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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
Commission file number 000-22129
EUROTECH, LTD.
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(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA 33-0662435
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1216 16th Street, N.W.
Washington, D.C. 20036
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (202) 466-5448
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $0.00025 par value N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |X|
As of March 31, 1999 the Registrant had 22,238,065 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................................ 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................. 11
ITEM 6. SELECTED FINANCIAL DATA......................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 21
ITEM 11. EXECUTIVE COMPENSATION.......................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
ON FORM 8-K..................................................... 28
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PART I
Item 1. Business
General
Eurotech, Ltd. (the "Company" or "Registrant") was incorporated in May,
1995 under the laws of the District of Columbia. The Company is a development
stage, technology transfer, holding, marketing 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 Israel. The Company intends to commercialize those and
other technologies principally in Western and 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, assignment and licensing arrangements. Although the
Company intends to seek to continue identifying, monitoring, reviewing and
assessing new technologies, its primary emphasis will be focused on
commercializing four of its present technologies ("Principal Technologies"). The
Company's Principal Technologies are: (i) Silicon compound technology ("EKOR")
(a silicon based elastomer which may be used to contain radioactive dust and
waste materials); (ii) Hybrid Non-isocyanate Polyurethane ("HNIPU") (a modified
polyurethane that does not contain the toxic isocyanates used in the production
of conventional polyurethane); (iii) Liquid Ebonite Material ("LEM") (a
synthetic liquid rubber); and (iv) Rubber Concrete ("Rubcon") (a rubber based
concrete).
The Company believes that the 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 of the
Principal Technologies. The Company recently has initiated a marketing program
for the Principal Technologies, and also has initiated discussions with a number
of prominent, potential users of the technologies, with a view towards the
future negotiation and execution of licensing and/or joint venture marketing and
sales agreements. To date, the Company has not generated any revenues from these
operations nor has it entered into any definitive agreements related to the
Principal Technologies.
Acquisition of Israeli Technologies
Incubator Technologies
The Company has informally agreed in principle with three Israeli
technology companies: (i) the Technion Entrepreneurial Incubator Co., Ltd.
("TEI"), (ii) the Ofek Le-Oleh Foundation ("Ofek") and (iii) the Incubator for
Technological Entrepreneurship-Kiryat Weizmann, Ltd. ("Weizmann") (collectively,
the "Incubators"), to participate in certain technology research and development
projects sponsored by each Incubator. Pursuant to such informal arrangements,
the Company would provide 15%-20% of the financing required for, and would
receive a 20% equity interest in, research and development projects selected by
the Company and such Israeli corporations as are formed for the purpose of
owning, developing and commercializing the technologies resulting from those
selected projects (each, an "Israeli Technology Company"). In furtherance of
this, the Company has opened an office at the premises of TEI in Haifa, Israel.
See "Description of Property." The Company has not entered into a written
agreement with any of the Incubators memorializing any such agreement in
principal, and the only written agreements between the Company and any Incubator
are those disclosed herein in connection with Chemonol, Ltd. ("Chemonol"),
Separator, Ltd. ("Separator"), Remptech, Ltd. ("Remptech"), and Comsyntech, Ltd.
("Comsyntech"), each of which is an Israeli corporation. None of the Incubators
are legally obligated to enter into any further such agreements with the
Company, and as a result there is no assurance that the Company will be able to
invest in or acquire any additional Incubator-sponsored technologies.
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Pursuant to agreements with each of Chemonol, Ofek and Weizmann, the
Company has invested in four Israel Technology Companies: (i) Chemonol, which
has developed materials and processes for manufacturing non-isocyanate
polyurethane industrial coatings (see "Business -- Principal Technologies --
Hybrid Non-isocyanate Polyurethane"); (ii) Separator, which is developing a
process for the electromagnetic separation and production of high temperature
superconductive metallic powders; (iii) Remptech, which is developing processes
for the production of extra-fine cobalt and nickel powders; and, (iv)
Comsyntech, which is developing a process for the continuous combustion
synthesis of ceramic, composite and intermetallic powders. See "Business-Other
Technologies." Under those agreements the Company has received 20% of each
Israeli Technology Company's common equity, in exchange for its investment of
U.S. $60,000 in each such corporation. In connection with these investments, the
Company also has obtained: (i) options to purchase Ofek's 20% common equity
interest in each of Remptech and Comsyntech, each of which is exercisable for a
period of 90 days commencing on November 6, 1999 at an exercise price to be
established by the parties; (ii) options to acquire from the holders of a
majority of the outstanding common equity (the "Principal Shareholders") of each
of Chemonol, Separator, Remptech and Comsyntech an additional 31% of each
corporation's common equity, which are exercisable for a period of 6 months
commencing on May 4, 1998 in the case of Chemonol, 12 months commencing on
September 4, 1998 in the case of Separator, and 12 months commencing on May 6,
1998 in the cases of Remptech and Comsyntech, each at an exercise price of
U.S.$93,000, and (iii) the perpetual right to direct the voting of the common
equity of the Principal Shareholders' of each company, giving the Company voting
control in each case. There is no assurance that when such options become
exercisable the Company will have sufficient funds to exercise any of them.
On January 20, 1999, the Company entered into an agreement with Chemonol
to invest US$300,000 in exchange for an additional 16% of Chemonol's common
equity. The agreement provides for the Company to make four equal payments of
$75,000 March 1, 1999, July 1, 1999, October 1, 1999 and January 1, 2000. Upon
completion, the Company will own 36% of Chemonol's common equity.
For a period of two years commencing on the date of its registration as an
Israeli corporation, the sale or other transfer of 25% or more of the
outstanding common equity of each of Chemonol, Separator, Remptech and
Comsyntech requires the consent of the Chief Scientist of the Israeli Ministry
of Commerce and Technology. The Company's options to acquire additional common
equity of the above Israeli Technology Companies are exercisable within such two
year periods and any acquisition of the common equity purchasable thereunder
will, therefore, require the Chief Scientist's consent. Although the Company
presently expects that if requested such consent would be given, there is no
assurance that such consent will be obtained. Accordingly, the Company plans to
seek to amend the terms of those options to extend their respective exercise
periods beyond the applicable two-year periods during which the Chief
Scientist's consent is required, prior to the times they each first commence.
Technologies Acquired from Prof. Oleg L. Figovsky
Pursuant to three Technology Purchase Agreements, each dated January 1,
1998, the Company has acquired from Oleg L. Figovsky, Ph.D. ("Prof. Figovsky")
(who is a consultant to the Company) all right, title and interest in and to the
following three technologies developed by him, inclusive of future improvements
thereto: (i) a group of related technologies collectively known as
"Interpenetrated Network Polymers" ("INPs"), (ii) Liquid Ebonite Material and
(iii) RubCon for purchase prices of $75,000, $15,000 and $35,000, respectively
(each, a "Purchase Price"). Pursuant to each such Technology Purchase Agreement,
during the 15-year period commencing on January 1, 1998, the Company is also
obligated to pay to Prof. Figovsky royalties equal to 49% of the Company's net
revenues from the sales or licensing of any products incorporating the
applicable technology, subject to the Company's right to deduct from the first
royalties otherwise payable under each agreement an aggregate sum equal to the
Purchase Price paid thereunder. The Company has prepared and filed patent
applications for these technologies in the U.S., Canada, China, Korea, Russia,
Ukraine, Germany, Japan and the countries of the European Patent Agreement.
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The Company believes that two of these technologies, RubCon and LEM, are
ready for commercialization, and has included them in the Principle Technologies
which the Company intends to be the focus of its marketing program.
RubCon is a rubberized concrete which the Company believes is superior to
presently available similar concretes and to conventional cement-based concretes
for applications in, among other things, the manufacture of industrial
floorings, equipment operating in aggressive chemical media, building
foundations, concrete pipes and outdoor structures. LEM is a synthetic, liquid
rubber having enhanced mechanical, permeability and anti-corrosive qualities,
that the Company believes can be applied successfully as a protective covering
for such objects as small-diameter piping, and the intricate parts of pumps,
fans and centrifuge rotors. See "Business - Principal Technologies."
The INP technology consists of a related group of technological processes
to produce a variety of polymeric compounds, including polyurethanes, that is
based on modifying the molecular structure of olygomeric cyclocarbonates. The
INP constituent technologies presently are in their respective research and
development phases. No assurance can be given that any INP constituents will be
successfully developed or, if developed, will result in commercially saleable or
profitable products or processes.
Principal Technologies
I. Silicon (EKOR) Compound. Pursuant to agreements variously among the Company,
the Ukrainian State Construction Company, ("Ukrstroj"), I.V. Kurchatov Institute
("Kurchatov") and the Euro-Asian Physical Society ("EAPS"), the Company has
provided financing for and has successfully completed demonstration testing of
its proprietary silicon (EKOR) compound technology for the purpose of
remediating the severe radioactive contamination problems that persist from the
1986 explosion of the Chernobyl Nuclear Power Plant ("ChNPP") Reactor 4 in
Chernobyl, Ukraine. 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 in Moscow and members of EAPS for the conservation and containment
of ecologically hazardous radioactive materials. The EKOR compound is based on
radiation-resistant compounds produced from silicon 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
Transactions - Silicon (EKOR) Compound." On March 23, 1999, EAPS was issued a
patent on the process for manufacturing its EKOR compound from the U.S. Patent
and Trademark Office, Patent No. 5,886,060.
In testing conducted at Kurchatov, the EKOR compound has been shown to be
highly resistant to radiation and structural degradation from exposure to
radiation, highly fire-resistant, water-proof, and capable of being formulated
in densities that display considerable structural strength and weight-bearing
properties (based on testing to date) of 100 lbs. per square inch. In
high-dosage radiation tests the EKOR compound has met or exceeded all
specifications for containment materials developed by the Chernobyl authorities.
The Company believes that the EKOR compound is the most technologically advanced
material for comprehensively containing both solid and liquid radioactive
materials, suppressing radioactive dust and preventing such materials and dust
from escaping into the atmosphere and from leaching into and contaminating
ground-water supplies. On November 28, 1997, the Ministry of Health of the
Russian Federation certified EKOR and its components as non-toxic, thereby
allowing for EKOR's production, delivery, sale and use in the Russian
Federation.
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As a silicon-based elastomer, the EKOR compound has adhesive properties
that allow it to stick to a wide variety of surfaces and materials. When
applied, the EKOR compound surrounds and "glues down" nuclear debris ranging
from fine dust to broken fuel rods, and in combination with its fire-resistant
and water-proof properties, prevents such debris from migrating by water or as
air-borne particles. The EKOR compound can be applied by a number of methods,
but most generally will be sprayed onto contaminated areas using a hose and
nozzle arrangement. The foaming rate and curing time for the EKOR compound can
be varied, thereby allowing it to penetrate cracks and crevices before curing,
and providing a seal against the transport of radioactive particles and
water-soluble radionuclides. The application of the EKOR compound to nuclear
accident sites would constitute an interim containment measure, pending the
removal and permanent storage or other disposal of the radioactive contaminants.
The Company expects that one of the first commercial uses of its EKOR
compound technology will be to contain and stabilize the extensive radioactive
debris and dust that continues to accumulate and contaminate the environment at
ChNPP Reactor 4 in the Ukraine, the site of a disastrous explosion and
near-reactor core meltdown in 1986, and to help structurally support the
concrete and steel "sarcophagus" that was built over Reactor 4 as an interim
containment measure. The rapid deterioration of the "sarcophagus," caused by the
intense radiation persisting at Reactor 4, has occasioned international concern
that without the implementation of effective site containment measures, a second
nuclear disaster and possible meltdown may occur. To this end, the G-8 group of
industrialized nations (the United States, United Kingdom, Italy, France,
Canada, Japan, Germany and Russia) has pledged up to U.S. $3.1 billion to assist
in a multi-step project of remediating and closing the plant, with approximately
U.S. $300 million budgeted for the project's first containment and site
stabilization phase. Pursuant to an agreement with Kurchatov Research Holdings,
Ltd. ("KRH"), a Delaware corporation principally owned by ERBC Holdings,
Limited, a British Virgin Islands corporation ("ERBC"), and CIS Development,
Inc., a Delaware corporation ("CIS"), 50% of the net profits (after deducting
development costs and related expenses attributable to EKOR) derived from the
sale or licensing of the EKOR compound will be retained by the Company, and 50%
will be remitted to KRH. Peter Gulko, formerly a director of and presently a
consultant to the Company, is the sole record owner of CIS. The KRH shares owned
of record by CIS are being held for the benefit of EAPS which, in turn, is
acting as representative of individual scientists, researchers and academics who
are affiliated with Kurchatov and EAPS. One present employee and one former
business representative of ERBC are beneficial owners of shares of the Company's
Common Stock, and Kurt Seifman, the chief executive officer and sole shareholder
of ERBC, is the beneficial owner of less than 1/4 of 1% of the Company's
outstanding Common Stock. From June 1997 until February 13, 1998, Dr. Randolph
Graves (who served as a director, chairman and Chief Executive Officer of the
Company until January 23, 1998) served as a director and Secretary of KRH.
During the period June 1997 through January 23, 1998, the Company did not enter
into any material agreements or commitments with KRH.
Based on the properties demonstrated by the EKOR compound, Ukrstroj (an
industrial amalgamation of the State Committee of Ukraine on Atomic Energy),
Kurchatov, the Ukrainian State Construction Company and the Company entered into
a Memorandum of Intent (the "Chernobyl Memorandum of Intent") which acknowledged
the successful completion of the laboratory development of EKOR compound for the
purpose of its application to the radioactive contamination remediation of ChNPP
Reactor 4, and pursuant to which the Company, Ukrstroj and EAPS entered into a
co-operation Agreement whereby the Company has provided financing for
demonstrating the technical and mechanical feasibility of applying the EKOR
compound for ChNPP Reactor 4 remediation. In furtherance of the foregoing,
Ukrstroj and ChNPP entered into an agreement (the "Ukrstroj- ChNPP Agreement")
to conduct such demonstration testing of the EKOR compound as is necessary to
ascertain the specification requirements for its application to the containment
of ChNPP Reactor 4. The Ukrstroj-ChNPP Agreement also provides for the Company's
participation in and financing of the EKOR demonstration test.
On April 24, 1997, demonstration of 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 demonstration, the Company, the management of the ChNPP
Reactor 4 Shelter Project, "Ukrstroj" and EAPS entered into a Joint Working
Group Agreement for the purpose of preparing the industrial-scale equipment,
machinery and other items that would be required to apply the EKOR compound at
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Reactor 4, if as and when the EKOR compound is applied in connection with the
remediation project. Such activities are presently expected to commence during
the Company's fourth quarter of 1999. In connection therewith, the Company will
construct industrial scale machinery for application of the EKOR compound at
ChNPP Reactor 4, based on the application machinery successfully demonstrated on
April 24, 1997. No assurance can be given that implementation of the EKOR
application machinery at ChNPP Reactor 4 will not experience delays, or,
regardless of when implementation commences, that the EKOR application machinery
will be ready. The occurrence of substantial delays will adversely affect the
Company's generation of near-term revenues. On June 30, 1998, the design
specifications for the application machinery were finalized by Eurotech and
EAPS. The use of such equipment has been approved by the management of the ChNPP
Reactor's Shelter Project. Eurotech is prepared to commence application of its
EKOR compound in connection with the ChNPP Reactor 4 remediation project. Such
commencement remains subject to the selection of a general contractor for the
project, the negotiation of satisfactory arrangments for the release of funds
from EBRD to the general contractor and, in the case of the Company, its
selection on a prime subcontractor by the general contractor.
Coordination and management of the formal selection of contractors and
technologies for studies relating to the ChNPP Reactor 4 remediation project has
been delegated to the European Bank of Reconstruction and Development ("EBRD").
Contractors, as well as the technology to be used in connection with the
remediation project will be determined on the basis of submitted bids, to be
passed on by EBRD and management of the ChNPP. EBRD has appointed a consortium
of Bechtel, Electricite de France and Batelle, a not for profit U.S. company
which operates Pacific Northwest National Laboratories, a research entity
located in the State of Washington and funded, in part, by the U.S. Department
of Energy, to review the technical aspects and feasibility of the various
proposals and bids received. It is presently expected that EBRD, through G-8
funds, will provide the financing for the actual remediation project.
Additionally, ChNPP management is authorized to initiate further, independent
studies. Management of the ChNPP Shelter Project has designated EKOR as a
preferred technology for the remediation project.
In addition to remediation of 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 throughout the
U.S., Europe and Japan. Separately from its contemplated ChNPP bid, the Company
is 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. The Company has submitted a first-round
demonstration 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, bids are presently 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.
On December 16, 1998, at the request of EAPS, the EKOR compound was
officially approved by the Russian Authorities for use in voice recorders (known
as "black boxes") which are contained in airplanes and record relevant in-flight
voice and other in-flight data relative to the to aircraft and its performance.
Approval was granted based on test reports compiled by the Russian authorities.
EAPS is currently fabricating black boxes incorporating EKOR for delivery to the
Russian governmental authorities.
II. Hybrid Non-isocyanate Polyurethane ("HNIPU"). HNIPU is a modified
polyurethane that does not contain the toxic isocyanates contained in the
production of conventional polyurethane, and has lower permeability and greater
chemical resistance qualities as compared to conventional polyurethane. The
Company believes that these
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advanced characteristics make HNIPU superior to conventional polyurethanes in
connection with their use in a number of industrial application contexts such as
manufacturing automotive bumpers, paints, plastics and truck beds; airplane and
rocket sealants, interior components and seating; construction adhesives,
coatings, flooring, glues and rooftops; industrial equipment and machinery; and
consumer goods such as appliances, footwear, furniture and plastic products.
HNIPU was developed by Chemonol. The Company purchased an additional 16% of
Chemonol common equity, for a total ownership interest of 36%, with a view
toward establishing its own research and production base in Israel for potential
joint ventures for HNIPU. Pursuant to a voting agreement with the Company,
Chemonol's Principal Shareholder has agreed to vote his common equity as
directed by the Company. See "Business - Acquisition of Israeli Technologies -
Incubator Technologies."
In November 1998, the Company presented its HNIPU technology at the
International Exhibition for Ideas, Inventions and New Products, ("IENA"), a
conference held in Nurenberg, Germany. The Company was awarded the two highest
awards by the IENA for its HNIPU technology.
The Company is marketing and selling HNIPU through one or more license
and/or joint venture agreements with major chemical companies in the United
States, Europe and Japan. Several major chemical companies have requested, and
have been supplied with samples of HNIPU for evaluation and application testing.
The Company is currently in the final stages of discussions regarding HNIPU with
several prospective business and joint venture partners; however no assurance
can be given that all or any of them will result in an HNIPU license or joint
venture agreement.
III. Liquid Ebonite Material ("LEM"). LEM is a synthetic liquid rubber with
enhanced mechanical, permeability and anti-corrosive qualities as compared to
conventional sheet rubber coverings. In laboratory testing, coverings made with
LEM, as compared to conventional sheet rubber coverings, have displayed greater
resistance to harsh chemicals such as acids, alkalis and benzene, and have been
successfully applied to intricate and complex surfaces such as sieve meshing.
Based on the physical and chemical properties of LEM, and on such tests, the
Company believes that LEM coverings are capable of providing superior protection
to small-diameter piping, and to the intricate parts of pumps, fans and
centrifuge rotors. LEM can be applied to form surface coverings using standard
coating techniques, including spraying and dipping.
LEM was independently developed by Prof. Figovsky and was acquired by the
Company pursuant to a Technology Purchase Agreement dated January 1, 1998, for a
purchase price of $15,000, plus royalties equal to 49% of the Company's net
revenues from sales or licenses of any products incorporating LEM, payable for a
period of 15 years commencing on January 1, 1998. To date, the Company has not
derived any such revenues and does not expect to derive any such revenues in
1999. Prof. Figovsky is a consultant to the Company. See "Business Acquisition
of Israeli Technologies - Technologies Acquired from Prof. Oleg L. Figovsky."
IV. RubCon. "RubCon" is a technologically advanced, polymer-based, rubberized
concrete that utilizes polybutadiene (a polymer derived from liquid rubber) as a
binding material for the various aggregates that, together with binders,
constitute concrete. In laboratory testing RubCon has exhibited high degrees of
compression, bending and tensile strength, a high degree of water-resistance and
a high degree of resistance to aggressive, corrosive chemicals as compared to
conventional "cement" concrete. The Company believes that RubCon has significant
potential utility in the manufacture of industrial flooring, equipment operating
in aggressive chemical media such as galvanic and electrolysis "baths,"
foundations, concrete pipes and other underground structures, seismic
reinforcement materials, and outdoor structures such as bridges that are
routinely exposed to harsh weather, climatic and corrosive conditions.
RubCon was independently developed by Prof. Figovsky, and was acquired by
the Company pursuant to a Technology Purchase Agreement dated January 1, 1998,
for a purchase price of $35,000, plus royalties equal to 49% of the Company's
net revenues from sales or licenses of any products incorporating LEM, payable
for a period of 15 years commencing on January 1, 1998. To date, the Company has
not derived any such revenues and does
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not expect to derive any such revenues in 1999. See "Business - General -
Acquisition of Israeli Technologies - Technologies Acquired from Prof. Oleg L.
Figovsky."
The Company currently anticipates that it will enter into discussions with
one or more of four major chemical companies that presently are evaluating
RubCon, with a view towards negotiating product purchase and/or license
agreements. No assurance can be given that any of those or any other companies
will determine that RubCon is suitable or economically viable for its business
purposes, that the Company will enter into discussions or negotiations with any
of those companies, or that, if entered into, they will result in product
purchases or license agreements. See "Business - General," and "Management's
Discussion and Analysis of Results of Operation and Financial Condition."
Other Technologies
The Company also is engaged in the continuing research and development of
other technologies it believes to be of potential, future commercial
significance.
Electromagnetic Separation ("EMS") Technology. The Company is
participating in the further research and development of a process to
electromagnetically separate high temperature superconducting ("HTSC") metal
powders, that has been developed by Separator. The Company is the holder of 20%
of Separator's common equity and has an option to purchase an additional 31% of
such common equity. Pursuant to a voting agreement with the Company, Separator's
Principal Shareholders have agreed to vote their common equity as directed by
the Company. See "Business - General - Acquisition of Israeli Technologies
Incubator Technologies." There can be no assurance that such equity purchase
option will be exercised, which will principally depend upon the results of
further research and development activities and later expressions of commercial
interest, if any, in the EMS technology.
The electromagnetic separation of HTSC powdered metals is based on the
interaction of HTSC particles with alternating magnetic fields at temperatures
approaching the level required for "HTSC transition," i.e., the point at which a
substance becomes superconducting. The research and testing data provided by
Separator indicates that the EMS technology allows for the extraction of
powdered metal particles having optimal electrophysical qualities, and in the
production of HTSC metallic powders with a critical electrical current that
exceeds those of HTSC powders produced using conventional technologies. Based on
demonstration testing conducted by Separator, the Company believes that the EMS
process for HTSC metallic powder can be used with a variety of powdered metals,
and can be configured either as a small bench testing device for laboratory
applications at universities and research and development companies, or as an
industrial-scale device with the capacity to produce up to 8 kilograms per hour
of HTSC powdered metal. The Company believes that the EMS technology can be
commercially applied in the production of underground electric transmission
cables, transformers, electric power system control and protection systems,
motors, generators, magnetic resonance imaging equipment and cellular telephone
base stations.
Powdered Metallurgy Technology. The Company is participating in the
further research and development of a process developed by Remptech, to produce
extra fine cobalt and nickel powders by recycling materials containing cobalt
and nickel. Powdered metallurgy is generally acknowledged as being capable of
yielding product with superior structural, physical and mechanical properties.
The Company believes that the powdered metallurgy process developed by Remptech
is technologically advanced and, based on Remptech's research and testing data,
is capable of producing cobalt and nickel powders of 99.8% purity and a grain
size of 1-2 micro-centimeters. The Company believes that such purities and grain
sizes are significant factors in the manufacture of materials of high quality
and internal physical integrity from powdered cobalt and nickel. Cobalt and
nickel are among the three naturally occurring elements that display magnetic
properties at room temperature and are widely used in metal alloys. Powdered
cobalt and nickel are used in a wide variety of industrial applications,
including magnetic, electrical and electronic materials and products.
The Company is the holder of 20% of Remptech's common equity and has
options to purchase the 20% common equity interest in Remptech held by OFEK that
is partially sponsoring Remptech's research and
7
<PAGE>
development activities, and an additional 31% of such common equity from
Remptech's Principal Shareholders. Pursuant to a voting agreement with the
Company, Remptech's Principal Shareholders have agreed to vote their common
equity as directed by the Company. See "Business - Acquisition of Israeli
Technologies - Incubator Technologies." There can be no assurance that such
equity purchase options will be exercised, which will principally depend upon
the results of further research and development activities and later expressions
of commercial interest, if any, in the Powdered Metallurgy technology.
Continuous Combustion Synthesis Technology. The Company also is
participating in the further research and development of a process for the
continuous combustion synthesis ("CCS") of ceramic, composite and intermetallic
powders, including titanium carbide powder, developed by Comsyntech. CCS is a
newly devised process utilizing the internal chemical energy of initial
reactants in a continuous action reactor, a device being developed by
Comsyntech. The Company believes this process offers competitive advantages
(such as increased productivity and lower production costs) over conventional
technology. Comsyntech research and testing data indicate that materials
produced with the CCS technology have exhibited superior high-thermomechanical
properties such as high strength, thermo and wear resistance and good corrosion
stability. Based on these properties, the Company believes that the CCS
technology is of potentially significant utility in producing ceramic, composite
and intermetallic powders with potential commercial application in the
production of metal-cutting tools and abrasives; metal alloys; aircraft and
automotive combustor, nozzle and turbine parts; piezo- and ferro-electric
materials; and surgical instruments.
The Company is the holder of 20% of Comsyntech's common equity and has
options to purchase the 20% common equity interest in Comsyntech held by Ofek,
which is partially sponsoring Comsyntech's research and development activities,
and an additional 31% of such common equity from Comsyntech's Principal
Shareholders. Pursuant to a voting agreement with the Company, Comsyntech's
Principal Shareholders have agreed to vote their common equity as directed by
the Company. See "Business - Acquisition of Israeli Technologies - Incubator
Technologies." There can be no assurance that such equity purchase options will
be exercised, which will principally depend upon the results of further research
and development activities and later expressions of commercial interest, if any,
in the powdered metallurgy technology.
Other technologies, including the telephone technology known as "CORO" are
presently being evaluated by the Company. As the results of those evaluations
are received, the Company will develop appropriate plans to commercialize those
technologies.
The Company is not a subsidiary of another corporation, entity or other
person. The Company does not have any subsidiaries.
Employees
The Company has two full-time employees and fourteen full-time consultants
operating in the United States, Germany, Moscow and Israel.
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.
Competition and Marketing
The near-term, primary markets for the Company's products and technologies
are chemical manufacturing and radioactive contamination containment,
remediation and transportation. The Company has limited experience in marketing
its products and technologies and, other than in connection with the remediation
of Reactor 4, intends to rely on licenses and joint ventures with major
international chemical and other companies for the marketing and sale of its
Principal Technologies. In the case of the EKOR compound, the Company has
retained two consultants to market EKOR to the U.S. government and private
companies. In contrast, other private and public sector
8
<PAGE>
companies and organizations have substantially greater financial and other
resources and experience than the Company. Competition in the Company's business
segments is typically based on product recognition and acceptance, price, and
marketing and sales expertise and resources. Any one or more of the Company's
competitors or other enterprises not presently known to the Company may develop
technologies and/or products which are superior to the Company's, significantly
underprice the Company's products and technologies, and/or more successfully
market existing or new competing products and technologies. To that extent the
Company's ability to compete could be materially and adversely affected.
Regulation
The Company is not aware of any U.S. or foreign laws or regulations that
govern the marketing, sale or use of any of its present technologies, other than
U.S., Russian and 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). 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 or different
standards may not in the future be adopted or applied depending on EKOR's
intended use, or that if adopted or applied, they will not materially increase
the cost to the Company of licensing and using the EKOR compound, or prevent its
use altogether. Moreover, there can be no assurance that any or all
jurisdictions in which the Company presently or in the future conducts its
business will not enact laws or adopt regulations which increase the cost of or
prevent the Company from licensing its other technologies or otherwise doing
business therein. Particularly in the cases of Russia and Ukraine, the enactment
of such laws or the adoption of such regulations may have a presently
unquantifiable, substantial adverse impact on the Company's financial condition,
business and business prospects.
Intellectual Property
Of the Company's present technologies, patent protection has been sought
only for the EKOR compound material and the Re-sealable Container Systems. On
March 23, 1999, EAPS received a patent on the process for the manufacture of the
EKOR compound from the US Patent and Trademark Office, Patent No. 5,836,000.
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, that the patents of others will not have an adverse
effect on the Company's ability to conduct its business or that one or more of
the Company's technologies will not infringe on the patents of others.
Furthermore, there can be no assurance that others will not independently
develop similar or superior technologies, duplicate any of the Company's
processes, or design around any technology that is patented by the Company. It
is possible that the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents of third parties relating to its
products. There can be no assurance that any license acquired under such patents
would be made available to the Company on acceptable terms, if at all, or that
the Company would prevail in any such contest. In addition, the Company could
incur substantial costs in defending itself in suits brought against the Company
on its patents or in bringing patent suits against other parties.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in part,
by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others.
Item 2. Description of Property
The Company recently relocated its headquarters to 1216 16th Street, NW,
Washington D.C. 20036 for which the Company pays monthly rent of $1,800. The
Company believes that its current facilities are sufficient to meet its
requirements.
9
<PAGE>
The Company also occupies 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. Such office will be utilized by the Company
for its contemplated, Israeli technology development and marketing activities.
See "Business -- General."
Item 3. Legal Proceedings
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and David
Morris filed an action in the Supreme Court for the State of New York, County of
New York, against Eurotech Ltd. for breach of contract, seeking injunctive
relief, specific performance and monetary damages of nearly $5 million (the
"Dirks Litigation"). The Dirks Litigation arises 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
defend vigorously, and believes that the plaintiffs' claims will be resolved
favorably to the Company. In response to the Dirks Litigation, the Company has
filed an appropriate response, including counterclaims relating thereto. If the
Company were to be adjudged liable in the Dirks Litigation, the resolution of
the litigation could have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Trading Market
The Company's Common Stock trades on the NASD Electronic Bulletin Board
market under the symbol EURO.
Number of Shareholders of Record
As of March 31, 1999, the Company had appropriately 170 shareholders of
record.
Dividends. To date the Company has not declared or paid dividends on its Common
Stock. The Company presently plans to retain earnings, if any, for use in its
business.
Market Price. Over the counter market quotations reflect inter-dealer prices
without markup, markdowns, or commissions and may not represent actual
transactions. The following table set forth the quarterly high and low closing
bid and closing asked prices (in U.S. $) for the Company's Common Stock, since
July 25, 1995.
<TABLE>
<CAPTION>
CLOSING BID CLOSING ASKED
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
JULY 25 (First Available) THRU SEPT. 29 .718 .531 .781 .593
OCT. 2 THRU DEC. 29 1.000 .562 1.125 .75
1996
JAN. 2 THRU MAR. 29 (Excluding Jan. 8) 1.343 1.000 1.467 1.125
APR. 1 THRU JUNE 21 2.312 .625 2.406 .75
JUNE 24 THRU JUNE 28 2.625 2.000 2.875 2.375
JULY 1 THRU SEPT. 30 2.500 1.325 2.625 1.40625
OCT. 1 THRU DEC. 31 10.00 1.9325 10.250 2.062
1997
JAN. 2 THRU MAR. 31 12.25 5.625 12.500 6.000
APR. 1 THRU JUNE 30 9.625 4.000 9.750 4.250
JULY 1 THRU SEPT. 30 6.875 5.000 7.125 5.1875
OCT. 1 THRU DEC. 31 5.4375 1.875 5.5625 1.9375
1998
JAN. 2 THRU MAR. 31 3.3125 2.000 3.375 2.18725
APR. 1 THRU JUN. 30 2.125 .9375 2.156 1.031
JULY 1 THRU SEPT. 30 1.281 .375 1.406 .4375
OCT. 1 THRU DEC. 31 .875 .21875 .96875 .25
1999
JAN. 1 THRU MAR. 31 1.125 .32 1.156 .40625
</TABLE>
11
<PAGE>
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. All share and pre-share information contained in this Report have
been re-stated adjusted to reflect such stock split.
12
<PAGE>
Recent Sales of Unregistered Securities
In June, 1996, the Company completed a private placement of 2,718,000
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 1993 (the
"Act") and only to accredited investors within the meaning of Rule 501 of the
Regulation D under the Act. The proceeds of such offering have been used as
follows:
Purpose Amount
------- ------
Bonuses $ 20,000
Accounting Fees $ 22,000
Technology development 637,500
In December, 1996, the Company completed a private placement of 40 Units,
each consisting of the Company's one-year promissory note in the principal
amount of $50,000 and 25,000 shares of its Common Stock for an aggregate
offering price of $2,000,000. The Units were offered and sold in reliance on an
exemption from registration pursuant to Rule 506 of Regulation D under the Act,
and only to accredited investors within the meaning of Rule 501 of Regulation D
under the Act.
The proceeds of such offering have been used as follows:
Purpose Amount
------- ------
Legal fees $120,000
Accounting fees 5,000
Consulting fees 350,000
Repayment of loans 210,000
Salaries 100,000
Technology development 915,000
Reserved for working capital 300,000
13
<PAGE>
In November 1997, the Company completed a private placement of $3,000,000
principal amount of its 8% Convertible Debentures due November 27, 2000 (the
"Debentures") and of Warrants to purchase up to 60,000 shares of the Company's
Common Stock (the "Warrants") (the Debentures and the Warrants, collectively,
the "Securities"). The Warrants were issued as additional consideration for the
purchase of the Debentures. The Securities were offered and sold in reliance on
an exemption from registration pursuant to Rule 506 of Regulation D under the
Act, and only to "accredited investors" within the meaning of Rule 501 of
Regulation D. See "Management's Discussion and Analysis of Results of Operation
and Financial Condition -- Liquidity and Capital Resources." The proceeds of
such offering have been and will be used as follows:
Purpose Amount
------- ------
Technology acquisition and development $1,000,000
Interest on debt $ 678,000
Working capital 1,000,000
In February 1998, the Company completed a private placement of $3,000,000
principal amount of its 8% Convertible Debentures due February 23, 2001 (the
"Debentures") and of Warrants to purchase up to 60,000 shares of the Company's
Common Stock (the "Warrants") (the Debentures and the Warrants, collectively,
the "Securities"). The Warrants were issued as additional consideration for the
purchase of the Debentures. The Securities were offered and sold in reliance on
an exemption from registration pursuant to Rule 506 under Regulation D under the
Act, and only to "accredited investors" within the meaning of Rule 501 of
Regulation D. See "Management's Discussion and Analysis of Results of Operation
and Financial Condition - Liquidity and Capital Resources." The proceeds of such
offering have been and will be used as follows:
Purpose Amount
------- ------
Retirement of Debt $1,000,000
Working Capital $ 678,000
In July 1998, the Company completed a private placement of $1,000,000 of
its Convertible Debentures due July 20, 2001 and Warrants to purchase up to
125,000 and shares of the Company's Common Stock. The Warrants were issued as
additional consideration for the purchaser of the Debentures. The Securities
were offered and sold in reliance on an exception from registration pursuant to
Rule 506 of Regulation D under the Act, and only to "accredited" investors
within the meaning of Rule 501 of Regulation D. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition on Liquidity and
Capital Resources." The proceeds of such offering have been and will be used as
follows:
Purpose Amount
------- ------
Working Capital $975,000
Legal and Accounting Fees $ 25,000
As part of the July, 1998 Convertible Debentures financing, the Company
modified its prior Convertible Debenture agreements eliminating the conversion
price "floor" attendant to the Debentures. Without the conversion price "floor",
the Company is not able to determine the number of shares the Convertible
Debenture may be converted into. Accordingly, there exists a possibility of
substantial dilution to the shareholders of the Company upon conversion of all
or any portion of the Convertible Debentures. For an illustration of the
potential dilution effect upon conversion, see Note 10 to the Financial
Statement.
14
<PAGE>
Item 6. Selected Consolidated Financial Information
The selected financial information set forth below is derived from the
Company's financial statements and should be read in conjunction with the
financial statements and related notes of the Company and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included under Item 7 of this Form 10-K.
15
<PAGE>
Statement of Operations Data: (2)
<TABLE>
<CAPTION>
For the Period from For the Year For the Year
Inception (May 26, 1995) Ended Ended
to December 31, 1998 December 31, 1997 December 31, 1998
-------------------- ----------------- -----------------
<S> <C> <C> <C>
EXPENSES $ $ $
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 3,430,105 1,007,671 1,039,591
Consulting fee 1,390,871 553,295 293,323
Compensatory element of stock issuance pursuant
to consulting agreement 2,471,227 839,550 422,200
Other general and administrative expenses 3,106,933 1,262,067 1,263,174
------------ ------------ ------------
TOTAL OPERATING EXPENSES 10,399,156 3,662,583 3,018,288
------------ ------------ ------------
OPERATING LOSS (10,399,156) (3,662,583) $ (3,018,288)
------------ ------------ ------------
OTHER EXPENSES:
Interest expense $ 867,133 $ 270,740 $ 552,971
Amortization of deferred and unearned financing
costs 12,979,305 8,507,919 4,242,884
------------ ------------ ------------
TOTAL OTHER EXPENSES: 13,846,438 8,778,659 $ 4,795,855
------------ ------------ ------------
NET LOSS $(24,245,594) $(12,441,242) $ (7,814,143)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ ( ) $ (0.71) $ (.40)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
USED IN BASIC AND DILUTED LOSS 17,581,711 19,323,098
PER SHARE ============ ============ ============
</TABLE>
Balance Sheet Data:
1997 1998
------------ ------------
Working Capital (deficit) $ (2,156,537) $ (1,933,751)
Total assets $ 952,243 $ 76,403
Total liabilities $ 5,801,966 $ 8,911,809
Deficit accumulated during the development stage $(16,431,451) $(24,245,594)
Total stockholders' equity (deficiency) $ (4,849,723) $ (8,835,406)
- ----------
(2) Through December 31, 1998, and since that date, the Company has not
derived any significant sales revenues.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
The following is a discussion and analysis of the results of operations of
the Company and should be read in conjunction with the financial statements and
related notes contained in this Form 10-K.
Certain information contained in this Form 10-K may contain
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties. Actual results could differ materially from
current expectations. Among the factors that could affect the Company's actual
results and could cause results to differ from those contained in the
forward-looking statements contained herein is the Company's ability to
commercialize its technologies successfully, which will be dependent on
business, financial and other factors beyond the Company's control, including,
among others, market acceptance, ability to manufacture on a large scale basis
and at feasible costs, together with all the risks inherent in the establishment
of a new enterprise and the marketing and manufacturing of new products.
Overview
The Company, incorporated in May 1995, is a development stage, technology
transfer, holding, marketing 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 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, assignment and licensing arrangements. Although the
Company intends to continue identifying, monitoring, reviewing and assessing new
technologies, its primary emphasis will be focused on commercializing four of
its present technologies ("Principal Technologies").
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 of the
technologies, with a view towards the future negotiation and execution of
licensing and/or joint venture marketing and sales agreements.
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 these
operations.
The Company has not been profitable since inception and expects to incur
substantial operating losses over the next twelve months. For the period from
inception to December 31, 1998, the Company incurred a cumulative net loss of
approximately $24,246,000. The Company expects that it will generate losses
until at least such time as it can commercialize its technologies, if ever. No
assurance 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.
Results of Operations
17
<PAGE>
For the Year Ended December 31, 1998 vs. the Year Ended December 31, 1997
The Company has had no revenues since inception. Consulting expenses
decreased from $1,393,000 for the year ended December 31, 1997 to $716,000 for
the year ended December 31, 1998. The decrease in consulting expense is
principally the result of the Company's reduction in the number of consultants
engaged during the period and the reduction in consulting fees paid by issuances
of common stock. Other general and administrative expenses for the year ended
December 31, 1997 as compared to the year ended December 31, 1998 remained
constant.
Research and development expenses increased for the year ended December
31, 1998 to $1,040,000, from $1,008,000, for the year ended December 31, 1997,
principally attributable to $187,500 paid by the Company to Professor Oleg L.
Figovsky, Ph.D. in connection with the four technology purchase agreements,
dated January 1, 1998 and April 1, 1998, and the purchase of technology from
Israeli scientists in April of 1998 for $40,000, all of which were charged to
research and development expenses during the year ended December 31, 1998 (see
Note 3 to the December 31, 1998 financial statements). Further, the Company has
increased its funding for development of its Principal Technologies. During the
year ended December 31, 1998, development expenditures for the Israeli and
Russian technologies aggregated $408,000 and $510,000, respectively, exclusive
of consulting fees reported under operating expenses.
For the years ended December 31, 1998 and 1997, the Company incurred
operating losses of $3,018,000 and $3,663,000, respectively. The losses are
principally due to expenses incurred in the acquisition and development of its
technologies, consulting costs, general and administrative expenses and the lack
of revenues.
Other expenses, consisting of interest expense and amortization of
deferred and unearned finance costs, decreased from $8,779,000 for the year
ended December 31, 1997 to $4,796,000 for the year ended December 31, 1998
although interest expense increased during this period. The increase in interest
expense was attributable to an increase in the amount of debt outstanding.
Amortization of deferred and unearned financing costs decreased from $8,508,000
for the year ended December 31, 1997 to $4,243,000 for the year ended December
31, 1998. The decrease in the amortization of deferred and unearned financing
costs is principally attributable to the issuance of shares of common stock in
1997 valued at $4,725,000 to the unit holders of the bridge financing in
connection with the Company's failure to have its S-1 Registration Statement
declared effective by the Securities and Exchange Commission by April 1, 1998.
The S-1 Registration Statement was declared effective by the Securities and
Exchange Commission in July 1998.
The Company expects to incur significant losses during 1999. The Company
anticipates that any revenue recognized in 1999 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, 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 expense 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 the initial stages of research and
development related to its EKOR compound technology.
18
<PAGE>
For the years ended December 31, 1997 and 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.
Liquidity and Capital Resources
The Company's principal sources of working capital from inception have
been net proceeds of $842,000 from the offering of common stock under Rule 504
of Regulation D, shareholder advances aggregating $761,440, a bridge financing
completed in December 1996 of $2,000,000, and from private placement of
$3,000,000 principal amount of 8% Convertible Debentures completed in November
1997, due November 27, 2000, $3,000,000 principal amount of 8% Convertible
Debentures completed in February 1998, due February 23, 2001, and $1,000,000
principal amount of 8% Convertible Debentures completed in July of 1998, due
July 20, 2001.
The Debentures may be converted into shares of the Company's common stock
at beneficial conversion rates based on the timing of the conversion (see Note
11 to financial statements). During the year ended December 31, 1998, a
debenture holder exercised the conversion right under the November 27, 1997
Convertible Debenture agreement and converted principal of $30,000 and accrued
interest of $2,194 into 100,002 shares of the Company's common stock. Based on
the bid price of the Company's common stock at December 31, 1998, the
Debentures' principal could be converted into approximately 28 million shares of
the Company's common stock.
On January 6, 1999, the Company's Chairman and the majority convertible
debt holder agreed to provide $500,000 on short-term financing to the Company,
$450,000 of which was paid on January 6, 1999 and the balance of which has yet
to be received. In exchange for this financing, the Company issued two secured
promissory notes. Each secured promissory note bears interest at 8% per annum
and is due January 6, 2000. The promissory notes are collateralized by the
Company's intangible assets and can be exchanged for 8% Convertible Debentures
under terms similar to the current outstanding debentures discussed in Note 11
to the Financial Statements.
During the year ended December 31, 1998, the Company's principal source of
cash was the February 1998 and July 1998 Debenture Offerings (Note 3 to the
Financial Statements) from which it derived net proceeds of approximately
$3,740,000. Of this amount, $2,000,000 was used to satisfy the Bridge Notes and
$227,500 was applied to the acquisition of technologies and the remaining funds
were being used for working capital.
The Company has agreed in principal to fund the commercialization of
certain technologies developed in the former Soviet Union by scientists and
researchers at Kurchatov, other institutes associated therewith, and members of
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 in principle to provide funding in
connection with the marketing and sale of three of its Principal Technologies.
Total expenditures under these programs approximated $1,200,000 during 1998. The
Company's principal source of funding for these expenditures during the fiscal
year 1998 was the proceeds from the Debenture Offerings.
During 1998, the Company paid $187,500 to Professor Oleg L. Figovsky,
Ph.D. in connection with four technology purchase agreements, dated January 1,
1998 and April 1, 1998. In addition, during 1998, the Company purchased for
$40,000 the rights to certain anticorrosive additive technology from Israeli
scientists.
19
<PAGE>
On January 20, 1999, the Company entered into an agreement to invest
$300,000 in exchange for an additional 16% interest in Chemonol, an Israeli
research and development company. The agreement obligates the Company to make
four equal payments of $75,000, commencing March 1, 1999, July 1, 1999, October
1, 1999 and January 1, 2000. At the completion of the transaction, the Company
will own 36% of Chemonol's common stock.
The Company will require additional financing to continue to fund research
and development efforts, operating costs and complete necessary work to
commercialize its technologies. As the development of each technology is
completed and the technology's commercial applications are identified, the
Company will seek joint venture partners to fund any further capital
expenditures, including the project financing. The Company is exploring
additional sources of working capital, including further private sales of
securities, joint ventures and licensing of technologies. During the first
quarter of 1999, the Company relied on shareholder loans of $500,000 as its
principal source of working capital. The report of the Company's independent
certified public accountants contain an explanatory paragraph which expresses
substantial doubt as to the Company's ability to continue as a going concern.
No assurance can be given that the Company can successfully obtain any
additional financing 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.
The Company had a working capital deficiency and stockholders' deficiency
of $1,934,000 and $8,835,000, respectively, as of December 31, 1998.
Year 2000 Compliance
In March 1998, the AICPA issued SOP 98-01, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which revises the
accounting for software development costs and will require the capitalization of
certain costs. The Company recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company has established processes for evaluating and managing the risks and
costs associated with this problem. The computing portfolio was identified and
an initial assessment has been completed. The cost of achieving Year 2000
compliance will not have a material impact on the accompanying financial
statements.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 130, "Comprehensive
Income" (SFAS 130), was issued in June 1997. SFAS 130 becomes effective for the
Company's fiscal year 1999 and requires reclassification of earlier financial
statements for comparative purposes. SFAS 130 requires that all items defined as
comprehensive income, including changes in the amounts of certain items, foreign
currency translation adjustments and gains and losses on certain securities, be
shown in a financial statement SFAS 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement. The Company believes that the adoption of SFAS 130 will not have
a material effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), was issued in
June 1997. SFAS 131 becomes effective for the Company's fiscal year 1999 and
requires restatement of disclosures for earlier periods presented for
comparative purposes. This new standard requires companies to disclose segment
data based on how management makes decisions about allocating resources to
segments and how it measures segment performance. SFAS 131 requires companies to
disclose a measure of segment profit or loss, segment assets, and
reconciliations to consolidated totals. It also
20
<PAGE>
requires entity-wide disclosures about a company's products and services, its
major customers and the material countries in which it holds assets and reports
revenues. The Company believes that the adoption of SFAS 131 will not have a
material effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits ("SFAS 132"), was
issued in February 1998. SFAS 132 becomes effective for 1999 and requires
restatements of disclosures for earlier periods presented for comparative
purposes. SFAS 132 revises employers' disclosure about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans, but rather standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate analysis, and eliminates certain disclosures that are no
longer useful. The Company believes that the adoption of SFAS 132 will not have
a material effect on the consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors and consolidated financial statements
are included in Part IV, Item 14 of this Report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Set forth below for each Director and Officer is his name, age, the year
in which he became a Director or Officer of the Company, his principal
occupation during the last five years and any additional directorships in
publicly-held companies.
Executive Officers and Directors
Name Age Position with the Company
---- --- -------------------------
Dr. David Wilkes 76 Chairman and Director
Dr. Randolph A. Graves, Jr. 60 Director
Frank Fawcett 52 President and Chief Executive Officer
Hans-Joachim Skrobanek 48 Executive Vice President, European Operations
Chad Verdi 32 Director
Dr. Wilkes founded his own flavor firm known as Globe Extracts in 1950, and
served as the Company's President and Chief Executive Officer until its sale in
1989. He grew Globe from a single site and one employee to 300 employees with
plants in the U.S. and South America. Globe Extracts specializes in creating
natural and synthetic flavorings for many of the top twenty-five national and
international food companies. Dr. Wilkes now serves as a consultant to the
international food industry.
Dr. Wilkes is a major stockholder and operator of the New York Network TV
Station WB-29 in Burlington, Vermont, a Warner Brothers affiliate. He is a
Trustee of the Brookdale University Hospital and Medical Center
21
<PAGE>
in Brooklyn, New York and a Director of Schulman and Schachne Institute for
Nursing and Rehabilitation, Inc. Dr. Wilkes is also a Trustee of the University
of Rhode Island Foundation, a member of the advisory council at the School of
Enviromental Sciences and Natural Resources, and one of only ten alumni elected
to the Hall of Fame at the College of Natural Resources at the University of
Rhode Island.
Dr. Wilkes holds distinguished honorary and elected positions including a Fellow
of the Institute of Food Technologies, a member of the New York Academy of
Science, a Fellow of the American Institute of Chemists, elected to and listed
in Who's Who - Global Business Leaders, and is a member of the Society of Flavor
Chemists.
Dr. Graves has over thirty years experience in managing scientic and engineering
programs with a focus on technology development, validation and application. He
was employed by NASA's Langley Research Center in a number of research and
research management positions before moving to NASA Headquarters where he served
as Director of Aerodynamics. He served on numerous managerial and technical
panels/committees including the Aerodynamics Panel of the Workshop on
Aeronautical Technology for the Year 2000 sponsored by the National Academy of
Science's National Research Council, served as a member of the American
Institute of Aeronautics and Astronautics Applied Aerodynamics Technical
Committee, served as a member of the White House's Federal Coordinating Council
on Science Engineering and Technology Subcommittee on High Performance Computing
and was NASA's member of NATO's Advisory Group on Aerospace Research and
Development Fluid Dynamics Panel where he also served as the Chairman of the
Subcommittee on Computational Fluid Dynamics.
Dr. Graves founded Graves Technology, Inc. in 1991 to provide consulting
services to the Aerospace Computing and Small Business communities. He applied
for, received and completed a Grant from the Department of Energy on Technology
Transfer. Dr. Graves has written or co-authored over sixty formal scientic and
technical reports, articles and conference papers, written some three dozen
technology identification reports for clients, written comprehensive in-depth
reports on specialized topics for clients and developed, coordinated and
prepared numerous business plans and investment overview documents for small
business clients.
Dr. Graves has held positions in small start up companies and currently serves
on the Business Advisory Board of Border Logic, Inc., a start up internet game
development company. Dr. Graves is an Associate Fellow of the American Institute
of Aeronautics and Astronautics, a member of the American Society of Mechanical
Engineers, was the recipient of a Sican Fellowship at Stanford University's
Graduate School of Business and is listed in Oxford's Who's Who - The Elite
Registry of Extraordinary Professionals.
Mr. Fawcett has over twenty years experience in corporate program and project
management in defense and private industries. His areas of expertise include
logistics, strategic, planning, operations, materials management, national and
international marketing research, analysis and intelligence. He was a co-founder
of interactive Technologies, a consulting firm that provided assistance to
companies desiring to enter the military/defense marketplace as prime
contractors, interactive Technologies provided administrative, marketing and
financial services to its clients.
Recently, Mr. Fawcett served as president of Isbre Holding Corporation which he
founded to import water from Norway. During its first eighteen months of
operation, Mr. Fawcett successfully guided the Company from start up to listing
on the NASDAQ stock exchange in the U.S. and on the Oslo stock exchange in
Norway. Under his leadership, the Company acquired the international
distribution rights for three spring water products and one non-alcoholic beer.
As a Program Manager for Sanders Associates, Mr. Fawcett was associated with the
acquisition, management and completion of numerous defense contracts and was
responsible for the manufacture of flight line testers for the United States
Air-Force. He successfully managed a $600 million procurement of Flight Line
Testers by the U.S. Air Force (Program ANMUSM-64), which subsequently won the
Secretary of Defense Superior Management Award. This system provided flight line
check out and combat readiness of all electronic systems on aircraft such as the
F-15, F-16, F-111 and B-52 and was successfully used in the Gulf War with Iraq.
22
<PAGE>
Mr. Fawcett is a member of the American Production and Inventory Control Society
and a member of the Materials Management Association.
Mr. Skrobanek is a former Director of EUROTECH and maintains an office in
Berlin, Germany. Mr. Skrobanek holds a Bachelor of Commerce degree and has over
twenty years experience in Banking, Trade-Financing, Barter-Trade, and Project
Financing in Germany with emphasis on Eastern Europe and states of the Former
Soviet Union. Formerly, Mr. Skrobanek was a manager at Dainier-Benz, spent 9
years as a Director with IVVKA AG (Affiliated with Quandt-Group/BMW), and 6
years as Managing Director of FBT-Finance by Trade GrbH (a wholly-owned
subsidiary of Berliner Bank Corporation).
Mr. Verdi is presently the President and CEO of Coastal Food Services &
Provisions Inc. and The Coastal Food Service Companies located in Cranston,
Rhode Island. Under Mr. Verdi's direction, Coastal Food Service Company has
grown since 1991 from sales of $2 million to a projected 1999 estimate of $30
million in sales. Under the management of Mr. Verdi the Coastal Group of
Companies has made two major diversified acquisitions and started an additional
horizontal growth company with estimated sales in 1999 of four million dollars.
In addition to Mr. Verdi's successful business operations and management
experience he has been an advisor and Shareholder for several public and private
companies including, Wild Heart Ranch and Evergreen Communications.
The Company has a Board of Directors comprised of 3 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.
On November 30, 1998, Adm. James D. Watkins resigned as a Director of the
Company. On December 10, 1998 Maxwell Rabb and Lawrence McQuade resigned as
Directors of the Company.
On December 10, 1998, Dr. David Wilkes and Dr. Randolph Graves were
elected to the Board of Directors by the departing Directors. On April 8, 1999,
Joseph Gatti resigned as a Director of the Company, and on that same date Chad
Verdi was elected to serve as a Director of the Company by the remaining
Members.
Key Consultants
Oleg L. Figovsky, Ph.D. has served as a technology and business
development consultant to the Company since April, 1996. From 1993 Prof.
Figovsky has served as the General Manager of Polyadd, Ltd., an Israeli
corporation. From 1992 until 1993, Prof. Figovsky was the Manager of Research
and Development at the Israeli Corrosion Research Institute. From 1990 until
1991 Prof. Figovsky served as the Director of Research Center of "Intercorr", an
Austrian-Russian joint venture, and from 1986 until 1991 he was the Head of the
Corrosion Protection Department of the All-Union Corrosion Protection Research
Institute in Moscow, Russia. Prof. Figovsky received a Masters of Science degree
in Materials Engineering from the All-Union Civil Engineering Institute, Moscow,
Russia, in 1964, a Ph.D in Materials Engineering from the Moscow Civil
Engineering Institute in 1971, and a Doctor of Science in Materials Engineering
from the Institute of Corrosion Protection, Moscow, in 1989.
Peter Gulko is a major shareholder and former Director of EUROTECH and
provides liaison between the Company and its affiliates in Russia, Ukraine and
Israel. Mr. Gulko has more than twenty years experience in business development,
foreign (representative) office management, client relations, supervision,
engineering project management and technology transfer.
Item 11. Executive Compensation.
The following Summary Compensation 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. No other executive officer or key
employee was compensated in excess of $100,000 during 1996, 1997 or 1998.
23
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Salary Bonus Compensation
Name and Principal Position Year ($) ($) ($)
<S> <C> <C> <C> <C>
Randolph A. Graves, Jr., President & 1997 $77,374 0 0
Chief Executive Officer........................ 1996 $77,374 $20,000 $243,109
</TABLE>
Compensation Arrangements
Compensation of Directors
The Company's directors do not receive any compensation for their service
as directors or on any committee of the Board.
1995 Incentive Stock Option Plan
The Company has adopted its 1995 Incentive Stock Option Plan ("Plan"). The
Board of Directors (the "Board") believes that the Plan is desirable to attract
and retain executives and other key employees of outstanding ability. Under the
Plan, options to purchase an aggregate of not more than 500,000 shares of Common
Stock may be granted from time to time to key employees, officers, directors,
advisors and consultants to the Company.
The Plan is currently administered by the Board which may empower a
committee to administer the Plan. The Board is generally empowered to interpret
the Plan, prescribe rules and regulations relating thereto, determine the terms
of the option agreements, amend them with the consent of the optionee, determine
the individuals to whom options are to be granted, and determine the number of
shares subject to each option and the exercise price thereof. The per share
exercise price for options granted under the Plan are determined by the Board
provided that the exercise price of incentive stock options ("ISOs") will not be
less than 100% of the fair market value of a share of the Common Stock on the
date the option 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
- ----------
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1996.
(2) Dr. Graves resigned as a Director, and as the Chairman, President and
Chief Executive Officer of the Company on January 23, 1998.
24
<PAGE>
descendants, subject to certain restrictions. Options may be exercised during
the holder's lifetime only by the holder, his or her guardian or legal
representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
that certain material modifications affecting the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
To date, no options have been granted pursuant to the Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
To the knowledge of the Company, the following table sets forth the
ownership of the Company's Common Stock as of March 31, 1999, by each person
owning more then 5% such Common Stock, by each officer and director and by all
officers and directors as a group.
Number of Shares Percentage of Shares
Name and Address(1) Beneficially Owned(2) Beneficially Owned
JNC Opportunity Fund, Ltd.(3)(4) 982,201 .044%
David Wilkes 122,500 *
Randolph Graves 615,000 .028%
Chad Verdi 16,500 *
Directors and Officers 754,000 .034%
- ----------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 1216 16th St., Washington, D.C. 20036.
(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
(4) Does not take into account potential conversion of Convertible Debentures.
See Item 5 and Note 10 to the Financial Statements.
Item 13. Certain Relationships and Related Transactions.
Shareholder and Other Loans.
In April 1997 ERBC Holdings, Limited, which is wholly-owned by Kurt
Seifman, a shareholder of the Company, loaned $30,000 to the Company, which
remains outstanding.
25
<PAGE>
Issuance of Common Stock to Consultants and Advisors.
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 the years ended December 31, 1997 and 1998, the Company issued
205,000 and 95,044 shares of common stock, respectively, as consideration for
consulting services performed by various consultants, including related parties.
During July 1998, the Company and the consultant mutually agreed to cancel
375,000 shares of common stock that were issued for past consulting services
valued at $93,750. The value of the cancelled shares of $93,750 has been
recorded as a reduction of consulting expense for the year December 31, 1998.
Shares issued, net of cancelled shares, under these arrangements were valued at
$839,550 and $422,200, which was all charged to operations during 1997 and 1998,
respectively.
Acquisition of Technologies from Consultant
Prof. Figovsky who is a consultant to the Company, is the originator and
developer of three technologies, INP, LEM and RubCon, all right, title and
interest in which was purchased by the Company from Prof. Figovsky in January,
1998, for an aggregate purchase price of $125,000 plus royalties equal to 49% of
the company's net revenues from the sale and/or licensing of such technologies,
payable for a period of 15 years commencing on January 1, 1998. See "Business --
General -- Acquisition of Israeli Technologies -- Incubator Technologies
- -Technologies Purchased from Prof. Oleg L. Figovsky; - Principal Technologies."
Common Directors, Officers and Shareholders
ERBC Holdings, Limited. ERBC is the beneficial owner of 255,000 shares of
the Company's Common Stock. One present and one former employee of ERBC,
Hans-Joachim Skrobanek and Peter Gulko, respectively, are shareholders and
former directors of the Company, and Mr. Skrobanek is the former Secretary of
the Company. Mr. Skrobanek is the beneficial owner of 145,000 shares, and Mr.
Gulko is the beneficial owner of 1,110,000 shares, of the Company's Common
Stock. The chief executive officer and sole shareholder of ERBC, Kurt Seifman,
is the beneficial owner of 1,246,300 shares of the Company's Common Stock. Mr.
Gulko currently is the President, Secretary and Principal Financial Officer of
the Company.
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 (after deducting development costs and related expenses attributed to
EKOR) derived by the Company from the sale or licensing of the Company's silicon
(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 (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 a consultant of the Company, is the sole shareholder of CIS. See
"Business - Principal Technologies - Silicon (EKOR) Compound."
26
<PAGE>
The business structure and relationships between the Company, ERBC, KRH
and EAPS are diagrammed below:
----------
| EAPS |
----------
|
|
Technology
License
o
----------
----------------| ERBC |--------------
| ---------- |
minority | |
shareholder | shareholder
| o o
| Sublicense |
| --------------- -------
| | EUROTECH, | | KRH |
-------------o| LTD. | -------
--------------- o
| |
| 50% of |
------net EKOR-----
profits
27
<PAGE>
PART IV
14. Exhibits, Financial Statements
(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
3.2 By-Laws of the Company(1)
4.1 Form of Common Stock Certificate(1)
10.1 Material Contracts
10.2 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(2)
10.3 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(2)
10.4 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(2)
10.5 Teaming Agreement between the Company and Duke Engineering
& Services, Inc.(2)
10.6 Form of Agreement between the Company, V. Rosenband and C.
Sokolinsky, and Ofek Le-Oleh Foundation(2)
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband
and C. Sokolinsky(2)
10.6.3 Voting Agreement between the Company, V. Rosenband and C.
Sokolinsky(2)
10.7.1 Investment Agreement between the Company and Chemonol,
Ltd.(2)
10.7.2 Equity Sharing Agreement between the Company and Leonid
Shapovalov(2)
10.7.3 Voting Agreement between the Company and Leonid
Shapovalov(2)
10.8.1 Agreement between the Company and Separator, Ltd.(2)
10.8.2 Equity Sharing Agreement between the Company and Efim
Broide(2)
10.8.3 Voting Agreement between the Company and Efim Broide(2)
10.9.1 Form of Agreement between the Company, Ofek Le-Oleh
Foundation and Y. Kopit(2)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit and
V. Rosenband(2)
10.9.3 Voting Agreement between the Company, Y. Kopit and V.
Rosenband(2)
10.10 Form of License Agreement between the Company and ERBC
Holdings, Ltd.(2)
10.11 Cooperation Agreement between the Company and
Forschungszentrum Julich GmbH(2)
10.12.1 Convertible Debenture Purchase Agreement among the
Company, JNC Opportunity Fund, Ltd. and Diversified
Strategies Fund, L.P.(2)
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(2)
10.12.3 Registration rights Agreement among the Company, JNC
Opportunity Fund, Ltd. and Diversified Strategies Fund,
L.P.(2)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and JNC Opportunity Fund, Ltd.(2)
- ----------
(1) Previously Filed.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 under the Securities Exchange Act of 1934, on file with the
Commission, file number 333-26673.
28
<PAGE>
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and Diversified Strategies Fund,
L.P.(2)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity
Fund, Ltd.(2)
10.12.7 Warrant No. 2 between the Company and Diversified
Strategies Fund, L.P.(2)
10.12.8 Warrant No. 3 between the Company and Diversified
Strategies Fund, L.P.(2)
10.13.1 Convertible Debenture Purchase Agreement between the
Company and JNC Opportunity Fund, Ltd.(2)
10.13.2 Escrow Agreement among the Company, JNC Opportunity Fund,
Ltd. and Robinson, Silverman, Pearce, Aronsohn and Berman,
LLP(2)
10.13.3 Registration Rights Agreement between the Company and JNC
Opportunity Fund, Ltd.(2)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001
between the Company and JNC Opportunity Fund, Ltd.(2)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity
Fund(2)
10.14.1 Debenture Purchase Agreement between the Company and JNC
Strategic Fund Ltd.
10.14.2 Form of 8% Convertible Debenture No.1 Due July 20, 2001
between the Company and JNC Strategic Fund Ltd.(3)
10.14.3 Form of 8% Convertible Debenture No.2 Due February 23,
2001 between the Company and JNC Opportunity Fund, Ltd.(3)
10.14.4 Warrant No. 4 between the Company and JNC Strategic Fund
Ltd.(3)
10.14.5 Registration Rights Agreement between the Company and JNC
Strategic Fund Ltd.(3)
10.14.6 Amended and Revised 8% Convertible Debenture No.1 Due
February 23, 2001 between the Company and JNC Opportunity
Fund, Ltd.(3)
10.14.7 Amended and Revised 8% Convertible Debenture No.2 Due July
20, 2001 between the Company and JNC Strategic Fund
Ltd.(3)
10.14.8 Amended and Revised 8% Convertible Debenture No.13 Due
November 27, 2000 between the Company and JNC Opportunity
Fund, Ltd.(3)
10.14.9 Amended and Revised 8% Convertible Debenture No.14 Due
November 27, 2000 between the Company and Diversified
Strategies Fund, L.P.(3)
10.15.1 Agreement between the Company and David Wilkes(3)
10.15.2 Secured Promissory Note between the Company as Maker and
JNC Strategic Fund Ltd. as Payee(3)
10.15.3 Secured Promissory Note between the Company as Maker and
David Wilkes as Payee(3)
10.15.4 Secured Promissory Note between the Company as Maker and
David Wilkes as Payee(3)
10.15.5 Escrow Agreement among the Company, JNC Strategic Fund
Ltd. and Encore Capital Mangement, L.L.C.(3)
10.15.6 Security Agreement by the Company in favor of JNC
Strategic Fund Ltd. and David Wilkes(3)
10.15.7 Warrant between the Company and JNC Strategic Fund Ltd.(3)
10.15.7 Warrant between the Company and David Wilkes(3)
10.15.8 Form of 8% Convertible Debenture Due Three Years from
Original Issue Date between the Company and JNC Strategic
Fund Ltd.(3)
23.1 Consent of Tabb, Conigliaro & McGann(4)
27 Financial Data Schedule (4)
(b) Reports on Form 8-K.
The Company filed reports on Form 8-K on August 25, 1998,
December 15, 1998 and January 28, 1999.
- ----------
(3) Incorporated by reference to the Company's Current Report on Form 8-K
under the Securities Exchange Act of 1934, on file with the Commission,
file number 000-22129.
(4) Filed herewith.
29
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Nos.
---------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
At December 31, 1997 and December 31, 1998
STATEMENTS OF OPERATIONS F-4
For the Years Ended December 31, 1996, 1997 and 1998
For the Period from Inception (May 26, 1995) to December 31, 1998
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5 - F-7
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996, 1997 and 1998
STATEMENTS OF CASH FLOWS F-8
For the Years Ended December 31, 1996, 1997 and 1998
For the Period from Inception (May 26, 1995) to December 31, 1998
NOTES TO FINANCIAL STATEMENTS F-9 - F-40
</TABLE>
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, 1997 and 1998 and the
related statements of operations, stockholders' deficiency, and cash flows for
the years ended December 31, 1996, 1997 and 1998 and for the period from
inception (May 26, 1995) to December 31, 1998. 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, 1997 and 1998 and the results of its operations
and its cash flows for the years ended December 31, 1996, 1997 and 1998 and for
the period from inception (May 26, 1995) to December 31, 1998, 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 four years of operations and, as of December 31, 1998,
had a working capital deficiency and a stockholders' deficiency. 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.
/s/ Tabb, Conigliaro & McGann, P.C.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
March 12, 1999
F-2
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
ASSETS ----------------------------
(Note 1) 1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 2) $ 617,756 $ 1,940
Receivable from related parties (Note 6) 5,918 5,918
Prepaid expenses and other current assets 21,539 200
------------ ------------
TOTAL CURRENT ASSETS 645,213 8,058
PROPERTY AND EQUIPMENT - net of accumulated depreciation (Notes 2 and 4) 14,050 31,846
OTHER ASSETS:
Organization and patent costs - net of accumulated amortization (Notes 2 and 5) 28,651 26,587
Deferred financing costs (Notes 2 and 11) 261,178 2,361
Other assets 3,151 7,551
------------ ------------
TOTAL ASSETS $ 952,243 $ 76,403
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable - bridge notes (Notes 7 and 11) $ 2,000,000 $ --
Accrued liabilities (Note 9) 576,966 1,716,809
Deferred revenue (Notes 2 and 3) 225,000 225,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,801,966 1,941,809
------------ ------------
CONVERTIBLE DEBENTURES (Notes 8, 11 and 16) 3,000,000 6,970,000
------------ ------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 1, 3, 7, 8, 11, 13, and 16)
STOCKHOLDERS' DEFICIENCY: (Notes 2, 7, 8, 11, 12, 13 and 16)
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 19,621,882 shares issued and outstanding at December 31,
1997 and December 31, 1998, respectively 4,732 4,905
Additional paid-in capital 12,892,313 15,452,783
Unearned financing costs (1,315,317) (47,500)
Deficit accumulated during the development stage (16,431,451) (24,245,594)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,849,723) (8,835,406)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 952,243 $ 76,403
============ ============
</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
For the Years Ended December 31, from Inception
-------------------------------------------- (May 26, 1995) to
1996 1997 1998 December 31, 1998
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
REVENUES $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development (Notes 2 and 3) 1,170,782 1,007,671 1,039,591 3,430,105
Consulting fees (Notes 11 and 13) 277,353 553,295 293,323 1,390,871
Compensatory element of stock issuances pursuant to
consulting agreements 1,209,477 839,550 422,200 2,471,227
Other general and administrative expenses 547,447 1,262,067 1,263,174 3,106,953
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,205,059 3,662,583 3,018,288 10,399,156
------------ ------------ ------------ ------------
OPERATING LOSS (3,205,059) (3,662,583) (3,018,288) (10,399,156)
------------ ------------ ------------ ------------
OTHER EXPENSES:
Interest expense (Notes 6, 7 and 8) 43,422 270,740 552,971 867,133
Amortization of deferred and unearned financing
costs (Notes 2, 7, 8 and 11) 228,502 8,507,919 4,242,884 12,979,305
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES 271,924 8,778,659 4,795,855 13,846,438
------------ ------------ ------------ ------------
NET LOSS $ (3,476,983) $(12,441,242) $ (7,814,143) $(24,245,594)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE
(Notes 2 and 11) $ (0.23) $ (0.71) $ (.40)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
USED IN BASIC AND DILUTED LOSS
PER SHARE (Notes 2 and 11) 14,808,000 17,581,711 19,323,098
============ ============ ============
</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, 1997 AND 1998
(Notes 2, 7, 8, 11, 12, 13 and 16)
<TABLE>
<CAPTION>
Common Stock
Date of --------------------- Paid-in Due from
Period Ended December 31, 1995: Transaction Shares(1) 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 1,020 523,980 (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 --
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, 1997 AND 1998
(Notes 2, 7, 8, 11, 12, 13 and 16)
<TABLE>
<CAPTION>
Common Stock Additional
Date of --------------------- Paid-in Due from
Year Ended December 31, 1997: Transaction Shares(1) 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
Year 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 (862,680) -- --
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>
(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-6
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1998
AND THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Notes 2, 7, 8, 11, 12, 13 and 16)
<TABLE>
<CAPTION>
Common Stock Additional
Date of --------------------- Paid-in Due from
Year Ended December 31, 1998: Transaction Shares(1) Amount Capital Stockholders
- ----------------------------- ----------- ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1997 18,928,836 $ 4,732 $ 12,892,313 $ --
Issuance of stock for consulting fees
($2.58 per share) 03/98 43,000 11 110,930 --
Issuance of stock for consulting fees
($0.85 per share) 06/98 143,000 35 215,895 --
Issuance of stock for consulting fees
($0.32 per share) 09/98 126,617 32 107,503 --
Issuance of stock for consulting fees 12/98 155,427 39 81,505 --
Issuance of stock pursuant to penalty
provision of bridge financing
($1.0625 per share) 04/98 500,000 125 531,124 --
Value assigned to conversion feature of
Convertible Debentures and 60,000
warrants issued as additional interest 02/98 -- -- 1,100,000 --
Value assigned to conversion feature of
Convertible Debentures and 125,000 warrants
issued as additional interest 07/98 -- -- 475,000 --
Cancellation of stock issued for consulting
fees 07/98 (375,000) (94) (93,656) --
Issuance of stock for conversion of debenture
note payable ($0.32 per share) 09/98, 11/98 100,002 25 32,169 --
Amortization of unearned financing costs -- -- -- --
Net loss -- -- -- --
---------- ------- ------------ ------------
Balance - December 31, 1998 19,621,882 $ 4,905 $ 15,452,783 $ --
========== ======= ============ ============
<CAPTION>
Deficit
Accumulated
Unearned During the
Financing Development
Year Ended December 31, 1998: Costs Stage Total
- ----------------------------- ----- ----------- -----------
<S> <C> <C> <C>
Balance - December 31, 1997 $(1,315,317) $(16,431,451) $(4,849,723)
Issuance of stock for consulting fees
($2.58 per share) -- -- 110,941
Issuance of stock for consulting fees
($0.85 per share) -- -- 215,930
Issuance of stock for consulting fees
($0.32 per share) -- -- 107,535
Issuance of stock for consulting fees -- -- 81,544
Issuance of stock pursuant to penalty
provision of bridge financing
($1.0625 per share) (531,249) -- --
Value assigned to conversion feature of
Convertible Debentures and 60,000
warrants issued as additional interest (1,100,000) -- --
Value assigned to conversion feature of
Convertible Debentures and 125,000 warrants
issued as additional interest (475,000) -- --
Cancellation of stock issued for consulting
fees -- -- (93,750)
Issuance of stock for conversion of debenture
note payable ($0.32 per share) -- -- 32,194
Amortization of unearned financing costs 3,374,066 -- 3,374,066
Net loss -- (7,814,143) (7,814,143)
----------- ------------ -----------
Balance - December 31, 1998 $ (47,500) $(24,245,594) $(8,835,406)
=========== ============ ===========
</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-7
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,476,983) $(12,441,242) $ (7,814,143)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,009 4,810 7,896
Amortization of deferred and unearned financing costs 228,502 8,507,919 4,242,884
Stock issued for license -- -- --
Consulting fees satisfied by stock issuances 1,209,477 839,550 422,200
Cash provided by (used in) the change in assets and liabilities:
(Increase) decrease in advances to related parties (89,918) 84,000 --
(Increase) decrease in prepaid expenses (11,878) (8,561) 21,339
Increase in other assets (3,151) -- (4,400)
Increase in accrued liabilities 279,216 284,650 792,036
Increase in deferred revenue -- 225,000 --
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,863,726) (2,503,874) (2,332,188)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs (24,639) (5,162) --
Capital expenditures (10,953) (6,391) (23,628)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (35,592) (11,553) (23,628)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 150 -- --
Proceeds from issuance of common stock 319,500 -- --
Offering costs (75,000) 75,000 --
Repayment by stockholders 3,000 -- --
Proceeds from (repayment of) bridge notes 2,000,000 -- (2,000,000)
Proceeds from Convertible Debentures -- 3,000,000 4,000,000
Borrowings from stockholders 141,000 420,140 --
Repayment to stockholders (141,000) (420,140) --
Deferred financing costs (22,150) (322,000) (260,000)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,225,500 2,753,000 1,740,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 326,182 237,573 (615,816)
CASH - BEGINNING 54,001 380,183 617,756
------------ ------------ ------------
CASH - ENDING $ 380,183 $ 617,756 $ 1,940
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 8,127 $ 270,804 $ 36,990
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
<CAPTION>
For the Period
from Inception
(May 26, 1995) to
December 31, 1998
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(24,245,594)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 13,897
Amortization of deferred and unearned financing costs 12,979,305
Stock issued for license 37,500
Consulting fees satisfied by stock issuances 2,471,227
Cash provided by (used in) the change in assets and liabilities:
(Increase) decrease in advances to related parties (5,918)
(Increase) decrease in prepaid expenses (200)
Increase in other assets (7,551)
Increase in accrued liabilities 1,369,002
Increase in deferred revenue 225,000
------------
NET CASH USED IN OPERATING ACTIVITIES (7,163,322)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs (31,358)
Capital expenditures (40,972)
------------
NET CASH USED IN INVESTING ACTIVITIES (72,330)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 150
Proceeds from issuance of common stock 841,500
Offering costs (2,898)
Repayment by stockholders 3,000
Proceeds from (repayment of) bridge notes --
Proceeds from Convertible Debentures 7,000,000
Borrowings from stockholders 561,140
Repayment to stockholders (561,140)
Deferred financing costs (604,150)
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,237,602
------------
INCREASE (DECREASE) IN CASH 1,940
CASH - BEGINNING --
------------
CASH - ENDING $ 1,940
============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 315,921
============
Income taxes $ --
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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, marketing 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,
1998, the Company has a stockholders' deficiency of $8,835,406, a
working capital deficiency of $1,933,751 and an accumulated deficit
since inception of $24,245,594. 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 and $1,000,000
completed during February and July 1998, respectively. Proceeds from
the February 1998 Convertible Debenture financing were used to
retire the $2,000,000 bridge note. In January 1999, the Company
borrowed $450,000 from two stockholders and issued a secured
promissory note (see Note 16). The Company is exploring additional
sources of working capital, which include a private offering of
common stock, private borrowings and joint ventures.
F-9
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
While no assurance can be given, management believes the Company can
raise adequate capital to keep the Company functioning during 1999.
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 and 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, 1998, 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%
Sortech, Ltd. ("Sortech") 20%
Amsel, Ltd. ("Amsel") 20%
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturity dates of three months or less to be cash equivalents.
F-10
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 six
Israeli research and development companies are included in research
and development. In addition, expenditures in connection with a
technology licensing agreements concluded during December 31, 1996,
1997 and 1998, aggregating $-0-, $495,000 and $227,500,
respectively, were charged to research and development (see Note 3).
F-11
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 accounts 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 were amortized over the life of the promissory
note.
Financing costs in connection with the November 1997, February 1998
and July 1998 Convertible Debenture offerings 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.
Loss Per Share
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 11, 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.
F-12
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The financial statements include various estimated fair value
information at December 31, 1997 and December 31, 1998, 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.
Reclassifications
Certain prior year balances have been reclassified to conform with
the current year presentation.
Impact of Recently Issued Accounting Standards
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting comprehensive income, defined as
all changes in equity from non-owner sources. Adoption of SFAS No.
130 did not have a material effect on the Company's financial
position or results of operations.
F-13
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Reporting
Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". SFAS No. 131 establishes standards for the way
public enterprises report information about operating segments in
annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial
reports issued to stockholders. Adoption of SFAS No. 131 did not
have a material effect on the Company's financial position or
results of operations.
Pensions and Postretirement Benefits
Effective December 29, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures About Pensions and Postretirement Benefits", which
standardizes the disclosure requirements for pensions and other
postretirement benefits. The Statement addresses disclosure only. It
does not address liability measurement or expense recognition. There
was no effect on financial position or net income as a result of
adopting SFAS No. 132.
Computerized Software Development
In March 1998, the American Institute of Certified Public
Accountants issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which revises the
accounting for software development costs and will require the
capitalization of certain costs. The adoption of SOP 98-1 did not
have an effect on the Company's financial position or results of
operations. The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures.
Software failures due to processing errors potentially arising from
calculations using the Year 2000 date are a known risk. The Company
is addressing this risk to the availability and integrity of
financial systems and the reliability of operational systems. The
Company has established processes for evaluating and managing the
risks and costs associated with this problem. The computing
portfolio was identified and an initial assessment has been
completed. The cost of achieving Year 2000 compliance will not have
a material impact on the accompanying financial statements.
F-14
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 $1,109,500, $408,000 and $236,000,
respectively, during the years ended December 31, 1996, 1997 and
1998.
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. In 1998, the
Company acquired a 20% interest in two separate Israeli technology,
research and development companies. The Company's share of losses
incurred from these research companies has been accounted for on the
equity basis and is included in research and development expenses.
The amount charged to research and development for the years ended
December 31, 1997 and 1998 approximated $102,000 and $172,000,
respectively, which reduced the Company's investment in these six
companies to zero.
F-15
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 (see Note 16). For each of the years
ended December 31, 1997 and 1998, the Company has made a $30,000
payment, totalling $60,000 to Chemonol. 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
a six-month 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. The option was not exercised by the Company and
expired during 1998. 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. For
each of the years ended December 31, 1997 and 1998, the Company has
made a payment of $30,000, totalling $60,000, to Separator. 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 a one-year option, commencing
on September 4, 1998, 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-16
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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. For
the years ended December 31, 1997 and 1998, the Company has made
payments of $21,000 and $26,000, respectively, per company, to
Comsyntech and Remptech. The last scheduled payment for each
company, of $13,000, is scheduled to be made no later than February
1, 1999.
On February 25 and May 19, 1998, the Company entered into two
additional written agreements to invest $60,000 per company in
Sortech Ltd. ("Sortech") and Amsel Ltd. ("Amsel"), Israeli
corporations established to own and develop technology in exchange
for 20% of Sortech and Amsel voting stock. For the year ended
December 31, 1998, the Company has made aggregate payments of
$30,000 to each company. The remaining two (2) scheduled payments of
$15,000, to each company, are scheduled to be paid between March 1
through November 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 for Comsyntech and Remptech, and upon termination
of the development period for Sortech and Amsel, at a price to be
determined for each company, (ii) a one-year option, commencing on
May 6, 1998, to acquire from the Principal Shareholders of
Comsyntech and Remptech an additional 31% of each Company's voting
equity for $93,000, and a one-year option, commencing on January 6,
1999, to acquire from the Principal Shareholders of Sortech and
Amsel an additional 31% of each Company'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.
F-17
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS (Continued)
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, Comsyntech, Sortech and Amsel 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, but there is no assurance
that such consent will be granted.
c) Pursuant to three Technology Purchase Agreements each dated January
1, 1998 and a fourth agreement dated April of 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 four
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"), (iii) "Rubber Concrete"
("RubCon") and (iv) Polymer Glues for operations in extreme
environments for purchase prices of $75,000, $15,000, $35,000 and
$62,500, respectively (each, a "Purchase Price"). Pursuant to each
such Technology Purchase Agreement, during 15-year period, 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 $187,500
research and development expenses during the year ended December 31,
1998.
d) During June 1998, the Company purchased for $40,000 the rights to
certain anticorrosive additive technology from Israeli scientists.
The Company has charged the $40,000 expenditure to research and
development expenses for the year ended December 31, 1998.
F-18
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS (Continued)
e) 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
Re-sealable 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.
f) 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.
F-19
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS (Continued)
g) 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.
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.
h) 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.
I) 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.
F-20
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - MACHINERY AND EQUIPMENT
Machinery and equipment consisted of the following:
December 31,
-----------------
1997 1998
------- -------
Cost $17,344 $40,972
Less: Accumulated depreciation 3,294 9,126
------- -------
$14,050 $31,846
======= =======
Depreciation expense for the years ended December 31, 1996, 1997 and
1998 amounted to $397, $2,897 and $5,832, respectively.
NOTE 5 - ORGANIZATION AND PATENT COSTS
Organization and patent costs consisted of the following:
December 31,
-----------------
1997 1998
------- -------
Organization cost $ 1,557 $ 1,557
Cost of patents 29,801 29,801
------- -------
31,358 31,358
Less: Accumulated amortization 2,707 4,771
------- -------
$28,651 $26,587
======= =======
Patent costs capitalized during 1997 and 1998 represent legal and
other costs related to filing of patent applications in various
countries.
Amortization expense for the years ended December 31, 1996, 1997 and
1998 amounted to $612, $1,913, and $2,064, respectively.
F-21
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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 notes. 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 7. 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 11). 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.
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 and 1998.
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 on February 23, 1998 (Note
8).
See Note 11 for further discussion of this financing.
F-22
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
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.
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.
On July 20, 1998, the Company sold through a private placement
$1,000,000, 8% Convertible Debenture notes, due July 20, 2001. As
additional consideration, the Company issued separate warrants to
purchase 125,000 shares of the Company's common stock at $1.06 per
share. The warrants are exercisable over two years.
During the year ended December 31, 1998, a debenture holder
converted $30,000 of principal and $2,169 of accrued interest into
100,002 shares of common stock.
See Note 11 for further discussion of the 8% Convertible Debentures.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
-----------------------
1997 1998
---------- ----------
Interest $ 35,231 $ 549,479
Penalties related to registration rights -- 350,000
Professional fees 294,386 352,234
Consulting fees 230,449 375,950
Other 16,900 89,146
---------- ----------
$ 576,966 $1,716,809
========== ==========
F-23
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
The Company was not required to provide for a provision for income
taxes for the years ended December 31, 1996, 1997 and 1998 as a
result of net operating losses incurred during those years.
The components of deferred tax assets and liabilities at December
31, 1997 and 1998 are as follows:
1997 1998
----------- -----------
Deferred Tax Assets:
Net operating losses carryforwards $ 1,636,000 $ 2,885,000
Start-up costs 105,000 70,000
Research and development costs 168,000 246,000
Compensatory element of stock issuances 3,553,000 4,003,000
----------- -----------
Total Gross Deferred Tax Assets 5,462,000 7,204,000
Less: Valuation allowance (5,462,000) (7,204,000)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
The net change in the valuation allowance for deferred tax assets
was an increase of approximately $1,742,000.
As of December 31, 1998, the Company had available approximately
$8,500,000 of net operating losses ("NOL") for income tax purposes
that may be carried forward to offset future taxable income, if any.
The NOL carryforwards from December 31, 1997 and prior expire during
the year 2010 through 2013, and the December 31, 1998 NOL expires in
the year 2018. 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.
A reconciliation between the statutory federal income tax rate (34%)
and the Company's effective rate is as follows:
1996 1997 1998
------ ------ ------
Federal statutory rate (34.0)% (34.0)% (34.0)%
Non-deductible expenses and losses -- 1.0 11.8
Increase in valuation allowance 34.0 33.0 22.2
------ ------ ------
Effective rate -0-% -0-% -0-%
====== ====== ======
F-24
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - 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.
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.
F-25
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
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 by April 1, 1998. Pursuant to the terms of the
notes, as of December 19, 1997, their interest rate has been
increased to 15% per annum.
The Company failed to complete the registration statement by April
1, 1998 and, accordingly, under the terms of the December 1997
extension agreement, the Company issued to the holders of the Bridge
Units an additional 500,000 shares of the Company's common stock.
On March 6, 1998, the Company paid all of the $2,000,000 principal
due to the holders of the bridge notes from proceeds of the February
23, 1998 Convertible Debenture offering.
F-26
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
Third Offering/Bridge Financing (Continued)
The common shares issued under the December 1996 agreement and
December 1997 extension agreement totalled 3,500,000 and have been
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 3,500,000 shares was based on fair value and
amounted to $7,976,124, 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 and $531,249 was recorded in 1998
attributable to 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, 1997 and 1998 amounted to $226,656, $7,218,219
and $531,249, 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, 1997 and 1998, amortization
related to the promissory note costs amounted to $1,846, $20,304 and
$-0-, respectively.
Fourth Offering/November 27, 1997 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 acquire 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) 90 days after 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
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.
F-27
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
Fourth Offering/November 27, 1997 8% Convertible Debentures
(Continued)
On July 20, 1998, the Company modified the November 27, 1997
Convertible Debenture agreement, which eliminated the moving floor
conversion price terms. The November 27, 1997 conversion price terms
were replaced by the July 20, 1998 $1,000,000 convertible debenture
note conversion price terms.
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. The Company's Registration
Statement was declared effective by the SEC in July 1998 and,
accordingly, the Company accrued $180,000 for liquidated damages in
accordance with this debenture agreement.
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 years ended December 31, 1997 and 1998, amortization of such
unearned financing cost amounted to $277,958 and $1,193,585,
respectively.
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 years ended December 31, 1997
and 1998, amortization related to such costs amounted to $89,170 and
$382,910, respectively. During the year ended December 31, 1998, a
debenture holder converted $30,000 of principal and $2,169 of
accrued interest into 100,002 shares of common stock.
F-28
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
Fifth Offering/February 23, 1998 8% 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 after
February 23, 1998, and prior to the 360th after February 23, 1998,
and (iii) 70% for any conversion honored after the 360th day after
February 23, 1998. 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.
On July 20, 1998, the Company modified the February 23, 1998
Convertible Debenture agreement, which eliminated the moving floor
conversion price terms. The February 20, 1998 conversion price terms
were replaced by the July 20, 1998 $1,000,000 Convertible Debenture
note conversion price terms.
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) 60,000 shares of
common stock related to the warrants. 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. The Company's Registration Statement was
declared effective by the SEC in July of 1998 and, accordingly, the
Company accrued $170,000 for liquidated damages in accordance with
this debenture agreement.
The Company has assigned a value of $1,000,000 to the debentures'
beneficial conversion feature and $100,000 to the 60,000 warrants,
and such amount is being amortized over 180 days commencing February
23, 1998. For the year ended December 31, 1998, amortization related
to such costs amounted to $1,100,000.
F-29
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
Fifth Offering/February 23, 1998 8% Convertible Debenture Offering
(Continued)
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. For the year ended December 31, 1998,
amortization related to such costs amounted to $235,000.
Sixth Offering/July 20, 1998 8% Convertible Debenture Offering
On July 20, 1998, the Company sold through a private placement
$1,000,000, 8% Convertible Debenture notes, due July 20, 2001. As
additional consideration, the Company issued separate warrants to
purchase 125,000 shares of the Company's common stock at $1.06 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 July 20, 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 $1.06, 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) 75% for any
conversion honored prior to the 180th day after July 20, 1998 and
(ii) 70% for any conversion honored after the 180th day after July
20, 1998. Commencing on July 20, 2001, 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.
The Company has assigned a value of $430,000 to the debentures'
beneficial conversion feature and $45,000 to the 125,000 warrants,
and such amount will be amortized over 180 days commencing July 20,
1998. For the year ended December 31, 1998, amortization related to
such costs amounted to $427,500.
Proceeds from the sale of the 1,000,000, 8% Convertible Debenture
notes, amounted to $975,000, net of legal and professional fees
amounting to $25,000. The legal and professional fees of $25,000
have been recorded as deferred financing costs and will be amortized
over 180 days commencing July 20, 1998. For the year ended December
31, 1998, amortization of such costs amounted to $22,500.
As part of this agreement, the Company modified its two prior
Convertible Debenture agreements to eliminate the moving floor
conversion prices.
F-30
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - 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 the years ended December 31, 1997 and 1998, the Company
issued 205,000 and 93,044 shares of common stock, respectively, as
consideration for consulting services performed by various
consultants, including related parties. During July 1998, the
Company and the consultant mutually agreed to cancel 375,000 shares
of common stock that were issued for past consulting services valued
at $93,750. The value of the cancelled shares of $93,750 has been
recorded as a reduction of consulting expense for the year December
31, 1998. Shares issued, net of cancelled shares, under these
arrangements were valued at $839,550 and $422,200, which was all
charged to operations during 1997 and 1998, respectively.
Warrants
At December 31, 1998, the Company had outstanding warrants to
purchase 1,611,500 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 13).
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, 1997 and 1998, no warrants were
exercised.
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.
F-31
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
Warrants (Continued)
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
convertible debenture notes 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 a 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.
Pursuant to the Convertible Debenture financings completed on
February 23, 1998 and July 20, 1998, the Company issued, to the
purchasers of the convertible debenture notes, warrants to purchase
60,000 and 125,000 shares of common stock, respectively, at $2.30
and $1.06 per share, respectively. The warrants from the February
23, 1998 and July 20, 1998 convertible debt financings may be
exercised over the two-year period ending February 23, 2000 and July
20, 2000, respectively. The warrants from the February 23, 1998 and
July 20, 1998 convertible debt financings were valued at $100,000
and $45,000, respectively, and said amounts will be charged to
operations as a financing cost over the 180-day period commencing
February 23, 1998 and July 20, 1998, respectively.
In estimating the value of warrants pursuant to the accounting
provisions SFAS 123, the Company used the following assumptions:
December 31,
-------------------------
1996 1997 1998
------- ------- -------
Risk-free interest rate 6% 5% 5%
Expected life 3 years 2 years 2 years
Expected volatility 30% 99% 33%
Dividend yield 0 0 0
If such accounting provisions of SFAS 123 were applied to the year
ended December 31, 1996, then the Company's net loss and the net
loss per share would have been $3,764,983 and $0.25, respectively.
There is no proforma effect for the years ended December 31, 1997
and 1998.
F-32
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' DEFICIENCY (Continued)
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 1,611,500
Convertible Debentures (assumed conversion at December 31, 1998
market value price and at largest discount) 27,795,038
----------
Total as of December 31, 1998 29,406,538
==========
Substantial issuance after December 31, 1998 through
January 12, 1999:
Convertible secured notes and related warrants issued
January 12, 1999 (assumed conversion at January 12,
1999 market value price price and at largest
discount) 1,624,159
==========
NOTE 12 - 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. Non-qualified 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.
F-33
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - 1995 STOCK OPTION PLAN (Continued)
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, 1998, no options were granted under the Option
Plan.
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations
In August 1996, the Company entered into a sublease agreement to
rent office space located in California for a period of fourteen
months. On November 1, 1997, the Company renewed the California
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.
On February 17, 1998, the Company assigned the California premise
lease to an entity controlled by a company shareholder. This
assignment was approved by the original lessor. During February
1998, the Company moved to a new office located in Washington, D.C.
The new office premise is rented on a month-to-month basis at the
rate of $3,350 per month.
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.
Rent expense for all premise operating leases was approximately
$11,000, $42,000 and $58,864 for the years ended December 31, 1996,
1997 and 1998, respectively.
Employment Agreement
During December 1997, 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) 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.
In April 1998, the Company employed a new president, who was
terminated during November 30, 1998. Pursuant to a letter agreement,
the former president received a base salary of $104,000 per annum,
of which $70,000 was charged to the 1998 operations. The Company is
currently negotiating with its former president for disputed
compensation.
F-34
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
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 $16,200 for the year ended
December 31, 1996.
On April 15, 1996, the Company entered into a consulting agreement
with a director, who also served as the Company's Chairman from
January 23, 1998 through December 12, 1998. The April 15, 1996
agreement provides for the consultant to evaluate technologies
acquired by the Company for the purpose of introducing such
technologies to potential licensees. The agreement provides 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. On December
12, 1998, the consulting agreement was terminated.
In July 1996, as amended, the Company entered into a consulting
agreement with a consultant to provide financial public relations
services to the Company 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. Each option shall has a term of one year. The options
were not exercised by the consultant and expired during November
1998. The consulting agreement was terminated in November of 1998.
F-35
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Consulting Agreements/Commitments (Continued)
On November 2, 1996, the Company entered into a two-year 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. 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.
Commencing November 1, 1998, the date the two-year consulting
agreement expired, the Company and the consultant agreed to continue
the former agreement on a month-to-month basis at the previous
compensation arrangement.
In December 1996, effective November 30, 1996, the Company entered
into a two-year consulting agreement for certain advisory services,
including directing a technology development branch in Israel. The
advisor was paid $2,000 and issued 5,000 shares of common stock for
services performed through November 15, 1996. 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. Effective April 1, 1998,
the Company agreed to increase the consultant's cash compensation to
$5,000 per month, and will issue a number of shares of common stock
equal to $6,000 per month. The number of shares will be determined
based on the bid price 5 days prior to issuance.
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. The agreement was terminated
effective January 1, 1998.
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. The agreement was terminated
effective January 1, 1998.
F-36
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Consulting Agreements/Commitments (Continued)
In December 1996, the Company entered into a two-year consulting
agreement for certain advisory services, including managing a
technology development branch in Israel. The advisor was paid $2,000
and issued 5,000 shares of common stock for services performed
through November 15, 1996. 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. Effective April 1, 1998, the Company
agreed to increase the consultant's cash compensation to $5,000 per
month, and will issue a number of shares of common stock equal to
$6,000 per month. The number of shares will be determined based on
the closing bid price 5 days prior to issuance.
On April 1, 1998, the Company entered into a one-year consulting
agreement for marketing and advisory services related to the
Company's technologies. The agreement provides for a monthly fee of
$11,000, payable in $5,000 in cash and the issuance of a number of
shares of common stock equal to $6,000. The number of shares will be
determined based on the closing bid price five days prior to
issuance.
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-37
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - 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. 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.
F-38
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation
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.
Former Employee Dispute
The former president has advised the Company that he believes that
he was wrongfully terminated under the provisions of a certain
employment agreement allegedly executed by the Company in his
behalf, and has made demand for certain payments, as provided in the
employment agreement in his possession. The Company has taken the
position that there is no valid employment agreement with the former
president and that he is not entitled to the payments demanded and
is attempting to negotiate a settlement of the matter. The Company
is unable to predict the outcome of this matter or any potential
liability, which the Company may incur.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Transactions
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.
1998:
During the year ended December 31, 1998, a holder of debentures
exercised the right under the November 27, 1997 convertible
debenture bond agreement to convert principal of $30,000 and accrued
interest of $2,194 into 100,002 shares of the Company's common
stock.
F-39
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - 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 preferred stock.
Costs in connection therewith, aggregating $75,000, were charged to
operations during the year ended December 31, 1997.
NOTE 16 - SUBSEQUENT EVENTS
Secured Promissory Note
On January 6, 1999, the Company's Chairman and the majority
convertible debt holder agreed to provide $500,000 of short-term
financing to the Company, $450,000 payable on January 6, 1999 and
$50,000 payable on March 31, 1999. In exchange for this financing,
the Company issued two secured promissory notes. Each secured
promissory note bears interest at 8% per annum and is due January 6,
2000. The promissory notes are collateralized by the Company's
intangible assets and can be exchanged for 8% Convertible Debentures
under terms similar to the current outstanding debentures discussed
in Note 11. As additional consideration for the financing, the
Company issued to the secured promissory note holders warrants to
purchase 84,750 shares of the Company's common stock at the average
market value for five trading days immediately preceding the
issuance date. The warrants expire five years from January 6, 1999.
Employment Agreement
On January 11, 1999, the Company entered into an employment
agreement with its current president. The agreement provides for
$2,000 per week salary and expires three months from January 11,
1999.
Increase in Investment in Chemonol
As discussed in Note 3, the Company has a 20% interest in Chemonol,
an Israeli research and development company. On January 20, 1999,
the Company entered into an agreement to invest $300,000 in exchange
for an additional 16% of Chemonol's voting stock. The agreement
provides for the Company to make four (4) equal payments of $75,000
commencing March 1, 1999, July 1, 1999, October 1, 1999 and January
1, 2000. At the completion of the transaction, the Company will own
36% of Chemonol.
F-40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EUROTECH,
LTD. BALANCE SHEET AS OF DECEMBER 31, 1998 AND STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
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<CURRENT-ASSETS> 8
<PP&E> 41
<DEPRECIATION> 9
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<CURRENT-LIABILITIES> 1,942
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<OTHER-EXPENSES> 1,039
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<INTEREST-EXPENSE> 4,796
<INCOME-PRETAX> (7,814)
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