SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
EUROTECH, LTD.
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(Exact name of registrant as specified in its charter)
District of Columbia 33-0662435
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(State or other Jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
1101 30th Street, N.W., Suite 500, Washington, D.C. 20007-3772
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(Address of principal executive offices, including Zip Code)
Registrant's telephone number: (202) 625-4382
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Common Stock, Par Value $.00025 Per Share
-----------------------------------------
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TABLE OF CONTENTS
Page
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ITEM 1. DESCRIPTION OF BUSINESS.............................................. 1
ITEM 2. SELECTED FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.................................. 29
ITEM 3. PROPERTIES.......................................................... 35
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................... 35
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..................... 36
ITEM 6. EXECUTIVE COMPENSATION.............................................. 39
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 41
ITEM 8. LEGAL PROCEEDINGS................................................... 46
ITEM 9. MARKET PRICE AND DIVIDENDS OF THE COMPANY'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS......................... 46
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES............................. 48
ITEM 11. DESCRIPTION OF SECURITIES TO BE REGISTERED.......................... 50
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS........................... 51
ITEM 13. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.................................................. 52
ITEM 14. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS.................................................... 52
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Eurotech, Ltd. (the "Company" or "Registrant") was incorporated in May,
1995 under the laws of the District of Columbia, and is a development stage,
technology transfer, holding and management company formed to commercialize new,
existing but previously unrecognized, and previously "classified" technologies,
with a particular current emphasis on technologies developed by prominent
research institutes and individual researchers in the former Soviet Union and in
Israel, and to commercialize those and other Western technologies for business
and other commercial applications principally in Western and Central Europe,
Ukraine, Russia, and North America. Since the Company's formation it has
acquired development and marketing rights to a number of technologies by
purchase, assignments, and licensing arrangements. Although the Company intends
to continue identifying, monitoring, reviewing and assessing new technologies,
its primary emphasis is the marketing and sales of four of its present
technologies that it deems to be ready for commercialization (the "Principal
Technologies"). To that end, the Company recently has initiated discussions with
a number of potential end-users of those technologies, with a view towards the
future negotiation and execution of licensing and/or joint venture marketing
agreements. Additionally, the Company is proceeding with the marketing and
potential application of its silicon-organic (EKOR) compound technology (which
is one of the Principal Technologies) in connection with nuclear contamination
remediation projects at the Chernobyl Nuclear Power Plant ("ChNPP") in Ukraine,
and in the United States, Russia and Germany. See "Description of Business
Principal Technologies," and "Selected Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of Operation - 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 revenues
from operations. 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 assurances
as to when or whether it will be able to commercialize its products and
technologies and realize any revenues therefrom.
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 end 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 and Services ("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 not included in the Principal Technologies), the Company also
intends to continue its efforts in connection with the contemplated introduction
of its waste-to-energy technology in Ukraine, and the further development (in
conjunction with Kurchatov and EAPS) of a silicon carbide "wafer" technology
with potential application in manufacturing integrated circuit computer chips.
See "Description of Business - Principal Technologies;" and "Other
Technologies."
<PAGE>
ACQUISITION OF ISRAELI TECHNOLOGIES
Incubator Technologies
The Company has 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
agreement the Company will provide 15%-20% of the financing required for, and
would receive a 20% equity interest in, research and development projects
selected by the Company and such Israeli corporations as are formed for the
purpose of owning, developing and commercializing the technologies resulting
from those selected projects (each, an "Israeli Technology Company"). In
furtherance of this, the Company has opened an office at the premises of TEI in
Haifa, Israel. See "Properties."
The Company has not entered into a written agreement with any of the
Incubators memorializing such agreements in principal, and the only written
agreements between the Company and any Incubator are those disclosed herein in
connection with Chemonol, Ltd. ("Chemonol"), Separator, Ltd. ("Separator"),
Remptech, Ltd. ("Remptech") and Comsyntech, Ltd. ("Comsynthech"), each an
Israeli corporation. None of the Incubators are legally obligated to enter into
any further such agreements with the Company, and as a result there is no
assurance that the Company will be able to invest in or acquire any additional
Incubator-sponsored technologies.
Pursuant to agreements with each of Chemonol, and with Ofek and Weizmann,
the Company has invested in four such Israel Technology Companies, to wit:
Chemonol, which has developed materials and processes for manufacturing
non-isocyanate polyurethane ("NIPU") industrial coatings; Separator which is
developing a process for the electromagnetic separation and production of high
temperature superconductive metallic powders; Remptech, which is developing
processes for the production of extra-fine cobalt and nickel powders; and
Comsyntech, which is developing a process for the continuous combustion
synthesis of ceramic, composite and intermetallic powders. See "Description of
Business." 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 Principal Shareholders' common
equity of each respective corporation, giving the Company voting control in each
case.
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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, will control those
corporations, and for financial reporting purposes will consolidate each of
those corporation's balance sheets and other financial statements with the
Company's. Although the Company presently anticipates it will exercise the
Chemonol option, there is no assurance that it or any other of the foregoing
options will be exercised. There is no assurance that when such options become
exercisable the Company will have sufficient funds to exercise any of them.
For a period of two years commencing on the date of its registration as an
Israeli corporation, the sale or other transfer of 25% or more of the
outstanding common equity of each of Chemonol, Separator, Remptech and
Comsyntech requires the consent of the Chief Scientist of the Israeli Ministry
of Commerce and Technology. The Company's options to acquire additional common
equity of the above Israeli Technology Companies are exercisable within such two
year periods and any acquisition of the common equity purchasable thereunder
will, therefore, require the Chief Scientist's consent. Although the Company
presently expects that if requested such consent would be given, there is no
assurance that such consent will be obtained. Accordingly, the Company intends
to amend the terms of those options so as to extend their respective exercise
periods beyond the applicable two-year periods during which the Chief
Scientist's consent is required, prior to the times they each first commence.
Technologies Acquired from Prof. Oleg L. Figovsky
Pursuant to the Technology Purchase Agreements each dated January 1, 1998,
the Company has acquired from Oleg L. Figovsky, Ph.D. ("Prof. Figovsky") (who is
a consultant to the Company) all right, title and interest in and to the
following three technologies developed by him, inclusive of future improvements
thereto: (i) a group of related technologies collectively known as
"Interpenetrated Network Polymers" ("INPs"), (ii) "Liquid Ebonite Material"
("LEM") and (iii) "Rubber Concrete" ("RubCon") for purchase prices of $75,000,
$15,000 and $35,000, respectively (each, a "Purchase Price"). Pursuant to each
such Technology Purchase Agreement, during the 15-year period commencing on
January 1, 1998, the Company is 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 also
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 focus 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 things as
small-diameter piping, and intricate parts of pumps, fans and centrifuge rotors.
See "Description of Business - Principal Technologies."
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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 of these other 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 Reactor 4 at
ChNPP, in Chernobyl, Ukraine. In September, 1997, pursuant to a joint-bidding
agreement between the Company and 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 EKOR compound technology was jointly developed by scientists
at Kurchatov and 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 of America, Ukraine, and all member countries of the European Patent
Agreement. See "Certain Relationships and Related 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 through 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 and from leaching into and contaminating
ground-water supplies.
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
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application of the EKOR compound to nuclear accident sites is intended as 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 use 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, 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. In high dosage radiation tests the EKOR compound has met or exceeded all
specifications established by the ChNPP authorities for containment materials.
In April 1997, the equipment for synthesizing and applying the EKOR compound was
successfully demonstrated for officials of ChNPP and other entities. The G-7
group of industrialized nations (the United States, United Kingdom, Italy,
France, Canada, Japan and Germany) has pledged up to U.S. $3.1 billion to assist
in a multi-step project of remediating and closing the plant, with approximately
U.S. $300 million budgeted for the project's first containment and site
stabilization phase.
Based on the properties demonstrated by the EKOR compound, ChNPP (an
industrial amalgamation of the State Committee of Ukraine on Atomic Energy),
Kurchatov, "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 applicable 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 initiating the EKOR application
program at ChNPP Reactor 4, which implementation presently is 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 ERBD. Contractors, as well as the technology to be used in
connection with the remediation project will be determined on the
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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 ERBD, through
G-8 funds, will provide the financing for the actual remediation project.
Additionally, ChNPP is authorized to initiate further, independent studies.
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 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 three sites in Russia: Sverdlosk Chimmash (a major development,
production and testing facility for nuclear, chemical and related equipment),
Chelyabinsk Mayak (a plutonium production site) and Kola (a disposal site for
nuclear fuel from atomic-powered ships and submarines). To this end, at nominal
cost to it, the Company has provided EKOR documentation and material samples to
these sites, and has arranged for personnel from Kurchatov and EAPS to be
available to provide technical advice regarding pertinent applications of the
EKOR compound. To date, the Company has not entered into any agreements
pertaining to either the testing or application of the EKOR compound at these
sites.
Non-isocyanate Polyurethane. NIPU is one of the constituent technologies
of the Interpenetrated Network Polymer technology independently developed by
Prof. Figovsky, a consultant to the Company. See "Description of Business -
Acquisition of Israeli Technologies - Technologies Acquired from Prof. Oleg L.
Figovsky." 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
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
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and rooftops; industrial equipment and machinery; and consumer goods such as
appliances, footwear, furniture and plastic products.
The rights to develop, market and sell industrial coatings based on NIPU
were acquired from Prof. Figovsky by Chemonol. At the date hereof, the Company
is the holder of 20% of Chemonol's common equity, and has an option to purchase
an additional 31% of such common equity from Chemonol's Principal Shareholder.
See "Description of Business - Acquisition of Israeli Technologies - Incubator
Technologies." There can be no assurance, however, that such $60,000 investment
will be completed 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 such expenses. See "Management's
Discussion and Analysis of Results of Operation and Financial Condition -
Liquidity and Capital Resources."
Liquid Ebonite Material. LEM is a synthetic liquid rubber with enhanced
mechanical, permeability and anti-corrosive qualities as compared to
conventional sheet rubber coverings. In laboratory testing, coverings made with
LEM 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 Prof. Figovsky, and was acquired by the
Company pursuant to a Technology Purchase Agreement dated January 1, 1998, for a
purchase price of $15,000, plus royalties equal to 49% of the Company's net
revenues from sales or licenses of any products incorporating LEM, payable for a
period of 15 years commencing on January 1, 1998. To date, the Company has not
derived any such revenues and does not expect to derive any such revenues until
the third quarter of 1998, at the earliest. See "Description of Business -
General - Acquisition of Israeli Technologies - Technologies Acquired from Prof.
Oleg L. Figovsky; - Risk Factors - Conflicts of Interest". "Directors and
Executive Officers - Consultants". "Certain Relationships and Related
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
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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 "Description of 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 "Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of Operation - 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. Figovsky, and was acquired by
the Company pursuant to a Technology Purchase Agreement dated January 1, 1998,
for a purchase price of $35,000, plus royalties equal to 49% of the Company's
net revenues from sales or licenses of any products incorporating LEM, payable
for a period of 15 years commencing on January 1, 1998. To date, the Company has
not derived any such revenues and does not expect to derive any such revenues
until the third quarter of 1998, at the earliest. See "Description of Business -
General - Acquisition of Israeli Technologies - Technologies Acquired from Prof.
Oleg L. Figovsky; - Risk Factors - Conflicts of Interest," "Directors and
Executive Officers - Consultants," and "Certain Relationships and Related
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 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 "Description of 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 "Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of Operation - Plan
of Operation."
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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 "EMS" Technology. The Company is participating
in the further research and development of a process to electromagnetically
separate high temperature superconducting ("HTSC") metal powders, that has been
developed by Separator. At the date hereof the Company is the holder of 20% of
Separator's common equity and has an option to purchase an additional 31% of
such common equity from Separator's Principal Shareholders. See "Description of
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.
To date, the Company has invested $30,000 in Separator, and pursuant to
its agreement with Weizmann 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 and will control Separator. 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 to produce
extra fine cobalt and nickel powders by recycling materials containing cobalt
and nickel. At the date hereof the Company is the holder of 20% of Remptech's
common equity and has options to purchase the 20% common equity interest in
Remptech of Ofek that is partially sponsoring Remptech's research and
development activities, and an additional 31% of such common equity from
Remptech's Principal Shareholders. See "Description of Business Acquisition of
Israeli Technologies - Incubator Technologies." Powdered metallurgy is generally
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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 and will control Remptech. 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 the equity purchase options 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.
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. At the date
hereof the Company is the holder of 20% of Comsyntech's common equity and has
options to purchase the 20% common equity interest in Comsyntech of Ofek, which
is partially sponsoring Comsyntech's research and development activities, and an
additional 31% of such common equity from Comsyntech's Principle Shareholders.
See "Description of Business - Acquisition of Israeli Technologies - Incubator
Technologies." CCS is a newly devised process for the production of ceramic,
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 CSS 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 CSS 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 CSS 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.
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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 and will control
Comsyntech. 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. 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 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
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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 intends to first introduce its waste-to-energy technology in
the city of Cherkassy, Ukraine, where the National Government has selected this
technology as the national standard for waste-to-energy facilities, and has
approved the construction of ten such facilities using the Company's
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 and director of the Company is the chairman,
Chief Executive Officer and a shareholder of Eurowaste. See "Risk Factors -
Conflicts of Interest," and "Certain Relationships and Related 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 "Description of Business -- 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 financing among the project co-ventures 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 revenue than is the existing, Ukraine
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, 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.
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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 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 Holdings, Limited, a British Virgin Island corporation
("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.
Pursuant to a technology license agreement entered into with Arbat
American, the Company has been paid a one-time royalty 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 royalty 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 Company's automated parking
technology. Presently, the Company is not aware of any plans of Arbat American
for any further such parking garages. See "Description of Business - Risk
Factors - Conflicts of Interest," "Security Ownership of Certain Beneficial
Owners and Management," "Directors and Executive Officers," and "Certain
Relationships and Related Transactions."
Re-sealable Containers. Pursuant to a sublicense (the "Re-sealable
Container Sublicense") entered into in December 1997, the Company has acquired
from ERBC an exclusive, worldwide and perpetual license 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
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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. 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 "Certain Relationships and Related
Transactions."
Other technologies, including the "CORO" telephone technology (see note
9(d) to the Company's Financial Statements) are presently being evaluated by the
Company. Pending the results of those evaluations, the Company has no current
plans to develop or commercialize those technologies.
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.
INTELLECTUAL PROPERTY
Of the Company's present technologies, patent protection has been sought
only for the EKOR compound material and the Re-sealable Container Systems.
Patent applications on EKOR have been filed by the Company and are pending in
the U.S., Ukraine and Japan, and two such patent applications have been filed by
EAPS in Russia, one of which is pending, and one of which has been granted.
Patent applications on the Re-sealable Container Systems have been filed and are
pending in Germany. The Company's success depends, in part, on its ability to
obtain and protect patents covering, and maintain trade secrecy protection of
its EKOR compound and other Principal Technologies, as well as other, future
technologies, and to operate without infringing on the proprietary rights of
third parties. Additionally, since the waste-to-energy technology is a
combination of existing, public domain technologies, it is uncertain whether the
waste-to-energy technology is patentable. Accordingly, such technology could be
subject to appropriation and use by any individual or entity that is so
inclined, for which the Company might not have legal recourse under any national
or 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
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provide the Company with competitive advantages or will not be challenged by
third parties or that the patents of others will not have an adverse effect on
the Company's ability to conduct its business. Furthermore, there can be no
assurance that others will not independently develop similar or superior
technologies, duplicate any of the Company's processes, or design around any
technology that is patented by the Company. It is possible that the Company may
need to acquire licenses to, or to contest the validity of, issued or pending
patents of third parties relating to its products. There can be no assurance
that any license acquired under such patents would be made available to the
Company on acceptable terms, if at all, or that the Company would prevail in any
such contest. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on its patents or in
bringing patent suits against other parties.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in part,
by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others.
The Company is not a subsidiary of another corporation, entity or other
person. The Company does not have any subsidiaries.
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, 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 $6,166,747, a working capital
deficit of $511,106, and an accumulated deficit since inception of $18,896,338.
The Company anticipates that it will continue to incur significant
operating losses through 1998, and 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
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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, and there can be no assurance as to when or whether it will be able to
commercialize its products and technologies. 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 "Description of Business - 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
"Description of Business - Risk Factors -- Need for Additional Financing;
Possibility of Future Dilution."
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 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. However,
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 "Selected
Financial Data; Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
No assurance can be given that the Company will successfully obtain any
further working capital or complete any further offerings or that of its
securities, 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
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assurance can be given as to the completion of research and development
activities and the successful marketing of the Company's technologies. See
"Selected Financial Data; Management's Discussion and Analysis of Financial
Condition and Results of Operation-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
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 ($6,166,747) 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 during 1997. In
accordance with the terms 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
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.
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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. 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 ChNPP), 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 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.
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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 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 Kurchatov and EAPS, 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 at 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 or which, if
successful, would have a materially adverse impact on the Company.
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 shares 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
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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, and in some cases in
Russia, 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
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 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
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<PAGE>
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-7 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.
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 Kurchatov. 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
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silicon-carbide "wafer" technology. No assurance can be given that the present,
favorable policy of the Russian Government will continue (see "Description of
Business - 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 DES) which has resulted in one successful, first-round demonstration
project bid, and has not entered into any licenses or joint venture for the
marketing and sale of its four Principal Technologies. DES has submitted a
letter of intent to bid, on behalf of itself and the Company, to the ERDB in
connection with studies for the remediation of Reactor 4 at the 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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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 he 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
"Description of 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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<PAGE>
COMPETITION AND TECHNOLOGICAL ALTERNATIVES
The near-term, primary market for the Company's products and technologies
is radioactive contamination containment, remediation and transportation, and
chemical manufacturing. Mid-term markets are expected to continue in these
technologies. The Company has limited experience in marketing its products and
technologies and, other than in connection with the remediation of Reactor 4 at
the ChNPP, intends to rely on licenses and joint venturers with major
international chemical and other companies 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. Any one or more of the Company's competitors or
other enterprises not presently known to the Company may develop technologies
which are superior to the Company's products or other technologies utilized by
the Company. To the extent that the Company's competitors are able to offer
cost-effective alternatives, the Company's ability to compete could be
materially and adversely affected. See "Description of 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 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 would prevail in any such contest. In addition, the Company could
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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 purchaser) 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 $1,000,000 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.
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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.
Randolph Graves, and of ERBC. In January 1998 Dr. Graves resigned as Chairman
and CEO, and Dr. Graves, Mr. Gulko and Mr. Skrobanek resigned as directors. Mr.
Skrobanek continues to serve the Company as its representative in the European
market. Eurotech had been dependent on Dr. Graves for administering the office
in LaJolla, 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 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 and Secretary of the Company,
and presently serves without an employment agreement. Mr. Gulko presently is not
covered by key-man life insurance.
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 Relationships and Related Transactions." Specifically, Kurt
Seifman, the beneficial owner of 1,246,300 shares of the Company's Common Stock,
is the chief executive officer of ERBC which, in turn: (i) has licensed the
Silicon-Organic (EKOR) compound technology and the Re-sealable Container Systems
to the Company (see "Description of Business Principal Technologies -
Silicon-Organic Compound"); (ii) is a principal equity owner of KRH to which the
Company has agreed to remit 50% of all net profits from sales of the EKOR
compound (see "Description of Business - Principal Technologies -
Silicon-Organic Compound"); and (iii) owns 40% of the outstanding common stock
of Arbat American, the owner of 50% of the equity in "Cinema World on Arbat".
See "Description of 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 "Description of Business - Other Technologies," "Directors
and Executive Officers," and "Certain Relationships and Related Transactions."
By virtue of its ownership interest in KRH, Mr. Seifman and ERBC 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
KRH, which is entitled to receive 50% of the net profits derived by the Company
from the sale of 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
- 26 -
<PAGE>
with KRH. See Description of "Business - Principal Technologies - Silicon
Organic (EKOR) Compound" and "Certain Transactions."
In addition, Prof. Figovsky, 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 Description
of "Business -- General -- Acquisition of Israeli Technologies -- Incubator
Technologies -- Technologies Purchased from Prof. Oleg L. Figovsky Principal
Technologies," "Management - Consultants,"and "Certain Transactions."
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 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. 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
"Description of Business - 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 shares of the Company's Common Stock outstanding(1), 16,347,400
shares are being registered under the Securities Act of 1933 (the "Securities
Act") by the Company and will be eligible for sale upon the effectiveness of the
Company's Registration Statement under which they are being registered on Forms
S-1. 6,998,000 shares of the Company's currently outstanding Common Stock were
- - ----------
(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 the conversion of convertible
debentures, outstanding at the date of the 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."
- 27 -
<PAGE>
issued without registration pursuant to Rule 504 of Regulation D under the
Securities Act, and are "restricted securities" and therefore, may not be sold
without registration except in compliance with Rule 144. Of the shares of Common
Stock outstanding1, 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 either by reason of having been sold pursuant to Rule 144 or having
qualified for sale without registration pursuant to Rule 701 under the
Securities Act. All "restricted" shares of Common Stock 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 16,347,440 Shares being registered by the Company under
the Securities Act carry registration rights pursuant to a Bridge Financing
completed by the Company in December, 1996, and 10,895,192(2) of the Shares
being so registered 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.
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.
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.
- 28 -
<PAGE>
ITEM 2. SELECTED FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
SELECTED 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 ended 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.
Operations Data:(3)
<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 COSTS -- 228,502 8,507,919 9,982,649
---------- -----------
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
---------- ----------- ------------ ------------
<CAPTION>
Balance Sheet Data
At December 31,
1995 1996 1997 March 31, 1998
---------- ----------- ------------ --------------
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>
- - ----------
(3) Through March 31, 1998, and since that date, the Company has not
derived any significant sales revenues.
- 29 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
GENERAL
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 in this Registration Statement.
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
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 license those and
other Western technologies for business and other commercial applications
principally in Central Europe, Ukraine, Russia and North America. Until recently
the Company had been principally engaged in identifying, monitoring, reviewing
and assessing technologies for their commercial applicability and potential, and
in acquiring selected technologies by equity investment, purchase, assignments,
and licensing arrangements. The Company believes that the Principal Technologies
are presently ready for commercialization and marketing. To that end, the
Company has decided to devote its business activities and resources principally
to the marketing and sale of the Principal Technologies. 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 "Description of
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 has incurred a cumulative net loss of
approximately $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.
- 30 -
<PAGE>
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 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.
- 31 -
<PAGE>
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 Principal Technologies (see Description of "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.
- 32 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital have been net proceeds
of $842,000 from the offering of common stock under Rule 504 of Regulation D,
shareholder advances aggregating $761,440, the bridge financing completed in
December of 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 and are being 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 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
are 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 the shares are not
registered under the Act within the specified time frame. As of December 31,
1996, the Company has 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, an additional 500,000 common shares were issued to
such holders in April, 1997, and a further 500,000 common shares have been
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. Pursuant to the terms of the notes, as of December 19, 1997
their interest rate has been increased to 15% per annum.
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
- 33 -
<PAGE>
$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.
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, 2000 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, 2001 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 the 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 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 is either
not filed with the SEC on or prior to January 15, 1998 or,
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<PAGE>
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 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 is declared effective.
The Company has agreed to fund the commercialization of certain
technologies developed in the former Soviet Union by scientists and researchers
at Kurchatov, other institutes associated therewith, and EAPS, collectively the
"Scientists." Kurchatov will provide the materials, facilities and personnel to
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 Non-isocyanate
Polyurethane, see "Description of Business -- General, and -- Principal
Technologies") and to provide funding for the further research and development
of four other Israeli technologies. See "Description of 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
have been remaining cash from the Bridge Financing ($380,000 as of December 31,
1996 and $0 as of September 30, 1997) and loans from shareholders and other
private lenders, which for the period January 1, 1997, through December 31,
1997, have totalled approximately $750,000. The Company's principal source of
funding for these expenditures during fiscal year 1998 will be the proceeds of
the Debenture Offerings. As the development of each technology is completed and
the technology's commercial applications are identified, the Company also will
seek joint venture partners to fund any further capital expenditures, including
the project financing.
As discussed above, the Company may require additional financing to
continue to fund research and development efforts, operating costs and complete
necessary work to commercialize its technologies. The Company has determined not
to proceed with a previously contemplated, initial public offering of 5,000,000
shares of cumulative convertible preferred stock. Costs in connection therewith,
aggregating $75,000, will be charged to expenses during fiscal year 1997.
The Company is exploring additional sources of working capital, including
further private sales of securities and joint ventures and licensing of
technologies. During the first three quarters of 1997 the Company relied on
shareholder loans and remaining Bridge Financing proceeds as its principal
sources of working capital. Through its joint bidding agreement with DES (see
"Description of 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 DES 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.
- 35 -
<PAGE>
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
system (and, particularly, in large, highly sophisticated or custom-designed
systems) whereby the system cannot distinguish between the year (or numbers)
1900 and 2000. The Company believes that appropriate "off-the-shelf" hardware
and software up-grades will be readily available, at reasonable cost, in time
for the Company to purchase, install and test them prior to the year 2000.
ITEM 3. PROPERTIES
The Company's headquarters are located at 1101 30th Street, N.W., Suite
500, Washington, D.C. 20007 pursuant to a lease commencing March 1, 1998 and
ending August 31, 1998, for which the Company pays monthly rent of $3,350. The
Company believes that its current facilities are sufficient to meet its
requirements.
The Company also occupies office space at the premises of Technion
Entrepreneurial Incubator, Ltd., in Haifa, Israel, on a month-to-month tenancy
basis. The Company expects to commence rental payments for such Israeli office
in March, 1997 at the rate of $300 per month. Such office will be utilized by
the Company for its contemplated, Israeli technology development and marketing
activities. See "Description of Business -- General."
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the Company, the following table sets forth the
ownership of the Company's Common Stock as of March 31, 1998, by each person
owning more then 5% of such Common Stock, by each officer and director and by
all officers and directors as a group.
Number of Shares Percentage of Shares
Name and Address(1) Beneficially Owned(2) Beneficially Owned
------------------- --------------------- ------------------
Peter Gulko 1,110,000 5.7%
Kurt Seifman 1,246,300 6.4%
Maxwell Rabb 80,000 6.4%
- 36 -
<PAGE>
James D. Watkins 113,000 *
Lawrence McQuade 0 0
Directors and Officers 1,303,000 6.7%
JNC Opportunity Fund, Ltd.(3) 5,063,847 25.9%
As a Group (4 Persons) __
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 1101 30th 1 Street, N.W., Suite 500, Washington, D.C. 20007
(2) Unless otherwise indicated, each person has sole voting and investment
power with respect to all shares.
(3) c/o Olympia Capital (Cayman), LTD.
Williams House
20 Reid Street
Hamilton Hm 11, Bermuda
* Less than 1%
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Company has a Board of Directors comprised of three persons. Directors
are elected at the annual meeting of shareholders and hold offices until the
next annual meeting of shareholders or until their successors have been elected.
Set forth below for each Director is his name, age, the year in which he became
a director of the Company, his principal occupation during the last five years
and any additional directorships in publicly-held companies.
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Position with the Company
- - ---- --- -------------------------
James D. Watkins 70 Director and Chairman
Maxwell Rabb 87 Director
Peter Gulko 48 President and Secretary
Lawrence McQuade 70 Director
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.
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
- 37 -
<PAGE>
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 is law
degree at Harvard Law School.
- 38 -
<PAGE>
correspondent banking relationships with U.S. and Latin American clients. Mr.
Wilkie received a B.A. degree in History from Harvard University in 1960.
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
Strobanek resigned as Directors of the Company, and Randolph Graves and
Hans-Joachim Skrobanek resigned as officers of the Company.
On January 23, 1998, Adm. James D. Watkins, Maxwell Rabb and Lawrence
McQuade were elected by the departing Directors to serve as Directors of the
Company.
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.
ANTICIPATED OFFICERS
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., and 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 American of Morgan Guaranty Trust Company, where he managed line
units responsible for sovereign debt, corporate and governmental 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.
- 39 -
<PAGE>
KEY CONSULTANTS
Name Age
- - ---- ---
Oleg L. Figovsky 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.
Richard A. Wall acted as a financial and business development consultant
to the Company from its inception until December 1997. Since 1996 Mr. Wall has
been a U.S. Resident Partner in the Institute for Applied Social Sciences
(Dusseldorf, German - Zurick, Switzerland - LaJolla, California). Since 1983 he
has been engaged in private, international investment banking activities head
quartered in New York City.
In 1996 and 1997 Mr. Wall loaned an aggregate of $561,440 to the Company,
all of which, together with accrued interest, has been repaid. Mr. Wall is the
beneficial holder of 120,000 shares of the Company's Common Stock and of options
to purchase 364,000 shares of Common Stock. See "Certain Relationships and
Related Transactions."
FOUNDER
Kurt Seifman, through ERBC Holdings, Limited (of which he is the chief
executive officer and sole shareholder), is the Founder of the Company. Mr.
Seifman is 85 years old, and is principally engaged in investment activities
personally and through ERBC. For the past five years Mr. Seifman has not been an
executive employee, director or officer of any business entity other than ERBC.
Mr. Seifman is the beneficial owner of 1,246,300 shares of the Company's
Common Stock. ERBC is the beneficial owner of 255,000 shares of the Company's
Common Stock. ERBC has sub-licensed to the Company the EKOR compound and the
Re-sealable Container Systems. See "Certain Relationships and Related
Transactions."
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the calendar years 1996 and 1997 to
Randolph A. Graves, Jr., its chief executive officer during 1996 and 1997. No
other executive officer or key employee (other than the chief executive officer)
was compensated in excess of $100,000.
- 40 -
<PAGE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- - ---------------------------------------------------------------------------------------------------
Annual Compensation
Other Annual
Salary Bonus Compensation(1)
Name and Principal Position Year ($) ($) ($)
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Randolph A. Graves, Jr, President & Chief Executive 1997 77,374 0 0
Officer(2) ........................................... 1996 $77,374 $20,000 $243,109
- - ---------------------------------------------------------------------------------------------------
</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, subject to existing employment
agreements, 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
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 may attempt to obtain Officers and Directors liability
insurance.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, the current
member of which is Mr. Graves. 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.
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.
- - ----------
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1995 and 1997, respectively.
(2) Dr. Graves resigned as a Director, and as the Chairman, President and
Chief Executive Officer of the Company on January 23, 1998.
- 41 -
<PAGE>
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 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.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDER AND OTHER LOANS
On June 30, 1996, Richard A. Wall Associates, Inc. a company controlled by
Richard A. Wall (who has acted as a consultant to and a promotor of the Company)
loaned $128,300 to the Company, payable with accrued interest at the rate of 10%
per anum, on December 31, 1996.
- 42 -
<PAGE>
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 1977, Richard A. Wall Associates, Inc., loaned $367,000 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 1996, 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, 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. See
"Recent Sales of Unregistered Securities." 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
Prof. Figovsky who is a consultant to the Company, is the originator and
developer of three technologies, INPS, LEM and RubCon, all right, title and
interest in which was purchased by the Company from Prof. Figovsky in January,
1998, for an aggregate purchase price of $125,000 plus royalties equal to 49% of
the company's net revenues from the sale and/or licensing of such technologies,
payable for a period of 15 years commencing on January 1, 1998. See "Business --
General -- Acquisition of Israeli Technologies -- Incubator Technologies
- - -Technologies Purchased from Prof. Oleg L. Figovsky; - Principal Technologies."
COMMON DIRECTORS AND SHAREHOLDERS
See "Description of Business - Risk Factors - Conflicts of Interest."
ERBC Holdings, Limited. ERBC, is the beneficial owner of 255,000 shares of
the Company's Common Stock. One present and one former employee of ERBC,
Hans-Joachim Skrobanek and Peter Gulko, respectively, are shareholders and
directors of the Company, and Mr. Skrobanek is the former
- - ----------
(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.
- 43 -
<PAGE>
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 of ERBC, Kurt Seifman, is
the beneficial owner of 1,246,300 shares of the Company's Common Stock.
Eurowaste Management, Ltd. Karl Krobath, the Chairman and Chief Executive
Officer of Eurowaste is the beneficial owner of 25,000 shares of the Company's
Common Stock.
Arbat American Autopark, Ltd. Hans-Joachim Skrobanek, a shareholder and
former director and the Secretary of the Company, is a shareholder and president
of Arbat American. ERCB 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 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 Relationships and Related Transactions." The outstanding common stock
of KRH is owned of record by ERBC and by CIS. Such Stock is held by CIS for the
benefit of the EAPS in EAPS's capacity as representative of various individual
Russian and Ukrainian scientists, researchers and academics affiliated with EAPS
and Kurchatov. KRH is entitled to receive 50% of the net profits derived by the
Company from the sale and licensing of the EKOR compound, one of the Company's
Principal Technologies. Peter Gulko, the beneficial owner of 1,110,000 shares of
the Company's Common Stock, who served as a director of the Company until
January 23, 1998, and who presently is the President and Secretary of the
Company, is the sole shareholder of CIS. See "Description of Business -
Principal Technologies - Silicon - Organic (EKOR) Compound."
TRANSACTIONS INVOLVING ERBC, EUROWASTE AND ARBAT AMERICAN.
Business Structure; Inter-company Relationships. The business structure
and relationships between the Company, ERBC, Eurowaste and Arbat American
diagrammed and described below (i) separate the Company's business purpose of
developing and commercializing technologies from end-user business operations,
and from on-going research in Russia, and (ii) advance the Company's strategy of
commercializing technologies through joint ventures, license arrangements and
strategic alliances. Additionally, such structure reduces the Company's exposure
to the various risks of conducting on-going business operations in Russia and
Ukraine.
Silicon-Organic (EKOR) Compound. EAPS is the applicant under pending
patent applications in respect of the EKOR compound filed in Russia and the
holder of a Russian EKOR patent 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
- 44 -
<PAGE>
License"), ERBC exclusively sub-licensed all of its right, title and interest in
and to the EKOR technology to the Company for a term co-terminus with the term
of the EAPS-ERBC License. Pursuant to an agreement among KRH and the Company
dated January 28, 1997, 50% of the net profits the Company derives from the
commercialization, sale or licensing of any technology developed by Kurchatov
and EAPS will be remitted to KRH. 50% of the KRH's outstanding capital stock is
owned by ERBC, and 50% is owned by individual Russian scientists, researchers
and academics affiliated with either or both Kurchatov and EAPS.
----------
| EAPS |
----------
|
|
Technology
License
|
----------
----------------| ERBC |--------------
| ---------- |
minority | |
shareholder | shareholder
| Sublicense |
| | |
| --------------- -------
| | EUROTECH, | | KRH |
--------------| LTD. | -------
--------------- |
| |
| 50% of |
------onet EKOR----
profits
Waste-to-Energy Technology. Pursuant to a letter agreement among the
Company and Eurowaste dated September 18, 1996, Eurowaste has agreed to pay to
the Company $2,450,000 upon the initiation of construction of the first
waste-to-energy plant in which Eurowaste is involved, and to pay to the Company
$425,000 upon the initiation of construction of each additional waste-to-energy
plan in which Eurowaste is involved. The Company believes that the terms of this
agreement are fair and commercially reasonable.
------------------
| |
--------------| EUROTECH, LTD. |---------
| | | |
| ------------------ |
| | |
| Technology |
| License |
Technology | |
- 45 -
<PAGE>
License & ------------------ |
Transfer | EUROWASTE ----------
Fees ------------------
----------------
Automated Parking Garages. Pursuant to a letter agreement among the
Company and Arbat American dated January 28, 1997, Arbat American has agreed to
pay to the Company $1,250 per parking space in each parking garage erected by
Arbat American or any affiliate of Arbat American the design of which
substantially conforms to the technology, designs, renderings, blueprints and
plans previously furnished by the Company to Arbat American. The Company
believes that the terms of such agreement are fair and commercially reasonable.
----------------
| EUROTECH, |
------------| LTD. |--------------
| ---------------- |
| | minority
| Technology shareholder
Technology License |
Fees | --------
| | | ERBC |
| | --------
| | 40%
| -------------------- shareholder
----------| ARBAT AMERICAN | |
--------------------------------
|
50% shareholder
|
------------------------------
| CINEMA WORLD ON ARBAT (1)|
| (Russian operating entity) |
------------------------------
- - ----------
(1) See "Description of Business - Automated Parking Garages."
- 46 -
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and
David Morris filed an action in the Supreme Court for the State of New York,
County of New York, against Eurotech Ltd. for breach of contract, seeking
injunctive relief, specific performance and monetary damages of nearly $5
million (the "Dirks Litigation"). The Dirks Litigation arises solely from an
agreement between Eurotech and National Securities Corporation ("National")
relating to financial advisory services to be performed by National Securities
Corporation, a broker/dealer with which the plaintiffs were affiliated and of
which Raymond Dirks Research was a division. Eurotech granted National a warrant
certificate for 470,000 shares at $1.00 per share (as adjusted to reflect the
June 1, 1996, four-to-one forward split of the Company's Common Stock) as a
retainer for general financial advisory services. In conjunction with the
separation of the plaintiffs and Raymond Dirks Research from National Securities
Corporation, National assigned a significant portion of the warrant certificate
to the plaintiffs.
The plaintiffs allege among other things that they are entitled to
damages composed of both the value of the stock on the date of their purported
exercise of an alleged assignment of the warrant certificate, and the decrease
in value of the price of the stock since the date of their purported exercise.
Eurotech believes that the plaintiffs have significantly overstated their
monetary damage claim and that, having sought monetary damages, the plaintiffs
are not entitled to any type of equitable relief.
Process was served upon Eurotech in late January 1998. Eurotech
intends to vigorously defend and believes that the plaintiffs' claims will be
resolved favorably to the Company. If the Company were to be adjudged liable in
the Dirks Litigation, the resolution of the litigation could have a material
adverse effect on the Company.
ITEM 9. MARKET PRICE AND DIVIDENDS OF THE COMPANY'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
Trading Market. The Company's Common Stock trades on the NASDAQ Electronic
Bulletin Board market.
Principal Market-Makers. Following are the principal market-makers in the
Company's Common Stock: Cantor Fitzerald 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 year 1996 and at June 9, 1998. The Common Stock is the
only class of the Company's equity securities shares of which are outstanding.
- 47 -
<PAGE>
=================================================================
Title of Class Number of Record Holders
-----------------------------------------------
As of December 31, 1996 As of 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 asked prices for the Company's Common Stock, since July
25, 1995:
(IN U.S. DOLLARS)
CLOSING BID CLOSING ASKED
1995 HIGH LOW HIGH LOW
---- --------------- ---------------
JULY 25
(First Available)
THRU .718 .531 .781 .593
SEPT. 29
OCT. 2
THRU 1 .562 1.125 .75
DEC. 29
1996
----
JAN. 2
THRU
MAR. 29 1.343 1 1.467 1.125
(Excluding Jan. 8)
APR. 1
THRU 2.312 .625 2.406 .75
JUNE 21
JUNE 24
THRU 2.625 2 2.875 2.375
JUNE 28
JULY 1
THRU 2.50 1.325 2.625 1.40625
SEPT. 30
OCT. 1
THRU 10 1.9375 10.25 2.0625
DEC. 31
1997
----
JAN. 2
THRU 12.25 5.625 12.50 6
MAR. 31
APR. 1 9.675 4.000 9.750 4.250
THRU
JUNE 30
- 48 -
<PAGE>
JULY 1 6.875 5.000 7.125 5.1875
THRU
SEPT. 30
OCT 1 5.4375 1.875 5.5625 1.9375
THRU
DEC. 31
1998
----
JAN. 2 3.3125 2.000 3.375 2.125
THRU
MARCH 31
APR. 1 2.127 .9375 2.156 1.031
THRU
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
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
In December, 1995, the Company completed a private placement of 4,280,0001
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 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 165,500
In June, 1996, the Company completed a private placement of 2,718,000(1)
shares of its Common Stock for an aggregate offering price of $679,500. The
shares were offered and sold in reliance on an exemption from registration
pursuant to Rule 504 of Regulation D under the 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:
- - ----------
(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.
- 49 -
<PAGE>
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 "Selected Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources." The proceeds of such offering have been and will be used as follows:
Purpose Amount
------- ------
Technology acquisition and development $ 1,000,000
Retirement of debt 678,000
Working capital 1,000,000
In February 1998 the Company completed a private placement of $3,000,000
principal amount of its 8% Convertible Debentures due February 23, 2001 (the
"Debentures") and of Warrants to purchase up to 60,000 shares of the Company's
Common Stock (the "Warrants") (the Debentures and the Warrants, collectively,
the "Securities"). The Warrants were issued as additional consideration for the
purchase of the Debentures. The Securities were offered and sold in reliance on
an exemption from registration pursuant to Rule 506 under Regulation D under the
Act, and only to "accredited investors" within the meaning of Rule 501 of
Regulation D. See "Management's Discussion and Analysis of Results of Operation
and
- 50 -
<PAGE>
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
ITEM 11. DESCRIPTION OF SECURITIES TO BE REGISTERED
The capital stock being registered is Common Stock
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.
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
- 51 -
<PAGE>
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 issue 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 89110.
ITEM 12. 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 or
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
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.
- 52 -
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See, Part F/S.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
(a) (1) See Audited Financial Statements and supplementary data index which
appears on page F-1 herein.
(2) Schedules have been omitted because they are either not applicable
or the required information is shown in the financial statements or
notes thereto.
(3) Exhibits
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of the Company(2)
3.2 By-Laws of the Company(2)
4.1 Form of Common Stock Certificate(2)
10.1 Material Contracts
10.2 Technology Purchase Agreement between the Company and
Oleg L. Figovsky(1)
10.3 Technology Purchase Agreement between the Company and
Oleg L. Figovsky(1)
10.4 Technology Purchase Agreement between the Company and
Oleg L. Figovsky(1)
10.5 Teaming Agreement between the Company and Duke
Engineering & Services, Inc.(1)
10.6 Form of Agreement between the Company, V. Rosenband and
C. Sokolinsky, and Ofek Le-Oleh Foundation(1)
10.6.2 Equity Sharing Agreement between the Company, V.
Rosenband and C. Sokolinsky(1)
- - ----------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, and amendments thereto, under the Securities Exchange Act of 1934, on
file with the Commission, file number 333-26673.
- 53 -
<PAGE>
10.6.3 Voting Agreement between the Company, V. Rosenband and
C. Sokolinsky(1)
10.7.1 Investment Agreement between the Company and Chemonol,
Ltd.(1)
10.7.2 Equity Sharing Agreement between the Company and Leonid
Shapovalov(1)
10.7.3 Voting Agreement between the Company and Leonid
Shapovalov(1)
10.8.1 Agreement between the Company and Separator, Ltd.(1)
10.8.2 Equity Sharing Agreement between the Company and Efim
Broide(1)
10.8.3 Voting Agreement between the Company and Efim Broide(1)
10.9.1 Form of Agreement between the Company, Ofek L-Oleh
Foundation and Y. Kopit(1)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit
and V. Rosenband(1)
10.9.3 Voting Agreement between the Company, Y. Kopit and V.
Rosenband(1)
10.10 Form of License Agreement between the Company and ERBC
Holdings, Ltd.(1)
10.11 Cooperation Agreement between the Company and
Forschungszentrum Julich GmbH(1)
10.12.1 Convertible Debenture Purchase Agreement among the
Company, JNC Opportunity Fund, Ltd. and Diversified
Strategies Fund, L.P.(1)
10.12.2 Escrow Agreement among the Company, JNC Opportunity
Fund, Ltd., and Diversified Strategies Fund, L.P. and
Robinson, Silverman, Pearce, Aronsohn & Berman, LLP(1)
10.12.3 Registration rights Agreement among the Company the
Company, JNC Opportunity Fund, Ltd., and Diversified
Strategies Fund, L.P.(1)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and JNC Opportunity Fund, Ltd.(1)
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and Diversified Strategies Fund,
L.P.(1)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity
Fund, Ltd.(1)
10.12.7 Warrant No. 2 between the Company and Diversified
Strategies Fund, L.P.(1)
10.12.8 Warrant No. 3 between the Company and Diversified
Strategies Fund, L.P.(1)
10.13.1 Convertible Debenture Purchase Agreement between the
Company and JNC Opportunity Fund, Ltd.(1)
10.13.2 Escrow Agreement among the Company, JNC Opportunity
Fund, Ltd. and Robinson, Silverman, Pearce, Aronshohn
and Berman, LLP(1)
10.13.3 Registration Rights Agreement between the Company and
JNC Opportunity Fund, Ltd.(1)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001
between the Company and JNC Opportunity Fund, Ltd.(3)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity
Fund(1)
23.1 Consent of Tabb, Conigliaro & McGann(3)
(b) Reports on Form 8-k.
The Company filed a report on Form 8-k on December 2, 1997.
- - ----------
(2) Previously Filed.
(3) Filed herewith.
- 54 -
<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>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized.
EUROTECH, LTD.
a District of Columbia corporation
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
- - ------------------------------ Principal Financial Officer
Peter Gulko
/S/ Lawrence McQuade Director June 11, 1998
- - ------------------------------
Lawrence McQuade
- 55 -
