain any legend if conversion of
Debentures, exercise of Warrant or other issuances of Underlying Shares in as
contemplated hereby, as the case may be, occurs at any time while an Underlying
Securities Registration Statement is effective under the Securities Act or, in
the event there is not an effective Underlying Securities Registration Statement
at such time, if in the opinion of counsel to the Company such legend is not
required under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company agrees that it will provide each Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from such
legend at such time as such legend is no longer required hereunder. The Company
may not make any notation on its records or give instructions to any transfer
agent of the Company which enlarge the restrictions of transfer set forth in
this Section 3.1(b).
3.2 Acknowledgement of Dilution. The Company acknowledges that the
issuance of Underlying Shares upon (i) conversion of the Debentures and as
payment of interest thereon and (ii) exercise of the Warrant may result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares in accordance with the
<PAGE>
terms of the Debentures and the Warrant is unconditional and absolute regardless
of the effect of any such dilution.
3.3 Furnishing of Information. As long as the Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. If at any time prior to the date on which the Purchaser may resell
all of their Underlying Shares without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act (as determined by counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent for the benefit of and enforceable by
the Purchaser) the Company is not required to file reports pursuant to Section
13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Purchaser
and make publicly available in accordance with Rule 144(c) promulgated under the
Securities Act annual and quarterly financial statements, together with a
discussion and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be included
in reports required by Section 13(a) or 15(d) of the Exchange Act in the time
period that such filings would have been required to have been made under the
Exchange Act. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 promulgated under the Securities Act, including the legal
opinion referenced above in this Section. Upon the request of any such Person,
the Company shall deliver to such Person a written certification of a duly
authorized officer as to whether it has complied with such requirements. In
connection with any future access or diligence of the Company by the Purchaser,
the Company agrees that its will not furnish to the Purchaser any non-public
information unless it first discloses in writing that such information is of
such character and the Purchaser thereafter agrees to receive such information.
3.4 Use of Disclosure Materials. The Company consents to the use of the
Disclosure Materials (which for purposes of the non-SEC Document Disclosure
Materials shall take into account any amendments and supplements thereto) and
any information provided by or on behalf of the Company pursuant to Section 3.3
by the Purchaser in connection with resales of the Securities other than
pursuant to an effective registration statement.
3.5 Blue Sky Laws. In accordance with the Registration Rights Agreement,
the Company shall qualify and obtain exemptions
<PAGE>
for the Underlying Shares under the securities or Blue Sky laws of such
jurisdictions as the Purchaser may request and shall continue such qualification
or exemption at all times until the Purchaser notify the Company in writing that
it no longer owns Securities; provided, however, that neither the Company nor
its Subsidiaries shall be required in connection therewith to qualify as a
foreign corporation where they are not now so qualified or to take any action
that would subject the Company to general service of process in any such
jurisdiction where it is not then so subject.
3.6 Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the
Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the issue or sale of the Securities to the Purchaser.
3.7 Increase in Authorized Shares. At such time as the Company would be,
if a notice of conversion or exercise (as the case may be) were to be delivered
on such date, precluded from (a) converting the full outstanding principal
amount of Debentures (and paying any accrued but unpaid interest in respect
thereof in shares of Common Stock) that remain unconverted at such date or (b)
honoring the exercise in full of the Warrant due to the unavailability of a
sufficient number of shares of authorized but unissued or re-acquired Common
Stock, the Board of Directors of the Company shall promptly (and in any case
within 30 Business Days from such date) prepare and mail to the shareholders of
the Company proxy materials requesting authorization to amend the Company's
certificate of incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least such number of shares as
reasonably requested by the Purchaser in order to provide for such number of
authorized and unissued shares of Common Stock to enable the Company to comply
with its conversion, exercise and reservation of shares obligations as set forth
in this Agreement, the Debentures and the Warrant. In connection therewith, the
Board of Directors shall (a) adopt proper resolutions authorizing such increase,
(b) recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder approval to carry out such resolutions (and hold a special meeting
of the shareholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (c) within 5 Business Days of obtaining
such shareholder authorization, file an appropriate amendment to the Company's
certificate of incorporation to evidence such increase.
<PAGE>
3.8 Purchaser Ownership of Common Stock. The Purchaser agrees not to
convert Debentures or exercise the Warrant to the extent such conversion or
exercise would result in the Purchaser beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the Debentures held by the
Purchaser after application of this Section. To the extent that the limitation
contained in this Section applies, the determination of whether Debentures are
convertible (in relation to other securities owned by the Purchaser) and of
which portion of the principal amount of such Debentures are convertible shall
be in the sole discretion of the Purchaser, and the submission of Debentures for
conversion shall be deemed to be the Purchaser's determination of whether such
Debentures are convertible (in relation to other securities owned by the
Purchaser) and of which portion of such Debentures are convertible, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the Purchaser to
convert Debentures at such time as such conversion will not violate the
provisions of this Section. The provisions of this Section may be waived by the
Purchaser upon not less than 75 days prior notice to the Company, and the
provisions of this Section shall continue to apply until such 75th day (or
later, if stated in the notice of waiver).
3.9 Listing of Underlying Shares. The Company will use its best efforts to
list the Common Stock for trading on the Nasdaq SmallCap Market or Nasdaq
National Market as soon as possible after the Closing Date. If the Common Stock
hereafter is listed for trading on the Nasdaq National Market, Nasdaq SmallCap
Market (or on the American Stock Exchange or New York Stock Exchange, or any
other national securities market or exchange), then the Company shall (1) take
all necessary steps to list the Underlying Shares thereon, including the
preparation of any required additional listing application therefor covering at
least the sum of (i) two times the number of Underlying Shares as would be
issuable upon a conversion in full of the then outstanding principal amount of
Debentures (plus all Underlying Shares are issuable as payment of interest
thereon, assuming all such interest were paid in shares of Common Stock) and
upon exercise in full of the then unexercised portion of the Warrants and (2)
provide to the Purchaser evidence of such listing, and the Company shall
thereafter maintain the listing of its Common Stock on such exchange or market
as long as Underlying Shares are issuable and/or outstanding.
3.10 Conversion Procedures. Exhibit E sets forth the procedures with
respect to the conversion of the Debentures, including the form of legal
opinion, if necessary, that shall be
<PAGE>
rendered to the Company's transfer agent and such other information and
instructions as may be reasonably necessary to enable the Purchaser to exercise
its right of conversion smoothly and expeditiously which are not set forth in
the Debentures.
3.11 Purchaser's Rights if Trading in Common Stock is Suspended or
Delisted. If at any time while the Purchaser (or any assignee thereof) owns any
Securities, less than $400,000 of the Common Stock trades on the OTC Bulletin
Board in any one week or there are fewer than six (6) market makers actively
making a market in the Common Stock (or, if after the Closing Date the Common
Stock is listed on any of the exchange, markets or trading facilities
contemplated in Section 3.9, if the Common Stock is delisted or suspended from
trading on such exchange, market or trading facility, other than as a result of
the suspension of trading in securities on such market or exchange generally, or
temporary suspensions pending the release of material information) for more than
three (3) Trading Days, then, notwithstanding anything to the contrary contained
in any Transaction Document, at the Purchaser's option exercisable by five (5)
Business Days prior written notice to the Company, the Company shall repay the
entire principal amount of then outstanding Debentures (and all accrued and
unpaid interest thereon) and redeem all then outstanding Underlying Shares then
held by the Purchaser, at an aggregate purchase price equal to the sum of (I)
the aggregate outstanding principal amount of Debentures then held by the
Purchaser divided by the Conversion Price on (a) the day prior to the date of
such suspension or delisting, (b) the day of such notice or (c) the date of
payment in full of the repurchase price calculated under this Section, whichever
is less, and multiplied by the Average Price preceding (x) the day prior to the
date of such suspension or delisting, (y) the day of such notice and (z) the
date of payment in full of the repurchase price calculated under this Section,
whichever is greater, (II) the aggregate of all accrued but unpaid interest and
other non-principal amounts (including liquidated damages, if any) then payable
in respect of all Debentures to be repaid, (III) the number of Underlying Shares
then held by the Purchaser multiplied by the Average Price immediately preceding
(x) the day prior to the date of such suspension or delisting, (y) the date of
the notice or (z) the date of payment in full by the Company of the repurchase
price calculated under this Section, whichever is greater, and (IV) interest on
the amounts set forth in I - III above accruing from the 5th day after such
notice until the repurchase price under this Section is paid in full at the rate
of 15% per annum. If after the Original Issue Date the Common Stock shall be
listed for trading or quoted on the Nasdaq SmallCap Market, Nasdaq National
Market or any other national securities exchange or market, this provision shall
similarly apply to any delistings or suspensions therefrom.
<PAGE>
3.12 Use of Proceeds. The Company shall use all of the proceeds from the
sale of the Securities for working capital purposes and not for the satisfaction
of Company debt or to redeem any equity or equity-equivalent securities of the
Company, except that the Company may apply up to $2,000,000 of the proceeds from
the sale of the Securities to repay debt evidenced by the Company's promissory
notes dated as of December 18, 1996. Pending application of the proceeds of this
placement in the manner permitted hereby, the Company will invest such proceeds
in interest bearing accounts and/or short-term, investment grade interest
bearing securities.
3.13 Notice of Breaches. The Company and the Purchaser shall give prompt
written notice to the other of any breach by it of any representation, warranty
or other agreement contained in any Transaction Document, as well as any events
or occurrences arising after the date hereof, which would reasonably be likely
to cause any representation or warranty or other agreement of such party, as the
case may be, contained in the Transaction Document to be incorrect or breached
as of such Closing Date. However, no disclosure by either party pursuant to this
Section shall be deemed to cure any breach of any representation, warranty or
other agreement contained in any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchaser of any notice or claim (written or oral) that it
receives from any lender of the Company to the effect that the consummation of
the transactions contemplated by the Transaction Documents violates or would
violate any written agreement or understanding between such lender and the
Company, and the Company shall promptly furnish by facsimile to the holders of
the Debentures a copy of any written statement in support of or relating to such
claim or notice.
3.14 Conversion Obligations of the Company. The Company shall honor
conversions of the Debentures and exercises of the Warrant and shall deliver
Underlying Shares in accordance with the respective terms and conditions and
time periods set forth in the Debentures and the Warrant.
3.15 Right of First Refusal; Subsequent Registrations; Certain Corporate
Actions. (a) The Company shall not, directly or indirectly, without the prior
written consent of Encore Capital Management, L.L.C. ("Encore"), offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition) any of its or its
Affiliates' equity or equity-equivalent securities or any instrument that
permits the holders thereof to acquire Common Stock at any time over the life of
the security or investment at a price that is less than the market
<PAGE>
price of the Common Stock at the time of issuance of such security or investment
(a "Subsequent Financing") for a period of 180 days after the Closing Date,
except (i) the granting of options or warrants to employees, officers and
directors, and the issuance of shares upon exercise of options granted, under
any stock option plan heretofore or hereinafter duly adopted by the Company,
(ii) shares issued upon exercise of any currently outstanding warrants and upon
conversion of any currently outstanding convertible preferred stock in each case
disclosed in Schedule 2.1(c), (iii) shares of Common Stock issued upon
conversion of Debentures, as payment of interest thereon, or upon exercise of
the Warrant in accordance with their respective terms, unless (A) the Company
delivers to Encore a written notice (the "Subsequent Financing Notice") of its
intention to effect such Subsequent Financing, which Subsequent Financing Notice
shall describe in reasonable detail the proposed terms of such Subsequent
Financing, the amount of proceeds intended to be raised thereunder, the Person
with whom such Subsequent Financing shall be affected, and attached to which
shall be a term sheet or similar document relating thereto and (B) Encore shall
not have notified the Company by 5:00 p.m. (New York City time) on the tenth
(10th) Trading Day after its receipt of the Subsequent Financing Notice of its
willingness to cause the Purchaser to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation, financing
to the Company on substantially the terms set forth in the Subsequent Financing
Notice. If Encore shall fail to notify the Company of its intention to enter
into such negotiations within such time period, the Company may effect the
Subsequent Financing substantially upon the terms and to the Persons (or
Affiliates of such Persons) set forth in the Subsequent Financing Notice;
provided, that the Company shall provide Encore with a second Subsequent
Financing Notice, and Encore shall again have the right of first refusal set
forth above in this paragraph (a), if the Subsequent Financing subject to the
initial Subsequent Financing Notice shall not have been consummated for any
reason on the terms set forth in such Subsequent Financing Notice within thirty
(30) Trading Days after the date of the initial Subsequent Financing Notice with
the Person (or an Affiliate of such Person) identified in the Subsequent
Financing Notice.
(b) Except for Underlying Shares and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be registered
in accordance with the Registration Rights Agreement, the Company shall not,
without the prior written consent of the Purchaser, (i) issue or sell any of its
or any of its Affiliates' equity or equity-equivalent securities pursuant to
Regulation S promulgated under the Securities Act, or (ii) register for resale
any securities of the Company for a period of not less than 90 Trading Days
after the date that the Underlying Securities Registration Statement is
<PAGE>
declared effective by the Commission. Any days that the Purchaser is unable to
sell Underlying Shares under the Underlying Securities Registration Statement
shall be added to such 90 Trading Day period for the purposes of (i) and (ii)
above.
(c) As long as there are Debentures outstanding, the Company shall
not and shall cause the Subsidiaries not to, without the consent of the holders
of the Debentures, (i) amend its certificate of incorporation, bylaws or other
charter documents so as to adversely affect any rights of the holders of
Debentures; (ii) repay, repurchase or offer to repay, repurchase or otherwise
acquire shares of its Common Stock other than as to the Underlying Shares; or
(iii) enter into any agreement with respect to any of the foregoing.
3.16 The Warrant. At the Closing, the Company shall issue to the
Purchaser, a Common Stock purchase warrant, in the form of Exhibit D (the
"Warrant"), pursuant to which the Purchaser shall have the right at any time and
from time to time thereafter through the second anniversary of the date of
issuance thereof, to acquire 60,000 shares of Common Stock at an exercise price
per share equal to 110% of the Average Price on the Closing Date.
3.17 Certain Securities Laws Disclosures; Publicity. (a) The Company shall
timely file with the Commission a Form D promulgated under the Securities Act as
required under Regulation D promulgated under the Securities Act and provide a
copy thereof to each Purchaser promptly after the filing thereof. The Company
shall file with the Commission (i) a press release acceptable to the Purchaser
disclosing the transactions contemplated hereby within three (3) Business Days
after the Closing Date and (ii) a Report on Form 8-K disclosing this Agreement
and the transactions contemplated hereby within ten (10) Business Days after the
Closing Date.
(b) In furtherance and in addition to the obligation of the Company
set forth in Section 3.17(a) above, the Company and the Purchaser shall consult
with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and neither
party shall issue any such press release or otherwise make any such public
statement without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.
ARTICLE IV
<PAGE>
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing the Company shall pay $10,000
to the Escrow Agent for the legal fees and disbursements incurred by the
Purchaser in connection with the preparation and negotiation of the Transaction
Documents. Other than the amounts contemplated by the immediately preceding
sentence, and except as set forth in the Registration Rights Agreement, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties levied in
connection with the issuance of the Debentures pursuant hereto. The Purchaser
shall be responsible for its own tax liability that may arise as a result of the
investment hereunder or the transactions contemplated by this Agreement.
4.2 Entire Agreement; Amendments. This Agreement, together with the
Exhibits and Schedules hereto, the Debentures and the Warrant contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with respect
to such matters.
4.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: Eurotech, Ltd.
1200 Prospect Street, Suite 425
LaJolla, California 92037
Facsimile No.: (619) 551-6840
Attn: Chief Financial Officer
With copies to: Ruffa & Ruffa, P.C.
150 East 58th Street
<PAGE>
New York, NY 10155
Facsimile No.: (212) 759-7696
Attn: William P. Ruffa
If to the Purchaser: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to (for Encore Capital Management, L.L.C.
communications to 12007 Sunrise Valley Drive, Suite 460
the Purchaser): Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser; or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign
<PAGE>
this Agreement or any rights or obligations hereunder without the prior written
consent of the Purchaser. Except as set forth in Section 3.1(a), neither
Purchaser may assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Company. The assignment by a party of
this Agreement or any rights hereunder shall not affect the obligations of such
party under this Agreement.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and, other than with respect Encore, who is an intended beneficiary of
the provisions of Section 3.15, entitled to enforce such provisions against the
parties hereto and permitted assignees under Section 4.6, is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
4.8 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and Federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court or that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.9 Survival. The representations, warranties, agreements and
covenants contained in this Agreement shall survive the Closing and the and
conversion of the Debentures and exercise of the Warrant.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create
<PAGE>
a valid and binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature page were an original thereof.
4.11 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
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SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Debenture Purchase Agreement to be duly executed by their respective authorized
persons as of the date first indicated above.
EUROTECH, LTD.
By: /s/ Peter Gulko
-------------------------------------
Peter Gulko
Director
JNC OPPORTUNITY FUND LTD.
By: /s/ Alan Brown
-------------------------------------
Alan Brown
Director
