11,971,942 SHARES OF COMMON STOCK
OF
EUROTECH, LTD.
This prospectus relates to the resale of shares of our common stock. The
shares may be sold by certain of our existing shareholders. We will not receive
any proceeds from the sale of the common stock.
Our common stock is traded on the Bulletin Board under the symbol "EURO."
The last sale price for our common stock, as reported on the Bulletin Board on
September 3, 1999, was $1.18.
We will bear all expenses, other than selling commissions and fees, in
connection with the registration and sale of the common stock being offered by
this prospectus.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK
FACTORS" STARTING ON PAGE 6. Some of the Risks you face in investing
in our common stock are:
We have a limited operating history and have not generated revenues
to date.
We have a high level of debt and a significant accumulated
Stockholders' deficit.
Our marketing and sales program is highly dependent on Negotiating
and entering into agreements with third parties. To date, we have
not entered into any definitive agreements with third parties.
Because we have a limited operating history, there can be no
assurance that our technologies and products will be accepted in the
marketplace.
The proceeds from the sale of these shares will not be available to
us.
---------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OUR SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE.
IT'S ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.
--------------------
September 30, 1999
The information in this prospectus might change. This prospectus isn't an offer
to sell our common stock - and doesn't solicit offers to buy - in any state
where the offer or sale isn't permitted.
1
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about Eurotech and this
prospectus. It likely does not contain all the information that is important to
you. For a more complete understanding, we encourage you to read the entire
document and the documents referred to in this prospectus, including the
financial statements and related notes.
In this prospectus, the words "Eurotech," "Company," "we," "our," and "us"
refer to Eurotech, Ltd.
The Company
Eurotech is a development stage, technology transfer, holding and
management company formed to commercialize new, existing but previously
unrecognized or classified technologies. Our current emphasis is on technologies
developed by prominent research institutes and individual researchers in the
former Soviet Union and Israel.
Since our formation, we have acquired selected technologies through equity
investments, assignments and licensing arrangements. While we intend to continue
identifying, monitoring, reviewing and assessing new technologies, our primary
focus will be on commercializing four of our present technologies. The four
present or Principal Technologies we intend to commercialize are:
o Silicon Compound Technology, EKOR, which is a silicon-based Material
for the conservation and containment of ecologically hazardous
radioactive materials;
o Hybrid Non-isocyanate Polyurethane, HNIPU, which is a Modified
polyurethane that does not contain the toxic isocyanates used in the
production process of conventional polyurethane;
o Liquid Ebonite Material, LEM, which is a synthetic rubber; and
o Rubber concrete, RubCon, which is a rubber-based concrete.
Currently, we intend to devote our business focus and resources primarily
to the marketing of the Principal Technologies. We have initiated a marketing
program for the Principal Technologies, and have initiated discussions with a
number of prominent potential users of the technologies. Our objective is to
enter into negotiation and execution of licensing and/or joint venture,
marketing and other agreements with potential users. To date, we have not
generated any revenues from our operations, or entered into any definitive
agreements related to the Principal Technologies.
Our executive office is located at 1216 16th Street, N.W., Washington,
D.C.,20036.
2
<PAGE>
The Offering
Capital Stock Offered by the
Selling Shareholders.......... 11,971,942 shares of common stock.
Capital Stock Outstanding
Before Offering(1)............ 30,770,692 shares of common stock.
Capital Stock Outstanding
After Offering (2)............ 33,846,193 shares of common stock.
Use of Proceeds................. We will not receive any proceeds from the
sale of any of the common stock.
Risk Factors.................... The common stock offered under this
Prospectus is speculative and very risky.
You should carefully consider the risk
factors contained in this prospectus before
investing. See the Risk Factors Section for
a more complete discussion of the risks
associated with investment in the common
stock.
(1) Common shares as of June 30, 1999, 23,149,454
Add: Common shares sold privately after June 30,1999. 3,000,000
Add: Common shares issued to directors, officers and
consultants 91,288
Add: Common Shares issued in exchange for certain 4,530,000
shares of Kurchatov Research Holdings Ltd
Total Shares Outstanding Before Offering 30,770,692
(2) Total common shares as of September 29, 1999 30,770,692
Add: Common shares registered for exercise of 1,276,250
Warrants.
Add: Common shares registered for holders of 10,827,692
convertible debentures
Less: Common shares registered for warrants (320,000)
held by holders of convertible debentures
Less: Common shares registered for existing (1,087,203)
restricted common shares held by debentures
holders.
Total Shares Outstanding After Offering 41,467,431
3
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1997 and 1998 and for the
years ended December 31, 1996, 1997 and 1998 are derived from and should be read
in conjunction with our audited financial statements and notes thereto included
elsewhere in the prospectus. The selected financial data for the six months
ended June 30, 1999 are derived from and should be read in conjunctions with our
unaudited financial statements included elsewhere in the prospectus. In the
opinion of management, the unaudited financial statements include all material
adjustments, consisting of only normal, recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for the
period. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and accompanying notes appearing
elsewhere in the prospectus.
4
<PAGE>
Statement of Operations Data
<TABLE>
<CAPTION>
For the Six
Months
For the Years Ended December 31, Ended
1996 1997 1998 June 30, 1999
(unaudited)
------------ ------------ ------------ ------------
REVENUES $ $ $ $
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development 1,170,782 1,007,671 1,039,591 493,149
Consulting fees 277,363 553,295 293,323 317,486
Compensatory element of stock
issuance pursuant to
consulting agreements 1,209,477 839,550 422,200 660,088
Other general and administrative
expenses 547,447 1,262,067 1,263,174 397,552
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,205,059 3,662,583 3,018,288 1,868,275
------------ ------------ ------------ ------------
OPERATING LOSS (3,205,059) (3,662,583) $ (3,018,288) (1,868,275)
------------ ------------ ------------ ------------
OTHER EXPENSES:
Interest expense $ 43,422 $ 270,740 $ 552,971 $ 341,107
Amortization of deferred
and unearned
financing costs 228,502 8,507,919 4,242,884 292,413
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES: 271,924 8,778,659 $ 4,795,855 633,520
------------ ------------ ------------ ------------
NET LOSS $ (3,476,983) $(12,441,242) $ (7,814,143) $ (2,501,795)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.23) $ (0.71) $ (0.40) $ (0.12)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
USED IN BASIC AND DILUTED
LOSS PER SHARE 14,808,000 17,580,711 19,323,098 20,622,70
============ ============ ============ ============
</TABLE>
5
<PAGE>
For the
Period from
Inception
May 6, 1995 to June 30,1999
(unaudited)
REVENUES $
------------
OPERATING EXPENSES:
Research and development 3,923,254
Consulting fees 1,708,357
Compensatory element of stock issuance pursuant
to consulting agreements 3,131,315
Other general and administrative expenses 3,504,505
------------
TOTAL OPERATING EXPENSES 12,267,431
------------
OPERATING LOSS (12,267,431)
------------
OTHER EXPENSES:
Interest expense 1,208,240
Amortization of deferred and unearned financing
costs 13,271,718
------------
TOTAL OTHER EXPENSES: 14,479,958
------------
NET LOSS $ 26,747,389
============
6
<PAGE>
Balance Sheet Data
<TABLE>
<CAPTION>
1996 1997 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Working Capital $ (1,809,237) $ (2,156,537) $ (1,933,751) $ (2,973,839)
Total assets $ 617,492 $ 952,243 $ 76,403 $ 232,340
Total liabilities $ 2,292,316 $ 5,801,966 $ 8,911,809 $ 9,338,445
Deficit accumulated during the development stage $ (3,990,209) $(16,431,451) $(24,245,594) $(26,747,389)
Total stockholders' (deficiency) $ (1,674,724) $ (4,849,723) $ (8,835,406) $ (9,570,785)
</TABLE>
7
<PAGE>
RISK FACTORS
Please carefully consider the risk factors before deciding to invest in the
common stock:
We have a limited operating history and anticipate incurring significant losses
through 1999.
Our limited operations to date have consisted primarily of identifying,
monitoring, reviewing and assessing technologies for their commercial
applicability. We are subject to all of the business risks associated with a new
enterprise, including,
o risks of unforeseen capital requirements,
o failure of market acceptance of our products and technologies,
o failure to establish business relationships with third parties,
o competitive disadvantages as against larger and more established
companies. We anticipate incurring significant operating losses
through 1999. We may incur additional losses thereafter, depending
upon:
o our ability to consummate any or a sufficient number of
o working arrangements or licenses with third parties and the
operation and financial success of any projects which are and our
potential working partners may be awarded.
We have had no meaningful revenues to date. While our management believes
that we will recognize revenues during 1999, based on expressions of interest
from third parties to acquire licenses and enter into agreements to use the
Principal Technologies, there can be no assurance as to when or whether we will
be able to commercialize our products and technologies and realize any revenues.
Our products and technologies have never been utilized on a large-scale
commercial basis. Our ability to operate the business successfully will depend
on a variety of factors, many of which are outside our control, including:
o competition,
o cost and availability of raw material supplies,
o changes in governmental (including foreign governmental) initiatives
and requirements,
o changes in domestic and foreign regulatory requirements, and
o costs associated with equipment development, repair and maintenance.
8
<PAGE>
Our independent public accountants and the notes to our financialstatements
included in this prospectus state that the continuation of our business as a
going concern depends on, among other things:
o obtaining of additional funds to complete the commercialization of
our present technologies,
o the generation of significant future revenues and income, and
o market acceptance of our technologies.
We will need additional monies to continue our business. The raising
ofadditional monies may significantly dilute your ownership percentage interest
in us.
Our future capital requirements could vary significantly and will depend
on certain factors. Many of these factors are not within our control. These
include the:
o existence and terms of any collaborative arrangements with third
parties;
o ongoing development and testing of our products;
o existence and terms of any licensing and/or joint venture
o agreements for the marketing and sales of our Principal
Technologies; and
o the availability of financing.
In addition, the continuation of our business will require significant
capital resources for the commercialization of our present technologies. To the
extent we raise additional capital by issuing equity securities, holders of our
equity securities will be diluted.
No assurance can be given that we will successfully obtain any further
working capital or complete any further offerings of our securities. Also, we
don't know if the monies we raise will be sufficient or that it will not cause
substantial dilution to you. Further, we can't assure that we will be successful
in the marketing of our technologies.
We have a high level of debt which we may have difficulty paying.
As of June 30, 1999 we had $6,660,000 of long term debt outstanding,
consisting of the unpaid principal amounts of our $3,000,000, $3,000,000 and
$1,000,000 8% Convertible Debentures due March 20, 2000, February 23, 2001 and
July 20, 2001, respectively.
You face substantial dilution of your equity ownership percentage if our
convertible debentures are converted.
As part of the convertible debenture financing, we issued warrants to
purchase shares of our common stock. Also, as part of our July 1998 Convertible
Debentures financing, we modified certain of our prior financing agreements
eliminating the conversion price "floor" attendant to the debentures. Without
the conversion price "floor", we are not able to determine the number of shares
the debentures may be converted into. Accordingly, there exists a possibility of
substantial dilution of your equity ownership upon conversion of all or any
portion of the debentures. For an illustration of the potential dilution, please
see note 11 to the financial statements included in this prospectus.
9
<PAGE>
We face substantial risk in attempting to do business in Russia and the Ukraine.
Political and Social Risks
In recent years, Russia and Ukraine each have been undergoing a
substantial political and social transformation from centralized communism to
the early stages of pluralist democracy. As part of this process, the former
centrally controlled, command economies of Russia and Ukraine have been subject
to various reforms intended to lead to generally apitalist, market-oriented
economies. There can be no assurance that the political and economic reforms
necessary to complete these transformations will continue, or if they continue,
will be successful. In their present stages, the Russian and Ukrainian political
and economic systems are characterized by a proliferation of political parties.
The Russian and Ukrainian political and economic systems are also vulnerable to
their respective populations' dissatisfaction with reform, economic
dislocations, social and ethnic unrest, and changes in governmental policies and
decisions. Any of these factors could have a material adverse effect on the
private or governmental availability of hard currency, currency exchange rates,
the private ownership of businesses and other enterprises, the social
distribution of wealth, the private ownership and alienality of tangible and
intellectual property, and the availability of construction materials and
equipment. Any of these events could have a materially adverse effect on us.
As part of the reforms being instituted in Russia and Ukraine, both
countries have enacted legislation to protect private property against
expropriation and nationalization. However, because of lack of experience in
enforcing these provisions, and because of the potential political changes that
could occur in the future, we can't assure you that these protections will be
enforced in the event of an attempted expropriation or nationalization of the
EKOR intellectual property rights would have a material adverse effect on us. In
particular, the EKOR compound technology was developed by the I.V. Kurchatov
Institute ("Kurchatov"), a Russian, state-controlled scientific research and
development institute, and the Euro-Asian Physical Society ("EAPS"), a
professional society in Russia, which through a series of assignments have,
ultimately, assigned the EKOR compound intellectual property rights to us. No
assurance can be given that any of these governmental, governmentally
controlled, or governmentally affiliated entities would legally resist an
attempted expropriation or nationalization, either of which, if successful,
would have a materially adverse impact on us.
Also, the relative political instability of Russia and the Ukraine could
result in major changes in their respective governments, present reform policies
or rejection of the same, any of which may have a material adverse effect on us.
We can't assure you that such developments will not occur either in Russia or
Ukraine.
The political and economic changes that have occurred in Russia and
Ukraine in recent years have resulted in significant dislocations of political
and governmental authority caused by the collapse of their, respective, previous
governmental structures and political systems. New political and governmental
systems are only beginning to take form in Ukraine and Russia. Furthermore,
significant unemployment in Russia and Ukraine, the influx of unemployed persons
into major Russian cities, significant wage arrearages in Ukraine and Russia,
10
<PAGE>
and the existence of poorly paid police forces in both countries have led to
significant increases in crime in Russia and Ukraine. Significant levels of
organized criminal activity exist in large metropolitan areas of both countries.
While President Yeltsin of Russia and President Kuchma of Ukraine have
instituted anti-crime and anti-corruption programs, such measures are of recent
origin and have achieved minimal and uncertain results. We can't assure you that
the levels of crime and corruption in Russia and Ukraine will be curbed or
otherwise brought under control, and no assurance can be given that the social
and economic dislocations caused by high rates of organized and other crime and
of official corruption will not in the future have a material adverse impact on
us.
In both Ukraine and Russia state-controlled and, more recently,
privately-owned enterprises have often failed to pay full salaries to their
employees, and in some instances have not paid salaries at all for extended
periods of time. This, in conjunction with historically high rates of inflation
and escalating costs of living in both countries, could lead in the future to
labor and social unrest. Unrest could have political, social and economic
consequences including increased support for a return to centralized
governments, a climate hostile to foreign investment and increasing levels of
violence, any of which could have a material adverse impact on us.
Economic Risks
Along with the institution of political reforms, the Ukrainian and Russian
governments have been attempting to create and implement policies of economic
reform and economic stabilization, and to create legal structures intended to
promote private, market-based activities, foreign trade and foreign investment.
Although these policies have met with some success in both countries, we can't
assure you that they, or similar policies will continue to be supported and
pursued, or that if supported and pursued, will be successful.
Despite the implementation of economic reform policies, the Russian
economy and the Ukrainian economy are characterized by declining gross domestic
production, significant inflation, increasing rates of unemployment and
underemployment, unstable currencies, and high levels of governmental debt as
compared to gross domestic production. The prospect of wide-spread insolvencies
and the collapse of various economic sectors exists in both countries.
Additionally, in both Russia and Ukraine there is a general lack of consensus as
to the rate, extent and substantive content of economic reform. We can't assure
you that either Russia or Ukraine in the future will remain receptive to foreign
investment or market-oriented economies. We can't assure you that the economy of
either country will improve.
Ukrainian and Russian businesses have limited experience operating in free
market conditions, and compared with Western businesses have limited experience
with entering into contracts and performing contractual obligations.
Additionally, Ukrainian and Russian governmental agencies, as well as Ukrainian
and Russian business enterprises, have limited experience with the substantive
content and detail typical of Anglo-American and other Western contracts.
Accordingly, the detailed agreement to perform specified contractual obligations
in many instances may be contained in a series of written approvals, consents
and the like from various governmental and quasi-governmental bodies, as well as
from business companies, that accompany
11
<PAGE>
a formal contract. Legal reforms have only been recently instituted in Russia
and Ukraine to interpret and enforce contractual obligations on principles
similar to those of the legal systems of Western countries. Our expected
near-term revenues substantially depend upon technology transfer and consulting
fees memorialized in written contracts with Ukrainian and Russian entities. We
can't assure you that such fees will be paid in the manner called for in such
contracts or that enforcement of such payment obligations, if not performed
fully or at all, will be successful in Russian or Ukrainian courts.
We can't assure you that we will enter into joint venture agreements, licenses,
collaborative agreements or contracts.
Presently, our primary business strategy is entering into joint ventures
and licenses for the marketing and sale of our Principal Technologies. Also, we
anticipate entering into collaborative agreements that allow us to bid on
nuclear waste and contamination remediation projects. There can be no assurance
that we will enter into any definitive project agreements, licenses or joint
ventures for the marketing and sale of our Principal Technologies.
We are uncertain as to whether we would be able to enforce our agreements with
Israeli companies.
Hybrid non-isocyanate polyurethane, one of our Principal Technologies, and
three of our other technologies, (i) Electromagnetic Separation Technology, (ii)
Powdered Metallurgy Technology and (iii) Continuous Combustion Synthesis
Technology, were acquired by us in accordance with informal agreements in
principle with three Israeli technology companies. Generally the agreements
provide for our investment in and receipt of equity in technology research and
development projects sponsored by the respective company and selected by us.
Those agreements in principle are not in writing, are informal
arrangements between us and the companies, and are not enforceable as against
any of the entities. As a result, although we have entered into written
investment and other agreements in the case of each of the foregoing
technologies, none of the entities is obligated to permit us to invest in and/or
acquire any further entity-sponsored research and development projects.
Accordingly, our opportunity to acquire and commercialize entity-sponsored
technologies may be limited to the foregoing technologies only.
Because we have a limited operating history, we don't know if the market will
accept our products and technologies.
Many potential users of the EKOR compound have already committed
substantial resources to other forms of radioactive contaminant remediation and
environmentally clean energy production. Our growth and future financial
performance in large measure will depend on demonstrating to prospective
licensees, joint venturers, collaborative partners and users the advantages of
the EKOR compound, and our other Principal Technologies over alternative
products and technologies. There can be no assurance that we will be successful
in any of these efforts.
12
<PAGE>
We face unknown environmental liability risks, and we don't carry environmental
liability insurance.
Our 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; the failures could result in significant claims for
personal injury, property damage, and clean-up or remediation. Any claims
against us could have a material adverse effect on us. We do not presently carry
any environmental liability insurance, and may be required to obtain such
insurance in the future in amounts that we can't presently determine. We can't
assure you that such insurance will provide coverage against all claims. Also,
we can't assure you that claims made against us will not be greater than our
insurance coverage. These type of events could have a material adverse effect on
us.
We are subject to significant competition and the existence or development of
preferred technologies.
The near-term, primary markets for our products and technologies are
principally chemical manufacturing and radioactive contamination containment,
remediation and transportation. Mid-term markets are expected to continue in
these industries. We have limited experience in marketing our products and
technologies and, other than in connection with the remediation of Reactor 4 at
the Chernobyl Nuclear Power Plant, intend to rely on licenses and joint ventures
with major international chemical and other companies for the marketing and sale
of our Principal Technologies. In contrast, other private and public sector
companies and organizations have substantially greater financial and other
resources and experience than we do. Competition in our business segments is
typically based on product recognition and acceptance, price, and marketing and
sales expertise and resources. Any one or more of our competitors or other
enterprises not presently known to us may develop technologies and/or products
which are superior to ours, significantly underprice our products and
technologies, and/or more successfully market existing or new competing products
and technologies. To the extent that our competitors are able to accomplish any
of the foregoing, our ability to compete could be materially and adversely
affected.
We don't know if monies will be made available to fund remediation of Reactor 4.
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
13
<PAGE>
expected that EBRD, through G-7 funds, will provide the financing for the actual
remediation project. We can't assure you that these funds will actually be
available.
We can't predict whether our proprietary technology and patents will be
protected.
Of our present technologies, U.S. patent protection has been sought for
the EKOR compound material, HNIPU, modified polyurethene, LEM, a synthetic
rubber, and a powdered metallurgy technology. Foreign patent protection has been
sought for a coatings and a continuous combustion synthesis technology. 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. 5,936,000. The
Company also owns Patent No. 5,880,203 issued on May 28, 1998 for adhesive
composition. We can't assure you that:
o any of our pending or future patent applications will be approved;
o we will develop additional proprietary technology that is
patentable;
o any patents issued to us will provide us with competitive
advantages;
o or will not be challenged by third parties;
o the patents of others will not have an adverse effect on our ability
to conduct our business; or
o one or more of our technologies will not infringe on the patents of
others.
We can't assure you that others will not independently develop similar or
superior technologies, duplicate any of our processes, or design around any
technology that is patented by us.
It is possible that we 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 us on acceptable terms, if at all, or that we would
prevail in any such contest. We could incur substantial costs in defending
ourselves in suits brought against us on our patents or in bringing patent suits
against other parties.
We also rely on trade secrets, proprietary know-how and technology which
we seek to protect, in part, by confidentiality agreements with our prospective
working partners and collaborators, employees and consultants. We can't assure
you that these agreements will not be breached, that we would have adequate
remedies for any breach, or that our trade secrets and proprietary know-how will
not otherwise become known or be independently discovered by others.
The price of our common stock is influenced by many factors.
Prices for our common stock will be influenced by many factors, including
the depth and liquidity of the market for the common stock, investor perception
of us and our products, and general economic and market conditions. The market
price of our common stock may also be significantly influenced by factors such
as the announcement of new
14
<PAGE>
projects by us or our competitors and quarter-to-quarter variations in our
results of operations.
Because our common stock price is below $5.00, we are subject to additional
rules and regulations.
The SEC has adopted regulations which generally define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share, subject to certain exceptions. Our common stock presently is a "penny
stock". Because our stock is a "penny stock", it is subject to rules that impose
additional sales practice requirements on broker/dealers who sell our securities
to persons other than established customers and accredited investors. There can
be no assurance that the common stock will trade for $5.00 or more per share, or
if so, when. Consequently, the "penny stock" rules may restrict the ability of
broker/dealers to sell our common stock and may affect the ability of the
selling shareholders in this prospectus to sell the common stock in a secondary
market.
Although we desire to list the common stock on the Nasdaq SmallCap Market,
there can be no assurance that we will ever qualify.
In order to qualify for initial listing on the Nasdaq SmallCap Market a
company must, among other things, have:
o at least $4,000,000 in net tangible assets;
o a $5,000,000 "public float"; and
o a minimum bid price for its securities of $4.00 per share.
For continued listing on the Nasdaq SmallCap Market, a company must:
o maintain $2,000,000 in net tanagible assets, and
o a $1,000,000 market value of a public float.
In addition, continued inclusion requires two market makers and a minimum
bid of $1.00 per share. Failure to meet these maintenance criteria may result in
the discontinuance of Nasdaq SmallCap Market listing.
Absent Nasdaq SmallCap Market or other Nasdaq or stock exchange listing,
trading, if any, in common stock will, as it presently is, continue in the
"Electronic Bulletin Board" administered by the National Association of
Securities Dealers, Inc. As a result, you may find it difficult to dispose of or
to obtain accurate quotations as to the market value of the common stock.
We will not receive any monies from the sale of these shares
We will not receive any proceeds from the sale of shares offered in this
prospectus.
We may be subject to substantial regulations
We are not aware of any U.S. or foreign laws or regulations that govern
the marketing, sale or use of any of our present technologies, other than U.S.,
Russian and various Western European environmental safety laws and regulations
pertaining to the containment and remediation of radioactive contamination and
the toxicity of materials
15
<PAGE>
used. Based on the results of tests conducted at Kurchatov, we believe that the
EKOR compound meets applicable U.S. and German regulatory standards. However, we
can't assure you that more stringent standards may not in the future be adopted,
which may materially increase our cost of licensing and using the EKOR compound,
or prevent its use altogether. Moreover, we can't assure you that any or all
jurisdictions in which we presently or in the future conduct our business will
not enact laws or adopt regulations which increase the cost of or prevent us
from licensing our other technologies or otherwise doing business.
We are dependent on key personnel and consultants
We are substantially dependent upon the services of our three full-time
employees and our consultants. The loss of the services of ant employee or
consultant without adequate replacement could have a material adverse effect
upon our business. We do not have "key man".
USE OF PROCEEDS
The shares are being offered by the selling shareholders for their own
accounts. We will not receive any proceeds from the sale.
DIVIDENDS
To date we have not declared or paid any dividends on our common stock and
do not anticipate doing so in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization (capital deficiency) as
of June 30, 1999. Please read this with the financial statements and notes to
the financial statements appearing elsewhere in this prospectus.
As of
June 30, 1999
(unaudited)
------------
CONVERTIBLE DEBENTURES $ 6,660,000
------------
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $0.01 par value; 1,000,000
shares authorized; -0- shares
issued and outstanding $ --
Common stock - $.00025 par value;
50,000,000 shares authorized;
23,349,454 shares issued and outstanding
at June 30, 1999, respectively 5,837
Additional paid-in capital 17,175,640
Unearned financing costs (4,873)
Deficit accumulated during the development stage (26,747,389)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (9,570,785)
TOTAL CAPITALIZATION (2,910,785)
============
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OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of our financial condition, results of our
operations and liquidity. Please read the following with our financial
statements and notes contained in this prospectus.
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed here.
Our Plan of Operation
We are a development stage, technology transfer, holding and management
company formed to commercialize new, existing but previously unrecognized or
classified technologies. Our current emphasis is on technologies developed by
prominent research institutes and individual researchers in the former Soviet
Union and Israel.
Since our formation, we have acquired selected technologies through equity
investments, assignments and licensing arrangements. While we intend to continue
identifying, monitoring, reviewing and assessing new technologies, our primary
focus will be on commercializing four of our present technologies. The four
present or Principal Technologies we intend to commercialize are:
o Silicon Compound Technology, EKOR, which is a silicon-based material
for the conservation and containment of ecologically hazardous
radioactive materials;
o Hybrid Non-isocyanate Polyurethane, HNIPU, which is a modified
polyurethane that does not contain the toxic isocyanates used in the
production process of conventional polyurethane;
o Liquid Ebonite Material, LEM, which is a synthetic rubber; and
o Rubber concrete, RubCon, which is a rubber-based concrete.
Until recently, we 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 we intend to continue
identifying, monitoring, reviewing and assessing new technologies, our primary
emphasis will be focused on commercializing four of our present technologies
("Principal Technologies").
We believe that the Principal Technologies are presently ready for
commercialization and marketing. To that end, we have decided to devote our
business activities and resources principally to the marketing and sale of the
Principal Technologies. We recently have 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.
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We intend to operate our business by licensing our technologies to end-users and
through development and operating joint-ventures and strategic alliances. To
date, we have not generated any revenues from these operations.
We have not been profitable since inception and expects to incur substantial
operating losses over the next twelve months. For the period from inception to
June 30, 1999, we incurred a cumulative net loss of approximately $26,747,000,
We expect that we will generate losses until at least such time as we can
commercialize our technologies, if ever. No assurance can be given that any of
our 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, we are 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 our control.
Our Results of Operations
Comparison of the Six Months Ended June 30, 1999 and the Six Months Ended June
30, 1998
We have had no revenues since inception. Consulting expenses increased
from $505,000 for the six months ended June 30, 1998 to $978,000 for the six
months ended June 30, 1999. The increase in consulting expense is principally
the result of our increase in non-cash compensation issued to consultants and
its Board of Directors and Advisory Board. Other general and administrative
expenses decreased from $882,000 for the six months ended June 30, 1998, to
$398,000 for the six months ended June 30, 1999, primarily due to a decrease in
professional fees and other costs related to the completion of a registration
statement.
Research and development expenses decreased for the six months ended June
30,1999 to $493,000, from $560,000, for the six months ended June 30, 1998.
During 1998, we paid $187,500 to Professor Oleg L. Figovsky, Ph.D. in connection
with four technology purchase agreements. These payments were charged to
research and development expenses during the first quarter of 1998. Research and
development expenditures for the six months ended June 30, 1999 included
$221,000 related to our continuing investment in our seven Israeli technology
companies and 272,000 for our German and Russian technologies.
For the six months ended June 30, 1999 and 1998, we incurred operating
losses of $1,868,000 and $1,948,000, respectively. The losses are principally
due to expenses incurred in the acquisition and development of our 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 $3,479,000 for the six
months ended June 30, 1998 to $634,000 for the six months ended June 30, 1999.
Amortization of deferred and unearned financing costs decreased from $3,050,000
for the six months ended June 30, 1998 to $292,000 for the six months ended June
30, 1999. The decrease in the
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amortization of deferred and unearned financing costs is principally
attributable to portions of unearned financing costs having been fully amortized
during 1998.
We expect to incur significant losses during 1999. We anticipate that any
revenue recognized in 1999 will be substantially offset by expenses incurred by
us in our efforts to commercialize, sell and market our Principal Technologies.
Comparison of the Three Months Ended June 30, 1999 and the Three Months Ended
June 30,1998
Consulting expenses increased from $284,000 for the three months ended
June 30,1998 to $774,000 for the three months ended June 30, 1999. The increase
in consulting expense is principally the result of the increase in non-cash
compensation issued to consultants and our Board of Directors and Advisory
Board. Other general and administrative expenses decreased from $322,000 for the
three months ended June 30, 1998, to $243,000 for the three months ended June
30, 1999, primarily due to a decrease in professional fees and other costs
related to the completion of a registration statement.
Research and development expenses decreased for the three months ended
June 30,1999 to $199,000, from $253,000, for the three months ended June 30,
1998. Research and development expenditures for the three months ended June 30,
1999 included $105,000 related to our continuing investment in its seven Israeli
technology companies and $94,000 for our German and Russian technologies.
For the three months ended June 30, 1999 and 1998, we incurred operating
losses of $1,216,000 and $859,000, respectively. The losses are principally due
to expenses incurred in the acquisition and development of our 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 $2,103,000 for the three
months ended June 30, 1998 to $334,000 for the three months ended June 30, 1999.
Amortization of deferred and unearned financing costs decreased from $1,803,000
for the three months ended June 30, 1998 to $161,000 for the three months ended
June 30, 1999. The decrease in the amortization of deferred and unearned
financing costs is principally attributable to portions of unearned financing
costs having been fully amortized during 1998.
We expect to incur significant losses during 1999. We anticipate that any
revenue recognized in 1999 will be substantially offset by expenses incurred by
us in our efforts to commercialize, sell and market our Principal Technologies.
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Comparison of 1998 and 1997
We have had no revenues since our 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 our reduction in the number of consultants engaged during the period
and the reduction in consulting fees paid by issuances of shares of our common
stock. Other general and administrative expenses for 1997 compared to 1998
remained constant.
Research and development expenses increased during 1998 to $1,040,000,
from $1,008,000, during 1997. The increase was principally attributable to (i)
$187,500 paid by us to Professor Oleg L. Figovsky, Ph.D. in connection with the
four technology purchase agreements, dated January 1, 1998 and April 1, 1998,and
(ii) the purchase of technology from Israeli scientists in April of 1998 for
$40,000. Each of these items was charged to research and development expenses
during 1998. Further, we increased our funding for development of our Principal
Technologies. During 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 1998 and 1997, we have incurred operating losses of $3,018,000 and
$3,663,000, respectively. The losses are principally due to the lack of revenues
and to the following expenses incurred:
o the acquisition and development of our technologies,
o consulting costs, and
o general and administrative expenses.
Other expenses, consisting of interest expense and amortization of
deferred and unearned financing costs, decreased from $8,779,000 during 1997 to
$4,796,000 during 1998. However, 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 during 1997 to $4,243,000 during 1998. The decrease in
the amortization of deferred and unearned financing costs is principally
attributable to the issuance of shares of our common stock in 1997 valued at
$4,725,000 to the unit holders of the bridge financing in connection with our
failure to have our S-1 Registration Statement declared effective by the SEC by
April 1, 1998. The S-1 Registration Statement was declared effective by the SEC
in July 1998.
We expect to incur significant losses during 1999. We anticipate that any
revenue recognized in 1999 will be substantially offset by expenses incurred by
us in our efforts to commercialize, sell and market the Principal Technologies.
Comparison of 1997 and 1996
During 1997, consulting expenses decreased to $1,392,845 compared to
$1,486,830 during 1996. Other general and administrative expenses during 1997
increased to $1,262,067 from $547,447 during 1996. The increase is principally
the result of an increase of $469,000 in legal fees, recording a charge against
operations of $75,000 in connection
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with our abandoned initial public offering, and a $90,000 increase in salaries
from additions to our staff in the 1997 period, as compared to the 1996 period.
Research and development expenses during 1997 decreased to $1,007,671 from
$1,170,782 during 1996. The decrease is attributable to our having completed the
initial stages of research and development related to the EKOR compound
technology.
For 1997 and 1996, we incurred operating losses of $3,662,583 and
$3,205,059, respectively. These losses are principally the result of expenses
incurred by us in developing the EKOR technology and our lack of revenues.
Interest expense and amortization of deferred and unearned finance costs
increased from $271,924 for 1996 to an aggregate of $8,778,659 for 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
Since our inception, our primary sources of working capital have been the
net proceeds of:
o $842,000 from a limited offering of our common stock;
o $2,000,000 from a bridge financing completed in 1996 and
subsequently repaid;
o $3,000,000, $3,000,000 and $1,000,000 from private placements of our
8% Convertible Debentures due November, 2000, February, 2001 and
July, 2001, respectively;
o $750,000 from a private offerings of our common stock.
The Debentures may be converted into shares of our common stock at
beneficial conversion rates (please see note 11 to our financial statements
included with this prospectus). During the three months ended March 31, 1999, a
debenture holder exercised the conversion right under the November 27, 1997
Convertible Debenture agreement and converted principal of $310,000 and accrued
interest of $31,276 into 987,201 shares of the Company's Common Stock. 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 our
common stock. Based on the bid price of our common stock at June 30, 1999, the
debentures' principal currently outstanding could be converted into
approximately 16 million shares of common stock.
During the six months ended June 30, 1999, our principal source of cash
was the January 1999 secured promissory notes from which we
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derived net proceeds of approximately $450,000, a $150,000 deposit received in
connection with a proposed sale of certain sublicensing rights and proceeds of
$475,000 from the sale of restricted common stock.
On January 6, 1999, our chairman and the majority convertible debt holder
provided $450,000 of short-term financing to us, evidenced by two secured
promissory notes. Each secured promissory note bears interest at 13% per annum
and is due January 6, 2000. The promissory notes are collateralized by our
intangible assets and can be exchanged for 8% convertible debentures under terms
similar to the current outstanding debentures.
During the six months ended June 30, 1999, we received a deposit of
$150,000 in connection with the proposed sale of our sublicensing rights to
Resealable Container Systems and TetraPak Containers. The proposed transaction
is presently in the discussion stage and to-date no agreements have been signed.
During 1998, our principal sources of cash were the February 1998 and July
1998 Debenture Offerings from which we derived net proceeds of approximately
$3,740,000. Of this amount, $2,000,000 was used to repay the bridge financing
$227,500 was applied to the acquisition of technologies and the remaining funds
were used for working capital.
We have agreed in principle to fund the commercialization of certain
technologies developed in the former Soviet Union by scientists and researchers
at Kurchatov, and members of EAPS. Kurchatov will provide the materials,
facilities and personnel to complete the necessary work to commercialize the
technologies. We also have agreed in principle to provide funding in connection
with the marketing and sale of three of our Principal Technologies. Total
expenditures under these programs approximated $1,200,000 during 1998. Our
principal source of funding for these expenditures during the year 1998 was the
proceeds from the debenture offerings.
During 1998, we 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, we purchased for $40,000 the rights to
certain anticorrosive additive technology from Israeli scientists.
On January 20, 1999, we 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 us to make four equal payments of
$75,000, commencing March 1, 1999, July 1, 1999, October 1, 1999 and January 1,
2000. The first three payment have been made. At the completion of the
transaction, we will own 36% of Chemonol's common stock.
We will require additional financing to continue to fund research and
development efforts and operating costs and to complete necessary work to
commercialize our technologies. As the development of each technology is
completed and the technology's commercial applications are identified, we will
seek joint venture partners to fund any further capital expenditures, including
project financing. We are exploring additional sources of working capital,
including further private sales of securities, joint ventures and licensing of
our technologies. During
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the first six months of 1999, we relied on shareholder loans of $450,000 as our
principal source of working capital. The report of our independent certified
public accountants contains an explanatory paragraph which expresses substantial
doubt as to our ability to continue as a going concern.
We can't assure you that we can successfully obtain any additional
financing or, if obtained, that such funding will not cause dilution to your
equity interest in us. Further, no assurance can be given as to the completion
of our research and development and successful marketing of our technologies.
We have a working capital deficiency and stockholders' deficiency of
$2,973,839 and $9,570,785, respectively, as of June 30, 1999.
OUR BUSINESS
General
We are a development stage, technology transfer, holding and management
company formed to commercialize new, existing but previously unrecognized or
classified technologies. Our current emphasis is on technologies developed by
prominent research institutes and individual researchers in the former Soviet
Union and Israel.
Since our formation, we have acquired selected technologies through equity
investments, assignments and licensing arrangements. While we intend to continue
identifying, monitoring, reviewing and assessing new technologies, our primary
focus will be on commercializing four of our present technologies. The four
present or Principal Technologies we intend to commercialize are:
o Silicon Compound Technology, EKOR, which is a silicon-based material
for the conservation and containment of ecologically hazardous
radioactive materials;
o Hybrid Non-isocyanate Polyurethane, HNIPU, which is a modified
polyurethane that does not contain the toxic isocyanates used in the
production process of conventional polyurethane;
o Liquid Ebonite Material, LEM, which is a synthetic rubber; and
o Rubber concrete, RubCon, which is a rubber-based concrete.
Currently, we intend to devote our business focus and resources primarily
to the marketing of the Principal Technologies. We have initiated a marketing
program for the Principal Technologies, and have initiated discussions with a
number of prominent potential users of the technologies. Our objective is to
enter into negotiation and execution of licensing and/or joint venture,
marketing and other agreements with potential users. To date, we have not
generated any revenues from our operations, or entered into any definitive
agreements related to the Principal Technologies.
Our executive office is located at 1216 16th Street, N.W., Washington, DC
20036.
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Principal Technologies
I. Silicon (EKOR) Compound
Pursuant to agreements among us, the Ukrainian State Construction Company
("Ukrstroj") I.V. Kurchatov Institute ("Kurchatov") and the Euro-Asian Physical
Society ("EAPS"), we have provided financing for and have successfully completed
demonstration testing of EKOR for the purpose of remediating the severe
radioactive contamination problems that persist from the 1986 explosion of
Chernobyl Nuclear Power Plant Reactor 4 in Chernobyl, Ukraine. We believe the
EKOR compound is the most effective existing technology and material for
containing and facilitating the disposal of radioactive dust and waste
materials.
EKOR was jointly developed by scientists at Kurchatov Institute in Moscow
and members of EAPS for the conservation and containment of ecologically
hazardous radioactive materials. EKOR 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, we are 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. On March 23, 1999, EAPS was issued a
patent on the process for manufacturing the EKOR compound from the U.S. Patent
and Trademark Office, Patent No. 5,886,060.
In testing conducted at Kurchatov, EKOR has been shown to be highly
resistant to radiation and structural degradation from exposure to radiation. It
has also proven to be highly fire-resistant, water-proof, and capable of being
formulated in densities that display considerable structural strength and
weight-bearing properties of 100 lbs. per square inch. In high-dosage radiation
tests EKOR has met or exceeded all specifications for containment materials
developed by theChernobyl authorities. We believe that EKOR is the most
technologically advanced material for comprehensively containing both solid and
liquid radioactive materials, suppressing radioactive dust and preventing such
materials and dust from escaping into the atmosphere and from leaching into and
contaminating ground-water supplies. On November 28, 1997, the Ministry of
Health of the Russian Federation certified EKOR and its components as non-toxic,
thereby allowing for EKOR's production, delivery, sale and use in the Russian
Federation.
As a silicon-based elastomer, EKOR has adhesive properties that allow it
to stick to a wide variety of surfaces and materials. When applied, EKOR
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. EKOR 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
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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.
We expect that one of the first commercial uses of EKOR 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,
and to help structurally support the concrete and steel "sarcophagus" that was
built over Reactor 4 as an interim containment measure. The rapid deterioration
of the "sarcophagus," caused by the intense radiation persisting at Reactor 4,
has occasioned international concern that without the implementation of
effective site containment measures, a second nuclear disaster and possible
melt-down may occur. To this end, the G-7 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 between us and Kurchatov Research Holdings, Ltd. ("KRH"), 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 us and 50% will be remitted to KRH. See "Certain
Transactions--Common Directors, Officers and Shareholders."
Based on the properties demonstrated by the EKOR compound, Ukrstroj,
Kurchatov, the Ukrainian State Construction Company and the Company entered into
a Memorandum of Intent that 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 Ukrstroj and EAPS entered into a co-operation Agreement whereby we have
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 (an industrial almalgamation of the State
Committee of Ukraine on Atomic Energy) 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 our 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 ChNPP
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 fourth quarter of 1999. We will construct industrial scale machinery for
application of the EKOR compound at ChNPP Reactor 4, based on the application
machinery successfully demonstrated on April
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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 our 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 4's Shelter
Project. Eurotech is prepared to commence application of its EKOR compound in
connection with the ChNPP Reactor 4 remediation project. The commencement
remains subject to the selection of a general contractor for the project, the
negotiation of satisfactory arrangements for the release of funds from the
European Bank of Reconstruction and Development ("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 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 Reactor 4.
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, with G-7 funds, will provide the financing for the actual remediation
project. Additionally, ChNPP Reactor 4 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, our 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 our contemplated ChNPP bid, we are
bidding on U.S. nuclear waste transportation, containment, storage and burial
projects utilizing the EKOR compound technology. We also have 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. We have submitted a first-round demonstration project 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.
We are also in the process of identifying potential licensees of the EKOR
technology, and have 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 us, or that such licensing discussions will successfully result in
the execution of an EKOR license.
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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 performers.
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. We believe that these advanced characteristics make
HNIPU superior to conventional polyurethane's 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 sealant, 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. We 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 us, Chemonol's principal shareholder has agreed to vote
his common equity as directed by us.
In November 1998, we presented our HNIPU technology at the International
Exhibition for Ideas, Inventions and New Products ("IENA"), a conference in
Nuremberg, Germany. We were awarded the two highest awards for our HNIPU at the
exhibition.
We are 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, sample HNIPU for evaluation and applications testing. We are
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.
A patent application for HNIPU was filed with the US Patent and Trademark
Office on May 28, 1998 and is pending.
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, we believe 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
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applied to form surface coverings using standard coating techniques, including
spraying and dipping.
LEM was independently developed by Prof. Figovsky and was acquired by us
pursuant to a Technology Purchase Agreement dated January 1, 1998 for a purchase
price of $15,000, plus royalties equal to 49% of our 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, we have not derived any such revenues
and do not expect to derive any such revenues in 1999. Prof. Figovsky one of our
consultants.
A patent application for LEM was filed with the US Patent and Trademark
Office on July 28, 1998 and is pending.
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. We believe 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
us pursuant to a Technology Purchase Agreement dated January 1, 1998 for a
purchase price of $35,000, plus royalties equal to 49% of our net revenues from
sales or licenses of any products incorporating Rubcon, payable for a period of
15 years commencing on January 1, 1998. To date, we have not derived any such
revenues and does not expect to derive any such revenues in 1999.
We currently anticipate that we 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
we 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.
Acquisition of Israeli Technologies
Incubator Technologies
We have informally agreed in principle with three Israeli technology
companies: (i) the Technion Entrepreneurial Incubator Co., Ltd. ("TEI"), (ii)
Ofek Le-Oleh Foundation, and (iii) the Incubator for Technological
Entrepreneurship-Kiryat Weizmann, Ltd., to participate in certain technology
research and development projects sponsored by each
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company. Under such informal arrangements, we would provide 15%-20% of the
financing required for, and would receive a 20% equity interest in, research and
development projects selected by us and the corporations. To this end, we have
opened an office at the premises of TEI in Haifa, Israel. We have not entered
into a written agreement with any of the foregoing companies memorializing any
such agreement in principle. The only written agreements between us and the
companies are those disclosed in connection with Chemonol, Separator, Remptech,
and Comsyntech, Ltd., each of which is an Israeli corporation. None of the
companies are legally obligated to enter into any further such agreements with
us. There is no assurance that we will be able to invest in or acquire any
additional Israeli company-sponsored technologies.
Under agreements with each of Chemonol, Ofek and Weizmann, we have
invested in four Israeli technology companies:
o Chemonol, which has developed materials and processes for
manufacturing hybrid non-isocyanate polyurethane industrial
coatings;
o Separator, which is developing a process for the electromagnetic
separation and production of high temperature superconductive
metallic powders;
o Remptech, which is developing processes for the production of
extra-fine cobalt and nickel powders; and,
o Comsyntech, which is developing a process for the continuous
combustion synthesis of ceramic, composite and intermetallic
powders.
Under those agreements, we received 20% of each company's common equity,
in exchange for our investment of U.S. $60,000. Also, we received:
o 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;
o options to acquire from the holders of a majority of the outstanding
common equity 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
o the perpetual right to direct the voting of the common equity of the
principal shareholders of each company, giving us voting control in
each case. There is no assurance that when such options become
exercisable we will have sufficient funds to exercise any of them.
As to Chemonol, on January 20, 1999, we entered into an agreement with it
to invest US$300,000 in Chemonol 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. The first three payment have been
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made. Upon completion, we will own 36% of Chemonol's common equity. As to
Separator, Remptech and Compsyntech, additional equity investments are subject
to further negotiation.
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. Our options to acquire additional common equity of
the above companies are exercisable within such two year periods and any
acquisition of the common equity will require the Chief Scientist's consent.
Although we presently expect that if requested such consent would be given,
there is no assurance that such consent will be obtained. Accordingly, we plan
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, we have acquired from Oleg L. Figovsky, Ph.D., 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: a group
of related technologies collectively known as Interpenetrated Network Polymers
("INP"); Liquid Ebonite Material ("LEM"); and RubCon for purchase prices of
$75,000, $15,000 and $35,000, respectively. Under the agreements, during the
15-year period commencing on January 1, 1998, we are obligated to pay to Prof.
Figovsky royalties equal to 49% of our net revenues from the sales or licensing
of any products incorporating the applicable technology. We have 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.
We believe that two of these technologies, RubCon and LEM, are ready for
commercialization, and have included them in the Principal Technologies which we
intend to be the focus of our marketing program.
RubCon is a rubberized concrete which we believe is superior to presently
available similar concrete 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 we believe 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.
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.
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Other Technologies
We also are engaged in the continuing research and development of other
technologies we believe to be of potential, future commercial significance.
Electromagnetic Separation ("EMS") Technology
We are 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. We are the holder of 20% of
Separator's common equity.
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 indicate 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, we believe 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. We believe 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
We are 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 a product with superior
structural, physical and mechanical properties. We believe 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. We
believe 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.
We are the holder of 20% of Remptech's common equity and have options to
purchase the 20% common equity interest in Remptech held by OFEK, which is
partially sponsoring Remptech's research and development activities, and an
additional 31% of such common equity from Remptech's principal shareholders.
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A patent application for powdered metallurgy technology was filed with the
US Patent and Trademark Office on July 30, 1998 and is pending.
Continuous Combustion Synthesis ("CCS") Technology
We are also participating in the further research and development of a
process for the 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. We believe 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, we believe
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.
A patent application for continuous combustion synthesis technology was
filed with the Israeli Patent Office on November 17, 1998 and is pending.
Re-sealing Packaging Technology
In December 1997 we acquired an exclusive world wide and perpetual license
to commercialize, use, exploit and market two mechanical systems for re-sealing
soft-drink beverage cans and cardboard beverage containers. The Company recently
received a $150,000 deposit on a proposed sale of its sublicensing rights to
both systems. The proposed transaction is in the discussion stage and no
agreements have been concluded.
Other technologies, including the telephone technology known as "CORO",
are presently being evaluated by us. As the results of those evaluations are
received, we will develop appropriate plans to commercialize those technologies.
We are not a subsidiary of another corporation, entity or other person. We
do not have any subsidiaries.
Employees
We have three full-time employees and fourteen consultants operating in
the United States, Germany, Russia and Israel.
None of our employees is covered by a collective bargaining agreement. We
consider our employee relations to be satisfactory and have not experienced any
labor problems.
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Competition and Marketing
The near-term, primary markets for our products and technologies are
chemical manufacturing and radioactive contamination containment, remediation
and transportation. We have limited experience in marketing our products and
technologies and, other than in connection with the remediation of Reactor 4,
intend to rely on licenses and joint ventures with major international chemical
and other companies for the marketing and sale of our Principal Technologies. In
the case of the EKOR compound, we have retained a consultant to market EKOR to
the U.S. government and private companies. In contrast, other private and public
sector companies and organizations have substantially greater financial and
other resources and experience than we do. Competition in our business segments
is typically based on product recognition and acceptance, price, and marketing
and sales expertise and resources. Any one or more of our competitors or other
enterprises not presently known to us may develop technologies and/or products
which are superior to ours, significantly underpriced our products and
technologies, and/or more successfully market existing or new competing products
and technologies. To that extent our ability to compete could be materially and
adversely affected.
Regulation
We are not aware of any U.S. or foreign laws or regulations that govern
the marketing, sale or use of any of our 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, we believe 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, will not materially increase the cost to us 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 we presently or
in the future conduct our business will not enact laws or adopt regulations
which increase the cost of or prevent us from licensing our other technologies
or otherwise doing business therein. Particularly in Russia and Ukraine, the
enactment of such laws or the adoption of such regulations may have a presently
unquantifiable, substantial adverse impact on our financial condition, business
and business prospects.
Intellectual Property
Of our present technologies, US patent protection has been sought for the
EKOR compound material; HNIPU, a modified polyurethene; LEM, a synthetic rubber;
and a powdered metallurgy technology. Foreign patent protection has been sought
for a coatings and a continuous combustion synthesis technology. On March 23,
1999, EAPS received a patent on the EKOR compound from the US Patent and
Trademark Office, Patent No. 5,836,000. There can be no assurance that any of
our pending or future patent applications will be approved, that we will develop
additional proprietary technology that is patentable, that any patents issued to
us will provide us with competitive advantages or will not be challenged by
third parties, that the patents of others will not have
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an adverse effect on our ability to conduct our business or that one or more of
our 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 our processes, or design around any
technology that is patented by us. It is possible that we may need to acquire
licenses to, or to contest the validity of, issued or pending patents of third
parties relating to our products. There can be no assurance that any license
acquired under such patents would be made available to us on acceptable terms,
if at all, or that we would prevail in any such contest. In addition, we could
incur substantial costs in defending suits brought against us on our patents or
in bringing patent suits against other parties.
In addition to patent protection, we also rely on trade secrets,
proprietary know-how and technology that we seek to protect, in part, by
confidentiality agreements with our prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others.
Description of Property
We recently relocated our headquarters to 1216 16th Street, NW,
Washington, DC 20036 for which we pay monthly rent of $1,800. We believe that
our current facilities are sufficient to meet our requirements.
We also occupy 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 us for our contemplated
Israeli technology development and marketing activities.
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 us for breach of contract, seeking injunctive relief, specific
performance and monetary damages of nearly $5 million. The Dirks litigation
arises from an agreement between us and National Securities Corporation 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. We 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 our 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. We believe
that the plaintiffs have
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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 on us in late January 1998. We intend to defend
vigorously and believe that the plaintiffs' claims will be resolved favorably to
us. In response to the Dirks litigation, we have filed an appropriate response,
including counterclaims relating thereto. If we were to be adjudged liable in
the Dirks litigation, the resolution of the litigation could have a material
adverse effect on us.
MARKET FOR COMMON STOCK
Trading Market
Our common stock trades on the NASD Electronic Bulletin Board.
Principal Market-Makers
The principal market-makers of our common stock are Cantor Fitzgerald
Securities, Grady & Hatch, Olson & Company, Sherwood Securities, Fahnstock &
Co., Paragon Capital Corporation, and Nash Weiss & Co.
Number of Shareholders of Record
The following table sets forth the approximate number of holders of record
of the common stock as of August 31, 1999 we have 177 shareholders of record.
Dividends.
To date we have not declared or paid dividends on our common stock. We
presently plan to retain earnings, if any, for use in our business.
Market Price.
The following table sets forth the quarterly high and low closing bid and
closing ask prices (in U.S. dollars) for the common stock for 1997 and the first
half of 1999.
1997 Clonging Bid
---- ------------
High Low
---- ---
JAN. 2 THRU MAR. 31 12.25 5.625
APR. 1 THRU JUNE 30 9.625 4.000
JULY 1 THRU SEPT. 30 6.875 5.000
OCT. 1 THRU DEC. 31 5.4375 1.875
1998
----
JAN. 2 THRU MAR. 31 3.3125 2.000
Apr. 1 THRU June 30 2.18 .25
JULY 1 THRU SEPT. 20 1.291 .975
OCT. 1 THRU DEC. 31 .975 .21375
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1999
----
JAN. 1 THRU MAR. 31 1.125 .30
APR. 1 THRU JUNE 30 1.00 .62
JULY 1 THRU SEPT.29 1.56 .75
Source: National Quotation Bureau, LLC
On June 1, 1996, our Board of Directors authorized a four-for-one split of
the then outstanding shares of our common stock. All share and
per-share information contained in this prospectus have been re-stated to
reflect such stock split.
The foregoing data represents prices between dealers and does not include
retail mark-ups, mark-downs or commissions, nor does such data represent actual
transactions or adjustments for stock-splits or dividends.
MANAGEMENT
Executive Officers and Directors
Name Age Position with the Company
---- --- -------------------------
Dr. David Wilkes 76 Chairman and Director
Dr. Randolph A. Graves, Jr. 60 Director
Don V. Hahnfeldt 55 President and Chief Executive
Dr. Geraldine V. Cox 55 Vice President and Chief Operating Officer
Hans-Joachim Skrobanek 48 Vice President, European Operations
Chad Verdi 32 Director
Michael L. Thomas 38 Secretary and Vice President,
Finance and Administration
Dr. David Wilkes serves as a consultant to the international food industry. From
1950 to 1989, Dr. Wilkes founded and served as president and chief executive
officer of Globe Extracts, a producer and creator of natural and synthetic
flavorings for many of the top twenty-five national and international food
companies.
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 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
Environmental 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.
He also holds distinguished honorary and elected positions including Fellow of
the Institute of Food Technologies, member of the New York Academy of Science,
Fellow of the American Institute of Chemists, is listed in Who's Who - Global
Business Leaders, and is a member of the Society of Flavor Chemists.
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Dr. Randolph A. Graves, Jr., serves as a consultant to the Aerospace Computing
and Small Business communities through Graves Technology, a company he founded
in 1991. Prior to founding Graves Technology, Dr. Graves held various positions
in small start-up companies. He currently serves on the Business Advisory Board
of Bortder Logic, Inc., a start-up internet game development company.
Dr. Graves has over thirty years experience in managing scientific 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 is an Associate Fellow of the American Institute of Aeronautics and
Astronautics, is 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. Dr. Graves has written or co-authored over sixty
formal scientific 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.
Mr. Don V. Hahnfeldt joined the Company on July 7, 1999 following a twenty-nine
year career in public and government service, including a strong background in
nuclear technology. His areas of expertise are strategic planning and financial
management.
Mr. Hahnfeldt recently served as City Manager of Sunnyside, Washington. Prior to
that he served in the U.S. Navy where he rose through the ranks to become
Commodore of a Trident Submarine Squadron with eight nuclear powered ballistic
missile subs, 4,000 personnel and an annual budget of $100 million. He was
awarded numerous citations for effective leadership and his commands were
repeatedly cited for outstanding efficiency and combat readiness. He was awarded
the Navy's highest peacetime personnel award, the Legion of Merit, four times.
Mr. Hahnfeldt received a B.S. in Business Administration from Roosevelt
University, an equivalent M.S. in Nuclear Engineering from the U.S. Navy Nuclear
Power School, an M.S. in Operations Research from the Navy Post Graduate School,
and an M.P.A. from Valdosta State University.
Dr. Geraldine V. Cox has 18 years experience in senior management in industry
and trade associations representing basic industries. While Dr. Cox was trained
as an environmental scientist, she has worked with
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the chemical and petrochemical, transportation electronics and allied
industries. She is chairman and Chief Executive Officer of AMPOTECH Corporation,
a technology transfer company focusing on power generation, and she was a Vice
President of Fluor Daniel reporting directly to the President of Sales. She was
Vice President and Technical Director of the Chemical Manufacturers Association
for 12 and one-half years, where she reorganized and restructured the industry
advocacy and research programs for the association. She also served as primary
media spokesman for the industry on many issues, including the accident in
Bophal, India. She was a White House Fellow, serving as the Special Assistant to
the Secretary of Labor (1976-1977). She has received numerous national awards,
including the highest civilian award from the United States Coast Guard for her
work on maritime industrial hygiene, and the Society of Women Engineers top
Award for engineering achievement in 1984.
Mr. Hans-Joachim Skrobanek is a former Director of ours 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 Daimler-Benz,
spent nine years as a Director with IVVKA AG (Affiliated with Quandt-Group/BMW),
and six years as Managing Director of FBT-Finance by Trade GmbH (a wholly-owned
subsidiary of Berliner Bank).
Mr. Chad A. Verdi is presently the President and CEO of Coastal Food Services &
Provisions Inc. and 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.
Under the management of Mr. Verdi, the Coastal Companies have 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.
Mr. Michael L. Thomas has more than ten years experience in marketing, sales,
accounting and management including: product development; financial and budget
planning; administrative management; fund-raising; grant writing and volunteer
resources. He was president and publisher of Health and Wellness publishing
where he edited Health Educator. Mr. Thomas was an account manager for RDP
Development. He served as research analyst working on management planning --
primarily on housing issues. He was a partner and sales manager at a catering
company, Love at First Bite Catering.
We have a Board of Directors comprised of three persons. Under our
By-Laws, directors are supposed to be elected at annual meetings of shareholders
and hold offices until the next annual meeting of shareholders or until their
successors have been elected. In practice, we have never held a shareholders
meeting for the election of directors.
On November 30, 1998, Adm. James D. Watkins resigned as a director. On
December 10, 1998 Maxwell Rabb and Lawrence McQuade resigned as directors.
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On December 10, 1998, Dr. David Wilkes, Dr. Randolph Graves, and Joseph
Gatti were elected to the Board of directors by the departing directors. On
April 8, 1999, Joseph Gatti resigned as a director, and on that same date Chad
Verdi was elected to serve as a director by the remaining directors.
On April 1, 1999 the Company entered into an Employment Agreement with
Frank X. Fawcett to serve as our President and Chief Executive Officer. On July
6, 1999 the Company and Mr. Fawcett entered into a Disengagement Agreement
terminating the Employment Agreement for personal reasons, and on July 7, 1999
Mr. Hahnfeldt took office as our President and Chief Executive Officer.
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 and provides
liaison between us and our 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.
Executive Compensation.
The following Summary Compensation Table sets forth the compensation paid
by us for services rendered in all capacities during the calendar years 1996,
1997 and 1998 to Randolph A. Graves, Jr., who was the Chief Executive Officer
through January 23, 1998. The table also set forth the compensation paid by us
for services rendered in all capacities during 1998 to Peter Gulko and John
McNeil Wilkie, who also served as the Chief Executive Officers, during 1998. No
other executive officer or key employee was compensated in excess of $100,000
during 1996, 1997 or 1998.
On April 7, 1999 we entered into an employment agreement with our then
President providing for an annual salary of $140,000. The contract was to
commence once we secured additional funding. Until then, the President would
continue to be paid under our original consulting agreement with him that
provided for total compensation of $104,000. Also, we issued to him, 60,000
shares of common stock. Such shares of common stock will be restricted as to
their resale until such time as they are registered unless an exemption applies.
39
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long term Compensation
------------------- ----------------------
Salary Bonus Restricted Stock Awards
Name and Principal Position Year ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Randolph A. Graves, Jr., President and 1996 $ 77,374 $20,000 $243,109 (1)
Chief Executive Officer 1997 $ 77,374 0 0
1998 5,000 0 0
Peter Gulko 1998 $15,000 0 0
John McNeil Wilkie 1998 $70,000 0 $100,000 (2)
</TABLE>
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1996.
(2) Reflects the value of common stock issued as partial compensation for
services rendered in 1998
40
<PAGE>
Compensation of Directors and Secretary
Each of the directors and the Corporate Secretary received 2,500 shares
per month for January through May 1999 and 5,000 shares per month for June
through August and, for the balance of their term as directors, each director
received ten-year options to purchase 150,000 shares of common stock at $0.71
per share. The Secretary will receive 5,000 shares of common stock per month.
1995 Incentive Stock Option Plan
In 1995 we adopted the 1995 Incentive Stock Option Plan (the "Plan"). The
Board of directors 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.
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 is determined by the Board
provided that the exercise price of incentive stock options 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
incentive stock option if the optionee owns more than 10% of our common stock.)
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, we 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 and five years in the case
of incentive stock options. Options may be exercised only while the original
grantee has a relationship with us 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
us 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 our common
stock, in the discretion of the Committee, each option may become fully and
immediately exercisable. Incentive stock options are not transferable other than
by will or the laws of descent and distribution. Non-qualified stock options may
be transferred to the optionee's spouse or lineal descendants, subject to
certain restrictions. Options may be exercised during the holder's lifetime only
by the holder, his or her guardian or legal representative.
Options granted pursuant to the Plan may be designated as incentive stock
options ("ISO"), with the attendant tax benefits
41
<PAGE>
provided under Sections 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 incentive stock
options exercisable for the first time by an employee during any calendar year
under all our plans and our 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, options to purchase 50,000 shares have been granted to one
employee of Eurotech pursuant to the Plan. In addition, options to purchase an
aggregate of 450,000 shares have been granted to our directors.
Limitation on Officers' and Directors' Liability
Our Articles of Incorporation provides that we shall, to the full extent
permitted by Section 29-304 of the District of Columbia Business Corporation
Act, as from time to time amended and in effect, indemnify any and all persons
we have the power to indemnify under said section. Section 29-304 of the
Business Corporation Act grants to us the power to indemnify any and all of our
directors or officers or former directors or officers or any person who may have
served at our request as a director or officer of another corporation in which
we own shares of capital stock or of which we are a creditor against expenses
actually and necessarily incurred by them in connection with the defense of any
action, suit or proceeding in which they, or any of them, are made parties or a
party, by reason of being or having been directors or officers or a director or
officer of the Company, or of such other corporation, except in relation to
matters as to which any such director or officer or former director or officer
or person is adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty. Such indemnification is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled, under any By-Law, agreement, vote of stockholders or otherwise. The
foregoing provisions of our Articles of Incorporation may reduce the likelihood
of derivative litigation against our directors and officers for breaches of
their fiduciary duties, even though such action, if successful, might otherwise
benefit us and our stockholders.
Additionally, our By-Laws provide for the indemnification of directors and
officers. The specific provisions of the By-Laws related to such indemnification
are as follows:
ARTICLE VI
INDEMNIFICATION
No director shall be liable to the corporation or any of
its stockholders for monetary damages for breach of fiduciary
duty as a director, except with respect to
42
<PAGE>
(1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in
good faith or which involve intentional misconduct or a
knowing violation of law, (3) liability which may be
specifically defined by law or (4) a transaction from which
the director derived an improper personal benefit, it being
the intention of the foregoing provision to eliminate the
liability of the corporation's directors to the corporation or
its stockholders to the fullest extent permitted by law. The
corporation shall indemnify to the fullest extent permitted by
law each person that such law grants the corporation the power
to indemnify.
We have obtained an officers' and directors' liability insurance policy
that will indemnify officers and directors for losses arising from any claim by
reason of a wrongful act under certain circumstances where we do not indemnify
such officer or director, and will reimburse us for any amounts where we may by
law indemnify any of our officers or directors in connection with a claim by
reason of a wrongful act.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to us regarding
beneficial ownership of our common stock at the date of this prospectus by (i)
each person known by us to own beneficially more than 5% of our common stock,
(ii) each of our directors, (iii) each of our executive officers, (iv) all
officers and directors as a group, and (v) each of the beneficial owners of the
11,971,942 shares of common stock registered in the Registration Statement
covering shares being offered. The shares offered will be sold, if at all,
solely by and at the discretion of the selling shareholders. We will not receive
any proceeds from any sales. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
With respect to the number of shares listed as beneficially owned by
certain selling shareholders prior to the offering, we have relied on statements
filed by the selling shareholders with the SEC pursuant to Sections 13(d)under
the Securities Exchange Act. We have no reason to believe that such filings are
inaccurate.
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Shares Beneficially
Prior to Offering Registered Owned After Offering
----------------- ---------- --------------------
Percent Percent
Name and Address of If Greater If Greater
Beneficial Owner Number than 1(1) Number Number than 1(2)
- ------------------------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Peter Gulko
976 Rock Haven Drive
Rockville, MD 20852 5,630,000 18.29 -- 5,630,000 13.66
David Wilkes(3)
15 Sommerset Dr., South
Great Neck, NY 11020 186,540 -- 9,750 176,790 --
Jeffrey Markowitz
7 Kensington Road
Scarsdale, NY 10583 0 -- 150,000(4) -- --
Richard Friedman(5)
49 Fort Royal Isle
Fort Lauderdale, FL. 33308 0 -- 150,000(5) -- --
AIM Corporate Relations Inc.
5540 14B Avenue
Tsawwassen, British Columbia
V4M 2G6 Canada 9,500 -- 9,500 9,500 --
JNC-Opportunity Fund Ltd.
c/o Olympia Capital
(Bermuda) Ltd.
Williams House, 20 Reid St
Hamilton HM 11, Bermuda 1,087,203 3.53 10,017,695(6) 1,087,203 --
JNC Strategic Fund Ltd.
c/o Olympia Capital
(Bermuda) Ltd.
Williams House, 20 Reid St
Hamilton HM 11, Bermuda 50,000 -- (7) 50,000 --
CDC Consulting, (12)
19476 Dorado Dr.
Trabuco Canyon, CA 92679 -- -- 67,500 -- --
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Prior to Offering Registered Owned After Offering
----------------- ---------- --------------------
Percent Percent
Name and Address of If Greater If Greater
Beneficial Owner Number than 1(1) Number Number than 1(2)
- ------------------------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Diversified Strategies
Fund, L.P.
c/o Encore Capital
Management, L.L.C.
12007 Sunrise Valley Dr.
Suite 460
Reston, VA 20191 -- 810,000(8) -- --
John McNeil Wilkie
P.O. Box 1723
126 W. Colorado Avenue
Telluride, CO 81435 50,000 -- 50,000 50,000 --
Randolph Graves, Jr.(3)
3299 Villanova Avenue
San Diego, CA 92122 615,000 1.99 -- 615,000 --
Lesley Simmons
10914 Ivy Hill Drive
#8
San Diego, CA 92131 5,000 -- 5,000 -- --
Chad A. Verdi(3)(9)
100 Pheasant Drive
East Greenwich, RI 02818 110,605 -- 145,605(9) 110,605 --
Michael L. Thomas(10)
1326 Girard Street, NW
Unit 2 Washington, DC 20009 62,895 62,895(10) 62,895 --
D.K Rogers(11)
20 W. 86th Street
*5A
New York, NY 10024 230,000 -- 230,000(11) 230,000 --
Richard Wall(12)
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
95 Hartford Way
Beverley Hills, CA 90210 -- -- 364,000(12) -- --
Don V. Hahnfeldt(13)
1130 Riva Ridge DR
Great Falls VA 22066 50,000 -- 50,000(13) 50,000 --
Directors and Officers
As a Group
(5 Persons) 1,025,040 3.3 990,040 1,025,040 2.48
</TABLE>
46
<PAGE>
(1) Based upon (i) 23,149,454 shares of common stock outstanding as on June 30,
1999; (ii) 3,000,000 shares sold in private placements after June 30, 1999;
(iii) 91,234 shares issued to directors; officers; and consultants after June
30, 1999; and (iv) 4,530,000 issued to Mr. Gulko in exchange for shares of KRH.
(2) Gives effect to: (i) 1,276,250 shares of common stock issuable upon the
exercise of warrants, (ii) up to 9,420,489 shares of common stock issuable upon
the conversion of convertible debentures outstanding at the date of this
prospectus (which shares have been registered under the registration statement
of which this prospectus is a part, and (iii) the sale by the selling
shareholders of all of the shares registered under the registration statement of
which this prospectus is a part. Does not give effect to 500,000 shares of
common stock reserved for issuance under our1995 stock option plan.
(3) Director
(4) Shares issuable upon exercise of warrants.
(5) Shares issuable upon exercise of warrants.
(6) Includes 310,000 shares issuable upon exercise of warrants; 9,707,692 shares
issuable upon conversion of convertible debentures of which 1,087,203 have been
previously issued for debt conversions in 1998 and 1999. With respect to the
number of shares listed as beneficially owned by JNC Opportunity Fund, we have
relied on a Schedule 13D filed by JNC Opportunity Fund. The number of shares of
Common Stock issuable upon conversion of the convertible debentures cannot be
determined presently, because such number is dependent upon a conversion price
that is subject to the market price of the common stock at the time of
conversion, and a discount factor that is dependent on when such conversion
occurs. In light of this, we have agreed to register 200% of the number of
shares issuable upon conversion of the full principal amount of and accrued
interest on the convertible debentures, assuming a conversion price that, as far
as presently can be determined, is most favorable to the debenture holder and
conversion immediately prior to the expiration of the conversion period. Encore
Capital Management L.L.C. ("Encore"), a registered investment manager under the
Investment Advisers Act of 1940, acts as investment adviser to JNC Opportunity
Fund, JNC Strategic Fund, and Diversified Strategies Fund.
(7) Shares included in Footnote (6).
(8) Includes 10,000 shares issuable upon exercise of warrants; 800,000 shares
issuable upon conversion of convertible debentures. With respect to the number
of shares listed as beneficially owned by Diversified, we have relied on a
Schedule 13(d) filed by Diversified. The number of shares of common stock
issuable upon conversion of the convertible debentures cannot be determined
presently, because such number is dependent upon a conversion price that is
subject to the market price of the common stock at the time of conversion, and a
discount factor that is dependent on when such conversion occurs. In light of
this, we have agreed to register 200% of the number of shares issuable upon
conversion of the full principal amount of and accrued interest on the
convertible debentures, assuming a conversion price that, as far as presently
can be determined, is most favorable to the
47
<PAGE>
debenture holder and conversion immediately prior to the expiration of the
conversion period. Encore acts as investment adviser to Diversified, JNC
Strategic Fund and JNC Opportunities Fund. Encore and Diversified are parties to
an Investment Advisory Agreement, included as an Exhibit to the Schedule 13D
filed by Diversified, pursuant to which, among other things, Encore has the
right to make certain investment decisions and exercise certain voting rights
with respect to the shares beneficially owned by Diversified.
(9) Includes 35,000 shares of common stock issuable upon the exercise of
warrants.
(10) Vice President of Finance and Administration and Secretary. Does not
include 50,000 shares of common stock issuable upon the exercise of stock
options.
(11) Shares issuable upon exercise of warrants.
(12) Shares issuable upon exercise of warrants.
(13) President and Chief Executive Officer effective July 7, 1999.
CERTAIN TRANSACTIONS
Shareholder and Other Loans
In April 1997 ERBC Holdings, Limited, which is wholly-owned by Kurt
Seifman, one of our shareholders, made us a loan of $30,000, which remains
outstanding.
Issuance of Common Stock to Consultants and Advisors
During 1996, we 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 six ended June 30, 1997 and 1998, we 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,
we and a 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.
During the three months ended March 31, 1998 and 1999, we issued 43,000
and 116,039 shares of common stock, respectively, as consideration for
consulting services performed by various consultants, including related parties.
Shares issued under these arrangements were valued at $110,930 and $89,871
respectively.
48
<PAGE>
Acquisition of Technologies from Consultant
Prof. Figovsky, who is a consultant, 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.
Common Directors, Officers and Shareholders
ERBC Holdings, Ltd. ("ERBC")
ERBC, which sublicensed to us the EKOR technology licensed to it by EAPS,
is the beneficial owner of 255,000 shares of our common Stock. Hans-Joachim
Skrobanek, who is a shareholder (145,000 shares) and an officer of ours, and at
one time served as one of our directors, is also an employee of ERBC. Peter
Gulko, who is a major shareholder of ours (5,630,000 shares), was one of our
original directors, briefly in 1998 served as our President and currently serves
as a consultant, at one time also worked for ERBC. Kurt Seifman, the chief
executive officer and sole shareholder of ERBC, is the beneficial owner of
1,246,300 shares of our common stock.
Kurchatov Research Holdings, Ltd ("KRH").
KRH is entitled to receive 50% of the net profit derived by us from the
sale and licensing of EKOR, one of our Principal Technologies.
Mr. Peter Gulko was one of the major shareholders of KRH until September
9, 1999, when he transferred 6,795,000 of his KRH shares (about 43.5% of KRH's
outstanding shares) to us in exchange for 4,530,000 authorized but previously
unissued shares of our common stock. Prior to that exchange, Mr. Gulko already
owned 1,100,000 of our common stock. We understand that another major
shareholder of KRH is Mr. Kurt Seifman and that KRH has a number of other
shareholders, including Dr. Wilkes and Dr. Graves, two of our three directors.
Mr. Gulko has informed us that he held the KRH shares that he transferred
to us, and tha he now holds our shares the he received in exchange, for the
benefit of EAPS in EAPS' capacity as representative of various Russian
scientists, researchers and academics affiliated with EAPS.
Dr. Graves, one of our directors who until January 23, 1998 served as our
Chairman and Chief Executive Officer, served as a director and officer of KRH
from June 1997 through February 13, 1998. We did not enter into any material
transactions, agreements or commitments with KRH during Dr. Graves' incumbency
as a director or officer of KRH.
49
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital consists of 50,000,000 shares of common stock, par
value $.00025 per share, and 1,000,000 shares of "blank check" Preferred Stock,
par value $0.01. As of June 30, 1999 there were outstanding 23,149,454 shares of
common stock, and no shares of blank check preferred stock. Below is a summary
description of certain provisions relating to our capital stock contained in our
Articals of Incorporation and By-Laws and under the District of Columbia
Business Corporation Act. The summary is qualified in its entirety by reference
to our Certificate of Incorporation and By-Laws and the District of Columbia
Business Corporation Act.
Common Stock
We are authorized to issue 50,000,000 shares of common stock. All the
issued and outstanding shares of common stock are validly issued, fully paid and
non-assessable. Each outstanding share of common stock has one vote on all
matters requiring a vote of the stockholders. There is no right to cumulative
voting; thus, the holders of fifty percent or more of the shares outstanding
can, if they choose to do so, elect all of the directors. In the event of a
voluntary or involuntary liquidation, all stockholders are entitled to a pro
rata distribution after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the common stock. The
holders of the common stock have no preemptive rights with respect to our
offerings of shares of our common stock. Holders of common stock are entitled to
dividends if, as and when declared by the Board out of the funds legally
available therefor. It is our present intention to retain earnings, if any, for
use in our business. Dividends are, therefore, unlikely in the foreseeable
future.
Blank Check Preferred Stock
Pursuant to our Certificate of Incorporation, our Board is authorized to
issue, without any action on the part of our stockholders, an aggregate of
1,000,000 shares of "blank check" preferred stock. The Board has authority to
divide the blank check preferred stock into one or more series and has broad
authority to fix and determine the relative rights and preferences, including
the voting rights of the shares of each series. The blank check preferred stock
could be used as a method of discouraging, delaying, or preventing a change in
control of the Company or be used to resist takeover offers opposed by
management. Under certain circumstances, the Board could create impediments to
or frustrate persons seeking to effect a takeover or otherwise gain control of
the Company by causing shares of blank check preferred stock with voting or
conversion rights to be issued to a holder or holders who might side with the
Board in opposing a takeover bid that the Board determines not to be in our best
interest. In addition, our ability to issue such shares of blank check preferred
stock with voting or conversion rights could dilute the stock ownership of such
person or entity. No shares of blank check preferred stock are currently issued
and outstanding and we have no plans to issue any shares of blank check
preferred stock.
Transfer Agent
The Transfer Agent for the common stock is Interwest Transfer Co., Inc.,
1981 East Murray Holladay Road, Suite 100, Salt Lake City, Utah 84117.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
A. Freely Tradeable Shares
Once this offering is complete, we will have a total of 33,846,193
shares of common stock outstanding assuming the exercise of the warrants and the
conversion of the debentures.(1) Of these outstanding shares, upon the exercise
of the warrants and the conversion of the convertible debentures registered by
us herein 25,717,137 shares will be freely tradeable, without restriction by or
further registration under the Securities Act.
B. Restricted Shares
8,129,056 shares of common stock were "restricted securities" as
described in Rule 144. However, most of such shares have been sold in compliance
with Rule 144 and are, therefore, freely tradeable by their purchasers.
- ----------
(1) In arriving at this number, we assumed the issuance of: (i) 1,276,250
shares under certain warrants; and (ii) up to 9,420,489 shares upon the
conversion of our convertible debentures registered by us under the registration
statement of which this prospectus is a part. Does not give effect to the
issuance of up to 500,000 shares of common stock reserved for issuance under our
1995 stock option plan.
PLAN OF DISTRIBUTION
The distribution of the shares by the selling shareholders or by their
respective pledgees, donees, transferees or other successors in interest may be
effected from time to time in one or more transactions for their own
accounts(which may include block transactions) on the NASD Electronic Bulletin
Board or any exchange on which the shares may then be listed, in negotiated
transactions, through the writing of options on shares (whether such options are
listed on an options exchange or otherwise), through short sales, sales against
the box, puts and calls and other transactions in our securities or other
derivatives thereof, or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The selling shareholders may effect such
transactions by selling shares to or through broker-dealers, including
broker-dealers who may act as underwriters, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders and/or the purchasers of shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The selling shareholders may also sell shares pursuant
to Rule 144 of Securities Act or pledge shares as collateral for margin
accounts, and such shares could be resold pursuant to the terms of such
accounts. The selling shareholders and any participating brokers and dealers may
be deemed to be "underwriters" as defined in Section 2(11) of the Securities
Act.
In order to comply with certain state securities laws, if applicable, the
shares will not be sold in a particular state unless such securities have been
registered or qualified for sale in such
51
<PAGE>
state or an exemption from registration or qualification is available and
complied with.
We have agreed to bear all expenses, other than selling commissions and
fees, in connection with the registration and sale of the shares being offered
by the selling shareholders.
EXPERTS
Our financial statements at December 31, 1997 and 1998 and for the years
ended December 31, 1996, 1997 and 1998 included in this prospectus have been
audited by Tabb, Conigliaro & McGann, P.C., independent certified public
accountants, as set forth in their report contained herein. The financial
statements have been included in reliance upon the report of Tabb, Conigliaro &
McGann, P.C., given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We are subject to the informational reporting requirements of
theSecurities Exchange Act of 1934, as amended, and file reports, proxy
statements and other information with the Securities and Exchange Commission.
The reports, proxy statements and other information may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; at 5757
Wilshire Boulevard, Los Angeles, California 90036; and at the New York Regional
Office of the Commission, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of the materials can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the registration
of the common stock offered hereby. This prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits, which are
incorporated by reference, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this prospectus or in any document incorporated by reference as to the
contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement for such other documents,
which may be obtained from the Commission at its principal office in Washington,
D.C. upon payment of the fees prescribed by the Commission. Each such statement
is qualified in its entirety by such reference.
Our Registration Statement on Form S-1, as well as any reports, proxy
statements and other information filed under the Exchange Act, can also be
obtained electronically after we have filed such documents with the Commission
through a variety of databases, including among others, the Commission's
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") program,
Knight-Ridder Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis.
Additionally, the Commission maintains a Website (at http://www.sec.gov) that
contains such information regarding us.
Any statement contained herein, or any document, all or a portion of which
is incorporated or deemed to be incorporated by reference
52
<PAGE>
herein, shall be deemed to be modified or superseded for purposes of the
Registration Statement and this prospectus to the extent that a statement
contained herein, or in any subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of the Registration
Statement or prospectus. All information appearing in this prospectus is
qualified in its entirety by the information and financial statements (including
notes thereof) appearing in the documents incorporated herein by reference. This
prospectus incorporates documents by reference which are not presented herein or
delivered herewith. These documents(other than exhibits thereto) are available
without charge, upon written or oral request by any person to whom this
prospectus has been delivered, from Secretary, Eurotech, Ltd., 1216 16th Street,
N.W., Washington, D.C. 20036, (202)466-5448 or by email at
[email protected].
53
<PAGE>
Eurotech, Ltd. (A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
----
I. For the Three Months Ended March 31, 1999 (unaudited)
BALANCE SHEETS
At December 31, 1998 and March 31, 1999 (unaudited) F-1
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1998 (unaudited) F-2 - F-3
For the Six Months Ended June 30, 1999 (unaudited)
For the Period from Inception (May 26, 1995)
to June 30, 1999
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-4 - F-7
For the Period from Inception (May 26, 1995)
to December 31, 1998 (unaudited)
For the Three Months Ended March 31, 1999 (unaudited)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 (unaudited) F-8
For the Six Months Ended June 30, 1999 (unaudited)
For the Period from Inception (May 26, 1995)
to June 30, 1999 (unaudited)
NOTES TO FINANCIAL STATEMENTS F-9 - F-15
II. For the Twelve Months Ended December 31, 1998
INDEPENDENT AUDITORS' REPORT F-16
BALANCE SHEETS
At December 31, 1997 and December 31, 1998 F-17
STATEMENTS OF OPERATIONS F-18
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-19 - F-21
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
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-23 - F-54
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
(Note 2)
<TABLE>
<CAPTION>
At December 31, 1998 At June 30, 1999
-------------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,940 $ 156,887
Receivable from related parties 5,918 5,918
Prepaid expenses and other current assets 200 6,481
------------ ------------
TOTAL CURRENT ASSETS 8,058 169,286
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 31,846 27,749
OTHER ASSETS:
Organization and patent costs - net of accumulated
amortization 26,587 25,555
Deferred financing costs 2,361 --
Other assets 7,551 9,750
------------ ------------
TOTAL ASSETS $ 76,403 $ 232,340
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Convertible notes payable $ -- $ 450,000
Accrued liabilities 1,716,809 2,318,125
Deferred revenue 225,000 375,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,941,809 3,143,125
------------ ------------
CONVERTIBLE DEBENTURES 6,970,000 6,660,000
------------ ------------
COMMITMENTS AND OTHER MATTERS (Notes 1, 2, 3, 5 and 6)
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $0.01 par value; 1,000,000 shares
authorized; -0- shares issued and outstanding -- --
Common stock - $0.00025 par value; 50,000,000 shares
authorized; 19,621,882 and 23,349,454 shares issued and
outstanding at December 31, 1998 and June 30, 1999,
respectively 4,905 5,837
Additional paid-in capital 15,452,783 17,175,640
Unearned financing costs (47,500) (4,873)
Deficit accumulated during the development stage (24,245,594) (26,747,389)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (8,835,406) (9,570,785)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 76,403 $ 232,340
============ ============
</TABLE>
See notes to financial statements.
F-1
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
For the Six Months Ended June 30, from Inception
-------------------------------- (May 26, 1995) to
1998 1999 June 30, 1999
------------ ------------ -----------------
<S> <C> <C> <C>
REVENUES $ -- $ -- $ --
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 560,511 493,149 3,923,254
Consulting fees 178,476 317,486 1,708,357
Compensatory element of stock issuances pursuant
to consulting agreements 326,871 660,088 3,131,315
Other general and administrative expenses 881,669 397,552 3,504,505
------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,947,527 1,868,275 12,267,431
------------ ------------ ------------
OPERATING LOSS (1,947,527) (1,868,275) (12,267,431)
------------ ------------ ------------
OTHER EXPENSES:
Interest expense 429,720 341,107 1,208,240
Amortization of deferred and unearned financing
costs 3,049,661 292,413 13,271,718
------------ ------------ ------------
TOTAL OTHER EXPENSES 3,479,381 633,520 14,479,958
------------ ------------ ------------
NET LOSS $ (5,426,908) $ (2,501,795) $(26,747,389)
============ ============ ============
NET LOSS PER COMMON SHARE $ (.28) $ (.12)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,248,919 20,622,701
============ ============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
REVENUES $ -- $ --
------------ ------------
OPERATING EXPENSES:
Research and development 252,840 199,376
Consulting fees 68,434 203,586
Compensatory element of stock issuances pursuant
to consulting agreements 215,931 570,188
Other general and administrative expenses 322,288 243,336
------------ ------------
TOTAL OPERATING EXPENSES 859,493 1,216,486
------------ ------------
OPERATING LOSS (859,493) (1,216,486)
------------ ------------
OTHER EXPENSES:
Interest expense 299,095 173,593
Amortization of deferred and unearned financing costs 1,803,433 160,687
------------ ------------
TOTAL OTHER EXPENSES 2,102,528 334,280
------------ ------------
NET LOSS $ (2,962,021) $ (1,550,766)
============ ============
NET LOSS PER COMMON SHARE $ (.16) $ (.07)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,554,670 21,170,622
============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
Date of ---------------------------- Paid-in
Period Ended December 31, 1995: Transaction Shares (1) Amount Capital
- ------------------------------ ----------- ----------- ----------- -----------
<S> <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
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
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 -- -- --
Net loss -- -- --
----------- ----------- -----------
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298
=========== =========== ===========
<CAPTION>
Deficit
Accumulated
Unearned During the
Due from Financing Development
Period Ended December 31, 1995: Stockholders Costs Stage Total
- ------------------------------ ------------ ----------- ------------ -----------
<S> <C> <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) (3,000) -- -- 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 (3,000) -- (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 -- -- 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.
See notes to financial statements.
F-4
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
Date of ----------------------------- Paid-in
Year Ended December 31, 1997: Transaction Shares (1) Amount Capital
- ---------------------------- ----------- ---------- ------------ ------------
<S> <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
Due from Financing Development
Year Ended December 31, 1997: Stockholders Costs Stage Total
- ---------------------------- ---------- ------------ ------------ ------------
<S> <C> <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.
See notes to 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, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
Date of ------------------------------- Paid-in
Year Ended December 31, 1998: Transaction Shares (1) Amount Capital
- ---------------------------- ----------- ------------ ------------ ------------
<S> <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
Due from Financing Development
Year Ended December 31, 1998: Stockholders Costs Stage Total
- ---------------------------- ------------ ------------ ------------ ------------
<S> <C> <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-6
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
Date of ------------------------------- Paid-in
Six Months Ended June 30, 1999: Transaction Shares (1) Amount Capital
- ------------------------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 19,621,882 $ 4,905 $15,452,783
Issuance of stock for consulting fees
($0.77 per share) 03/99 116,039 29 89,871
Issuance of stock for consulting fees
($0.72 per share) 06/99 624,332 156 446,532
Issuance of stock for conversion of debenture
note payable ($0.35 per share) 02/99 987,201 247 341,029
Value assigned to conversion feature of
Convertible Debentures and 84,750 warrants
issued as additional interest 01/99 -- -- 175,425
Value assigned to additional consideration for
financing activities ($0.72 per share) 05/99 100,000 25 71,975
Issuance of stock for additional working
capital ($0.25 per share) 06/99 1,900,000 475 474,525
Modification of warrants issued 06/99 -- -- 123,500
Amortization of unearned financing costs -- -- --
Net loss -- -- --
---------- -------- -----------
Balance - June 30, 1999 23,349,454 $ 5,837 $17,175,640
========== ======== ===========
<CAPTION>
Deficit
Accumulated
Unearned During the
Due from Financing Development
Six Months Ended June 30, 1999: Stockholders Costs Stage Total
- ------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 $ -- $ (47,500) $(24,245,594) $(8,835,406)
Issuance of stock for consulting fees
($0.77 per share) -- -- -- 89,900
Issuance of stock for consulting fees
($0.72 per share) -- -- -- 446,688
Issuance of stock for conversion of debenture
note payable ($0.35 per share) -- -- -- 341,276
Value assigned to conversion feature of
Convertible Debentures and 84,750 warrants
issued as additional interest -- (175,425) -- --
Value assigned to additional consideration for
financing activities ($0.72 per share) -- (72,000) -- --
Issuance of stock for additional working
capital ($0.25 per share) -- -- -- 475,000
Modification of warrants issued -- -- -- 123,500
Amortization of unearned financing costs -- 290,052 -- 290,052
Net loss -- -- (2,501,795) (2,501,795)
------ ----------- ------------ -----------
Balance - June 30, 1999 $ -- $ (4,873) $(26,747,389) $(9,570,785)
====== =========== ============ ===========
</TABLE>
(1) Share amounts have been restated to reflect the 4 for 1 stock split on June
1, 1996.
See notes to financial statements.
F-7
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
from Inception
For the Six Months Ended June 30, (May 26, 1995) to
1998 1999 June 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,426,908) $ (2,501,795) $(26,747,387)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,698 5,128 19,026
Amortization of deferred and unearned financing costs 3,049,661 292,413 13,271,718
Accrued interest 208,329 31,276 31,276
Stock issued for license -- -- 37,500
Consulting fees satisfied by stock issuances 326,871 660,089 3,131,316
------------ ------------ ------------
Sub-total 1,837,343 (1,512,889) (10,256,553)
Cash provided by (used in) the change in assets and liabilities:
Decrease in advances to related parties -- -- (5,918)
Increase in prepaid expenses (5,453) (6,281) (6,481)
Increase in other assets (2,400) (2,199) (9,751)
Increase in accrued liabilities 539,425 601,316 1,970,318
Increase in deferred revenue -- 150,000 375,000
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,305,777) (770,053) (7,933,385)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs -- -- (31,358)
Capital expenditures (20,038) -- (40,972)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (20,038) -- (72,330)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options -- -- 150
Proceeds from issuance of common stock -- 475,000 1,316,500
Offering costs -- -- (2,898)
Repayment by stockholders -- -- 3,000
Proceeds from Convertible Debentures 3,000,000 450,000 7,450,000
Proceeds from bridge notes -- -- 2,000,000
Repayments of bridge notes (2,000,000) -- (2,000,000)
Borrowings from stockholders -- -- 561,140
Repayment to stockholders -- -- (561,140)
Deferred financing costs (235,000) -- (604,150)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 765,000 925,000 8,162,602
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (560,815) 154,947 156,887
CASH - BEGINNING 617,756 1,940 --
------------ ------------ ------------
CASH - ENDING $ 56,941 $ 156,887 $ 156,887
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 36,630 $ 526 $ 316,447
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
</TABLE>
See notes to financial statements.
F-8
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited. These statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ( the "SEC"). Certain information and
footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to state
fairly the financial position and results of operations as of and for the
periods indicated. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto for
the year ended December 31, 1998, included in the Company's Form 10K as
filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 2- BUSINESS AND CONTINUED OPERATIONS
Eurotech, Ltd. (the "Company") was incorporated under the laws of the
District of Columbia on May 26, 1995. The Company is a development-stage,
technology transfer, holding, 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.
F-9
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 2 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. However, as
shown in the accompanying financial statements, the Company has incurred
losses from operations from inception. As of June 30, 1999, the Company
has a stockholders' deficiency of $9,570,785, a working capital deficiency
of $2,973,839 and an accumulated deficit since inception of $26,747,389.
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 3). In May 1999, the Company borrowed $50,000
from an unrelated party, which was repaid in June 1999. During the quarter
ended June 30, 1999, the Company raised $475,000 from the sale of
restricted common stock. The Company is exploring additional sources of
working capital, which include a private offering of common stock, private
borrowings and joint ventures.
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.
F-10
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 3 - NOTES PAYABLE
Secured Promissory Notes
On January 6, 1999, the Company's Chairman and the majority convertible
debt holder provided $450,000 of short-term financing to the Company,
evidenced by two secured promissory notes. Each secured promissory note
bears interest at 13% 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. 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 an exercise price of $0.36
per share. The warrants expire five years from January 6, 1999.
The Company has assigned a value to the debt's beneficial conversion
feature and warrants amounting to $175,425, and such amount is being
amortized over 180 days commencing January 6, 1999.
NOTE 4 - STOCKHOLDERS' DEFICIENCY
Significant Common Stock Issuances During 1999
During the six months ended June 30, 1999, a debenture holder converted
$310,000 of principal and $31,276 of accrued interest into 987,201 shares
of common stock.
During the six months ended June 30, 1999, the Company issued 740,371
shares of common stock as consideration for consulting services performed
by various employees and consultants, including related parties, through
June 30, 1999. Shares issued under these arrangements were valued at
$536,403, which was all charged to operations during the six months ended
June 30, 1999.
During the quarter ended June 30, 1999, the Company sold 1,900,000 shares
of its restricted common stock for $475,000.
F-11
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 4 - 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 1,696,250
Convertible Debentures (assumed conversion at June 30, 1999
market value price and at largest discount) 16,174,380
Option to purchase common stock 50,000
----------
Total as of June 30, 1999 17,920,630
==========
Substantial issuance after June 30, 1999 through July 31, 1999:
Warrants to purchase common stock 50,000
==========
NOTE 5 - TECHNOLOGY INVESTMENTS AND LICENSING AGREEMENT
Investments in Israeli Technology Companies
During 1997 and 1998, the Company agreed to acquire a 20% interest in
seven separate Israeli technology, research and development companies
("incubators"). The Company's share of losses incurred by these companies
has been accounted for on the equity basis and included in research and
development expenses.
The Company had, as of December 31, 1998, 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. During the six months
ended June 30, 1999, the Company paid $150,000 under the agreement, which
was charged to research and development costs.
During the six months ended June 30, 1999, an additional $71,000 was
invested in the seven Israeli technology incubators.
The amount charged to research and development expenses related to these
investments for the six months ended June 30, 1999 approximated $221,000,
which reduced the carrying value of the Company's investment in these
seven companies to $-0- at June 30, 1999.
F-12
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 5 - TECHNOLOGY INVESTMENTS AND LICENSING AGREEMENT (Continued)
Proposed Sale of Technology
The Company received a deposit on a proposed sale of its sublicensing
rights to Re-sealable Container Systems and TetraPak containers. The
proposed transaction is presently in the discussion stage and to-date, no
agreements have been signed. Included in unearned revenue is the $150,000
deposit related to the proposed sale.
NOTE 6 - CONTINGENCIES AND OTHER MATTERS
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.
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-13
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 6 - CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and David
Morris filed an action in the Supreme Court for the State of New York,
County of New York, against Eurotech, Ltd. for breach of contract, seeking
injunctive relief, specific performance and monetary damages of nearly $5
million (the "Dirks Litigation"). The Dirks Litigation arises solely from
an agreement between Eurotech and National Securities Corporation
("National") relating to financial advisory services to be performed by
National Securities Corporation, a broker/dealer with which the plaintiffs
were affiliated and of which Raymond Dirks Research was a division.
Eurotech granted National a warrant certificate for 470,000 shares at
$1.00 per share as a retainer for general financial advisory services. In
conjunction with the separation of the plaintiffs and Raymond Dirks
Research from National Securities Corporation, National assigned a
significant portion of the warrant certificate to the plaintiffs. It is
Eurotech's position that the warrant certificate is voidable.
The plaintiffs allege, among other things, that they are entitled to
damages composed of both the value of the stock on the date of their
purported exercise of an alleged assignment of the warrant certificate,
and the decrease in value of the price of the stock since the date of
their purported exercise. Eurotech believes that the plaintiffs have
significantly overstated their monetary damage claim and that, having
sought monetary damages, the plaintiffs are not entitled to any type of
equitable relief.
Process was served upon Eurotech at its California office in late January
1998. Based on the advice of its outside counsel, Eurotech believes that
the plaintiffs' claims will be resolved favorably to the Company. In
response to the Dirks litigation, the Company has filed an appropriate
response, including counterclaims relating thereto. 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.
F-14
<PAGE>
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
NOTE 7 - SUBSEQUENT EVENT
Employment Agreements
In April 1999, the Company entered into an employment agreement with the
President of the Company providing for an annual salary of $140,000. In
addition, the Company issued 60,000 shares of common stock. As of July 1,
1999, the President resigned. On July 7, 1999, the Company entered into a
letter agreement with its new President providing for a salary of $100,000
for the year commencing July 7, 1999, with an initial signing bonus of
warrants to purchase 50,000 shares of common stock at a price equal to the
market price at July 1, 1999. The warrants are exercisable for a term of
three years.
F-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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 AgreementS
On January 11, 1999, the Company entered into an employment agreement with
its THEN president. The agreement, which has been terminated, provided for
$2,000 per week salary.
On July 7, 1999, the Company's current President took office at a salary
of 100,000 per year plus the issuance to him of 50,000 shares of common stock.
Investment in KRH
On September 9, 1999, the company acquired 6,795,000 of KRHL in exchange
for the Issuance of to CIS Development Corp. of 4,530,000 the common stock of
the company.
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 on 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-54
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representation not contained in this
prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This prospectus does
not constitute an offer of any securities other than those to which it relates
or an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such offer or solicitation would be unlawful. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary 2
Selected Consolidated Financial Data 4
Risk Factors 6
Use of Proceeds 12
Dividends 12
Capitalization 14
Our Management's Discussion and Analysis
of Results of Operations and
Financial Condition 15
Our Business 19
Market Price of Common Stock 29
Management 31
Principal and Selling Shareholders 36
Certain Transactions 40
Description of Securities 42
Shares Eligible for Future Sale 42
Plan of Distribution 43
Legal Matters 43
Experts 43
Additional Information 44
Index to Financial Statements 45
-----------------
================================================================================
================================================================================
EUROTECH, LTD.
11,971,942 Shares of Common Stock
------------------
PROSPECTUS
------------------
