Item 8. Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements are
included in Part IV, Item 14 of this Report beginning on page F-1.
23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Set forth below for each Director and Officer is his name, age, the year
in which he became a Director or Officer of the Company, his principal
occupation during the last five years and any additional directorships in
publicly-held companies.
Executive Officers and Directors
Name Age Position with the Company
---- --- -------------------------
James D. Watkins 70 Director and Chairman
Maxwell Rabb 87 Director
Peter Gulko 48 President and Secretary
Lawrence McQuade 70 Director
John McNeil Wilkie 59 Sr. Vice President and Chief Financial
Officer
The Company has a Board of Directors comprised of three persons. Directors
are elected at the annual meeting of shareholders and hold offices until the
next annual meeting of shareholders or until their successors have been elected.
James D. Watkins is a retired Admiral of the U.S. Navy, and has served as
Director and Chairman of the Board of the Company since January 1998. Admiral
Watkins has also served the Company as a technology consultant since October,
1996. Since 1993, Admiral Watkins has served as the President of the Joint
Oceanographic Institutions, Inc., in Washington, D.C., and later, President,
Consortium for Oceanographic Research and Education (two non-profit consortia
that manage research projects). He is also a director of the International
Technology Corporation (IT Corp) and GTS-Duratek. From March 1989 until January
1993 Admiral Watkins served as the Secretary of the U.S. Department of Energy in
the administration of President Bush. Admiral Watkins was named Chief of Naval
Operations by President Reagan in June, 1982. Admiral Watkins is a 1949 graduate
of the U.S. Naval Academy, and received a Master's Degree in Mechanical
Engineering from the U.S. Naval Postgraduate School in 1958.
Maxwell Rabb has been a Director of the Company since January, 1998. Mr.
Rabb served as the U.S. Ambassador to Italy from 1981 to 1989, and has held many
U.S. government assignments. He is currently counsel to the law firm of Kramer,
Levin, Neftalis & Frankel. From 1953 to 1956, he served as Secretary of the
Cabinet of the President of the United States in the Eisenhower Administration.
Since then, Ambassador Rabb has served every President in each administration
thereafter in various government posts, including: Chairman of the U.S.
Delegation to UNESCO in Paris (1959-1960); U.S. Representative to the World Bank
and Member of the Conciliation Panel for the Settlement of International
Disputes (1967-1973); and the Panel for Relief Assistance for India, Pakistan
and Bangladesh. From 1937 to 1943, Ambassador Rabb served as Administrative
Assistant to U.S. Senator Henry Cabot Lodge and to U.S. Senator Sinclair Weeks
in 1944, prior to entering the Navy during World War II. In 1946, he became
legal and legislative counsel to Secretary of the Navy, Honorable James
Forestal, and a consultant to the U.S. Senate Rules Committee in 1952. In 1989,
Ambassador Rabb was awarded the Grand Cross of the Order of Merit of the Knights
of Malta in Rome. He received an LLB from Harvard Law School.
Lawrence C. McQuade has served as Director of the Company since January
1998. In 1997, Mr. McQuade was a founding partner of River Capital International
and continues as one of two partners
24
engaged in the creation and execution of all phases of River Capital
International's financial services business, primarily in Russia. Since 1995,
Mr. McQuade has been the Chairman of Qualitas International, a financial
consulting business with business in Russia and South America. From 1996 to
1997, Mr. McQuade was a director of Country Baskets Index Fund, a director of
Applied Bioscience International from 1995 to 1996 and a director of the Czech &
Slovak American Enterprise Fund from 1994 to 1996 serving as chairman of the
board from 1995 to 1996. From 1988 to 1995, Mr. McQuade was the Vice Chairman of
Prudential Mutual Fund Management, Inc., where he was the President and a
director of 39 mutual funds. Mr. McQuade served as Assistant Secretary to the
U.S. Department of Commerce under President Lyndon Johnson. Mr. McQuade is a
1950 graduate of Yale University, received a B.A. and an M.A. from Oxford
University where he was a Rhodes Scholar and earned is law degree at Harvard Law
School.
Peter Gulko has been the President and Secretary of the Company since
February, 1998, and served as a Director of the Company from its incorporation
in May, 1995 until January, 1998. From May 1994 until February 1998 Mr. Gulko
also acted as a business agent for ERBC particularly with respect to that
company's activities in the former Soviet Union. See "Risk Factors Conflicts of
Interest," and "Certain Transactions." From 1995 Mr. Gulko has also been the
President of CIS Development, Inc., a consulting company of which he is the sole
owner. From 1991 until 1994 Mr. Gulko was the director of the Moscow, Russia,
office of TMR, International, a technology transfer company that specialized in
oil refining. Mr. Gulko is a 1973 recipient of a Masters Degree in Civil
Engineering from Novocherkassk University in Russia.
John McNeil Wilkie was appointed Sr. Vice President and Chief Financial
Officer of the Company on April 13, 1998. From 1992 through 1997 Mr. Wilkie
served as the President of Telluride Music Co., Inc., which he founded and which
owns and operates a retail music store in Telluride, Colorado. From 1990 through
1991 Mr. Wilkie was a managing director of The Consulting Group, Ltd., an
executive search firm, for which he developed and executed executive searches
for U.S., European and Japanese companies in the financial services industry.
From 1986 through 1989 he served as Vice Chairman of Morgan Guaranty
International Bank, where he served as Chairman of the Credit Policy Committee
and performed strategic planning and developed policy directed towards high net
worth individuals and international trade. From 1986 through 1989 Mr. Wilkie
served as Vice President and General Manager for Corporate Finance - Latin
America of Morgan Guaranty Trust Company, where he managed line units
responsible for sovereign debt, corporate and government lending, debt trading
and sales, and correspondent banking relationships with U.S. and Latin American
clients. Mr. Wilkie received a B.A. degree in History from Harvard University in
1960.
On November 17, 1997, Karl J. Krobath resigned as a Director of the
Company. On January 23, 1998, Randolph Graves, Peter Gulko and Hans Joachim
Strobanek resigned as Directors of the Company, and Randolph Graves and Hans
Joachim Skrobanek resigned as officers of the Company.
On January 23, 1998, Adm. James D. Watkins, Maxwell Rabb and Lawrence
McQuade were elected by the departing Directors to serve as Directors of the
Company.
Key Consultants
Oleg L. Figovsky, Ph.D. has served as a technology and business
development consultant to the Company since April, 1996. From 1993 Prof.
Figovsky has served as the General Manager of Polyadd, Ltd., an Israeli
corporation. From 1992 until 1993, Prof. Figovsky was the Manager of Research
and Development at the Israeli Corrosion Research Institute. From 1990 until
1991 Prof. Figovsky served as the Director of Research Center of "Intercorr", an
Austrian-Russian joint venture, and from 1986 until 1991 he was the Head of the
Corrosion Protection Department of the All-Union Corrosion Protection Research
Institute in Moscow, Russia. Prof. Figovsky received a Masters of Science degree
in Materials Engineering from the All-Union Civil Engineering Institute, Moscow,
Russia, in 1964, a Ph.D in Materials Engineering from the Moscow Civil
Engineering Institute in 1971, and a Doctor of Science in Materials Engineering
from the Institute of Corrosion Protection, Moscow, in 1989.
Richard A. Wall acted as a financial and business development consultant
to the Company from its inception until December 1997. Since 1996 Mr. Wall has
been a U.S. Resident Partner in the Institute for Applied Social Sciences
(Dusseldorf, German - Zurick, Switzerland - LaJolla, California). Since 1983 he
has been engaged in private, international investment banking activities head
quartered in New York City.
In 1996 and 1997 Mr. Wall loaned an aggregate of $561,440 to the Company,
all of which, together with accrued interest, has been repaid. Mr. Wall is the
beneficial holder of 120,000 shares of the Company's Common Stock and of options
to purchase 364,000 shares of Common Stock. See "Certain Relationships and
Related Transactions."
Founder
Kurt Seifman, through ERBC Holdings, Limited (of which he is the chief
executive officer and sole shareholder), is the Founder of the Company. Mr.
Seifman is 85 years old, and is principally engaged
25
in investment activities personally and through ERBC. For the past five years
Mr. Seifman has not been an executive employee, director or officer of any
business entity other than ERBC.
Mr. Seifman is the beneficial owner of 1,246,300 shares of the Company's
Common Stock. ERBC is the beneficial owner of 255,000 shares of the Company's
Common Stock. ERBC has sub-licensed to the Company the EKOR compound and the
Re-sealable Container Systems. See "Certain Relationships and Related
Transactions."
Item 11. Executive Compensation.
The following Summary Compensation Table table sets forth the compensation
paid by the Company for services rendered in all capacities during the calendar
years 1996 and 1997 to Randolph A. Graves, Jr., its chief executive officer
during 1996. No other executive officer or key employee was compensated in
excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Salary Bonus Compensation(1)
Name and Principal Position Year ($) ($) ($)
Randolph A. Graves, Jr, President & Chief 1997 $77,374 0 0
Executive Officer(2)......................... 1996 $77,374 $20,000 $243,109
Compensation Arrangements
Compensation of Directors
The Company's directors do not receive any compensation for their service
as directors or on any committee of the Board.
1995 Incentive Stock Option Plan
The Company has adopted its 1995 Incentive Stock Option Plan ("Plan"). The
Board of Directors (the "Board") believes that the Plan is desirable to attract
and retain executives and other key employees of outstanding ability. Under the
Plan, options to purchase an aggregate of not more than 500,000 shares of Common
Stock may be granted from time to time to key employees, officers, directors,
advisors and consultants to the Company.
The Plan is currently administered by the Board which may empower a
committee to administer the Plan. The Board is generally empowered to interpret
the Plan, prescribe rules and regulations relating thereto, determine the terms
of the option agreements, amend them with the consent of the optionee, determine
the individuals to whom options are to be granted, and determine the number of
shares subject to each option and the exercise price thereof. The per share
exercise price for options granted under the Plan are determined by the Board
provided that the exercise price of incentive stock options ("ISOs") will not be
less than 100% of the fair market value of a share of the Common Stock on the
date the option
(1) Reflects the value of common stock issued as partial compensation for
services rendered in 1996.
(2) Dr. Graves resigned as a Director, and as the Chairman, President and
Chief Executive Officer of the Company on January 23, 1998.
26
is granted (110% of fair market value on the date of grant of an ISO if the
optionee owns more than 10% of the Common Stock of the Company). Upon exercise
of an option, the optionee may pay the purchase price with previously acquired
securities of the Company, or at the discretion of the Board, the Company may
loan some or all of the purchase price to the optionee.
Options will be exercisable for a term determined by the Board, which will
not be greater than ten years from the date of grant (five years in the case of
ISO's). Options may be exercised only while the original grantee has a
relationship with the Company which confers eligibility to be granted options or
within three months after termination of such relationship with the Company, or
up to one year after death or total and permanent disability. In the event of
the termination of such relationship between the original grantee and the
Company for cause (as defined in the Plan), all options granted to that original
optionee terminate immediately. In the event of certain basic changes in the
Company, including a reorganization, merger or consolidation of the Company, or
the purchase of shares pursuant to a tender offer for shares of Common Stock of
the Company, in the discretion of the Committee, each option may become fully
and immediately exercisable. ISOs are not transferable other than by will or the
laws of descent and distribution. Non-qualified stock options may be transferred
to the optionee's spouse or lineal descendants, subject to certain restrictions.
Options may be exercised during the holder's lifetime only by the holder, his or
her guardian or legal representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
that certain material modifications affecting the Plan must be approved by the
stockholders, and any change in the Plan that may adversely affect an optionee's
rights under an option previously granted under the Plan requires the consent of
the optionee.
To date, no options have been granted pursuant to the Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
To the knowledge of the Company, the following table sets forth the
ownership of the Company's Common Stock as of March 31, 1998, by each person
owning more then 5% such Common Stock, by each officer and director and by all
officers and directors as a group.
Number of Shares Percentage of Shares
Name and Address (1) Beneficially Owned(2) Beneficially Owned
-------------------- --------------------- ------------------
Peter Gulko 1,110,000 5.9%
Maxwell Rabb 80,000 *
Kurt Seifman 1,246,300 6.9%
James D. Watkins 97,000 *
Lawrence McQuade 0 0
John McNeil Wilkie 0 0
Directors and Officers
As a Group (5 Persons) 2,533,300 13.7%
----------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 1101 30th Street, N.W., Suite 500, Washington, D.C. 20007
(2) Unless otherwise indicated, each person has sole voting and investment
power with respect to all shares.
27
Item 13. Certain Relationships and Related Transactions.
Shareholder and Other Loans.
On June 30, 1996, Richard A. Wall Associates, Inc. a company controlled by
Richard A. Wall (who has acted as a consultant to the Company) loaned $128,300
to the Company, payable with accrued interest at the rate of 10% per anum, on
December 31, 1996.
On August 31, 1996, Richard A. Wall Associates, Inc., Chad Nellis (a
shareholder and the son of Mr. Wall) and D.K. Rogers (a shareholder and
consultant to the Company) loaned to the Company $13,000, $100,000, and
$100,000, respectively, each such loan being payable, with accrued interest at
the rate of 10% per annum, on December 31, 1996.
During 1997, Richard A. Wall Associates, Inc., loaned $420,140 to the
Company.
The loans made by Richard A. Wall Associates, Inc., in 1996 and in 1997
were repaid in full in fiscal years 1996 and 1997, respectively. The loans made
by Mr. Nellis and Ms. Rogers were fully converted into four Units in the
Company's third unregistered offering of Common Stock pursuant to Rule 506 of
Regulation D under the Securities Act.
In April 1997 ERBC Holdings, Limited, which is wholly-owned by Kurt
Seifman, a shareholder of the Company, loaned $30,000 to the Company, which
remains outstanding.
Issuance of Common Stock to Consultants and Advisors.
On October 10, 1995, the Company granted options to Richard A. Wall and
Kelly Capital Corporation to acquire 200,000(1) shares, each, of the Company's
Common Stock in exchange for past financial public relations and investment
banking services, respectively. The shares issuable upon exercise of those
options were part of the Company's first unregistered offering of Common Stock
pursuant to Rule 504 of Regulation D under the Securities Act of 1933. All such
options were exercised on January 18, 1996.
The services of Mr. Wall and Kelly Capital Corporation were each valued by
the Company at $25,000, which valuation the Company believes to be fair and
reasonable.
Acquisition of Technologies from Consultant
Prof. Figovsky who is a consultant to the Company, is the originator and
developer of three technologies, INP, LEM and RubCon, all right, title and
interest in which was purchased by the Company from Prof. Figovsky in January,
1998, for an aggregate purchase price of $125,000 plus royalties equal to 49% of
the company's net revenues from the sale and/or licensing of such technologies,
payable for a period of 15 years commencing on January 1, 1998. See "Business --
General -- Acquisition of Israeli Technologies -- Incubator Technologies
-Technologies Purchased from Prof. Oleg L. Figovsky; - Principal Technologies."
Common Directors, Officers and Shareholders
ERBC Holdings, Limited. ERBC is the beneficial owner of 255,000 shares of
the Company's Common Stock. One present and one former employee of ERBC,
Hans-Joachim Skrobanek and Peter Gulko, respectively, are shareholders and
former directors of the Company, and Mr. Skrobanek is the
(1) On June 1, 1996, the Company's Board of Directors authorized a
four-for-one forward split of the then outstanding shares of the Company's
Common Stock. The number of shares of Common Stock issuable upon exercise of the
foregoing options has been restated to reflect such stock split.
28
former Secretary of the Company. Mr. Skrobanek is the beneficial owner of
145,000 shares, and Mr. Gulko is the beneficial owner of 1,110,000 shares, of
the Company's Common Stock. The chief executive officer and sole shareholder of
ERBC, Kurt Seifman, is the beneficial owner of 1,246,300 shares of the Company's
Common Stock. Mr. Gulko currently is the President and Secretary of the Company.
Eurowaste Management, Ltd. Karl Krobath, the chairman and chief executive
officer of Eurowaste, is the beneficial owner of 25,000 shares of the Company's
Common Stock.
Arbat American Autopark, Ltd. Hans-Joachim Skrobanek, a shareholder and
former director and the Secretary of the Company, is a shareholder and president
of Arbat American. ERBC is the beneficial owner of 40% of the outstanding common
stock of Arbat American.
Kurchatov Research Holdings, Ltd. During the period of June, 1997, through
February 13, 1998, Dr. Graves (who until January 23, 1998, served as the
Chairman, Chief Executive Officer and a director of the Company) served as a
director and Secretary of KRH, which is entitled to receive 50% of the net
profits derived by the Company from the sale or licensing of the Company's EKOR
compound. During Dr. Grave's tenure as President of KRH, the Company did not
enter into any material agreements or commitments with KRH. See "Business -
Principal Technologies - Silicon - Organic (EKOR) Compound" and "Certain
Relationships and Related Transactions." The outstanding common stock of KRH is
owned of record by ERBC and by CIS. Such Stock is held by CIS for the benefit of
the EAPS in EAPS's capacity as representative of various individual Russian and
Ukrainian scientists, researchers and academics affiliated with EAPS and
Kurchatov. KRH is entitled to receive 50% of the net profits derived by the
Company from the sale and licensing of the EKOR compound, one of the Company's
Principal Technologies. Peter Gulko, the beneficial owner of 1,110,000 shares of
the Company's Common Stock, who served as a director of the Company until
January 23, 1998, and who presently is the President and Secretary of the
Company, is the sole shareholder of CIS. See "Business - Principal Technologies
- Silicon - Organic (EKOR) Compound."
Transactions Involving ERBC, Eurowaste and Arbat American.
Business Structure; Inter-company Relationships. The business structure
and relationships between the Company, ERBC, Eurowaste and Arbat American
diagrammed and described below (i) separate the Company's business purpose of
developing and commercializing technologies from end-user business operations,
and from on-going research in Russia, and (ii) advance the Company's strategy of
commercializing technologies through joint ventures, license arrangements and
strategic alliances. Additionally, such structure reduces the Company's exposure
to the various risks of conducting on-going business operations in Russia and
Ukraine.
Re-sealable Containers. ERBC is the sub-licensor to the Company of the
Re-sealable Container Systems.
Silicon-Organic (EKOR) Compound. EAPS is the applicant under a pending
patent application in respect of the EKOR compound filed in Russia, and the
holder of a Russian EKOR patent. The Company is the applicant under pending
patent applications in respect of the EKOR compound filed in the U.S., Ukraine,
Japan and Germany. Pursuant to a License Agreement among EAPS (as Licensor), and
ERBC (as Licensee) dated September 6, 1996 (the "EAPS-ERBC License") ERBC became
the exclusive licensee of all right, title and interest in and to the EKOR
technology in Canada, China, Japan, the Republic of Korea, the United States of
America, Ukraine and all countries that are members of the European Patent
Agreement (the "Territory") for a term expiring on August 1, 2014. The EAPS-ERBC
License, among other things, grants ERBC the right to sub-license its rights and
interest thereunder. Pursuant to the License Agreement among ERBC and the
Company dated September 16, 1996 (the "ERBC-Eurotech License"), ERBC exclusively
sub-licensed all of its right, title and interest in and to the EKOR technology
to the Company for a term co-terminus with the term of the EAPS-ERBC License.
Pursuant to an agreement among KRH and the Company dated January 28, 1997, 50%
of the net profits the Company derives from the commercialization, sale or
29
licensing of any technology developed by Kurchatov and EAPS (which includes the
EKOR compound) will be remitted to KRH. KRH's outstanding capital stock is owned
by ERBC and by CIS. Such stock is held by CIS for the benefit of EAPS (which in
such regard is acting as representative of individual Russian scientists,
researchers and academics affiliated with either or both Kurchatov and EAPS).
See "Certain Relationships and Related Transactions."
Waste-to-Energy Technology. Pursuant to a letter agreement among the
Company and Eurowaste dated September 18, 1996, Eurowaste has agreed to pay to
the Company $2,450,000 upon the initiation of construction of the first
waste-to-energy plant in which Eurowaste is involved, and to pay to the Company
$425,000 upon the initiation of construction of each additional waste-to-energy
plan in which Eurowaste is involved. The Company believes that the terms of this
agreement are fair and commercially reasonable.
| |
------------->| EUROTECH, LTD. |---------
| | | |
| ------------------ |
| v |
| Technology |
| License |
Technology v |
License & ------------------ |
Transfer | EUROWASTE -<--------
Fees ------------------
--<-------------
Automated Parking Garages. Pursuant to a letter agreement among the
Company and Arbat American dated January 28, 1997, Arbat American has agreed to
pay to the Company $1,250 per parking space in each parking garage erected by
Arbat American or any affiliate of Arbat American the design of which
substantially conforms to the technology, designs, renderings, blueprints and
plans previously furnished by the Company to Arbat American. The Company
believes that the terms of such agreement are fair and commercially reasonable.
| -------------------- shareholder
----------| ARBAT AMERICAN | |
v
50% shareholder
v
------------------------------
| CINEMA WORLD ON ARBAT (1)|
| (Russian operating entity) |
------------------------------
----------
(1) See "Business - Other Technologies - Automated Parking Garages."
31
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) (1) See Audited Financial Statements and supplementary data index
which appears on page F-1 herein.
(2) Schedules have been omitted because they are either not applicable or
the required information is shown in the financial statements or
notes thereto.
(3) Exhibits
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Certificate of Incorporation of the Company(1)
3.2 By-Laws of the Company(1)
4.1 Form of Common Stock Certificate(1)
10.1 Material Contracts(1)
10.2 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.3 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.4 Technology Purchase Agreement between the Company and Oleg
L. Figovsky(1)
10.5 Teaming Agreement between the Company and Duke Engineering
& Services, Inc.(1)
10.6 Form of Agreement between the Company, V. Rosenband and C.
Sokolinsky, and Ofek Le-oleh Foundation(1)
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband
and C. Sokolinsky(1)
10.6.3 Voting Agreement between the Company, V. Rosenband and C.
Sokolinsky(1)
10.7.1 Investment Agreement between the Company and Chemonol,
Ltd.(1)
10.7.2 Equity Sharing Agreement between the Company and Leonid
Shapovalov(1)
10.7.3 Voting Agreement between the Company and Leonid
Shapovalov(1)
10.8.1 Agreement between the Company and Separator, Ltd.(1)
10.8.2 Equity Sharing Agreement between the Company and Efim
Broide(1)
10.8.3 Voting Agreement between the Company and Efim Broide(1)
10.9.1 Form of Agreement between the Company, Ofek L-Oleh
Foundation and Y. Kopit(1)
10.9.2 Equity Sharing Agreement between the Company, Y. Kopit and
V. Rosenband(1)
10.9.3 Voting Agreement between the Company, Y. Kopit and V.
Rosenband(1)
10.10 Form of License Agreement between the Company and ERBC
Holdings, Ltd.(1)
10.11 Cooperation Agreement between the Company and
Forschungszentrum julich GmbH(1)
10.12.1 Convertible Debenture Purchase Agreement among the
Company, JNC Opportunity Fund, Ltd. and Diversified
Strategies Fund, L.P.(1)
10.12.2 Escrow Agreement among the Company, Inc. opportunity Fund,
Ltd., and Diversified Strategies Fund, L.P. and Robinson,
Silverman, Pearce, Aronsohn & Berman, LLP(1)
10.12.3 Registration rights Agreement among the Company the
Company, JNC Opportunity Fund, Ltd., and Diversified
Strategies Fund, L.P.(1)
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and JNC Opportunity Fund, Ltd.(1)
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000
between the Company and Diversified Strategies Fund,
L.P.(1)
10.12.6 Warrant No. 1 between the Company and JNC Opportunity
Fund, Ltd.(1)
10.12.7 Warrant No. 2 between the Company and Diversified
Strategies Fund, L.P.(1)
10.12.8 Warrant No. 3 between the Company and Diversified
Strategies Fund, L.P.(1)
32
10.13.1 Convertible Debenture Purchase Agreement between the
Company and JNC Opportunity Fund, Ltd.(1)
10.13.2 Escrow Agreement among the Company, JNC Opportunity Fund,
Ltd. and Robinson, Silverman, Pearce, Aronshohn and
Berman, LLP(1)
10.13.3 Registration Rights Agreement between the Company and JNC
Opportunity Fund, Ltd.(1)
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001
between the Company and JNC Opportunity Fund, Ltd.(1)
10.13.5 Warrant No. 3 between the Company and JNC Opportunity
Fund(1)
23.1 Report of Tabb, Conigliaro & McGann(2)
(b) Reports on Form 8-k.
The Company filed a report on Form 8-k on December 2, 1997.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 under the Securities Exchange Act of 1934, on file with the Commission,
file number 333-26673.
(2) Filed with this Form 10-K.
33
EUROTECH, LTD.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page Nos.
---------
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS
At December 31, 1996 and December 31, 1997 F-3
STATEMENTS OF OPERATIONS F-4
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
For the Period from Inception (May 26, 1995) to December 31, 1997
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5 - F-6
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
STATEMENTS OF CASH FLOWS F-7
For the Period from Inception (May 26, 1995) to December 31, 1995
For the Years Ended December 31, 1996 and 1997
For the Period from Inception (May 26, 1995) to December 31, 1997
NOTES TO FINANCIAL STATEMENTS F-8 - F-34
F-1
Board of Directors and Stockholders
Eurotech, Ltd.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Eurotech, Ltd. (the "
Company") (a development stage company) as of December 31, 1996 and 1997 and the
related statements of operations, stockholders' deficiency, and cash flows for
the period from inception (May 26, 1995) to December 31, 1995, the years ended
December 31, 1996 and 1997 and for the period from inception (May 26, 1995) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eurotech, Ltd. (a development
stage company) at December 31, 1996 and 1997 and the results of its operations
and its cash flows for the period from inception (May 26, 1995) to December 31,
1995, the years ended December 31, 1996 and 1997 and for the period from
inception (May 26, 1995) to December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered a loss from
operations in each of its three years of operations and, as of December 31,
1997, had a working capital deficiency of $2,156,753 and stockholders'
deficiency of $4,849,723. As discussed in Note 1 to the financial statements,
these factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
April 14, 1998
F-2
EUROTECH, LTD.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
(Note 1)
At December 31,
1996 1997
------------ ------------
CURRENT ASSETS:
Cash (Note 2) $ 380,183 $ 617,756
Receivable from related parties (Note 6) 89,918 5,918
Prepaid expenses and other current assets 12,978 21,539
------------ ------------
TOTAL CURRENT ASSETS 483,079 645,213
PROPERTY AND EQUIPMENT - net of accumulated depreciation
(Notes 2 and 4) 10,556 14,050
OTHER ASSETS:
Organization and patent costs - net of accumulated amortization (Notes 2 and 5) 25,402 28,651
Deferred financing costs (Notes 2 and 10) 20,304 261,178
Deferred offering costs (Note 14) 75,000 --
Other assets 3,151 3,151
------------ ------------
TOTAL ASSETS $ 617,492 $ 952,243
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Notes payable - bridge notes (Notes 7, 10 and 15) $ 2,000,000 $ 2,000,000
Accrued liabilities (Note 12) 292,316 576,966
Deferred revenue (Notes 2 and 3) -- 225,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,292,316 2,801,966
------------ ------------
CONVERTIBLE DEBENTURES (Notes 8 and 15) -- 3,000,000
------------ ------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 1, 3, 7, 8, 10, 12, and 15)
STOCKHOLDERS' DEFICIENCY: (Notes 2, 7, 8, 10, 11, 12 and 15)
Preferred stock - $0.01 par value; 1,000,000 shares authorized;
-0- shares issued and outstanding -- --
Common stock - $0.00025 par value; 50,000,000 shares authorized;
17,233,836 and 18,928,836 shares issued and outstanding at December 31,
1996 and December 31, 1997, respectively 4,306 4,732
Additional paid-in capital 4,804,298 12,892,313
Unearned financing costs (2,493,219) (1,315,317)
Deficit accumulated during the development stage (3,990,209) (16,431,451)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (1,674,824) (4,849,723)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 617,492 $ 952,243
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period from For the Period
Inception (May 26, For the Years Ended December 31, from Inception
1995) to (May 26, 1995) to
December 31, 1995 1996 1997 December 31, 1997
REVENUES $ -- $ -- $ -- $ --
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Research and development
(Notes 2 and 3) 212,061 1,170,782 1,007,671 2,390,514
Consulting fees (Notes 10 and 12) 266,900 277,353 553,295 1,097,548
Compensatory element of stock
issuances pursuant to consulting
agreements -- 1,209,477 839,550 2,049,027
Other general and administrative
expenses 34,265 547,447 1,262,067 1,843,779
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 513,226 3,205,059 3,662,583 7,380,868
---------------- ---------------- ---------------- ----------------
OPERATING LOSS (513,226) (3,205,059) (3,662,583) (7,380,868)
---------------- ---------------- ---------------- ----------------
OTHER EXPENSES:
Interest expense (Notes 6, 7 and 8) -- 43,422 270,740 314,162
Amortization of deferred and
unearned financing costs
(Notes 2, 7, 8 and 10) -- 228,502 8,507,919 8,736,421
---------------- ---------------- ---------------- ----------------
TOTAL OTHER EXPENSES -- 271,924 8,778,659 9,050,583
---------------- ---------------- ---------------- ----------------
NET LOSS $ (513,226) $ (3,476,983) $ (12,441,242) $ (16,431,451)
================ ================ ================ ================
NET LOSS PER COMMON SHARE $ (0.06) $ (0.23) $ (0.71)
================ ================ ================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 8,159,467 14,808,000 17,581,711
================ ================ ================
The accompanying notes are an integral part of these financial statements.
F-4
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Notes 2, 7, 8, 10, 11, 12 and 15)
Common Stock
------------ Additional
Date of Paid-in Due from
Period Ended December 31, 1995: Transaction Shares Amount Capital Stockholders
------------------------------------------------- ----------- ----------- ------- ----------- -----------
Founder shares issued ($0.00025 per share) 05/26/95 4,380,800 $ 1,095 $ (1,095) $ --
Issuance of stock for offering consulting
fees ($0.0625 per share) 08/31/95 440,000 110 27,390 --
Issuance of stock ($0.0625 and $0.25 per share) Various 4,080,000 1,020 5,23,980 (3,000)
Issuance of stock for license ($0.0625 per share) 08/31/95 600,000 150 37,350 --
Issuance of stock options for offering legal
and consulting fees -- -- 75,000 --
Offering expenses -- -- (105,398) --
Net loss -- -- -- --
----------- ------- ----------- -----------
Balance - December 31, 1995 9,500,800 2,375 557,227 (3,000)
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) Various 1,278,000 320 319,180 --
Exercise of stock options 01/18/96 600,000 150 -- --
Issuance of stock for consulting fees
($0.34375 per share) 03/22/96 160,000 40 54,960 --
Issuance of stock for consulting fees
($0.0625 per share) 05/15/96 2,628,000 657 163,593 --
Issuance of stock for consulting fees
($0.590625 per share) 06/19/96 1,500,000 375 885,563 --
Issuance of stock for consulting fees
($1.82 per share) 11/12/96 57,036 14 104,275 --
Issuance of stock pursuant to bridge financing
($1.81325 per share) 12/96 1,500,000 375 2,719,500 --
Amortization of unearned financing costs -- -- -- --
Repayment by stockholders -- -- -- 3,000
Net loss -- -- -- --
----------- ------- ----------- -----------
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298 $ --
=========== ======= =========== ===========
Deficit
Accumulated
Unearned During the
Financing Development
Period Ended December 31, 1995: Costs Stage Total
------------------------------------------------- ----------- ----------- -----------
Founder shares issued ($0.00025 per share) $ -- $ -- $ --
Issuance of stock for offering consulting
fees ($0.0625 per share) -- -- 27,500
Issuance of stock ($0.0625 and $0.25 per share) -- -- 522,000
Issuance of stock for license ($0.0625 per share) -- -- 37,500
Issuance of stock options for offering legal
and consulting fees -- -- 75,000
Offering expenses -- -- (105,398)
Net loss -- (513,226) (513,226)
----------- ----------- -----------
Balance - December 31, 1995 -- (513,226) 43,376
Year Ended December 31, 1996:
Issuance of stock ($0.25 per share) -- -- 319,500
Exercise of stock options -- -- 150
Issuance of stock for consulting fees
($0.34375 per share) -- -- 55,000
Issuance of stock for consulting fees
($0.0625 per share) -- -- 164,250
Issuance of stock for consulting fees
($0.590625 per share) -- -- 885,938
Issuance of stock for consulting fees
($1.82 per share) -- -- 104,289
Issuance of stock pursuant to bridge financing
($1.81325 per share) (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)
=========== =========== ===========
(1) Share amounts have been restated to reflect the 4 for 1 stock split on June
1, 1996.
The accompanying notes are an integral part of these financial statements.
F-5
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Notes 2, 7, 8, 10, 11, 12 and 15)
Common Stock
------------ Additional
Date of Paid-in Due from
Period Ended December 31, 1997: Transaction Shares Amount Capital Stockholders
---------------------------------------------- ----------- ------------ ------------ ------------ -------------
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 $ --
============ ============ ============ =============
Deficit
Accumulated
Unearned During the
Financing Development
Period Ended December 31, 1997: Costs Stage Total
---------------------------------------------- ------------ ------------ ------------
Balance - December 31, 1996 $ (2,493,219) $ (3,990,209) $ (1,674,824)
Issuance of stock for consulting fees
($2.50 per share) -- -- 160,000
Issuance of stock for consulting fees
($5.45 per share) -- -- 212,549
Issuance of stock for consulting fees
($5.00 per share) -- -- 295,001
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) (2,725,000) -- --
Value assigned to conversion feature of
Convertible Debentures (1,337,143) -- --
Value assigned to issuance of 127,500 warrants
in consideration for interest and placement
fees in connection with Convertible
Debentures (284,480) -- --
Value assigned to issuance of 35,000 warrants
to shareholder for consulting services (39,588) -- --
Value assigned to issuance of 364,000 warrants
to shareholder as additional consideration
for financing activities (826,680) -- --
Issuance of stock for consulting fees
($4.00 per share) -- -- 172,000
Accrual of stock issued January 1998 pursuant
to penalty provision of bridge financing
($2.00 per share) (2,000,000) -- --
Amortization of unearned financing costs 8,426,793 -- 8,426,793
Net loss -- (12,441,242) (12,441,242)
------------ ------------ ------------
Balance - December 31, 1997 $ (1,315,317) $(16,431,451) $ (4,849,723)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
EUROTECH, LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Period For the Period
from Inception from Inception
(May 26, 1995) to For the Years Ended December 31, (May 26, 1995) to
December 31, 1995 1996 1997 December 31, 1997
----------------- ------------ ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (513,226) $ (3,476,983) $(12,441,242) $ (16,431,451)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 182 1,009 4,810 6,001
Amortization of deferred and unearned
financing costs -- 228,502 8,507,919 8,736,421
Stock issued for license 37,500 -- -- 37,500
Consulting fees satisfied by stock issuances -- 1,209,477 839,550 2,049,027
Cash provided by (used in) the change in assets
and liabilities:
(Increase) decrease in advances to related
parties -- (89,918) 84,000 (5,918)
(Increase) decrease in prepaid expenses (1,100) (11,878) (8,561) (21,539)
Increase in other assets -- (3,151) -- (3,151)
Increase in accrued liabilities 13,100 279,216 284,650 576,966
Increase in deferred revenue -- -- 225,000 225,000
----------------- ------------ ------------ -----------------
NET CASH USED IN OPERATING
ACTIVITIES (463,544) (1,863,726) (2,503,874) (4,831,144)
----------------- ------------ ------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization and patent costs (1,557) (24,639) (5,162) (31,358)
Capital expenditures -- (10,953) (6,391) (17,344)
----------------- ------------ ------------ -----------------
NET CASH USED IN INVESTING
ACTIVITIES (1,557) (35,592) (11,553) (48,702)
----------------- ------------ ------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 150 -- 150
Proceeds from issuance of common stock 522,000 319,500 -- 841,500
Offering costs (2,898) (75,000) 75,000 (2,898)
Repayment by stockholders -- 3,000 -- 3,000
Proceeds from bridge notes -- 2,000,000 -- 2,000,000
Proceeds from Convertible Debentures -- -- 3,000,000 3,000,000
Borrowings from stockholders -- 141,000 420,140 561,140
Repayment to stockholders -- (141,000) (420,140) (561,140)
Deferred financing costs -- (22,150) (322,000) (344,150)
----------------- ------------ ------------ -----------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 519,102 2,225,500 2,753,000 5,497,602
----------------- ------------ ------------ -----------------
INCREASE (DECREASE) IN CASH 54,001 326,182 237,573 617,756
CASH - BEGINNING -- 54,001 380,183 --
----------------- ------------ ------------ -----------------
CASH - ENDING $ 54,001 $ 380,183 $ 617,756 $ 617,756
================= ============ ============ =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 8,127 $ 270,804 $ 278,931
================= ============ ============ =================
Income taxes $ -- $ -- $ -- $ --
================= ============ ============ =================
The accompanying notes are an integral part of these financial statements.
F-7
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1- BUSINESS AND CONTINUED OPERATIONS
Eurotech, Ltd. (the "Company") was incorporated under the laws of the
District of Columbia on May 26, 1995. The Company is a development-stage,
technology transfer, holding and management company, formed to
commercialize new, existing but previously unrecognized, and previously
"classified" technologies, with a particular current emphasis on
technologies developed by prominent research institutes and individual
researchers in the former Soviet Union and in Israel, and to license those
and other Western technologies for business and other commercial
applications principally in Western and Central Europe, Ukraine, Russia
and North America. Since the Company's formation, it has acquired
development and marketing rights to a number of technologies by purchase,
assignments, and licensing arrangements. The Company intends to operate
its business by licensing its technologies to end-users and through
development and operating joint ventures and strategic alliances. To date,
the Company has not generated any revenues from operations.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, as shown in the
accompanying financial statements, the Company has incurred losses from
operations from inception. As of December 31, 1997, the Company has a
stockholders' deficiency of $4,849,723, a working capital deficiency of
$2,156,753 and an accumulated deficit since inception of $16,431,451. The
Company requires additional funds to commercialize its technologies and
continue research and development efforts. Until the commencement of
sales, the Company will have no operating revenues, but will continue to
incur substantial expenses and operating losses. No assurances can be
given that the Company can complete development of any technology, not yet
completely developed, or that with respect to any technology that is fully
developed, it can be manufactured on a large scale basis or at a feasible
cost. Further, no assurance can be given that any technology will receive
market acceptance. Being a start-up stage entity, the Company is subject
to all the risks inherent in the establishment of a new enterprise and the
marketing and manufacturing of a new product, many of which risks are
beyond the control of the Company. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Since inception, the Company has financed its operations through sale of
its securities, shareholder loans, a bridge financing totalling $2,000,000
completed in December of 1996, a Convertible Debenture financing of
$3,000,000 completed in November of 1997 and a Convertible Debenture
financing of $3,000,000 completed in February of 1998. The Company is
exploring additional sources of working capital, which include a private
offering of common stock, private borrowings and joint ventures.
F-8
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The $2,000,000 bridge financing was retired from proceeds of the February
1998 Convertible Debenture financing.
While no assurance can be given, management believes the Company can raise
adequate capital to keep the Company functioning during 1998. No assurance
can be given that the Company can successfully obtain any working capital
or complete any proposed offerings or, if obtained, that such funding will
not cause substantial dilution to shareholders of the Company. Further, no
assurance can be given as to the completion of research and development
and the successful marketing of the technologies.
These financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary as a
result of the above uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Equity Method of Accounting for Unconsolidated Foreign Affiliates
Investment in companies in which the Company has a 20% to 50% interest, in
which it has the ability to exercise significant influence over operating
and financial policies are accounted for on the equity method.
Accordingly, the Company's proportionate share of their undistributed
earnings or losses are included in the statement of operations.
At December 31, 1997, investments in companies accounted for under the
equity method consist of the following foreign companies which are located
in Israel:
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
The Company maintains cash balances at a bank which exceeded the Federal
Depository Insurance Corporation's ("FDIC") maximum balance of $100,000 by
$623,581 as of December 31, 1997.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of five years.
Organization and Patent Costs
Organization costs are being amortized on a straight-line basis over 5
years. Patent costs are being amortized on a straight-line basis over 17
years, which represent both the statutory and economic lives of the
patents.
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement 121 on January 1, 1996 and there was no effect to the Company.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Revenue Recognition
The Company expects that it will derive substantially all of its revenue
from the sale, licensing and sub-licensing of technology. Revenue from the
sale of technology will be recognized in the year of sale. Revenue from
licensing and sub-licensing will be recognized in the periods when the
fees have been earned.
F-10
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development expenditures are charged to expense as incurred,
unless they are reimbursed under specific contracts. Losses incurred on
the equity basis in the Company's interest in four Israeli research and
development companies are included in research and development. In
addition, expenditures in connection with a technology licensing agreement
concluded in December 1997, aggregating $495,000, were charged to research
and development during 1997 (see Note 3).
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires compensation expense to be recorded (i) using the new fair value
method, or (ii) using existing accounting rules prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25") and related interpretations with proforma disclosure
of what net income and earnings per share would have been had the Company
adopted the new fair value method. The Company intends to continue to
account for its stock-based compensation plans in accordance with the
provisions of APB 25.
Deferred and Unearned Financing Costs
Financing costs in connection with a one-year bridge loan completed in
December of 1996 are being amortized over the life of the promissory note.
Financing costs in connection with the November 1997 Convertible
Debentures offering are being amortized over the expectant life (180 days)
of the obligation. The expectant life was determined to be the conversion
date that was most beneficial to the note holder, in accordance with
Emerging Issues Task Force ("EITF") topic number D-60.
Stock Split
On June 1, 1996, the Board of Directors authorized four-for-one stock
split, thereby increasing the number of issued and outstanding common
shares to 14,166,800 and decreasing the par value of each common share to
$0.00025. The accompanying financial statements, notes and other
references to share and per share data have been retroactively restated to
reflect the stock split for all periods presented.
F-11
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Data
During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which changed certain
requirements for computing and disclosing earnings per share, retroactive
for all periods presented. Adoption of this statement had no effect on the
accompanying financial statements.
Basic net loss per common share has been computed based on the weighted
average number of shares of common stock outstanding during the periods
presented, which were retroactively adjusted to give recognition to the
stock split on June 1, 1996. Common stock equivalents, consisting of
warrants and Convertible Debentures discussed in Note 10, were not
included in the calculation of diluted loss per share because their
inclusion would have had the effect of decreasing the loss per share
otherwise computed.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information
at December 31, 1996 and December 31, 1997, as required by Statement of
Financial Accounting Standards 107, "Disclosures about Fair Value of
Financial Instruments". Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value
to the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Receivables and Payables: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Notes Payable: The carrying amounts of notes payable approximate fair
value due to the length of the maturities, the interest rates being tied
to market indices and/or due to the interest rates not being significantly
different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other
than trading.
F-12
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
a) Collaboration Agreements With Russian Organizations
Under various agreements, the Company has agreed to fund the
commercialization of certain technologies developed in the former
Soviet Union by scientists and researchers at the I.V. Kurchatov
Institute ("Kurchatov"), other institutes associated therewith, and
the Euro-Asian Physical Society ("EAPS"), collectively the
"Scientists". Kurchatov will provide the materials, facilities and
personnel to complete the necessary work to commercialize such
technologies. Disbursements made by the Company related to the
Kurchatov arrangement were charged to research and development
expenses and amounted to $174,561, $1,109,550 and $408,000,
respectively, during the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and
1997.
In addition, pursuant to an agreement with the Kurchatov Research
Holdings, Ltd. ("KRH"), a Delaware corporation, beneficially owned
by ERBC Holdings, Ltd. ("ERBC") and individual Russian scientists,
researchers and academics, who are affiliated with Kurchatov and
EAPS, the Company agreed to pay KRH 50% of the net profits derived
from the sale, license or commercialization of any technologies or
products based upon technologies developed by the scientists and
transferred to the Company or supplied by the scientists to the
Company. The managing director and one former business
representative of ERBC are shareholders of the Company.
In connection with the collaboration agreement discussed above, in
September 1996, the Company entered into a licensing agreement with
ERBC, whereby ERBC sublicensed its license to use and exploit
certain technologies and inventions relating to a silicon organic
("EKOR") compound technology in the United States, Ukraine, Canada,
China, Japan, Republic of Korea and all European countries who are
members of the European Patent Agreement. The term of the license
expires on August 1, 2014. Under the agreement, the Company shall
pay to ERBC a royalty equal to 3% of the cost of contracts made by
the Company on which the Company would have any income. In addition
to the royalty payment, pursuant to the collaboration agreement with
KRH, the Company will be required to remit 50% of the net profit
derived from the EKOR compound technology to KRH.
b) Investments in Israeli Technology Companies
During 1997, the Company acquired a 20% interest in four separate
Israeli technology, research and development companies. The
Company's share of losses incurred by these companies has been
accounted for on the equity basis and included in research and
development expenses. The amount charged to research and development
for 1997 approximated $102,000, which reduced the Company's
investment in these four companies to zero.
F-13
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
Technion Entrepreneurial Incubator, Ltd.
During April 1997, the Company entered into an informal agreement in
principal with the Technion Entrepreneurial Incubator, Ltd. ("TEI"), an
Israeli corporation, to participate in certain technology research and
development projects sponsored by the TEI, whereby the Company will
provide 15%-20% of the financing required for, and will receive a 20%
equity interest in, research and development projects selected by the
Company. In furtherance of this venture, the Company has opened an office
at the premises of TEI in Haifa, Israel, has identified three technology
development projects for investment, and has agreed to invest in a fourth
such project, involving certain polyurethane technology with potential use
in paints and coatings. Pursuant to that agreement, the Company agreed to
invest up to $60,000 in Chemonol, Ltd. ("Chemonol"), an Israeli
corporation established to own and develop that technology, in exchange
for 20% of Chemonol's voting equity. As of December 31, 1997, the Company
has made two payments totalling $30,000 to Chemonol. The remaining $30,000
is scheduled to be paid by November 1, 1998. The Company has also entered
into agreements with the holder of 50% of Chemonol's outstanding voting
equity (the "Principal Shareholder") granting to the Company an option to
acquire from the Principal Shareholder an additional 31% of Chemonol's
voting equity for $93,000, and the present right to direct the voting of
the Principal Shareholder's voting equity. There can be no assurance that
these or any other development projects will result in useful technologies
or that the same will be commercially saleable or profitable.
Incubator for Technological Entrepreneurship - Kiryat Weizmann, Ltd.
During July 1997, the Company entered into an informal agreement in
principal with the Incubator for Technological Entrepreneurship - Kiryat
Weizmann, Ltd. ("Kiryat Weizmann, Ltd.") to participate in certain
technology research and development projects sponsored by Kiryat Weizmann
Ltd.
Pursuant to that informal agreement, the Company agreed to invest,
pursuant to a written agreement, up to $60,000 in Separator, Ltd.
("Separator"), an Israeli corporation established to own and develop
technology, in exchange for 20% of Separator's voting equity. As of
December 31, 1997, the Company has made total payments of $30,000 to
Separator. The remaining $30,000 is scheduled to be paid by August 1,
1998. The Company has also entered into written agreements with the holder
of 50% of Separator's outstanding voting equity (the "Principal
Shareholder") granting to the Company an option to acquire from the
Principal Shareholder an additional 31% of Separator's voting equity for
$93,000, and the present right to direct the voting of the Principal
Shareholder's voting equity. There can be no assurance that these or any
other development projects will result in useful technologies or that the
same will be commercially saleable or profitable.
F-14
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
Ofek Le-Oleh Foundation
During August 1997, the Company entered into an informal agreement in
principal with the Ofek Le-Oleh Foundation ("Foundation") to participate
in certain technology research and development projects sponsored by the
Foundation.
Pursuant to that informal agreement, the Company agreed to invest,
pursuant to written agreements, up to $60,000 per company in Comsyntech,
Ltd. ("Comsyntech") and Remptech, Ltd. ("Remptech"), Israeli corporations
established to own and develop technology, in exchange for 20% of
Comsyntech's and Remptech's voting equity. As of December 31, 1997, the
Company has made its first payment of $21,000 per company to Comsyntech
and Remptech. The last scheduled payment of $13,000 is scheduled to be
made no later than February 1, 1999. In connection with these investments,
the Company obtained (I) an option to purchase a 20% common equity
interest owned by the foundation exercisable for a period of 90 days
commencing on November 6, 1999 at a price to be determined, (ii) an option
to acquire from the Principal Shareholders an additional 31% of
Comsyntech's and Remptech's voting equity for $93,000, and (iii) the
present right to direct the voting of the Principal Shareholders' voting
equity. There can be no assurance that these or any other development
projects will result in useful technologies or that the same will be
commercially saleable or profitable.
Equity Transfer Consents for Israeli Companies
For a period of two years commencing on the date of its registration as an
Israeli corporation, the sale or other transfer of 25% or more of the
outstanding common equity of each of Chemonol, Separator, Remptech and
Comsyntech requires the consent of the Chief Scientist of the Israeli
Ministry of Commerce and Technology. The Company's options to acquire
additional common equity of the above Israeli Technology Companies are
exercisable within such two-year periods and any acquisition of the common
equity purchasable thereunder will, therefore, require the Chief of
Scientist's consent. Although the Company presently expects that if
requested such consent would be given, there is no assurance that such
consent will be obtained.
F-15
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS
c) Re-sealable Containers. Pursuant to a sublicense (the "Re-sealable
Container Sublicense") entered into in December 1997, the Company
has acquired from ERBC an exclusive, worldwide license to
commercialize, use, exploit and market two mechanical systems (the
"Re-sealable Container Systems") for resealing soft-drink (and other
similarly configured) beverage cans, and cardboard "TetraPak"
beverage containers. "TetraPak" containers are four-sided,
pyramidical beverage containers widely used in Europe, made of
packaging material similar to milk "cartons" familiar to the U.S.
market.
ERBC acquired an exclusive and worldwide license to the Re-sealable
Container Systems pursuant to a license agreement, dated March 20,
1997, with Cetoni Unwelttechnologie-Emwik Lungs GmbH ("Cetoni"), a
Germany company that developed and held all right, title and
interest in and to those systems, in consideration of ERBC's payment
to Cetoni of $495,000, plus 50% of all royalties received by ERBC
from sales of products and devices embodying or otherwise using
Resealable Container Systems. Under the Re-sealable Container
Sublicense, the Company paid ERBC $495,000 in consideration of the
sub-license granted thereunder, and is obligated to pay to Cetoni
50% of the Company's net revenues from the sale or licensing of such
products and devices.
The Company has accounted for this technology license fee as
acquired research and development and, in accordance with FASB
Interpretation No. 4, has charged the license fee of $495,000 to
research and development expenses for the year ended December 31,
1997.
d) On January 28, 1997, the Company entered into a technology transfer
consulting arrangement with American Autopark, Ltd. ("Arbat") to
license its technology, designs, renderings, blueprints and plans
for the construction and operation of vertical parking structures.
The Company is to receive a fee equal to $1,250 per parking space in
each garage erected by Arbat or any of its affiliates based upon the
technology transferred to Arbat by the Company. Certain shareholders
of the Company are shareholders of Arbat.
In August 1997, the Company received a $225,000 technology transfer
fee under this agreement related to a construction of a parking
structure in Moscow, Russia. The Company has deferred the
recognition of this revenue until such time when all initial
technology has been transferred to Arbat and the Company has no
remaining obligation once construction commences.
e) In September 1996, the Company entered into a technology transfer
and consulting agreement with Eurowaste, Ltd. ("Eurowaste"), a
related party, under which Eurowaste will pay the Company $2,450,000
upon the initiation of construction of the first waste to energy
plant, and a design and implementation consulting fee of $425,000
for each subsequent plant. A shareholder and director of the Company
is the Chairman, Chief Executive Officer and a shareholder of
Eurowaste.
F-16
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND LICENSING
AGREEMENTS (Continued)
The Company intends to recognize revenue from the initial fee of
$2,450,000 at the time when all initial technology has been
transferred to Eurowaste and the Company has no remaining
obligations once construction commences. Revenue from the $425,000
design and implementation and consulting fee will be recognized
during the construction period of each subsequent waste-to-energy
plant.
f) On May 1, 1995, the Company entered into a license agreement which
granted the Company an exclusive right to license certain
technologies for medical application systems in Russian/European
countries for the remaining life of the patent for $37,500. In lieu
of cash, the owner accepted 600,000 shares of the Company's common
stock. The agreement called for quarterly royalty payments equal to
5% of gross revenues earned and received by the Company with a
minimum annual royalty of $100,000. No minimum royalty payment was
to accrue or be payable until December 1, 1995. The Company
terminated the agreement on November 30, 1995 and expensed the cost
of the license. No products were developed or sold using the
licensed technology and no royalties were due the owner.
g) On May 29, 1995, the Company entered into a license agreement which
granted the Company, for the life of the patent, territorially
limited exclusive license to use technology marketed under the name
Coherent On Receive Only ("CORO") in Europe and the Near East. In
consideration for the grant of the license and the use of the
proprietary engineering, the Company agreed to pay the developer a
$200,000 initial license fee upon delivery of the technology, along
with an 8% royalty payable semi-annually on equipment gross sales.
If the technology is delivered, the Company intends to account for
the $200,000, an initial license fee and amortize over the shorter
of the economic life of the technology or remaining term of license
agreement.
Management is currently evaluating the viability of this technology
and its potential uses in various markets.
NOTE 4 - MACHINERY AND EQUIPMENT
Machinery and equipment consisted of the following:
Depreciation expense for the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and 1997
amounted to $-0-, $397 and $2,897, respectively.
NOTE 5 - ORGANIZATION AND PATENT COSTS
Organization and patent costs consisted of the following:
Patent costs capitalized during 1996 and 1997 represent legal and other
costs related to filing of patent applications in various countries.
Amortization expense for the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and 1997
amounted to $182, $612 and $1,913, respectively.
NOTE 6 - NOTES PAYABLE TO/RECEIVABLES FROM RELATED PARTIES
Loans from Related Parties
During 1996, three shareholders of the Company loaned the Company $341,300
under four separate promissory note. The notes bear interest at the rate
of 10% per annum and were due on December 31, 1996. In December of 1996,
$141,300 of principal on such notes was repaid by the Company. The balance
of $200,000 was converted into four units of the bridge financing
discussed in Note 8. Interest expense related to these loans for 1996
amounted to $15,948.
During 1997, the Company borrowed $420,140 from a shareholder of the
Company. The loans were due on demand and provided for an interest rate of
10% per annum. As additional consideration, the shareholder received
warrants to purchase 364,000 shares of common stock at $5.02 exercisable
over the three-year period ending December 31, 2000 (see Note 10). As of
December 31, 1997, the Company repaid all of the shareholder's loans which
amounted to $420,140, plus applicable interest of $7,075.
F-18
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - NOTES PAYABLE TO/RECEIVABLES FROM RELATED PARTIES (Continued)
Loans to Related Parties
In December 1996, the Company advanced $84,000 to a consultant and
shareholder of the Company. The full amount, plus interest at 10% per
annum, was repaid during February 1997.
During 1996, the Company advanced $5,918 to Arbat Autopark, Ltd., a
company related by virtue of common shareholders. Said advance is
non-interest bearing and outstanding at December 31, 1997.
NOTE 7 - NOTES PAYABLE - BRIDGE LOAN
In December 1996, the Company completed a private placement of 40 Units,
each consisting of the Company's one-year promissory note in the principal
amount of $50,000, bearing interest at the rate of 12% per annum, and
25,000 shares of its common stock for an aggregate offering price of
$2,000,000. Of such Units sold, four Units were issued to two shareholders
in exchange for cancellation of promissory notes amounting to $200,000
(see Note 6).
The proceeds of such offering were used to pay accrued liabilities, repay
shareholders promissory notes of $141,000 and fund research and
development costs.
In December of 1997, the Company and the promissory note holders agreed to
extend the original maturity date from December 18, 1997 to March 18, 1998
and increase the interest rate from 12% to 15% per annum effective on
December 19, 1997. On March 6, 1998, the promissory notes were satisfied
by the Company from proceeds of a Convertible Debenture financing
completed in February of 1998.
See Note 10 for further discussion of this financing.
NOTE 8 - 8% CONVERTIBLE DEBENTURES
On November 27, 1997, the Company sold through a private placement
$3,000,000, 8% Convertible Debenture notes, due November 27, 2000. As
additional consideration, the Company issued separate warrants to the
purchasers to purchase 60,000 shares of the Company's common stock at 110%
of the market price, determined over the last five trading days prior to
November 27, 1997, or $4.73 per share. The warrants are exercisable over
two years.
See Note 10 for further discussion of the Convertible Debentures.
F-19
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES
For the period from inception (May 26, 1995) to December 31, 1995,
pursuant to Internal Revenue Service Code Section 195, the Company elected
to treat its expenditures as start-up costs. These costs totalling
approximately $510,000 were treated, for income tax purposes, as deferred
expenses to be amortized on a straight-line basis over five years.
The Company was not required to provide for a provision for income taxes
for the period ended December 31, 1995 and for the years ended December
31, 1996 and 1997 as a result of net operating losses incurred during
these periods.
The components of deferred tax assets and liabilities at December 31, 1996
and 1997 are as follows:
1996 1997
---------- ----------
Deferred Tax Assets:
Net operating loss carryforwards $ 803,902 $2,562,766
Start-up costs 138,728 104,045
Temporary differences, principally relates to tax
effects of compensatory element of stock
issuances 411,251 2,831,219
---------- ----------
Total Gross Deferred Tax Assets 1,353,881 5,498,030
Less: Valuation allowance (1,353,881) (5,498,030)
---------- ----------
Net Deferred Tax Assets $ -- $ --
========== ==========
The net change in the valuation allowance for deferred tax assets was an
increase of $4,144,149.
As of December 31, 1997, the Company had available approximately
$7,537,000 of net operating losses for income tax purposes that may be
carried forward to offset future taxable income, if any. These
carryforwards expire during the year 2015 through 2017. Pursuant to
Section 382 of the Internal Revenue Code, substantial restrictions are
imposed on the utilization of net operating loss carryforwards in the
event of an ownership change.
F-20
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 9 - INCOME TAXES (Continued)
A reconciliation of income tax expense at the statutory rate to
income tax expense at the Company's effective rate is as follows:
1996 1997
----------- -----------
Computed tax at the statutory rate $(1,182,174) $(4,230,022)
Non-deductible expenses and losses 1,702 85,873
Tax effects of temporary differences 411,251 2,419,968
Start-up costs (34,681) (34,683)
Unutilized net operating loss 803,902 1,758,864
State income taxes -- --
----------- -----------
Income Tax Expense $ -- $ --
=========== ===========
NOTE 10 - STOCKHOLDERS' DEFICIENCY
Common Stock Transactions
In May 1995, the Company issued 4,380,800 shares to its founder.
Since inception (May 26, 1995) through December 31, 1997, the
Company completed two offerings of common stock under Rule 504 and
two offerings under 506 of the Securities Act of 1933 (the "Act") as
follows:
First Offering
Under the first offering, during the period from inception (May 26,
1995) to December 31, 1995, the Company sold 2,640,000 shares of
common stock at $0.0625 per share and derived aggregate proceeds of
$165,000, of which $3,000 was due from stockholders at December 31,
1995.
During August 1995, the Company issued 440,000 shares of common
stock, valued at $27,500, to two individuals and a financial
institution as consideration for assistance in the above offerings.
During August 1995, the Company issued 600,000 shares of common
stock in connection with its purchase of a license valued at
$37,500. The shares were issued as part of the first offering.
F-21
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
On October 10, 1995, the Company issued 600,000 non-qualified stock
options to acquire shares of common stock to three related parties
as consideration for financial public relations services, investment
banking services and legal services, valued at $75,000, in
connection with the above offerings. The options were issued outside
of the 1995 Stock Option Plan and had a term of one year commencing
January 1, 1996. All of the options were exercised on January 18,
1996 and the related 600,000 shares were issued as part of the first
offering.
Second Offering
Under the second offering, which commenced in October of 1995, the
Company sold 2,718,000 shares of common stock at $0.25 per share and
derived aggregate proceeds of $679,500. Of these 2,718,000 shares
sold, pursuant to the second offering, 1,440,000 shares were sold
during 1995 for aggregate proceeds of $360,000 and 1,278,000 shares
were sold during 1996 for aggregate proceeds of $319,500.
Third Offering/Bridge Financing
In December 1996, the Company completed a private placement (the
"Bridge Financing") of 40 Units, each consisting of the Company's
one-year promissory note in the principal amount of $50,000, bearing
interest at the rate of 12% per annum, and 25,000 shares of its
common stock for an aggregate offering price of $2,000,000, and
aggregate number of common shares of 1,000,000. Of such Units sold,
four Units were issued to two shareholders in exchange for
cancellation of promissory notes amounting to $200,000 (see Note 6).
The Units were offered and sold in reliance on an exemption from
registration pursuant to Rule 506 of Regulation D under the Act, and
only to accredited investors within the meaning of Rule 501 of
Registration D under the Act.
Under the agreement, the notes were due one year from the issuance
date. Holders of the shares of common stock issued pursuant to this
agreement have, among other things, demand and mandatory
registration rights, including penalties, which require the Company
to issue to the Unit holders up to 1,000,000 additional shares of
common stock if such shares were not registered under the Act within
the specified time frame. As of December 31, 1996, the Company
recorded an additional 500,000 shares of common stock to be issued
under the offering based on the Company's belief that it would not
meet one of the two filing deadlines. The Company did not meet
either filing deadline and, accordingly, the 500,000 additional
common shares recorded as of December 31, 1996, were issued to such
holders in April 1997, and a further 500,000 common shares were
issued to such holders in August 1997. As of their maturity in
December 1997, the Company had insufficient funds to repay such
notes and also had not yet registered the shares of common stock as
required under the agreement. Accordingly, the Company obtained the
agreement of the noteholders to extend the notes' maturity until
March 18, 1998, in consideration of the issuance to the noteholders
of an aggregate of 1,000,000 additional shares of the Company's
common stock. The Company agreed to register such shares of common
stock under the Act. Pursuant to the terms of the notes, as of
December 19, 1997, their interest rate has been increased to 15% per
annum.
F-22
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
Furthermore, under the terms of the December 1997 extension
agreement, if by April 1, 1998 a registration statement, which shall
include all shares issued to holders of bridge notes, is not
declared effective by the Securities and Exchange Commission (the
"SEC"), then the Company will issue to each Unit holder, 12,500
shares of the Company's common stock. Effective on April 2, 1998,
and for each of the three-month period thereafter, if the
registration statement is not declared effective by the SEC, the
Company and unit holders will negotiate the number of penalty shares
to be issued.
The 3,000,000 common shares issued under the December 1996 agreement
and December 1997 extension agreement are detachable shares and are
accounted for separately from the promissory notes as an addition to
paid-in capital for the value of the stock issued and as a charge to
stockholders' deficiency for the unearned portion. The value
assigned to the 3,000,000 shares was based on fair value and
amounted to $7,444,875, of which $2,719,875 was recorded in 1996
attributable to 1,500,000 shares, and $4,725,000 was recorded in
1997 attributable 1,500,000 shares. These amounts are being
amortized on the interest method over a 12-month period and charged
to financing costs. The amount charged to financing costs for the
years ended December 31, 1996 and 1997 amounted to $226,656 and
$7,218,219, respectively.
Costs associated with this offering allocated to the promissory
notes, which amounted to $22,150, have been capitalized and are
being amortized as financing costs over the life of the notes. For
the years ended December 31, 1996 and 1997, amortization related to
the promissory note costs amounted to $1,846 and $20,304,
respectively.
Fourth Offering/8% Convertible Debentures
On November 27, 1997, the Company sold through a private placement
$3,000,000, 8% convertible debenture notes, due November 27, 2000.
As additional consideration, the Company issued separate warrants to
the purchasers to purchase 60,000 shares of the Company's common
stock at 110% of the market price, determined over the last five
trading days prior to November 27, 1997, or $4.73 per share. The
warrants are exercisable over two years.
The debenture agreement permits the holders of the debentures to
convert the debt into shares of common stock at beneficial
conversion rates based on the timing of the conversions. The
conversion feature commences at the earlier of: (i) the date the
underlying shares to the convertible debentures are registered and
declared effected by the SEC; (ii) February 25, 1998. Shares of
common stock to be issued at the conversion date shall be equal to
the outstanding principal and accrued interest at the conversion
date, divided by the conversion price. The conversion price is the
lower of $5.38 or the average bid price per share of the Company's
common stock for five trading days immediately
F-23
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
preceding the conversion date, multiplied by (i) 80% in the case of
conversions effected prior to May 29, 1998, (ii) 75% in the case of
conversions effected on or after May 29, 1998, but prior to November
25, 1998, and (iii) 70% in the case of conversions effected on or
after November 25, 1998. Furthermore, the conversion price may not
be less than a specified "floor" initially set at $2.00. Commencing
on November 27, 1999, all or any portion of the remaining debt, at
the option of Eurotech, is convertible into common stock at the 70%
conversion rate.
The Convertible Debenture agreement obligates the Company to
register a number of common shares equal to the sum of (i) 200% of
the number of shares of common stock into which the debentures are
convertible, (ii) interest thereon and (iii) 127,500 shares of
common stock related to the warrants. Further, the Company has
agreed that if a registration statement covering the underlying
shares of the Convertible Debenture is either not filed with the SEC
on or prior to January 15, 1998, or, if filed, is not declared
effective by the SEC on or prior to February 16, 1998, the Company
will be obligated to pay to the debenture holders liquidated damages
equal to 1% of the aggregate principal amount of the then
outstanding notes on the first day of each month until such filing
or effectiveness deficiency is cured. As of March 12, 1998, such
registration statement has not been declared effective by the SEC.
Accordingly, the Company will be liable for such damages to the
purchasers of the Convertible Debentures.
The Company has assigned a value of $1,337,143 to the beneficial
conversion feature of the debentures and $134,400 to the 60,000
warrants issued the purchasers of the Convertible Debentures. These
amounts are accounted for separately from the Convertible Debentures
as an addition to paid-in capital and as a reduction of
stockholders' equity for the unearned portion. The unearned portion
is being amortized on the interest method over the 180-day period
commencing November 27, 1997 and is charged to financing costs. For
the year ended December 31, 1997, amortization of such unearned
financing cost amounted to $277,958.
Costs in connection with the $3,000,000 Convertible Debenture
offering allocated to the Convertible Debentures, amounted to
$472,080. Such costs were comprised of: (i) legal and professional
fees amounting to $22,000, (ii) a placement fee to an unrelated
party amounting to $300,000 and (iii) the placement agent received
non-cash consideration valued at $150,080 consisting of warrants to
purchase 67,500 shares of the Company's common stock at $4.73 per
share, or 110% of Company's average closing price, determined over
the last five trading days prior to November 27, 1997. The Company
is amortizing such costs over 180 days as a financing expense
commencing November 27, 1997. For the year ended December 31, 1997,
amortization related to such costs amounted to $89,170.
F-24
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' DEFICIENCY (Continued)
Other Issuances
During 1996, the Company issued 4,345,036 shares of common stock as
consideration for consulting services performed by various employees
and consultants, including related parties, through December 31,
1996. Shares issued under these arrangements were valued at
$1,209,477, which was all charged to operations during 1996. Of such
shares issued in 1996, 2,628,000 shares of common stock were issued
for start-up services rendered principally during 1995. Such shares
were assigned a value of $164,250, which represented the fair market
value for these services rendered at such time.
During 1997, the Company issued 205,000 shares of common stock as
consideration for consulting services performed by various
consultants, including related parties, during the year ended
December 31, 1997. Shares issued under these arrangements were
valued at $839,550, which was all charged to operations during 1997.
General
Shares of common stock and stock options issued for other than cash
have been assigned amounts equal to the fair value of the underlying
service or assets received in the exchange. The fair market value of
the shares issued were determined by taking into consideration
restrictions on future sale, risks associated with start-up of a new
business, lack of revenues, lack of working capital and equity and
other various economic risks.
Compensation to related parities paid in the form of shares of
common stock or stock options, materially approximate amounts that
would have been paid by unrelated parties.
Warrants
At December 31, 1997, the Company had outstanding warrants to
purchase 1,426,500 shares of the Company's common stock at prices
ranging from $1 to $5.02 as described below.
Pursuant to a financial consulting agreements, in April of 1996, the
Company agreed to issue warrants to purchase 600,000 shares of
common stock. The warrants are exercisable for a period of four
years commencing May 22, 1997 at an exercise price of $1.00 per
share. To date, the Company has issued warrants to purchase 130,000
shares of common stock. The Company has not issued the remaining
470,000 warrants due to the non-performance of services and for
other business reasons (see Note 12).
In October 1996, the Company entered into two-year consulting
agreements with two individuals for certain advisory services. As
full compensation for services to be rendered to the term of the
agreements, the Company issued warrants to purchase 150,000 shares
of common stock each exercisable for a period of five years
commencing October 1, 1996 at an exercise price of $1.50 per share.
For the years ended December 31, 1996 and 1997, no warrants were
exercised.
F-25
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
As additional consideration for monies advanced the Company during
1997 (Note 6), a shareholder received warrants to purchase 364,000
common shares at a price of 110% of the average market price over
the five-day period ending November 20, 1997, or $5.02 per share.
The warrants may be exercised commencing January 1, 1998 and expire
on December 31, 2000. The warrants were assigned a value of $862,680
which was all charged to operations as a financing expense during
1997.
Pursuant to a financial consulting agreement in December of 1997, a
consultant was issued warrants to purchase 35,000 shares of common
stock at $4.73 per share. The warrants may be exercised commencing
January 1, 1998 and expire on December 31, 2000. The warrants were
assigned a value of $39,588 which was all charged to operations as a
financing expense during 1997.
Pursuant to the Convertible Debenture financing completed in
November of 1997, the Company issued to the purchasers of the
debentures warrants to purchase 60,000 shares of common stock and
issued to the placement agent warrants to purchase 67,500 shares of
common stock at $4.73 per share. The warrants may be exercised over
the two-year period ending November 27, 1999. The warrants were
valued at $284,480 and said amount will be charged to operations as
a financing cost over the 180-day period commencing November 27,
1997.
In estimating the value of warrants pursuant to the accounting
provisions SFAS 123, the Company used the following assumptions:
December 31, 1996 December 31, 1997
----------------- -----------------
Risk-free interest rate 6% 5%
Expected life 3 years 2 years
Expected volatility 30% 99.61%
Dividend yield 0 0
If such accounting provisions of SFAS 123 were applied, then the
Company's net loss and the net loss per share would have been
$3,764,983 and $.25, respectively, for the year ended December 31,
1996. There is no proforma effect for 1997 because the warrants
issued during 1997 were to non-employees and were for financing
services. The value assigned to these warrants is being charged to
operations over the expectant life of the related debt.
Earnings Per Share
Securities that could potentially dilute basic earnings per share
("EPS") in the future that were not included in the computation of
diluted EPS because to do so would have been antidilutive for the
for the periods presented consist of the following:
F-26
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Warrants to purchase common stock 1,426,500
Convertible Debentures (assumed conversion at initial
floor price and at largest discount) 2,142,857
Options to purchase common stock 75,000
---------
Total as of December 31, 1997 3,644,357
=========
Substantial issuance after December 31, 1997 through
March 12, 1998:
Convertible Debentures issued February 1998 (assumed
conversion at initial floor price and at largest
discount) 2,900,000
=========
NOTE 11 - 1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors and stockholders of the Company on
November 12, 1995. Under the Option Plan, 500,000 shares of the
Company's common stock, subject to certain adjustments, are reserved
for issuance upon the exercise of options. Options granted under the
Option Plan may be either (i) options intended to constitute
incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, or any corresponding provisions of
succeeding law (the "Code") or (ii) non-qualified stock options.
Incentive stock options may be granted under the Option Plan to
employees (including officers) of the Company or a subsidiary
corporation (or any director of, or consultant or advisor to, the
Corporation, as may be selected by the committee) thereof on the
date of grant. Nonqualified options may be granted to (i)
non-employees of the Company or a subsidiary thereof on the date of
the grant, and (ii) consultants of advisors who do not provide
bonafide services, and such services must not be in connection with
the offer or sale of securities in a capital raising transaction.
By its terms, the Option Plan is to be administered by a committee
(the "Committee") appointed by the Board of Directors which shall
consist of either the entire Board of Directors, or by a committee
of two or more persons (who may or may not be directors), and who
serve at the discretion of the Board of Directors. Subject to the
provisions of the Option Plan, the Committee has the authority to
determine the persons to whom options will be granted, the exercise
price, the term during which options may be exercised and such other
terms and conditions as it deems appropriate.
Any options granted under the Option Plan will be at the fair market
value of the common stock on the date of the grant (or 110% of the
fair market value in the case of employees holding ten percent or
more of the voting stock of the Company). Options granted under the
Option Plan will expire not more than ten years from the date of the
grant subject to earlier termination under the Option Plan. The term
of an incentive stock option granted to a 10% shareholder shall be
no more than 5 years from the date of the grant. The Option Plan
will terminate on November 12, 2005.
As of December 31, 1997, no options were granted under the Option
Plan.
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligations
In August 1996, the Company entered into a sublease agreement to
rent office space for a period of fourteen months. On November 1,
1997, the Company renewed its lease for a five-year period. Under
the lease agreement, annual rent will amount to $48,000 for each
year, commencing November 1, 1997, subject to certain expense
adjustments.
Commencing March 1997, the Company rented office space at the
premises of Technion Entrepreneurial Incubator, Ltd., in Haifa,
Israel, on a month-to-month tenancy basis at the rate of $300 per
month.
F-27
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Rent expense for all premise operating leases was approximately
$-0-, $11,000 and $42,000 for the period ended December 31, 1995,
and the years ended December 31, 1996 and 1997, respectively.
Employment Agreement
The Company terminated the employment agreement with the former
President of the Company effective on February 28, 1998. Pursuant to
the employment agreement, the former President received: (i) a base
salary of $77,374 per year; (ii) 255,000 shares of the Company's
common stock. The 255,000 shares issued pursuant to the contract was
valued at $152,000 and was charged to operations during 1996.
Consulting Agreements/Commitments
Commencing January 1, 1997, the Company agreed to pay a consultant
and advisor to the Company who is also a shareholder of the Company,
monthly consulting fees of $16,667. This agreement expired on
December 31, 1997.
The Company engages ERBC under an oral agreement to develop business
plans, develop business opportunities in the European Union, Russian
and Ukraine and for the evaluation of various technologies held by
former instrumentalities in the former Soviet Union. The Company
paid ERBC for consulting services $177,400, $16,200 and $-0- ,
respectively, during the period from inception (May 26, 1995) to
December 31, 1995 and for the years ended December 31, 1996 and
1997.
On April 15, 1996, the Company entered into a consulting agreement
with a director and, effective January 23, 1998, the Chairman of the
Company to evaluate technologies acquired by the Company for the
purpose of introducing such technologies to potential licensees. The
agreement calls for a payment of $10,000 and issuance of 20,000
shares of common stock as consideration for services performed
through September 15, 1996. Commencing October 15, 1996 through
April 15, 1998, the Company is obligated to pay $2,000 and issue
4,000 shares of common stock on a monthly basis as compensation for
the consulting services through the earlier of April 15, 1998 or the
termination date.
F-28
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
In July 1996, as amended, the Company entered into a consulting
agreement to provide financial public relations services for a term
of two years. The agreement can be terminated by the Company at the
end of any calendar quarter by providing one week's written notice
to the consultant. The agreement provided that the consultant
initially receive monthly payments of $2,500, increased to $5,000,
effective November 1996. Also, the consultant was granted an option
to acquire up to 12,500 shares of common stock in each calendar
quarter at an exercise price equal to the ask price per share on
July 1 of each year as reported by National Quotation Bureau. During
1996 and 1997, options to acquire up to 25,000 common shares at
$2.50 per share and 50,000 common shares at $6.75 per share,
respectively, have vested under this agreement, but have not been
exercised by the consultant. Each option shall has a term of one
year.
In November 1996, the Company entered into a consulting agreement
for certain technology advisory services, including the evaluation
of nuclear waste disposal technologies acquired by the Company for
the purpose of introducing such technologies to potential licensees,
for a term of two years. The Company is obligated to pay $4,000 and
issue 20,000 shares of common stock for services performed through
November 15, 1996. Commencing December 15, 1996, the consultant is
obligated to receive $4,000 and 4,000 shares of common stock on a
monthly basis as compensation during the term of the agreement.
In December 1996, the Company entered into a consulting agreement
for certain advisory services, including directing a technology
development branch in Israel, for a term of two years. The advisor
is obligated to be paid $2,000 and issued 5,000 shares of common
stock for services performed through November 15, 1996. In addition,
commencing January 1, 1997, on a monthly basis, the advisor will
receive as compensation $1,000 and 2,000 shares of common stock
during the term of the agreement. On December 1, 1997, the agreement
was revised for a term of two years commencing on December 1, 1997.
The revised agreement states that, on a monthly basis, the
compensation will increase to 3,000 and 4,000 shares of common
stock.
In December 1996, the Company entered into a consulting agreement
for certain services, including establishing a technology
development branch is Israel, for a period of two years. The Company
is obligated in January 1997 to pay $2,000 and issued 5,000 shares
of its common stock for services rendered through the date of the
agreement. In addition, commencing January 1, 1997, the advisor will
receive as compensation $1,000 and 1,000 shares of common stock
during the term of the agreement.
In December 1996, the Company entered into a consulting agreement
with a shareholder of the Company for certain technology advisory
services, including establishing a technology development branch in
Israel, for a term of two years. Under the agreement, on April 1,
1997, the Company will pay an introductory sum of $2,000 and issue
5,000 shares of common stock. Commencing April 1, 1997, the
shareholder will receive $1,000 on a monthly basis as compensation
during the term of the agreement.
F-29
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
In December 1996, the Company entered into a consulting agreement
for certain advisory services, including managing a technology
development branch in Israel, for a term of two years. The advisor
is obligated to be paid $2,000 and issued 5,000 shares of common
stock for services performed through November 15, 1996. In addition,
commencing January 1, 1997, on a monthly basis, the advisor will
receive as compensation $1,000 and 2,000 shares of common stock
during the term of the agreement. On December 1, 1997, the agreement
was revised for a term of two years commencing on December 1, 1997.
The revised agreement states that, on a monthly basis, the
compensation will increase to $3,000 and 4,000 shares of common
stock.
Compensation paid to related parties under the above listed
consulting and other arrangements materially approximated amounts
which would be assessed by unrelated parties.
International Operations
The Company has strategic alliances, collaboration agreements and
licensing agreements with entities which are based in Russia and
Ukraine. Both of these countries have experienced volatile and
frequently unfavorable economic, political and social conditions.
The Russian economy and the Ukraine economy are characterized by
declining gross domestic production, significant inflation,
increasing rates of unemployment and underemployment, unstable
currencies, and high levels of governmental debt as compared to
gross domestic production. The prospects of wide-spread insolvencies
and the collapse of various economic sectors exist in both
countries.
In view of the foregoing, the Company's business, earnings, asset
values and prospects may be materially and adversely affected by
developments with respect to inflation, interest rates, currency
fluctuations, government policies, price and wage controls, exchange
control regulations, taxation, expropriation, social instability,
and other political, economic or diplomatic developments in or
affecting Russia and Ukraine. The Company has no control over such
conditions and developments, and can provide no assurance that such
conditions and developments will not adversely affect the Company's
operations.
F-30
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Risk of Environmental Liability; Present Lack of Environmental
Liability Insurance
The Company's radioactive contaminant technology is subject to
numerous national and local laws and regulations relating to the
storage, handling, emission, transportation and discharge of such
materials, and the use of specialized technical equipment in the
processing of such materials. There is always the risk that such
materials might be mishandled, or that there might be equipment or
technology failures, which could result in significant claims for
personal injury, property damage, and clean-up or remediation. Any
such claims against the Company could have a material adverse effect
on the Company. The Company does not presently carry any
environmental liability insurance, and may be required to obtain
such insurance in the future in amounts that are not presently
predictable. There can be no assurance that such insurance will
provide coverage against all claims, and claims may be made against
the Company (even if covered by insurance policies) for amounts
substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on the Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash which is at
one bank. Future concentration of credit risk may arise from trade
accounts receivable. Ongoing credit evaluations of customers'
financial condition will be performed and, generally, no collateral
will be required.
Litigation
In December 1997, Raymond Dirks, Jessy Dirks, Robert Brisotti and
David Morris filed an action in the Supreme Court for the State of
New York, County of New York, against Eurotech, Ltd. for breach of
contract, seeking injunctive relief, specific performance and
monetary damages of nearly $5 million (the "Dirks Litigation"). The
Dirks Litigation arises solely from an agreement between Eurotech
and National Securities Corporation ("National") relating to
financial advisory services to be performed by National Securities
Corporation, a broker/dealer with which the plaintiffs were
affiliated and of which Raymond Dirks Research was a division.
Eurotech granted National a warrant certificate for 470,000 shares
at $1.00 per share as a retainer for general financial advisory
services. In conjunction with the separation of the plaintiffs and
Raymond Dirks Research from National Securities Corporation,
National assigned a significant portion of the warrant certificate
to the plaintiffs.
The plaintiffs allege, among other things, that they are entitled to
damages composed of both the value of the stock on the date of their
purported exercise of an alleged assignment of the warrant
certificate, and the decrease in value of the price of the stock
since the date of their purported exercise. Eurotech believes that
the plaintiffs have significantly overstated their monetary damage
claim and that, having sought monetary damages, the plaintiffs are
not entitled to any type of equitable relief.
F-31
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Process was served upon Eurotech at its California office in late
January 1998. Eurotech intends to vigorously defend and believes
that the plaintiffs' claims will be resolved favorably to the
Company. If the Company were adjudged liable in the Dirks
Litigation, the resolution of the litigation could have a material
adverse effect on the Company.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Transactions
1995:
During the period from inception (May 26, 1995) to December 31,
1995, the Company issued 440,000 shares of common stock to settle
liabilities of $27,500 associated with stock offerings and issued
600,000 shares of common stock for the purchase of a license valued
at $37,500.
During the period from inception (May 26, 1995) to December 31,
1995, the Company issued stock options for 600,000 shares of common
stock to settle legal and consulting fee liabilities of $75,000
associated with stock offerings.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
1996:
During the year ended December 31, 1996, the Company issued
4,440,036 shares of common stock to settle liabilities of $1,381,736
associated with consulting services and financing costs.
1997:
During the year ended December 31, 1997, the Company issued 205,000
shares of common stock to settle liabilities of $839,550 associated
with consulting services.
NOTE 14 - ABORTED PROPOSED INITIAL PUBLIC OFFERING OF PREFERRED STOCK
In June of 1997, the Company had determined not to proceed with a
previously contemplated, initial public offering of 5,000,000 shares
of cumulative convertible preferred stock. Costs in connection
therewith, aggregating $75,000, were charged to operations during
the year ended December 31, 1997.
F-32
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - SUBSEQUENT EVENTS
Technologies Acquired
Pursuant to three Technology Purchase Agreements each dated January
1, 1998, the Company has acquired from Oleg L. Figovsky, Ph.D. , a
consultant to the Company, all right, title and interest in and to
the following three unpatented technologies developed by him,
inclusive of future improvements thereto: (i) a group of related
technologies collectively known as "Interpenetrated Network
Polymers" ("INPs"), (ii) "Liquid Ebonite Material" ("LEM") and (iii)
"Rubber Concrete" ("RubCon") for purchase prices of $75,000, $15,000
and $35,000, respectively (each, a "Purchase Price"). Pursuant to
each such Technology Purchase Agreement, during 15-year period
commencing on January 1, 1998, the Company is obligated to pay to
Dr. Figovsky royalties equal to 49% of the Company's net revenues
from the sale or licensing of any products incorporating the
applicable technology, subject to the Company's right to deduct from
the first royalties payable under each agreement an aggregate sum
equal to the Purchase Price paid thereunder.
Convertible Debenture Offering
On February 23, 1998, the Company sold through a private placement
$3,000,000, 8% convertible debenture notes, due February 23, 2001.
As additional consideration, the Company issued separate warrants to
purchase 60,000 shares of the Company's common stock at $2.30 per
share. The warrants are exercisable over two years.
The debenture agreements permit the holders of the debentures to
convert the debt into shares of common stock at beneficial
conversion rates based on the timing of the conversion. The notes
conversion feature commences at the earlier of: (i) the date the
underlying shares to the convertible debenture notes are registered
and declared effected by the SEC; (ii) 90 days after February 23,
1998. Shares of common stock to be issued at the conversion date
shall be equal to the outstanding principal and accrued interest at
the conversion date, divided by the conversion price. The conversion
price is the lower of $2.62 or the average bid price per share of
the Company's common stock for five trading days immediately
preceding the conversion date, multiplied by (i) 80% for any
conversion honored prior to the 180th day after February 23, 1998,
(ii) 75% for any conversion honored on or after the 180th day and
prior to the 360th after February 23, 1998, and (iii) 70% for any
conversion honored after the 360th day after February 23, 1998.
Furthermore, the conversion price may not be less than a specified
"floor" initially set at $1.625. Commencing on February 23, 2000,
all or any portion of the remaining debt due under this financing at
the option of Eurotech is convertible into shares of common stock at
the 70% conversion rate.
Furthermore, the Company has agreed that if a Registration Statement
covering the underlying shares of the convertible note is either not
filed with the SEC on or prior to March 2, 1998 or, if filed, is not
declared effective by the SEC on or prior to March 15, 1998, the
Company will be obligated to pay to the debenture holders liquidated
damages equal to 1% of the aggregate principal amount of the then
outstanding notes on the first day of each month until such filing
or effectiveness deficiency is cured.
F-33
EUROTECH, LTD.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - SUBSEQUENT EVENTS (Continued)
The Company intends to assign a value to the debentures' beneficial
conversion feature and warrants amounting to $1,100,000, which will
be amortized over 180 days commencing February 23, 1998.
Proceeds from the sale of the 3,000,000, 8% convertible debenture
notes amounted to $2,765,000 net of costs which were comprised of:
(i) legal and professional fees amounting to $10,000, (ii) a
placement fee to an unrelated party amounting to $225,000. The legal
and placement fees of $235,000 will be recorded as deferred
financing costs and will be amortized over 180 days commencing
February 23, 1998.
Repayment of $2,000,000 Bridge Notes
On March 6, 1998, the Company repaid all of the $2,000,000 principal
due to the holders of the bridge notes from proceeds of the February
1998 Convertible Debenture offering.
F-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
14, 1998.
EUROTECH, LTD.
By:/s/ Peter Gulko
-----------------------------------
Peter Gulko, President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/James D. Watkins Director and Chairman April 14, 1998
----------------------
James D. Watkins
/s/Maxwell Robb Director April 14, 1998
----------------------
Maxwell Robb
/s/Lawrence McQuade Director April 14, 1998
----------------------
Lawrence McQuade
/s/Peter Gulko President and Secretary April 14, 1998
----------------------
Peter Gulko
/s/John McNeil Wilkie Sr. Vice President and April 14, 1998
---------------------- Chief Financial Officer
John McNeil Wilkie
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