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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
COMMISSION FILE NUMBER 000-22129
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Eurotech, Ltd.
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(Name of registrant as specified in its charter)
District of Columbia 33-0662435
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10306 Eaton Place, Suite 220
Fairfax, Virginia 22030
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 352-4399
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.00025 par value
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Title of class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12-b-2). Yes [ ] No [X]
On June 30, 2002, the aggregate market value of the voting and
nonvoting common equity held by non-affiliates of the registrant was
approximately $13,564,902.
On April 15, 2003, the registrant had approximately 94,923,797 shares
of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None, other than exhibits listed as incorporated by reference on the
exhibit table hereto.
INTRODUCTORY NOTE
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS, BY THEIR NATURE, INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, VOLATILITY OF STOCK PRICES AND ANY OTHER FACTORS DISCUSSED IN THIS AND
OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS.
GENERAL
We are a development-stage company engaged in the business of
acquiring, developing, and marketing emerging chemical and electronic
technologies designed to create products for use in the environmental and
security sectors. We manage engineering and scientific development programs
designed to identify products and processes that have differentiated
characteristics with possibly reduced manufacturing and/or use risks. Our
portfolio of technologies and potential products include: (a) proprietary
materials created to specifically solve the problems of how nuclear and other
hazardous wastes are cost effectively contained, (b) advanced performance
materials for use in industrial products such as coatings and paints, and (c)
through our subsidiary, Markland Technologies, Inc., a publicly-traded Florida
corporation, referred to herein as Markland, automatic detection of explosives
and illicit materials for use in homeland security. We are seeking to
commercialize our technologies using various financial and transactional
vehicles including: technology transfer, licensing, joint venture, and
distribution agreements.
Our business is divided into three divisions: (i) Nuclear &
Environmental Technology Solutions, (ii) Security & Safeguards (which is
currently conducted through our Markland subsidiary) and (iii) Advanced
Performance Materials.
Our nuclear and environmental technologies consist of a family of
silicon-based geopolymers known as EKOR(TM), a fire-resistant surface fixative
known as Rad-X and a set of remote sensing technologies (known as
Electromagnetic Radiography, or EMR, and Acoustic Core, or AC) for subsurface
investigation. All three technologies are aimed at initial opportunities for
sale or licensing within key U.S. Department of Energy, or DOE, geographic areas
and overseas in the United Kingdom, Germany and Russia. During 2002, we
completed several demonstration contracts for EKOR(TM) In December, 2002, we
agreed to license the rights that we own to the AC technology to Markland. In
March, 2003, we entered into an agreement to license the rights that we own to
certain of these technologies of HomeCom Communications, Inc., a Delaware
corporation (referred to herein as HomeCom). See "Business -- Recent Events"
below.
Our safeguards and security technologies, now conducted through
Markland, are intended to provide or be a part of cost efficient and reliable
solutions to homeland security needs. Two technologies currently under
development are the AC technology and Crypto.com(TM) relating to, respectively,
"in-situ" detection of various materials including certain explosives and
illicit materials and "cyber-space" security solutions to provide a high level
of encryption-based security. We have also previously launched, and Markland
continues to develop, a development program for an Automated Portal Threat
Inspection System, or APTIS, to fill a homeland security need for automatic,
efficient screening for plastic explosives carried by personnel and baggage at
airports and secure facilities.
Our advanced performance materials technologies centers around other
technology not related to hazardous waste and security. The technology based
upon Hybrid Nonisocyanate Polyurethane, or HNIPU, is intended as a replacement
for conventional polyurethane binders, commercial coatings, paints, adhesives,
and foams. We are in discussions with domestic and international parties
relating to licensing, selling and/or joint venturing for developing and
commercializing certain HNIPU technologies and variants. The technologies can be
used, potentially, for non-toxic industrial paints and coatings and non-toxic
foam products such as, but not limited to, certain components contained in
automotive interiors.
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During second quarter 2002, we successfully demonstrated an acrylic version of
HNIPU. In March, 2003, we entered into an agreement to license the rights that
we own in HNIPU to HomeCom.
We hold a greater than 50% equity interest in several Israeli research
and development companies which may be deemed to be subsidiaries. In addition,
we also own a majority interest in Crypto.com, Inc., a Delaware corporation,
which, prior to the Markland transaction, held certain encryption technology
assets currently under development. Such assets, including the trademark
"crypto.com" were transferred to Markland in December 2002, although Crypto,
though holding no assets, remains a majority-owned subsidiary of ours.
We were incorporated under the laws of the District of Columbia on May
26, 1995. Our executive office is located at 10306 Eaton Place, Suite 220,
Fairfax, Virginia 22030 and our telephone number is (703) 352-4399. Each of our
operational divisions (some conducted through subsidiaries) are described in the
following sections. In this Report, the terms "Company," "we," "us," "our" and
similar terms refer to Eurotech, Ltd., a District of Columbia corporation.
RECENT EVENTS
On November 26, 2002 we announced that we signed a Cooperative Research
and Development Agreement, or CRADA, with the United States Air Force. The
objective of the CRADA is to jointly develop a system that will demonstrate the
effectiveness of the Acoustic Core technology to non-intrusively detect
explosive materials in cargo and/or vehicles. The CRADA Team will consist of
personnel from the Company, U.S. Air Force Air Mobility Battle Lab, and other
USAF and Department of Defense, or DOD, personnel from the operating location
and technical experts as required. The CRADA is now being conducted through
Markland. Markland will provide the Acoustic Core explosive detection system,
including the data collection hardware, analysis software/hardware system and
technical guidance for operation. The Air Force will provide the necessary
technical support for the trial activity phase and cargo pallets and/or vehicles
for the demonstration phase. The Air Force Air Mobility Battle Lab will also
arrange to provide the facilities, explosives and resources necessary to conduct
the demonstrations. In general, USAF personnel will be responsible for the
demonstration of the system with assistance from Markland, and Markland will be
responsible for the setup and operation of the system with oversight and
assistance from USAF personnel. The program schedule is estimated to be four to
six months in length and is divided into three phases. The first phase consists
of collection of raw acoustic data from containers utilizing surrogate explosive
targets and will be performed at Idaho National Environmental and Engineering
Laboratories. The second phase consists of collection of acoustic signatures of
various explosive materials under a controlled environment within DOD
facilities. The third phase consists of demonstration of technology capabilities
within a field evaluation test. Successful completion of this program could lead
to potential acquisition programs using the technology to screen air cargo and
within various DOD force protection tasks.
On December 10, 2002, we received a written notice from the staff of
the American Stock Exchange indicating that such staff had determined that we
would not be able to regain compliance with the AMEX's continued listing
standards by March 31, 2004, and that the Exchange intended to proceed with the
filing of an application with the Securities and Exchange Commission, or SEC, to
strike our common stock from listing and registration on AMEX if we did not
appeal such determination by Tuesday, December 17, 2002. On December 12, 2002,
our board of directors decided not to appeal such determination and effective as
of the close of trading on December 24, 2002, our common stock was delisted from
trading on the Amex and thereafter began being quoted on the Pink Sheets
Electronic Quotation Service under the symbol "EUOT." Our common stock will be
listed on the Pink Sheets pending our continued pursuit of obtaining approval by
the OTC Bulletin Board, or OTC BB, for the quotation of our common stock on the
OTC BB.
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On December 19, 2002, we closed a transaction with Markland pursuant to
which we agreed to license all of its rights to the Acoustic Core technology
relating to illicit materials detection and exchange all rights related to
certain cryptology technology held by Crypto for 239,927,344 shares of the
outstanding common shares of Markland, representing approximately 80% of the
outstanding common shares at the time of closing. As part of this transaction,
we agreed that the CRADA would be conducted through Markland and that we would
endeavor to have our rights in the CRADA assigned to Markland.
Also on December 19, 2002, we executed a definitive Pledge and Security
Agreement with our principal stockholder, Woodward LLC, or Woodward, pursuant to
which Woodward surrendered its rights to receive approximately $5.7 million of
our Series B 5% cumulative convertible preferred stock, or Series B Preferred,
in exchange for a security interest in the shares of Markland we concurrently
acquired 50% of the proceeds generated from future sales by us of these same
shares. Such transactions is referred to herein as the "Security Arrangement."
It is in our sole discretion on how and when these securities will be sold, if
at all, subject to applicable laws. Subject to applicable law, such proceeds,
when received by us, will be directed to automatically redeem the balance of the
shares of Series B Preferred owned or to be acquired by Woodward, in lieu of the
previously agreed upon redemption schedule for the Series B Preferred. If
redemptions under the Security Arrangement occur later than as would be mandated
by the previously agreed upon schedule, the previously agreed upon schedule
shall prevail. We subsequently agreed to with Woodward to terminate the Security
Arrangement as described below.
On March 27, 2003, we announced that we agreed to license the rights we
own to the EKOR(TM), HNIPU and EMR/AC technologies to HomeCom. The agreement
calls for us to exchange the license to the technology in exchange for (i)
shares of HomeCom's newly issued Series F Convertible Preferred Stock, which,
when sufficient shares of HomeCom common stock are authorized by HomeCom's
stockholders, will be convertible into 75% of HomeCom's common stock (ii) shares
of newly issued Series G Convertible Preferred Stock with a stated face value of
$1.069 million and (iii) varying royalty payments based on net sales of
different types of licensed products. HomeCom plans to file a proxy to authorize
the issuance of additional shares of common stock of HomeCom. Upon the closing
of the sale of HomeCom's existing web hosting business (which also requires
stockholder approval, and for which a proxy will be required) and the
resignation of three current members of HomeCom's board of directors, the
Company will have rights to majority control of the HomeCom board of directors
and responsibility for the assignment of any new executive management positions
in HomeCom. The proposed exchange transaction is subject to the satisfaction of
certain conditions set forth in the transaction documents. The closing of these
transactions has not occurred as of the date of this Report.
Also on March 27, 2003, we announced that as part of the technology
licensing transaction we entered into with HomeCom, we reached an agreement with
Woodward to (i) retire all shares of our outstanding Series A 3% Convertible
Preferred Stock held by Woodward and the rights of Woodward to receive shares of
our Series B 5% Convertible Preferred Stock and (ii) cancel our obligation to
issue to Woodward 10 million shares common stock in exchange for, respectively,
$16 million of Series D Convertible Preferred Stock of Markland and $1.069
million worth of HomeCom Series G Preferred Stock. We have also agreed with
Woodward that we will terminate the Security Arrangement upon the closing of
this transaction. We expect to obtain the Markland Series D Preferred shares
from Markland at the future closing of an exchange by us of 100 million shares
of Markland common stock for such Series D Preferred Stock. We expect to receive
the HomeCom Series G Preferred at the future closing of its technology licensing
transaction with HomeCom. The closing of these transactions has not occurred as
of the date of this Report and are subject to the satisfaction of certain
conditions set forth in the transaction agreements.
On April 2, 2003, we announced that Carey Naddell was appointed our
Chairman of the Board to replace Don V. Hahnfeldt, who stepped down as Chairman
of the Board, but who will continue to serve as a director of the Company. Mr.
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Naddell has served as an independent director of the Company since March 2002,
and has been chairman of the Audit Committee of our board of directors. It is
expected that Mr. Naddell will serve as Chief Operating Officer through a
transition period up to three months, after which he will become our President
and CEO. During such time, Mr. Hahnfeldt will continue as President and CEO in a
transitional capacity.
OUR OPERATING DIVISIONS
NUCLEAR & ENVIRONMENTAL TECHNOLOGY SOLUTIONS DIVISION (NETS)
Our NETS division operates under a quality assurance program that meets
Federal, domestic and international requirements, including auditing suppliers
and testing laboratories. NETS has three technologies that are being actively
marketed. They consist of a family of silicon-based geopolymers known as
EKOR(TM), a fire-resistant surface fixative known as Rad-X, and a set of remote
sensing technologies for subsurface investigation known as EMR. Each technology
was introduced to the market in 2001. All three technologies are aimed at
initial opportunities for sale or licensing within the DOE market. In 2002, this
division had revenues of $66,174. In December 2002, we agreed to license the
illicit materials detection application of EMR to Markland. On March 27, 2003,
we entered into an agreement to license EKOR(TM) and the remaining rights we
hold in the EMR/AC technologies to HomeCom.
Despite significant technical advantages to our technologies and
successful demonstrations at various sites, project implementation and
full-scale application has been initially negatively impacted by budgetary
reductions within the DOE and re-evaluation of priorities and projects as a
result of the terrorist attacks of September 11, 2001. Notwithstanding the
foregoing, we believe that the increased attention to Homeland Security will
result in a more favorable marketplace for our technologies.
The following is a description of our NETS technologies:
1. EKOR(TM)
BACKGROUND. EKOR(TM) was developed jointly by scientists at the I.V.
Kurchatov Institute, or Kurchatov, and members of the Euro-Asian Geophysical
Society, or EAPS, both based in Moscow, Russia, as a family of materials
designed for long-term isolation of hazardous and radioactive materials. As a
silicon-based elastomer, EKOR(TM)'s adhesive properties allow it to stick to a
wide variety of wet or dry surfaces and materials. When applied, EKOR(TM)
materials surround and immobilize radioactive or hazardous debris ranging from
fine dust to large pieces of equipment and, in combination with their
fire-resistant and water-proof properties, prevent such debris from migrating by
water or as air-borne particles. EKOR(TM) materials also possess other highly
desirable performance characteristics such as chemical , fire and heat
resistance, and resistance to environmental aging and degradation from
radiation. In addition to its unique combination of performance characteristics,
EKOR(TM) comes in multiple composite forms and can be applied using specified
methods for waste coating and encapsulation. This allows EKOR(TM) to be used as
a solution for a broad spectrum of nuclear and hazardous waste management
problems.
The EKOR(TM) product family's performance characteristics and
flexibility of form make it a tool for a broad spectrum of applications. There
are five basic forms of EKOR(TM):
o Sealer Plus, which can be sprayed to coat containers or cover
contaminated surfaces;
o Sealer, which can be applied using a brush or poured in a
range of densities to fill crevices, ducts or pipes;
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o Foam, which is pumped in a range of densities to fill
crevices, ducts or pipes;
o Grout, applied in a pour and mix method, which can be used to
make shapes for shielding or to macroencapsulate items to form
an unleachable monolith for transportation or disposal;
o Matrix, applied in a pour and mix method, which can be used to
microencapsulate radioactive or hazardous wastes to form an
elastomeric monolith for transportation or disposal; and
o StoneStore, applied in a pour and mix method, which can be
used to microencapsulate highly radioactive waste and will
form a ceramic monolith for permanent disposal.
In tests conducted at Kurchatov, EKOR(TM) was shown to be highly
resistant to radiation and structural degradation from exposure to radiation. It
also proved to be highly fire resistant, waterproof, and capable of being
formulated in densities that display considerable structural strength and
weight-bearing properties of 100 pounds per square inch. In these high-dosage
radiation tests, EKOR(TM) has met or exceeded all applicable specifications for
containment materials.
NuSil Technologies, or NuSil, is now producing EKOR(TM) under a
manufacturing license agreement with us at its facilities in California. This
agreement allows EKOR(TM) materials to be manufactured in volumes sufficient to
support estimated initial EKOR(TM) sales both within and outside of the United
States. We contemplate developing more local production in Europe and Asia as
demand increases.
In 2001, we successfully replicated the Israeli formula for EKOR(TM) to
make EKOR(TM) products in the United States. In March 2001, the EKOR family of
products was presented to waste management professionals from around the world
at the annual Waste Management Symposium in Tucson, Arizona. As a result of the
interest generated at the symposium, we have been presenting EKOR(TM) for use in
a variety of applications at DOE sites to various waste management
professionals. Also in 2001, we successfully completed product testing for the
first EKOR produced in the United States. This testing validated EKOR(TM)'s
expected performance and provided information required by contractors at DOE
sites.
During 2002, EKOR(TM) was selected as a waste stabilization material at
multiple DOE sites. Battelle Memorial Institute, Columbus, Ohio, under a site
decommissioning contract from the DOE, applied EKOR(TM) within a series of
reactor drain pipes to immobilize residual radioactive contamination, protecting
workers, the public and the environment during facility sectioning and disposal.
EKOR(TM) was selected by Westinghouse Savannah River Company at the DOE Savannah
River Site near Aiken, South Carolina to encapsulate Low Activity Cell Debris in
compliance with the State of South Carolina regulations for containment and
disposal of radioactive waste. EKOR(TM) is actively being considered by the
Pacific Northwest National Laboratory, a DOE national laboratory, to stabilize
Alpha Dust in the H-Basin Fuel Pool, which will provide protection to workers
during facility decommissioning. EKOR(TM) is also under consideration by BNFL,
Inc, to stabilize radioactive contamination in waste disposal tanks at the DOE
Mound Site near Miamisburg, Ohio and in Sellafield, England, which BNFL uses as
a primary waste disposal site. EKOR(TM) was recently tested at the DOE Argonne
National Laboratory to immobilize surrogate radioactive calcined waste and
salts. Initial evaluation of EKOR(TM) is promising for High Level Waste
Immobilization. The DOE has more than 100 million gallons of HLW at their
Hanford and Savannah River Sites with additional significant volumes of calcined
waste at the DOE Idaho Falls facility. We will continue to perform testing on
additional product forms of EKOR(TM) in 2003.
5
INTELLECTUAL PROPERTY. EAPS, as the lead inventor, has patented
EKOR(TM) in the U.S., Russia, and other industrialized countries. On March 23,
1999, the U.S. Patent and Trademark Office issued to EAPS Patent No. 5,886,060
on the process for manufacturing one of the EKOR(TM) compound variants. Under
sub-licensing agreements, Eurotech is the exclusive global licensee of all
right, title and interest (inclusive of all patent and other intellectual
property rights now or in the future) in EKOR(TM). For that license and
specified research and development and engineering services, we are required to
make fixed payments to EAPS at the rate of $120,000 per year until 2005. We paid
$132,000 to EAPS during 2002, the additional $12,000 being attributable to the
accelerated development of the StoneStore technology. Our revenue from net sales
of EKOR(TM) are subject to royalties aggregating up to 3%, increasing in 2005 to
3.1% on certain of such revenues. In particular, royalties are payable at the
rate of 1% to the intermediate licensee of the EKOR technology; a further 2%
royalty on certain of our EKOR(TM) revenues payable to another entity that until
November 30, 1999 owned a 50% interest in the EKOR(TM) sublicense; and,
beginning in 2005, a 0.1% royalty on product sales payable to EAPS. We do not at
this point know whether we will be in a position to successfully file for
additional patents on any other aspect of EKOR(TM) and we do not know if
additional proprietary technology that we develop relating to EKOR(TM) will
prove patentable.
In addition to patent protection, another form of protection for our
proprietary assets is through the screening and selection of prospective working
partners and collaborators, employees and consultants. We cannot, however, be
sure that one or more of these people will not violate the trust that we repose
in them, that, even though we have signed confidentiality agreements, we would
have adequate remedies for any violation, or that our trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by others.
The use of EKOR(TM) is subject to U.S. environmental safety laws and
regulations pertaining to the safe use and containment of hazardous and nuclear
waste. Based on the results of tests conducted at Kurchatov and those performed
to date in the United States, we believe that the EKOR(TM) compounds meet
current applicable regulations for safe use, containment and storage of
hazardous and nuclear materials. It is, however, possible that more stringent or
different standards may be adopted or applied in the future that might influence
EKOR(TM)'s intended use, and it is also possible that the standards, if adopted
or applied, may materially increase the cost to us of using EKOR(TM) compounds
or prevent their use altogether. We are not aware of any other U.S. or foreign
laws or regulations that significantly hinder the marketing, sale, or use of
EKOR(TM) based materials.
We have applied for trademark protection for the mark "EKOR" with the
U.S. Patent and Trademark Office.
INVESTMENT. Through December 31, 2002, we have spent approximately
$27,726,021 ($326,021 in 2002) on the development of EKOR(tm), including costs
of manufacturing, materials, testing, salaries, and consulting fees and travel
expense reimbursements paid to the Russian scientists and others.
COMMERCIALIZATION. Since EKOR(TM) has not generated the revenues that
were projected in its first two years of marketing. EKOR(TM)'s acceptance into
nuclear waste management has been slower than anticipated resulting in lower
than expected revenue generation. However, we believe that EKOR(TM) is the most
technologically advanced material for comprehensive long-term isolation of both
solid and liquid radioactive materials, suppressing radioactive dust and
preventing such materials and dust from escaping into the atmosphere and from
leaching into and contaminating ground-water supplies. We believe that EKOR(TM)
also has properties that make it a superior, cost effective and safer isolation
technology for some non-radioactive hazardous materials and a unique sealant for
potential applications in the construction industry. Significant technical
issues remain, including those dealing with the residue from production of
nuclear weapons and the examination
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of all research that supported that production and the disposal issues of
nuclear fuel being discharged from nuclear power plants. These issues are the
responsibility of the DOE.
Our NETS division offers EKOR(TM) for sale in quantities ranging from
5-gallon containers and 55-gallon drums to specialized application guns with
material cartridges. We also offer technical support to clients in evaluating
the appropriate equipment and form of EKOR(TM) for their specific needs. We
offer project management support, application training and equipment rental or
sale, but we do not provide application personnel. Following the introduction of
EKOR(TM) in March 2001, we targeted several DOE sites for demonstrations that
that we believed would lead to project implementation and then full-scale
application. Specifically, we had substantial discussions with staff at Savannah
River Site (or SRS, near Aiken, South Carolina), Oak Ridge National Laboratory
(or ORNL, in Oak Ridge, Tennessee), Fernald Closure Site (in Fernald, OH),
Battelle Memorial Institute (or BMI, in Columbus, Ohio), Rocky Flats
Environmental Testing Site (or RFETS, near Denver, Colorado), Los Alamos
National Laboratory (or LANL, Los Alamos, New Mexico), Lawrence Livermore
National Laboratory (or LLNL, Livermore, California), Hanford Reservation
(Richland, WA) and Idaho National Engineering & Environmental Laboratory (or
INEEL, Idaho Falls, Idaho). We have had numerous meetings with DOE staff at
their headquarters in Washington, D.C. and Germantown, Maryland. We also
introduced EKOR(TM) to companies doing project and management work at DOE and
commercial sites. We arranged demonstrations at SRS, ORNL, BMI, INEEL and at our
production facility in California for staff from RFETS and ORNL.
The technical performance of EKOR(TM) was excellent, but early
demonstrations did point out that the Sealer product, as a solution that
required mixing of a paste and catalyst and significant monitoring of
specialized application equipment, needed further development to be more
user-friendly. To address this issue, our technical staff, working with NuSil
and EAPS, created a one-part formulation that could be applied, as received from
the factory, using standard airless paint sprayers. The new product, Sealer
Plus, was introduced in November 2001 and was initially demonstrated at BMI in
January 2002. In that initial demonstration, Sealer Plus was applied to a
variety of surfaces and tested for over a month to evaluate durability and
performance. Its ease of application and successful performance led BMI to
incorporate it into their planning for decommissioning work at BMI and West
Valley. Reception from other potential users has also been positive.
The EKOR(TM) Foam product is currently not receiving funding as we are
concentrating funds on the Sealer, Matrix and Grout products.
The demonstration of EKOR(TM) Grout at INEEL highlighted its ability to
operate in an underwater environment. INEEL has certain components that are
being stored underwater because of their behavior when exposed to air. Using
EKOR(TM) Grout to encapsulate these components underwater and form a nearly
impermeable barrier may permit removal of these components from pool storage and
disposal in a normal non-aquatic manner. Due to the success of this
demonstration, EKOR(TM) Grout was selected as a technology participant in their
Large Scale Demonstration & Deployment Project, or LSDDP, originally scheduled
to start in October 2001 but is currently on hold due to postponements during
2002.
EKOR(TM) Matrix was demonstrated at the Savannah River Site with
personnel from Westinghouse Savannah River Company in March 2001. It was used in
bench-scale quantities (200 ml per application) to encapsulate incinerator ash
and wet resins and then in a gallon size to encapsulate several gallons of
simulated radioactive cell debris. In each application, the material cured over
a 24-48 hour period into a solid elastomeric monolith. Based on the results of
the demonstration, Matrix was chosen as the encapsulation technology for debris
coming from cleanup of SRS's Low Activity Cells. The project, scheduled to start
in March 2002, was on hold through 2002 due to DOE funding and other project
priorities at Westinghouse Savannah River Company.
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Although EKOR(TM) is not a shielding material itself, in 2002 we
demonstrated it to be a satisfactory medium into which shield material may be
incorporated. EKOR(TM) Matrix was loaded with various percentage amounts of
neutron-absorbing boron in one project and gamma shielding tungsten in another,
which demonstrated EKOR(TM)'s radiation resistance with radiation shielding
capabilities.
StoneStore is a form of EKOR(TM) that we believe has the potential to
change the way to permanently encapsulate high-level radioactive waste. By using
certain minerals as fillers in conjunction with the block copolymer that forms
the base of all EKOR(TM) materials, StoneStore starts as an elastomer but
transitions into a hard ceramic with high doses of radiation. This process does
not require high temperatures or pressures and can be compared to a
room-temperature version of vitrification, only without the complex chemistry
concerns. The DOE has estimated that their vitrification projects may cost up to
$500 billion to dispose of existing highly radioactive waste, but use of
StoneStore may be able to reduce that estimate by 50-75% or more.
We did not achieve our initial projections of $5-10 million in total
EKOR(TM) sales beginning in 2001. Our sales of EKOR(TM) in 2002 amounted to only
$66,174. We believe these shortfalls in revenue generation are the result of our
overly optimistic projections in penetrating the nuclear waste market and
various other unanticipated events. Production of EKOR(TM) at NuSil was more
difficult than anticipated and required delay of product rollout until March
2001, effectively delaying marketing by several months. We also believe the
change in U.S. government priorities and its appointed officials created a
flurry of change at DOE that caused most Decommissioning & Dismantlement, or
D&D, activities within their sites to stop or slow severely. As DOE waste
management and D&D strategies, budgets and schedules were close to being
initiated, the events of September 11th apparently caused another reevaluation,
with the result being DOE sites that did not know their 2002 budgets until
January 2002, some four months later than usual.
Since EKOR(TM) did not generate the revenues projected in its first two
years of marketing, we have reviewed EKOR(TM) with respect to its performance
and continued justification for carrying this technology as a depreciable asset.
While the numerous EKOR(TM) demonstrations and small-scale applications, which
have been performed at various U.S. nuclear sites and for a variety of
government contractors have generally been successful, the contracts and
revenues anticipated from them have not been realized yet for several unforeseen
reasons. These include delayed funding for some projects such as the Large Scale
Demonstration Project for which EKOR(TM) was selected for nuclear waste
encapsulation at Idaho National Engineering and Environmental Lab, and Savannah
River Site encapsulation of hot cells for which EKOR(TM) was the successful
competitor. The general cause for the overall delay in launching a successful
commercialization of EKOR(TM) has been the general lack for funding available
since EKOR(TM) was introduced due to reasons ranging from change in Presidential
Administrations and Secretary of Energy, to shifts in priorities since September
11, 2001 terrorist attacks and war against terrorism, as well as EKOR(TM)'s
ability to displace previously selected conventional products for use in
encapsulation of nuclear waste. In spite of these delays in EKOR(TM)'s
commercial success, we continue to maintain very high confidence in EKOR(TM)'s
marketability and revenue generation potential in the nuclear and hazardous
waste treatment industry. We fully expect that EKOR(TM) will be a viable
solution to many of the nuclear waste containment, transportation, storage and
disposal challenges existing today. However, as a result of this assessment of
EKOR(TM)'s sales performance and the unpredictability of future delays of
funding that may continue to affect EKOR(TM), we recorded an impairment loss of
$3,084,947 related our EKOR(TM) technology rights in the fourth quarter of 2002.
8
2. RAD-X
BACKGROUND. Rad-X was developed from a version of Firesil(TM), using
certain new ingredients to improve its properties for its intended use as an
interior fire-resistant fixative for equipment or facilities with contaminated
surfaces. See "Business - Technologies Acquired from Dr. Oleg Figovsky -
FIRESIL" below. Rad-X differs from EKOR(TM) Sealer Plus in that it is not
weather-resistant and does not have the chemical, radiation and aging resistance
needed for long-term protection. Rad-X does provide a low-cost fixative for
surfaces that are scheduled for disassembly or dismantlement and need strong
adhesion (glue-down of contaminated particles that could become airborne) and
fire-resistance properties. Rad-X was first presented to the market in September
2001. The Rad-X technology is not being licensed to HomeCom and is currently
being retained by us.
INTELLECTUAL PROPERTY. We have chosen to protect our interest in Rad-X
by treating the formulation as proprietary property. The solution is produced
under contract by Davis-Frost, Inc., a coating fabricator based in Lynchburg,
Virginia. We entered into a confidentiality agreement with Davis-Frost, Inc.
that precludes any dissemination of the formulation for Rad-X.
INVESTMENT. Our investment to date in the creation of the Rad-X product
line, is less than $20,000. Including testing and marketing samples projected in
2002, the total investment in its development and commercial roll out should be
less than $50,000. During 2002, we spent $5,161 in connection with Rad-X, all of
which was paid to Davis-Frost, Inc.
COMMERCIALIZATION. Rad-X was initially created for feasibility testing
at DOE's Rocky Flats Environmental Testing Site, or RFETS, and was delivered in
late September 2001. Testing of the product at other laboratories occurred in
November 2001. This testing confirmed its outstanding fire and smoke resistance.
Rad-X may be one of a very few coatings that can meet proposed DOE fire/smoke
criteria for certain specialized applications. Rad-X was marketed in connection
with EKOR(TM) at DOE sites that are performing decommissioning or hazardous
material management in 2002. Initial small sales of Rad-X have commenced in
2003.
3. SUBSURFACE REMOTE SENSING TECHNOLOGIES (EMR/AC)
BACKGROUND. In an agreement dated July 2001 and amended on October 3,
2001 with Trylon Metrics, Inc., we were licensed certain rights to Acoustic Core
and Electromagnetic Radiography for specific markets, consisting of (i) illicit
material detection, (ii) above surface or subsurface nuclear or other hazardous
material remediation, (iii) marine dredging sites (inland and ocean) and (iv)
oil exploration. We have agreed to license the illicit materials detection
application to Markland and the remaining three applications to HomeCom.
Both technologies use a non-contact inspection methodology (unique for
each technology) that creates signals that are then interpreted by a digital
analyzer that allows identification of elemental or compound materials from
their empirically determined properties. Acoustic Core is used in applications
that are predominately wet (i.e., riverbeds, wetlands, etc) and EMR is used in
dry environments. Completed research and development studies have verified that
Acoustic Core and EMR can uniquely identify materials by their acoustic or
electromagnetic signatures, but the unique feature of these technologies is its
ability to map in three dimensions the existence of target materials at
extremely low concentrations at depths of up to 300 feet. The capabilities of
these technologies complement the EKOR(TM) product line by, for example,
allowing tanks of waste to be monitored for leaks and the leaks, when
discovered, targeted for repair. Acoustic Core and EMR have applications in
every market that involves subsurface evaluation, from contamination discovery
and monitoring to resource discovery. The October 3, 2001 Amendment to our
agreement with Trylon Metrics granted certain additional rights to us which
allowed us to
9
further market this core technology to provide screening capabilities for
explosives. Due to pressing needs for this type of technology in the
marketplace, the application of Acoustic Core through Markland environment has
become one of our core developmental initiatives.
INTELLECTUAL PROPERTY. The Acoustic Core technology is covered by U.S.
Patent 4,922,467. EMR is currently protected by trade secret. We acquired the
worldwide rights to the applications of these technologies listed above, without
restrictions, in July and October 2001. We have subsequently agreed to license
the illicit materials detection application to Markland and remainder of our
rights to HomeCom.
INVESTMENT. We issued 2,500,000 fully paid and non-assessable shares of
restricted common stock, valued at $2,500,000, for the acquisition of the rights
to Acoustic Core and EMR, including derivatives of this technology which are
also being used by us through Markland. Included with the technologies were the
exclusive services of companies that have manufactured them and demonstrated
them in the field. During the third and fourth quarters of 2001, we spent an
additional $50,000 on further development, refinement, and marketing of the
Acoustic Core and EMR for the NETS market segment. During 2002, we spent an
aggregate of $844,202 on Acoustic Core and EMR, of which $600,000 was
capitalized. We agreed to license the illicit materials detection application to
Markland in December 2002 and remainder of our rights to HomeCom in March 2003.
COMMERCIALIZATION. Both Acoustic Core and EMR have been validated in
tests at DOE sites (Oak Ridge and INEEL) on a variety of materials utilizing
prototype instrumentation. Sandia National Laboratory did an in-depth evaluation
of the science behind these technologies in 1999 and concluded that they provide
a unique capability to identify and map in three dimensions low levels of
material concentration at substantial depths. Combined with this performance is
a cost effectiveness that should be considerably more economical than current
methods. During the fourth quarter of 2001, we submitted several proposals to
the DOE for evaluation of areas of potential contamination and to commercial
entities being pressured by the EPA for potential subsurface contamination, but
they have not been selected for inclusion in currently funded programs to date.
In 2002, we successfully funded a prototype illicit materials detection
apparatus which was reviewed by the Air Force and led to our November 2002
agreement with the Air Force. We are marketing to U.S. agencies (DOE, DOD and
EPA) and companies either performing work for those agencies or responsible for
cleanup activities being required by them. The ability of Acoustic Core and EMR
in resource detection (oil, gas, minerals) will be explored in 2003 through
HomeCom.
ADVANCED PERFORMANCE MATERIALS DIVISION (APM)
In 2001, we formed the Advanced Performance Materials Division. Our
objective is to organize our non-nuclear and non-security related technologies
into a business unit that would provide focus to their commercialization effort,
coordinate on-going research and developement related to those technologies,
allow prioritization of marketing efforts in-line with available corporate
resources and provide a managerial structure and point of contact for potential
licensees. The main principal of the APM division is Dr. Oleg Figovsky, a
renowned Israeli scientist, who has decided to sell and license his technologies
to us through various technology transfer agreements. In the APM division, we
are conducting operations relating to technologies acquired directly from Dr.
Figovsky and the following seven single technology Israeli startup companies
which developed certain technologies and in which we own a significant equity
interest. A majority of these companies have proceeded through their "incubator
stage" and the subject technology is awaiting commercialization as we either own
or control (through stock ownership in such entities) the intellectual property
rights of these entities. However, due to limited working capital, management
decided to temporarily curtail the funding of the operations and further
10
development of the technologies and related operations for five of the
Israeli-based technology companies: Comsyntech, Ltd., Remptech, Ltd., Sorbtech,
Ltd., Rademate, Ltd. and Amsil, Ltd.
Chemonol, Ltd., or Chemonol, has developed formulations and processes
for manufacturing hybrid non-isocyanate polyurethane (known as HNIPU) for use in
paints, coatings, adhesives, sealants, forms, and other industrial applications;
Sorbtech, Ltd., or Sorbtech, has developed a new inorganic sorbent
(known as SB-1) for petroleum product removal;
Rademate, Ltd., or Rademate, has developed a biodegradable hydrophobic
material with application as a packaging coating for the food industry;
Remptech, Ltd., or Remptech, has developed processes for the production
of extra-fine cobalt and nickel powders and a continuous combustion synthesis
technology;
Comsyntech, Ltd., or Comsyntech, is developing a process for the
continuous combustion synthesis of ceramic, composite and intermetallic powders;
Amsil, Ltd., or Amsil, is developing high-thermostable organomineral
polymers; and
Corpem, Ltd., or Corpem, is investigating the feasibility of
water-based suspensions utilizing innovative cross-linking agents, which would
result in non-toxic environmentally friendly, highly stable, crack resistant
coatings for concrete, metal or rubber. However, we abandoned our investment in
this entity during 2002.
1. CHEMONOL (DEVELOPER OF HYBRID NON-ISOCYANATE POLYURETHANE OR "HNIPU"
PROCESSES)
BACKGROUND. HNIPU is a hybrid polyurethane that does not involve the
toxic isocyanates utilized in the production of conventional polyurethane and
that has lower permeability and greater chemical resistance qualities as
compared to conventional polyurethane. We believe that these advanced
characteristics, in addition to the potential reduced risk from the elimination
of isocyanates in its production, make HNIPU superior to conventional
polyurethanes in connection with their use in a number of industrial application
contexts such as manufacturing automotive components, paints, foams, plastics
and truck bed liners; aerospace sealants, industrial adhesives, coatings,
flooring, glues; industrial equipment and machinery; and consumer goods such as
appliances, footwear, furniture and plastic products. We have agreed to license
the rights we own in HNIPU to HomeCom.
INTELLECTUAL PROPERTY. On December 25, 1997 Chemonol filed an Israeli
patent application (122763) on a process to produce HNIPU. Chemonol and Polymate
Ltd. (see disclosure below) jointly have filed two process patent applications
in Europe (99100586.0-2110 filed on January 14, 1999 and 99114308.2-2102 filed
on July 21, 1999). Chemonol and Polymate also filed an international patent
application (PCT/IB99/01/01885 filed on November 24, 1999), based on the
European applications.
INVESTMENT. Chemonol is developing manufacturing techniques and
applications for HNIPU. During 1997, 1998, 1999, and 2000, we invested $30,000,
$60,000, $305,000, and $265,000 respectfully, for which we have acquired 52%
ownership of the common stock outstanding. During 2001, we invested an
additional $95,000 to facilitate technology transfer, bringing our total
investment to $755,000, which represents 57% of ownership of the outstanding
common stock of Chemonol. We invested no funds on Chemonol during 2002.
11
COMMERCIALIZATION. Commercialization efforts for HNIPU are being
handled by Eurotech, not Chemonol, and are addressed below under "Business -
Technologies Acquired from Dr. Oleg Figovsky - HNIPU". Chemonol operations are
dedicated to support transfer of the HNIPU technology to the U.S. and on-going
product research and development as directed by Eurotech.
2. SORBTECH, LTD. (DEVELOPER OF SB-1)
BACKGROUND. There are many oil spill adsorbents available in the
market. SB-1 is a new product that can be used to adsorb oil. SB-1 is an
innovative new sorbent composed of basalt non-woven fabric - an ultra-fine
basalt filament. A proprietary process results in extremely high adsorption
capacity when compared to existing adsorbents currently available in the
marketplace.
Major advantages of SB-1 include:
o Extremely high adsorption capacity. Common adsorption capacity
for products currently in the market range approximately from
0.8 - 30 grams of petroleum products per gram of adsorbent
weight (gr/gr). SB-1 adsorption capacity ranges from 12 to 82
gr/gr, depending on time and oil viscosity;
o Naturally-occurring mineral. SB-1 itself, if handled in
accordance with its prescribed use, is an environmentally
clean material; and
o Nonflammable. SB-1 is thermally resistant (up to 700(degree)C)
SB-1 can be provided in a variety of forms that facilitate the clean-up
of petroleum products from the multitude of spill types such as: open sea,
harbors, bilges, surface skimming and finishing, large land open surfaces, rail
yards, oil pump stations, oil storage depots, airports, soil contamination,
industrial areas, machinery, gas stations, etc.
When SB-1 is applied to a petroleum spill, oil is adsorbed, but no
water is incorporated, thus increasing the adsorbent efficiency and effective
life. The extracted oil products can be reused with little, if any,
reprocessing.
INTELLECTUAL PROPERTY. Sorbtech applied for patents for oil and waste
adsorbent and the method of manufacturing the same with the U.S. Patent and
Trademark Office (09/497,489) on February 4, 2000 and with the Israeli Patent
Office (128402) on July 2, 1999. Sorbtech has withdrawn these applications at
our request as we decided to apply trade secret laws to the protection of the
Sorbtech technologies.
INVESTMENT. During 1999 and 2000, we invested $62,500, and $260,000
respectfully bringing our total investment $322,500, which represents 52%
ownership of the outstanding common stock of Sorbtech. We did not make any
additional investment in Sorbtech in 2001 or 2002.
COMMERCIALIZATION. It was determined in early 2001 that the production
of Sorbtech SB-1 in North America was required for the final product to be cost
competitive. Technologically, SB-1 repeatedly demonstrated superior sorbtive
capacity when measured against polypropylene. Unfortunately, there are no
existing North American facilities equipped with the appropriate technology to
manufacture the required base fiber. Transfer of the technology including
conversion of an existing U.S. facility or the construction of a dedicated
production line will require a capital invest of at least several hundred
thousand dollars. With company resources focused on commercializing HNIPU and
other technologies, SB-1 marketing activities were restricted to our web site
and select contacts with potential manufacturers. We have received some interest
from potential end users of a final sorbent product. Potential users of the SB-1
12
material for manufacturing an end state sorbent product have elected to wait
until cost competitive production can be established in North America. As these
firms do not traditionally manufacture their sorbtive materials they have not
expressed interest in initiating or funding the production of SB-1 material. Due
to this fact, and the other commercialization efforts focused on HNIPU, we have
decided to cease further development and active marketing of this product until
such time as the manufacture or licensing of this technology becomes cost
effective.
3. REMPTECH (DEVELOPER OF POWDERED METALLURGY TECHNOLOGY)
BACKGROUND. Powdered metallurgy, the process of producing metals,
alloys or metal containing compositions in a solid or compact state from
powdered or particulate material with or without heating is generally
acknowledged as being capable of yielding a product with superior structural,
physical, and mechanical properties. We believe that the powdered metallurgy
process developed by Remptech is technologically advanced and, based on
Remptech's research and testing data, is capable of producing cobalt and nickel
powders of 99.8% purity and a grain size of 1-2 micro-centimeters. We believe
that such purities and grain sizes are significant factors in the manufacture of
materials of high quality and internal physical integrity from powdered cobalt
and nickel. Cobalt and nickel are among the three naturally occurring elements
that display magnetic properties at room temperature and are widely used in
metal alloys. Powdered cobalt and nickel are used in a wide variety of
industrial applications, including magnetic, electrical, and electronic
materials and products.
INTELLECTUAL PROPERTY. Remptech's U.S. Patent (6,090,179) for powdered
metallurgy technology was issued on July 81, 2000. On July 12, 1999, Remptech
also filed under the Patent Cooperation Treaty (PCT/IL99/00379).
INVESTMENT. During 1997, 1998, 1999, and 2000, we invested $21,000,
$26,000, $165,500, and $80,000 respectfully bringing our total investment
$292,500, which represents 52% of ownership of the outstanding common stock of
Remptech. We did not make any additional investment in Remptech in 2001 or 2002.
COMMERCIALIZATION. In 2001 and 2002, commercialization of Remptech was
limited to direct mailings to potential candidate for acquisition of the
technology and our web site. The direct mailings resulted in some requests for
additional information.
4. COMSYNTECH (DEVELOPER OF CONTINUOUS COMBUSTION SYNTHESIS OR "CCS" AND
CONTINUOUS ACTION REACTOR)
BACKGROUND. With Comsyntech, we participated in the development of two
technologies: CCS and Continuous Action Reactor.
CCS. CCS is a newly devised process utilizing the internal chemical
energy of initial reactants in a continuous action reactor, a device being
developed by Comsyntech. We believe this process offers competitive advantages
(such as increased productivity and lower production costs) over conventional
technology. Comsyntech research and testing data indicate that materials
produced with the CCS technology have exhibited superior high-thermomechanical
properties such as high strength, thermo and wear resistance and good corrosion
stability. Based on these properties, we believe that the CCS technology has
potentially significant utility in producing ceramic, composite, and
intermetallic powders with potential commercial application in the production of
metal-cutting tools and abrasives, metal alloys, aircraft and automotive
combustor, nozzle and turbine parts, piezo- and ferro-electric materials, and
surgical instruments.
13
Continuous Action Reactor (Method for Continuous Combustion Synthesis
of ceramic, composite and intermetallic powders). The continuous action reactor
offers the competitive advantage of increased productivity and lower production
costs relative to conventional high-temperature furnace reactors and powder
production processes. One apparatus replaces high-temperature furnaces as well
as spraying and grinding equipment. Furthermore, this method offers additional
significant advantages including:
o Rapid production. Large quantities can be quickly produced;
o Lower manufacturing costs. Expensive high-temperature
furnaces, complex processes, and equipment are eliminated;
o Reduced energy consumption. Energy consumption is greatly
reduced; and
o Improved purity. Mixture purification during synthesis enables
high purity materials to be obtained.
INTELLECTUAL PROPERTY. CCS Patent application (127109) for a method of
obtaining powders of inorganic compounds under combustion conditions was filed
by Comsyntech with the Israeli Patent Office on November 17, 1998 and is
pending. A patent application for a Continuous Action Reactor apparatus for
self-propagating high-temperature synthesis was filed by Comsyntech with the
U.S. Patent and Trademark Office (09/535,805) on March 28, 2000 and is pending.
INVESTMENT. During 1997, 1998, 1999, and 2000, we invested $21,000,
$26,000, $45,500, and $200,000 respectfully bringing our total investment
$292,500, which represents 52% of ownership of the outstanding common stock of
Comsyntech. We did not make any additional investment in Comsyntech in 2001 or
2002.
COMMERCIALIZATION. Commercialization efforts in 2001 and 2002 were
limited to our web site and target mailings to potential candidates for
acquiring the technology. The target mailings generated a number of requests for
additional information.
5. RADEMATE (DEVELOPER OF RAPIDLY BIODEGRADABLE HYDROPHOBIC MATERIAL OR
"RBHM")
BACKGROUND. Rademate has developed a cellulose-based, rapidly
biodegradable hydrophobic material, or RBHM. RBHM is a new, hydrophobic (water
resistant), strong, cheap, and completely biodegradable composite material that
is environmentally friendly. The idea of RBHM is to improve the properties of
both paper and plastic packaging materials. Due to its biodegradable nature,
RBHM is an ideal coating for disposable loose fill bags and packages. The
material can be used as a commodity in trade, industry, and agriculture for a
wide range of applications. To date, most attempts to produce biodegradable
products for consumers focused on developing plastics that could biodegrade.
RBHM approaches biodegradable products from the other direction - making
cellulose-based material with the same physical properties as plastic, except
the material biodegrades completely in the same time as regular paper bags.
RBHM consists of cellulose (paper) and biodegradable organic additives.
Biodegradation of RBHM occurs in wet soil under normal enzymatic action of
various microorganisms - fungi and bacteria. We believe that the main advantages
of RBHM are:
14
o High Strength. RBHM's strength characteristics, especially
combined with low elongation and acquired water resistance of
the material, make RBHM unique and highly desirable for
packaging applications.
o Water Resistance. RBHM keeps water resistance for one week.
Thus, it has excellent prospects for many packaging
applications. Most of the existing biodegradable packaging
products are not hydrophobic at all and will fail if wetted
during use.
o Full Degradation in the Environment. Enzymes begin breaking
down RBHM in the presence of moisture in natural environments
such as soil. Then microorganisms decompose the material with
rapidly occurring metabolic reactions. RBHM is completely
converted into carbon dioxide, water, and biomass in two to
three months in wet soil. Thus, this process completely
coincides with the definition of biodegradability given by
most experts.
o RBHM Uses Reproducible Natural Raw Materials. The cheapest raw
material, as well as the most widespread organic material in
nature, is cellulose. Cellulose is renewable, reproducing
itself through the natural cycle. Sound environmental
management balances resources, recycles whenever possible and
uses them in a renewable cycle. Cellulose is present widely on
the planet - in trees, bushes, grass, and other plants.
o Relatively Low Cost. The main obstacle to widespread use of
biodegradable polymers has been cost. Biodegradable polymers
are traditionally significantly more expensive than commodity
polymers. The high costs involved in the production of
biodegradable polymers means that they cannot compete
favorably with conventional polymers. RBHM does not have the
cost barriers that are characteristic of all the other
biodegradable plastics. This high cost deterred the widespread
adoption of biodegradable plastics in major consumer
application. At an additional cost of less than 10% , and
sometimes less depending on the type of material treated,
materials treated with RBHM provide plastic-like performance
and are biodegradable. On the other hand, currently available
degradable materials can cost twice as much.
We believe that the number of potential applications for RBHM is high.
Because RBHM can be applied on sheets, films and fibers, it is suitable for a
range of single-use products, including grocery and waste bags, the top, and
back sheets of disposable diapers, and disposable eating utensils. It can be
used to create agricultural films and bags that cover ripening fruit. RBHM
products such as disposable plates and cups, films for food packaging,
miscellaneous everyday items and sanitary products are but a few of the possible
applications. Box and bag consumers are generally commercial and industrial
users requiring a particular packaging container for a specific product.
INTELLECTUAL PROPERTY. Rademate was issued U.S. Patent #6294265 for
"Hydrophobic biodegradable cellulose-containing material" on September 25, 2001.
Rademate has one application with the Israeli Patent Office (126306), dated
September 23, 1998, which is pending.
INVESTMENT. During 1998, 1999, and 2000, we invested $30,000, $60,000,
and $370,000 respectfully bringing our total investment $460,000, which
represents 52% of ownership of the outstanding common stock of Rademate. We did
not make any additional investment in Rademate in 2001 or 2002.
COMMERCIALIZATION. RBHM was marketed through our web site during 2001
and 2002.
15
6. AMSIL (DEVELOPER OF HIGHLY STABLE ORGANOMINERAL POLYMERS)
BACKGROUND. Organomineral polymers based on quaternary ammonium
silicates, or QAS, are a new kind of silicate material with excellent adhesion
properties to hydrophilic and hydrophobic surfaces, have high chemical
resistance, fire resistance and are environmentally compatible. QAS have
superior properties in comparison to epoxy resins and traditional silicates,
including: high adhesion to metallic and concrete surfaces; extreme stability in
water; thermostability to 2000(degree) K; resistance to corrosion and erosion;
and excellent mechanical characteristics.
Dr. Figovsky has advised us that QAS may be used as ammonia compounds;
as biocides; in textiles as textile softeners for home use; as the final rinse
in the washing machine; as a rinse after shampooing, as emulsifiers; in metal
working - as additives to acid used in the cleaning and pickling of steel to
prevent hydrogen corrosion; in road building, as bentonite treatment; in
oilfields; as antistatic in polymers - e.g., in PVC belting; for the preparation
of excellent quality toner; as components in special systems of water
purification; as components in self-setting aqueous mixtures for the manufacture
of chemically resisting materials; as additives in concrete and coatings; in
structure-directing agents, e.g., for the synthesis of molecular sieves with
high-modulus silica; in silicate salts - for blends of hydrophilic medical use;
as raw material for preparation of organosilanes; with aggregated titanium
pigment products containing QAS - for pigment preparation; as silicates,
anti-corrosion coating of different surfaces (metals, concrete, wood, etc.); as
fire-protection coating; and for specific application as glue.
INTELLECTUAL PROPERTY. With respect to QAS, Amsil has received two U.S.
Patents and has two pending in Israel (128282 filed January 24, 1999 and 129977
filed May 16, 1999). U.S. Patent #6320059 for "Polymeric composition having
self-extinguishing properties" was issued December 11, 2001. U.S. Patent
#6337036 for "Conductive composition having self-extinguishing properties" was
issued January 8, 2002.
INVESTMENT. During 1998, 1999, and 2000, we invested $30,000, $62,500,
and $230,000 respectfully bringing our total investment $332,500, which
represents 52% of ownership of the outstanding common stock of Amsil. We did not
make any additional investment in Amsil in 2001 or 2002.
COMMERCIALIZATION. Currently, we are calling QAS to the attention of
industries through our web site and professional contacts, as a result of which
we have received expressions of interest from companies that included small
regional producers to a large multinational conglomerate. During 2002, we
received indications of interest in, and delivered samples of, QAS.
7. CORPEM - PROTECTIVE CRACK RESISTANT COATINGS BASED ON WATER BORNE
CHLOROSULFONATED POLYETHYLENE (OR CSPE)
BACKGROUND AND ABANDONMENT. The proposed project was based on previous
research in the field of statistical modeling of processes of formation of
various branched crosslinked structures. The modeling allows the preparation of
materials having preselected desirable properties. CSPE is hardened by water
suspension of chlorine-sulfonated-polyethylene hardened by Mannich alkalis. In
2001 we invested $30,000 in Corpem. Eurotech's investment was matched with
$150,000 by the office of the Chief Scientist of the Ministry of Industry and
Commerce of the Israeli Government. In 2002, we invested an additional $15,000
but have made an operational decision to abandon our interest in this project.
As part of our agreement with the Israeli Government, we will relinquish our
interest in Corpem during 2003.
16
TECHNOLOGIES ACQUIRED FROM DR. OLEG FIGOVSKY (PART OF APM DIVISION)
1. HNIPU
BACKGROUND. We described the HNIPU technology above in our discussion
of Chemonol.
INTELLECTUAL PROPERTY. HNIPU network polymers and composites formed
therefrom is patented in the U.S. (Patent Number #6120905, issued September 19,
2000) and also in Europe (EP 1088021, PCT WO 9965969) and Australia (4441099).
Such patents have previously been assigned to Eurotech. The method of synthesis
of cyclocarbonates and nonisocyanate or hybrid nonisocyanate network
polyurethanes is patent applied for in the United States, which application has
been assigned to us.
INVESTMENT. HNIPU was independently developed by Dr. Figovsky and was
acquired by us pursuant to a Technology Purchase Agreement dated January 1, 1998
for a purchase price of $75,000, plus royalties equal to 49% of our net revenues
from sales or licenses of any products incorporating HNIPU, payable over a
period of 15 years commencing on January 1, 1998. To date, we have not derived
any revenues from HNIPU. Dr. Figovsky is one of our consultants. As of February
27, 2000, we entered into an amended agreement with Dr. Figovsky pursuant to
which he surrendered his 49% royalty interest in HNIPU and the other
technologies discussed below for a payment to him of an aggregate of $235,000
and an agreement to pay him a royalty of 1% of gross revenues generated by sales
of products incorporating these technologies. On March 5, 2003, in anticipation
of the HomeCom transaction, Dr. Figovsky and Polymate, Ltd. surrendered to us
the remaining revenue rights they held in HNIPU (and certain other technologies
described elsewhere herein) and will receive shares of HomeCom at the closing of
our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. We are seeking to commercialize HNIPU through
licensing or joint venture agreements with major companies in the United States,
Europe, and Japan that would either produce HNIPU binder or incorporate it into
their product lines. Several international companies have requested, and been
supplied with, samples HNIPU binder or foam for evaluation and applications
testing. A market analysis performed for us shows that the U.S. market for
polyurethane coatings and adhesives in the U.S. alone is projected to amount to
$8.5 billion by 2005. We have focused on replicating the formulation of the
HNIPU technology in the United States. We have identified several suitable
binder production facilities and have furthered our efforts to establish a
customer base of paint and coating manufacturers. We achieved a milestone in
2001 with the development of a HNIPU foam. This development has created
additional opportunity in the global rigid foam market and has lead to
considerable interest from North American and European based companies. In 2002,
we developed an acrylic version of HNIPU and engaged in discussions with third
parties regarding HNIPU and delivered samples of the product.
2. LIQUID EBONITE MATERIAL OR "LEM"
BACKGROUND. LEM is a synthetic liquid rubber with enhanced mechanical,
permeability and anti-corrosive qualities as compared to conventional sheet
rubber coverings. In laboratory testing, coverings made with LEM, as compared to
conventional sheet rubber coverings, have displayed greater resistance to harsh
chemicals such as acids, alkalis and benzene, and have been successfully applied
to intricate and complex surfaces such as sieve meshing. Based on the physical
and chemical properties of LEM, and on the basis of such tests, we believe that
LEM coverings are capable of providing superior protection to small-diameter
piping and to the intricate parts of pumps, fans, and centrifuge rotors. LEM can
be applied to form surface coverings using standard coating techniques,
including spraying and dipping.
17
INTELLECTUAL PROPERTY. Dr. Figovsky was issued U.S. Patent #6303683 on
October 16, 2001 for Liquid Ebonite mixtures and coatings, and concretes formed
therefrom. Dr. Figovsky also filed under the Patent Cooperation Treaty
(PCT/US99/16883) on July 26,1999. These patents and applications were acquired
by us in 1998.
INVESTMENT. LEM was independently developed by Dr. Figovsky and was
acquired by us pursuant to a Technology Purchase Agreement, dated January 1,
1998, for a purchase price of $15,000, plus royalties equal to 49% of our net
revenues from sales or licenses of any products incorporating LEM, payable over
a period of 15 years commencing on January 1, 1998. On February 27, 2000, we
entered into an amended agreement with Dr. Figovsky pursuant to which he
surrendered his 49% royalty interest in HNIPU and the other technologies,
including LEM, for a payment to him of an aggregate of $235,000 and an agreement
to pay him a royalty of 1% of gross revenues generated by sales of products
incorporating these technologies. On March 5, 2003, Dr. Figovsky surrendered to
us the remaining revenue rights he held in LEM (and certain other technologies
described elsewhere herein) and will receive shares of HomeCom at the closing of
our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. During 2001, we were devoting limited management
time and attention to the marketing of this technology. In 2002, we marked LEM
via our website and received some indications of interest.
3. RUBBER CONCRETE, OR "RUBCON"
BACKGROUND. RubCon is a technologically advanced, polymer-based,
rubberized concrete that utilizes polybutadiene, a polymer derived from liquid
rubber, as a binding material for the various aggregates that, together with
binders, constitute concrete. In laboratory testing, RubCon has exhibited high
degrees of compression, bending and tensile strength, a high degree of
water-resistance and a high degree of resistance to aggressive, corrosive
chemicals as compared to conventional "cement" concrete. We believe that RubCon
has significant potential utility in the manufacture of industrial flooring,
equipment operating in aggressive chemical media such as galvanic and
electrolysis "baths," foundations, concrete pipes and other underground
structures, seismic reinforcement materials, and outdoor structures such as
bridges that are routinely exposed to harsh weather and corrosive conditions.
Other applications may be for pads in vibration-sensitive machinery such as
compressors and pumps.
INTELLECTUAL PROPERTY. RubCon was developed based on our LEM patent
applications and is protected as a trade secret.
INVESTMENT. RubCon was independently developed by Dr. Figovsky and was
acquired by us pursuant to a Technology Purchase Agreement dated January 1, 1998
for a purchase price of $35,000, plus royalties equal to 49% of our net revenues
from sales or licenses of any products incorporating RubCon, payable for a
period of 15 years commencing on January 1, 1998. On February 27, 2000, we
entered into an amended agreement with Dr. Figovsky pursuant to which he
surrendered his 49% royalty interest in HNIPU and the other technologies,
including RubCon, for a payment to him of an aggregate of $235,000 and an
agreement to pay him a royalty of 1% of gross revenues generated by sales of
products incorporating these technologies. On March 5, 2003, Dr. Figovsky
surrendered to us the remaining revenue rights he held in RubCon (and certain
other technologies described elsewhere herein) and will receive shares of
HomeCom at the closing of our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. We have done limited marketing for the manufacture
and sale of RubCon. At the end of 2002 and at the time of this report's
preparation, we were not devoting any management time or attention to the
marketing of this technology, other than marketing efforts via our website.
18
4. ANTICORROSIVE ADDITIVES FOR POLYMERS - UPGRADES CHEMICAL RESISTANCE
CHARACTERISTICS OF BASE POLYMERS
BACKGROUND. Anticorrosive Additives, or Aadd, are an innovative
approach to creating highly chemical resistant polymer materials. AAdd are
specially designed to upgrade the chemical resistance characteristics of base
polymers to achieve optimal performance capabilities of materials operating in
aggressive environments. AAdd can be mixed into a wide range of polymer
materials offering a significant increase in product life and reducing product
permeability. These custom-made specialty formulations are designed to meet
specific client requirements. When cured with polymer-based materials, AAdd can
dramatically improve the capabilities of poly-based materials by upgrading their
chemical resistance properties. The additives are inorganic powders that react
with the aggressive environments into which they are introduced, forming a new
phase of high-strength hydrate complexes. This enhanced bonding occurs upon the
penetration of aggressive media into the AAdd-containing polymer material. The
chemical resistant properties of AAdd are activated by harsh environmental
conditions where polymer systems without additives remain defenseless to
chemical corrosion.
Dr. Figovsky has represented to us, but we have not sought independent
testing to verify that (i) AAdd can be mixed into a wide range of polymer
materials such as epoxies, polyurethanes, glues, nylons, polyolephines,
synthetic rubbers and PVC, offering performance-enhancing attributes that
increase the value of the end product; that he has developed an extensive
product range of additives for upgrading the most common polymers against a wide
variety of aggressive media including acids, seawater, fluorine, alkalies, and
more; and that AAdd is an effective solution for many applications.
INTELLECTUAL PROPERTY. No patent activity is presently underway. We own
whatever intellectual property rights and patent rights in AAdd that may be
available.
INVESTMENT. AAdd was independently developed by Dr. Figovsky, and was
acquired by us pursuant to the Technology Purchase Agreement dated January 1,
1998 referred to above for a purchase price of $45,000 plus royalties equal to
49% of our net revenues from sales or licenses of any products incorporating
AAdd, payable for a period of 15 years commencing on January 1, 1998. On
February 27, 2000, we entered into an amended agreement with Dr. Figovsky
pursuant to which he surrendered his 49% royalty interest in HNIPU and the other
technologies, including AAdd, for a payment to him of an aggregate of $235,000
and an agreement to pay him a royalty of 1% of gross revenues generated by sales
of products incorporating these technologies. On March 5, 2003, Dr. Figovsky
surrendered to us the remaining revenue rights he held in AAdd (and certain
other technologies described elsewhere herein) and will receive shares of
HomeCom at the closing of our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. We have not yet begun any marketing efforts for AAdd
other than via our website.
5. FIRESIL(TM) - FIRE PROTECTION ORGANOMINERAL COATING - FIRE-STOP FOR
RESIDENTIAL AND COMMERCIAL APPLICATION
BACKGROUND. Firesil(TM) is an environmentally compatible fire-stop
material with good adhesion properties to hydrophilic and hydrophobic surfaces
and exhibits excellent fire resistance, thermostability, and good water
resistance.
INTELLECTUAL PROPERTY. We acquired the formula for Firesil(TM) from Dr.
Figovsky in 2000. We terminated previously initiated patent applications and
have elected to protect this formula as a trade secret. We own the federally
registered trademark "Firesil".
19
INVESTMENT. Firesil(TM) was independently developed by Dr. Figovsky,
and was acquired by us pursuant to an amended agreement with Dr. Figovsky dated
as of February 27, 2000 for a purchase price of $5,000 as part of a larger
transaction pursuant to which he surrendered his 49% royalty interest in HNIPU,
LEM, RubCon, AAdd and Poly-D additives for a payment to him of an aggregate of
$235,000 and an agreement to pay him a royalty of 1% of gross revenues generated
by sales of products incorporating these technologies. On March 5, 2003, Dr.
Figovsky surrendered to us the remaining revenue rights he held in Firesil(TM)
(and certain other technologies described elsewhere herein) and will receive
shares of HomeCom at the closing of our transaction with HomeCom in
consideration thereof.
COMMERCIALIZATION. We successfully adopted the formula for the
Firesil(TM) technology to the U.S. in 2001 and have produced the product for
commercial sale in both 2001 and 2002 under an agreement with a manufacturer
located in central Virginia. We continue to market Firesil(TM) directly to
corporations that are prospective candidates for acquiring or licensing the
technology. Discussions have also been held with U.S. government agencies and
insurance companies. Firesil(TM) was tested by an accredited lab to ASTM
protocol and passed with superior results.
6. KAUTON - AN OIL AND GAS INDUSTRY PIPELINE SPECIALTY COATING
BACKGROUND. Kauton is an advanced semi-ebonite two-component liquid
rubber based coating for corrosion protection of oil and gas pipelines. It
contains specialized anticorrosion components and has vulcanization temperature
50% less than conventional liquid ebonite materials, which allows for easier
application and manufacture. Kauton would provide enhanced protection to weld
joints of large diameter pipelines.
INTELLECTUAL PROPERTY. We acquired the intellectual property rights to
this technology from Dr. Figovsky in 2000. The technology is protected by trade
secret.
INVESTMENT. Kauton was independently developed by Dr. Figovsky. We
acquired a 99% interest pursuant to an agreement with Dr. Figovsky dated as of
February 27, 2000 for a purchase price of $5,000 pursuant as part of a larger
transaction pursuant to which he surrendered his 49% royalty interest in
HNIPU,LEM, RubCon, AAdd and Poly-D additives for a payment to him of an
aggregate of $235,000 and an agreement to pay him a royalty of 1% of gross
revenues generated by sales of products incorporating these technologies. On
March 5, 2003, Dr. Figovsky surrendered to us the remaining revenue rights he
held in Kauton (and certain other technologies described elsewhere herein) and
will receive shares of HomeCom at the closing of our transaction with HomeCom in
consideration thereof.
COMMERCIALIZATION. At present, we are not engaged in the marketing of
Kauton other than via our website.
7. HYPOCORR - SPECIALIZED WATER BASED CRACK RESISTANT COATING
BACKGROUND. Hypocorr is a water-based crack-resistant coating based on
chlorine-sulphonated polyolifines with novel cross-linked agents. As such, this
coating is believed to be more environmentally friendly at half the expense of
conventional crack resistant coatings.
INTELLECTUAL PROPERTY. We acquired the intellectual property rights to
this technology from Dr. Figovsky in 2000.
INVESTMENT. Hypocorr was independently developed by Dr. Figovsky. We
acquired a 99% interest pursuant to an agreement dated as of February 27, 2000
for a purchase price of $5,000 as part of a larger transaction pursuant to which
he surrendered his 49% royalty interest in HNIPU, LEM, RubCon, AAdd and Poly-D
20
additives for a payment to him of an aggregate of $235,000 and an agreement to
pay him a royalty of 1% of gross revenues generated by sales of products
incorporating these technologies. On March 5, 2003, Dr. Figovsky surrendered to
us the remaining revenue rights he held in Hypocorr (and certain other
technologies described elsewhere herein) and will receive shares of HomeCom at
the closing of our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. At present, we are not engaged in the marketing of
Hypocorr other than via our website.
8. POLYDIENE URETHANE ADHESIVES - ELECTRONIC GLUES FOR RUGGEDIZED
APPLICATIONS
BACKGROUND. Polymeric adhesives are widely used in the electronic
industry, mainly to protect electronic devices against conditions of vibration
and impact, which can prevent the devices from functioning as designed. Our
advanced polydiene urethane based (Poly-D adhesives) is specially designed to
perform under rugged conditions. Poly-D adhesives used in conjunction with
soldering increase the reliability of electronic devices by providing components
with excellent environmental stability and improved reliability. Other
noteworthy attributes include:
o Non-corrosive - limited to no corrosion of the bonded
electronic components;
o Non-adsorbent - will not be adsorbed into the components or
substrate;
o Non-reactive - completely non-reactive toward electric
isolation during and after hardening; and
o Non-disruptive - low internal stress to remain non-disruptive
to electronic parts
INTELLECTUAL PROPERTY. Poly-D additives are protected through U.S.
Patent #5880203 which was assigned to us by Dr. Figovsky in 1998. Additional
international patent protection activities were recently halted due to a
reassessment of our intellectual property policy.
INVESTMENT. Poly-D adhesives were independently developed by Dr.
Figovsky acquired by us pursuant to a technology purchase agreement dated
January 1, 1998 for a purchase price of $15,000, plus royalties equal to 49% of
our net revenues from sales or licenses of any products incorporating Poly-D
adhesives, payable over a period of 15 years commencing on January 1, 1998. As
of February 27, 2000, we entered into an amended agreement with Dr. Figovsky
pursuant to which he surrendered his 49% royalty interest in HNIPU, LEM, RubCon,
AAdd and Poly-D additives for a payment to him of an aggregate of $235,000 and
an agreement to pay him a royalty of 1% of gross revenues generated by sales of
products incorporating these technologies. On March 5, 2003, Dr. Figovsky
surrendered to us the remaining revenue rights he held in Poly-D (and certain
other technologies described elsewhere herein) and will receive shares of
HomeCom at the closing of our transaction with HomeCom in consideration thereof.
COMMERCIALIZATION. We are marketing Poly-D adhesives through our web
site and direct industry requests. Presently, no additional marketing activities
are envisioned. Market analysis indicates a highly specialized niche market with
limited potential to provide adequate return on investment that would justify
more aggressive marketing activities. We propose to attempt to license or sell
this technology in its entirety.
21
ISRAELI TECHNOLOGY START-UP COMPANIES
The government of Israel has in place a program pursuant to which an
inventor/developer may submit to the office of the Chief Scientist a proposal to
develop specified technology. If the Chief Scientist approves the proposal,
arrangements are made pursuant to which (i) an Israeli company is incorporated;
(ii) the entrepreneur is allocated initially 50% of the company's equity in
exchange for his technology; (iii) a local technology company is brought into
the picture as incubator to furnish office and laboratory facilities and support
services for a period of two years in exchange for a further 20% of the equity;
(iv) a venture capital partner, who is required to invest $60,000, becomes
another 20% shareholder; and (v) the remaining 10% of the equity is made
available to the start-up company's employees. Upon organization of the start-up
company, the Israeli government will make available to it grants of up to
$300,000.
Over the years, we have worked with three Israeli technology incubator
companies (TEIC - Technion Entrepreneurial Incubator Co., Ltd; Ofek La'Oleh
Jesre'el Valley Initiative Center; and ITEK Incubator for Technological
Entrepreneurship, Kiryat Weizmann, Ltd.), which allowed us to act as the venture
capital partner in the incubation the seven start-up companies described above.
As provided by Israeli law and regulations, we received initially 20%
of each company's common equity in exchange for an initial investment of U.S.
$60,000. Subsequently we made further investments in each of them for additional
equity. In certain instances the start-up company has developed its technology,
the Company has secured its access to these technologies through licensing or
ownership, and is awaiting the opportunity to further market and commercialize
the technology. The current status of our investment in each of these companies
is discussed in connection with our description of their respective technology.
POLYMATE, LTD.
Dr. Oleg Figovsky and Mr. Alex Trossman, our two Israeli consultants,
jointly own a company called Polymate, Ltd., which conducts an operation called
the Israeli Research Center. The Israeli Research Center consists of a
laboratory, employing other scientists/ technicians, in the premises of the Ofek
La'Oleh - Jesre'el Valley Initiative Center. The function of the Israeli
Research Center is to continue the development of the technologies that we
purchased from Dr. Figovsky and to supervise the technology start-up companies
in which we participate. We are under agreement to provide all of the funding
for Polymate, Ltd. and the Israeli Research Center in the approximate aggregate
amount of $22,000 per month, inclusive of consulting fees to Dr. Figovsky, Dr.
L. Shapovalov and Mr. Trossman. During 2002, we were deliquent in certain of our
payments due under these arrangements and presently in negotiations to reach a
settlement, which we expect will be finalized in the second quarter of 2003. Dr.
Figovsky and Mr. Trossman continue to be retained and compensated by us as
consultants on a month-to-month basis. Their original consulting agreements have
expired. Peter Gulko, one of our significant shareholders and an advisor to our
board of directors, plays a significant role in the management of our
relationship with Polymate, Messrs. Figovsky and Trossman and with the
development of our Israeli technologies.
SECURITY & SAFEGUARDS DIVISION
The terrorist attacks of September 11, 2001 have resulted in the
creation of a governmental agency to monitor Homeland Security. Our Security &
Safeguard division, which is conducted through Markland as of December 2002,
provides products and technologies which management believes can provide or be a
part of cost efficient and reliable solutions to these Homeland Security needs.
22
1. CRYPTO.COM
BACKGROUND. In February 2000, we organized Crypto.com., Inc., a
Delaware corporation, to develop cryptographic systems for secure communication.
At that time, we entered into a one-year employment/development contract,
extendable by us, with a mathematician-inventor, in which he agreed to develop
such a system and which would restrict his ability to work on related products
even if the contract was not extended. We extended this agreement until February
2002 an have since been operating with the inventor on a month-to-month basis.
The inventor believes that he can develop the mathematical concepts that can
produce a series of secure communication products. The products' use would vary
depending on the level of security and speed of the cryptographic system. The
inventor's goal is to produce a product that allows secure communication. Secure
communications is a growing market that is fueled by the growth of the Internet,
by business use of intranets and by the growth of global electronic
communications, all of which result in electronic movement of remotely processed
corporate files used in multiple locations. The products, when developed will,
be targeted to the appropriate commercial entities. As in the case of all
start-up development efforts, there can be no assurance that any commercially
viable products will result from our development efforts. In December 2002, we
transferred the assets of Crypto.com., Inc., including the registered trademark
"crypto.com", to Markland.
INTELLECTUAL PROPERTY. Although in the development stage, the potential
intellectual property assets will be protected by trade secrecy laws. We entered
into confidentiality agreements with the parties directly involved in the
development process. Should commercially viable products be developed, we will
then decide whether to patent one or more inventions or to continue to rely on
trade secrecy. We also applied for and received trademark protection for the
mark "crypto.com." We transferred all of our rights to these technologies to
Markland in December 2002.
INVESTMENT. In 2000, in addition to committing $10,000 to Crypto.com,
Inc.'s capital, we spent $220,462 to support the development of its technology.
During 2001 and 2002, we spent $316,000 and 127,229, respectively, for the
account of Crypto.com, Inc. Although we transferred all of Crypto's assets to
Markland in December 2002, we continue to own 66.04 % of the equity of Crypto,
with the technology inventor owning 18.87%, a consultant who introduced us to
the inventor owning 9.43%, and certain current and former officers and directors
of the Company owning an aggregate of 5.66%.
COMMERCIALIZATION. The need for secure communications at varying speeds
and security levels is a rapidly growing market. Increasing computer power and
software continue to defeat low-level and difficult-to-break cryptographic
systems and thus increase the value and need for effective absolutely secure
communications and higher speed cryptographic systems, which are difficult to
break. The commercialization model depends on the speed and level of security of
the inventor's mathematical concepts. We envision that we would license such a
product, if successfully developed, to many different companies.
During early 2001, the mathematical concepts developed by the inventor
were reviewed, analyzed, and evaluated in active interactions between the
inventor and our third party experts. On the basis of successful preliminary
evaluations of the concepts performed by our third party experts, the inventor
undertook the further development of several variants of the mathematical
concepts into cryptographic systems for technology demonstration purposes.
During 2002, we initiated marketing efforts with regard to this technology and
we expect that Markland will continue such efforts in 2003.
While validation studies were being conducted by our third party
experts, we began marketing the technology concepts and cryptographic systems to
selected potential users. Limited demonstrations were carried out for several
potential users, leading in the fourth quarter of 2001 to preliminary discussion
with a telecommunications company on possible licensing of one of the Crypto.com
encryption technology variants. These discussions resulted in a non-exclusive
23
licensing agreement to market, license and commercialize its cryptology
technology dated as of December 31, 2001, between Crypto.com. and Etelix, Inc.,
or Etelix. Crypto granted a non-exclusive license and right to market for a
period of five years. The agreement with Etelix was terminated in December,
2002. Markland will continue to seek out potential commercial users for the
Crypto.com technology for licensing or joint venture activities.
2. ACOUSTIC CORE NON-CONTACT INSPECTION TECHNOLOGY
BACKGROUND. In a July 2001 agreement, and an amendment to that
agreement, dated October 3, 2001, we entered into an agreement whereby we
licensed from Trylon Metrics, Inc. their rights to certain technologies for
certain markets for in-situ remote sensing of hazardous, toxic, explosive, and
nuclear waste materials. One of the key technologies acquired is the Acoustic
Core non-contact inspection technology that utilizes acoustic sensing to
identify illicit and hazardous materials from their empirically determined
acoustic properties. Completed research and development studies have shown that
materials can be uniquely identified by their acoustic signatures. This includes
the highly explosive and difficult to detect C4 plastic explosive. We have
prepared the engineering documentation for the rapid development of a screening
portal for detecting illicit and dangerous materials on individuals entering
secured areas such as public buildings, military reservations, and
transportation terminals. In November 2002, our efforts led to our agreement
with the Air Force pursuant to which we will develop this technology with them.
In December, 2002, we agreed to license this technology to Markland.
INTELLECTUAL PROPERTY. The Acoustic Core technology is covered by U.S.
Patent 4,922,467. The rights to certain applications of Acoustic Core were
licensed to us by Trylon Metrics, Inc. and we have subsequently agreed to
sub-license one of those applications to Markland and the remaining applications
to HomeCom.
INVESTMENT. We issued 2,500,000 fully paid and non-accessible shares of
its restricted common stock, valued at $2,500,000, for the acquisition of the
rights to certain technologies for in-situ remote sensing of hazardous, toxic,
explosive, and nuclear waste materials. During third and fourth quarters of
2001, we spent an additional $25,000 on development, refinement, and marketing
of the Acoustic Core part of the acquired technologies. During 2002, we spent an
aggregate of $844,202 on Acoustic Core and EMR, of which $600,000 was
capitalized. We agreed to license the illicit materials detection application to
Markland in December 2002 and remainder of our rights to HomeCom in March 2003.
COMMERCIALIZATION. The Acoustic Core technology has been validated in
tests on a variety of materials utilizing prototype instrumentation. Research,
which began in 1997 in collaboration with the Battelle Memorial Institute,
successfully demonstrated that Acoustic Core is capable of non-intrusively
detecting C4 plastic explosives located within containers. These proof of
concept tests have laid the technical foundations for the development and
deployment of Acoustic Core based remote sensing security products. During the
fourth quarter of 2001, we submitted proposals to an agency of the U.S.
Government in response to a call for new technologies to address urgent homeland
security needs.
In addition, demonstrations of the prototype instrumentation were
conducted for interested commercial and governmental organizations. During 2002,
we funded the continued development of an illicit materials detection portal
apparatus which was demonstrated to the Air Force, leading to a research a
development agreement with the Air Force in November 2002. Markland will
continue seek to enter into licensing, contracted, or joint venture developments
with organizations for the development, implementation, and operations of
Acoustic Core based security products. Toward that end, Markland will continue
our strategy of focusing marketing efforts on informing security related
government, private, and commercial organizations of the potential of Acoustic
Core based technologies to be a cost effective basis for a variety of remote
sensing security products.
24
PATENTS AND TRADEMARKS
Many entities, including some developing technologies similar to ours,
now have and may in the future obtain patents and other intellectual property
rights that cover or affect products or services directly or indirectly related
to those that we offer. In general, if a court determines that one or more of
our products infringes on intellectual property held by others, we would be
required to cease infringes on intellectual property held by others, we would be
required to cease developing or marketing those products, to obtain licenses to
develop and market those products from the holders of the intellectual property,
or to redesign those products in such a way as to avoid infringing the patent
claims. If a competitor holds intellectual property rights, the entity might be
predisposed to exercise its right to prohibit our use of its intellectual
property in our products and services at any price, thus impacting our
competitive position.
We cannot assure you that we are aware of all patents and other
intellectual property rights that our products may potentially infringe. In
addition, patent applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly, we cannot evaluate
the extent to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation, which we
may not have the resources to pursue.
We cannot estimate the extent to which we may be required in the future
to obtain licenses with respect to patents held by others and the availability
and cost of any such licenses. Those costs, and their impact on the net income
we might receive could be material. Damages in patent infringement cases can
also include a tripling of actual damages in certain cases. To the extent that
we are required to pay royalties to third parties to whom we are not currently
making payments, these increased costs of doing business could negatively affect
our liquidity and operating results.
In addition, there may be entities developing and marketing
technologies which infringe on patents and intellectual property rights held by
us. Patent infringement claims are protracted and costly. We may not have the
resources to adequately protect our intellectual property. Any expenditures to
pursue intellectual property rights by us could negatively affect our ability to
market and develop our existing technologies.
COMPETITORS TO EUROTECH'S PRIMARY TECHNOLOGIES
Our technologies are targeted at highly competitive markets. Due to the
nature and size of some of the contracts that we bid for, including some of the
larger governmental ones, there are sometimes other competitors who may have
significantly greater name recognition and greater financial and other resources
than we do. We believe however, the proprietary nature of our products when
partnered with our level of technical expertise and the quality of our services
give us a competitive advantage against some of the entities listed below with
respect to some of our primary technologies.
EKOR(TM)
EKOR(TM) is a composite material based on a silicone polymer different
from other silicones produced by manufacturers such as GE Silicones and Dow
Corning, because its performance qualities include resistance to chemical and
radiation corrosion.
25
HNIPU (HYBRID NON-ISOCYANATE POLYURETHANE)
HNIPU is a hybrid that outperforms other non-isocyanate polyurethanes
and should meet or exceed most of the performance characteristics of other
polyurethanes currently available. Some of the major producers of polyurethanes
used in coatings and finishes, sealants and adhesives include Akzo Nobel, Dow
Chemical and Kansai.
ACOUSTIC CORE EXPLOSIVE DETECTION TECHNOLOGY
Major competitors of detection and screening equipment include InVision
Technologies and L3 Communications who have equipment installed in major
airports for baggage screening.
CRYPTO.COM ENCRYPTION TECHNOLOGY
There are many communications and data security systems available today
that include encryption capability from public and private use to commercial and
government applications. One of the largest and most widely used is RSA
Security, Inc.
EMPLOYEES
As of December 31, 2002, we had four full-time employees and two
officers. As of December 31, 2002, we also had various consulting arrangements
with individuals and corporations in the United States, Germany, Russia, and
Israel to serve its limited additional staffing needs.
On March 1, 2002, the Company hired Mr. Todd J. Broms as the President
and Chief Executive Officer. Mr. Broms resigned in August 2002.
On April 2, 2003, we announced that Carey Naddell was appointed our
Chairman of the Board to replace Don V. Hahnfeldt, who stepped down as Chairman
of the Board, President and CEO but who will continue to serve as a director of
the Company. Mr. Naddell has served as an independent director of the Company
since March 2002, and been chairman of the Audit Committee of our board of
directors. It is expected that Mr. Naddell will serve as Chief Operating Officer
through a transition period up to three months, after which he will become our
President and CEO. During such time, Mr. Hahnfeldt will continue as President
and CEO in a transitional capacity.
None of our employees are covered by a collective bargaining agreement.
We consider our employee relations to be satisfactory and have not experienced
any labor problems.
ITEM 2. PROPERTIES.
For our corporate headquarters, we rent an office suite with 7,861
square feet of space in Fairfax, Virginia under a lease that expires in 2005 and
calls for the payment of a monthly rent, including certain taxes and utilities,
of $19,229.97, subject to customary escalation. We are currently in a dispute
with our landlord regarding the property which is our corporate headquarters.
See "Legal Proceedings" below.
ITEM 3. LEGAL PROCEEDINGS.
On February 14, 2003, SMII Fairfax, LLC, the landlord of our corporate
headquarters located at 10306 Eaton Place, Fairfax, Virginia, filed suit in the
Fairfax County General District Court alleging breach of contract for unlawful
detainer. Without admitting or denying liability, we have entered into
negotiations with our landlord and expect that we will come to a settlement in
the near future.
26
On October 21, 2002, our former legal counsel filed a Demand for
Arbitration before the American Arbitration Association seeking $288,755 dollars
in alleged unpaid legal fees from us. The dispute was subsequently resolved
pursuant to a Settlement Agreement dated April 15, 2003 pursuant to which we are
to pay such counsel the sum of $310,581 by a combination of cash and stock in
accordance with a schedule and on the terms set forth in the Settlement
Agreement. The satisfaction of this payment obligation is to occur no later than
by December 22, 2003.
We may, from time to time, be involved in actual or potential legal
proceedings that we consider to be in the normal course of our business. We do
not believe that any of these proceedings will have a material adverse effect on
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of 2002.
[remainder of page intentionally left blank]
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock are listed for quotation on the OTC Pink Sheet
Electronic Quotation Service under the symbol "EUOT". Until December 24, 2002,
our common stock was listed on the American Stock Exchange. The range of
reported high and reported low sales prices per share for our common stock for
each fiscal quarter since March 31, 2001, as reported by the American Stock
Exchange or the OTC Pink Sheet Electronic Quotation Service, as applicable, are
set forth below. The quotations merely reflect the prices at which transactions
were proposed, and do not necessarily represent actual transactions.
QUARTERLY COMMON STOCK PRICE RANGES
- -------------------------------------------------------------------------------
QUARTER ENDED: COMMON STOCK
- -------------------------------------------------------------------------------
HIGH LOW
- -------------------------------------------------------------------------------
March 31, 2001 $2.75 $1.10
- -------------------------------------------------------------------------------
June 30, 2001 $1.42 $0.64
- -------------------------------------------------------------------------------
September 30, 2001 $0.76 $0.26
- -------------------------------------------------------------------------------
December 31, 2001 $1.33 $0.25
- -------------------------------------------------------------------------------
March 31, 2002 $1.10 $0.35
- -------------------------------------------------------------------------------
June 30, 2002 $0.60 $0.15
- -------------------------------------------------------------------------------
September 30, 2002 $0.21 $0.07
- -------------------------------------------------------------------------------
December 24, 2002 $0.70 $0.07
- -------------------------------------------------------------------------------
December 26-31, 2002* $0.30 $0.20
- -------------------------------------------------------------------------------
* Denotes period following the delisting of our common stock from Amex
and the commencement of listing on the OTC Pink Sheet Electronic
Quotation Service.
As of April 23, 2003, we had approximately 489 holders of record of our
common stock. No cash dividends have been paid on the common stock to date. We
currently intend to retain any earnings for further business development.
28
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE
EXERCISE OF EXERCISE PRICE OF NUMBER OF SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FOR FUTURE ISSUANCE
------------- ------------------- ------------------- -------------------
(a) (b) (c)
Equity compensation
approved by
plans approved by
security holders(*) 1,062,500 1.65 137,500
Equity compensation
plans not approved by
security holders 6,075,333(**) 1.51 n/a
------------------------------------------------------------------------------
Total 7,137,833 1.53 137,500
(*) We intend to offer an appropriate amendment or restatement of our
option plan to be put before our shareholders for a vote at our next
annual meeting. Our current option plan, an amendment to which was
approved by our shareholders in 2000, allows for the issuance of
1,250,000 options as incentive stock options.
(**) Consists of (i) 2,844,000 options which are not intended to be issued
pursuant to our 1999 Stock Option Plan and (ii) 3,231,333 shares
underlying warrants which we've issued. Such options were issued
subject to shareholder approval.
RECENT SALES OF UNREGISTERED SECURITIES
On January 9, 2002, we issued 6,000,369 shares of its common stock from
the conversion of $3,000,000 principal amount of February 1998 Convertible
Debentures, plus the amount of all accrued and unpaid interest, totaling
$3,574,419.
On December 7, 2002, we issued 4,000,000 shares of its common stock for
capitalized technology development costs valued at $600,000.
On December 12, 2002, we sold 5,000,000 shares of common stock for
$250,000 in connection with the private equity financing.
On December 12, 2002, a warrant holder exercised its warrants and
purchased 5,000,000 shares of common stock. Proceeds from warrants exercised
total $250,000.
As of December 31, 2002, we issued 70,145 shares of its common stock as
consideration for consulting services performed by various consultants, totaling
$318,234.
As of January 3, 2003, we raised $275,000 from the issuance of
5,500,000 shares of common stock in connection with the private equity
financing.
As of January 22, 2003, we raised $125,000 from a notes payable with a
private investor.
29
The issuances described above were deemed exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. Certain issuances
described above were deemed exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about us or had access, through
employment or other relationships, to such information.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the five years in
the period ended December 31, 2002 has been derived from our audited
consolidated financial statements. This information should be read in
conjunction with the audited consolidated financial statements and notes
thereto.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues ................................. $ 88,821 $ 18,873 $ 350,000 $ 150,000 $ --
Cost of sales ............................ 5,807 8,160 -- -- --
Other general and administrative
expenses ................................. 3,475,562 3,435,381 3,427,588 2,057,398 1,263,174
Loss on impairment of technology rights .. 3,084,947 -- -- -- --
Total costs and expenses ................. 12,043,867 8,801,839 10,120,410 5,300,724 3,018,288
Minority interest in subsidiary .......... 64,369 -- -- -- --
Net loss ................................. (12,443,396) (8,760,235) (9,872,789) (6,492,312) (7,814,143)
Preferred stock dividends-non cash ....... 3,625,359 -- -- -- --
Net loss Attributable to common
stockholders ............................. (16,068,755) (8,760,235) (9,872,789) (6,492,312) (7,814,143)
Basic and diluted net loss per share ..... (.23) (.18) (.23) (.27) (.40)
Weighted average number of common shares
outstanding .............................. 70,129,726 48,835,959 42,750,339 24,477,178 19,323,098
CONSOLIDATED BALANCE SHEET DATA:
Current assets ........................... $ 607,248 $ 719,186 $ 4,281,381 $ 3,547,211 $ 8,058
Property and equipment, net .............. 138,938 193,661 181,413 24,750 31,846
Technology rights ........................ 2,450,112 6,961,957 6,304,022 7,913,559 --
Total assets ............................. 3,215,612 8,119,910 11,017,263 11,519,844 76,403
Accounts payable and accrued expenses .... 3,117,763 885,207 1,439,543 3,139,204 1,716,809
Current portion of convertible debentures -- 3,000,000 500,000 2,660,000 --
Long-term Obligations .................... 375,000 202,091 3,000,000 3,900,000 6,970,000
Total liabilities ........................ 4,141,354 4,087,298 5,164,543 10,374,204 8,911,809
Minority interest ........................ 3,967,130 -- -- -- --
Total stockholders' (deficiency) equity .. (4,892,872) 4,032,612 5,852,720 1,145,640 (8,835,406)
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
THE FOLLOWING IS A DISCUSSION OF OUR FINANCIAL CONDITION, RESULTS OF
OUR OPERATIONS AND LIQUIDITY. THIS DISCUSSION SHOULD BE READ TOGETHER WITH OUR
FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS REPORT IN RESPONSE TO ITEM 8
BELOW.
CERTAIN INFORMATION IN THIS REPORT, INCLUDING THE FOLLOWING DISCUSSION,
MAY INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WE INTEND THE DISCLOSURE IN
THESE SECTIONS AND THROUGHOUT THIS REPORT TO BE COVERED BY THE SAFE HARBOR
PROVISIONS FOR FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING OUR EXPECTED
FINANCIAL POSITION AND OPERATING RESULTS, OUR BUSINESS STRATEGY, OUR FINANCING
PLANS, AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CAN SOMETIMES BE IDENTIFIED BY THE COMPANY'S USE OF
FORWARD-LOOKING WORDS SUCH AS "MAY," "BELIEVE," "PLAN," "WILL," "ANTICIPATE,"
"ESTIMATE," "EXPECT," "INTEND" AND OTHER PHRASES OF SIMILAR MEANING. KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS COULD CAUSE THE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE STATEMENTS. THE
FORWARD-LOOKING INFORMATION IS BASED ON VARIOUS FACTORS AND WAS DERIVED USING
NUMEROUS ASSUMPTIONS.
YOU SHOULD CAREFULLY CONSIDER THE ASSUMPTIONS DESCRIBED BELOW AND
ELSEWHERE IN THIS REPORT. IF FORWARD-LOOKING STATEMENTS FAIL TO ACTUALLY OCCUR,
OUR BUSINESS, BUSINESS PROSPECTS, FINANCIAL CONDITION OR OPERATING RESULTS MAY
BE HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK MAY DECLINE OR WE
MAY BE FORCED OUT OF BUSINESS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT IN US.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO
INTELLECTUAL PROPERTY OR MAINTAIN RIGHTS TO THIRD-PARTY PATENTS, WE MAY LOSE
VALUABLE RIGHTS, EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY
LITIGATION TO PROTECT SUCH RIGHTS.
OUR FINANCIAL STATEMENTS WERE PREPARED ON THE ASSUMPTION THAT WE WILL
CONTINUE AS A GOING CONCERN, AND OUR INDEPENDENT ACCOUNTANT HAS EXPRESSED A
SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
As a result of our losses from operations and our limited capital
resources, investors should be aware that there are serious risks of us not
being able to continue as a going concern. In the event that we are unable to
raise additional funds from private as well as public sources and/or do not
achieve our planned growth in revenue, we may be required to discontinue some or
all of our operations, to reduce the development of some or all of our products,
or to reduce our workforce, all of which would materially adversely effect our
business. There can be no assurance that such capital would be available to us,
or, if it is available to us, that it would be on terms favorable to us.
GENERAL
Commencing in January of 2003, we are no longer a development stage
company as a result of Markland's acquisition of Ergo Systems, Inc. in January
2003 (see Note 13 to consolidated financial statements).
See the "Business" section of this Form 10-K for a description of
management's plan with respect to each technology.
31
OUR RESULTS OF OPERATIONS
COMPARISON OF 2002 AND 2001
For the year ended December 31, 2002 and year ended December 31, 2001,
we incurred operating losses of $11,955,046 and $8,782,966 respectively. The
losses result principally from expenses incurred in the acquisition and
development of our technologies, consulting costs, general and administrative
expenses and the absence of revenues. The larger loss in the 2002 period
resulted principally from an increase in compensatory element of stock issuances
for consulting expenditures and an impairment loss associated with our EKOR(TM)
technology.
In 2002, we recognized approximately $89,000 in revenue from operations
relating to demonstrations of EKOR(TM), Security and Safeguards, and QAS
Products. Revenue for 2001 was from our demonstrations of EKOR(TM) and
Firesil(TM) Products.
Research and development expenses increased by $165,788 to $912,861 for
the year ended December 31, 2002 from $747,073 for the year ended December 31,
2001.
Consulting expenses decreased by $306,504 to $2,405,375 for the year
ended December 31, 2002 from $2,711,879 for the year ended December 31, 2001,
which includes $1,270,075 for 2002 and $535,031 for 2001 of compensatory element
of stock issuances pursuant to consulting and other agreements.
Other general and administrative expenses increased by $40,181 to
$3,475,562 for the year ended December 31, 2002 from $3,435,381 for the year
ended December 31, 2001.
Depreciation and amortization increased by $259,969 to $2,159,315 for
the year ended December 31, 2002 from $1,899,346 for the year ended December 31,
2001, of which $1,610,000 in each period was for the amortization of acquired
EKOR(tm) technology rights and related to our November 1999 purchase of
technology rights from the company now called Advanced Technology Industries,
Inc. ("ATI"). This amortization will not re-occur due to EKOR(TM)'s impairment
during December 2002. The increase is attributable to the amortization of
Acoustic Core technology rights of our July 2001 license of technology rights
from Trylon Metrics, Inc.
As a result of this assessment of EKOR(TM)'s sales performance and the
unpredictability of future delays of funding that may continue to affect
EKOR(TM), we recorded an impairment and wrote down its asset value to zero in
the fourth quarter of 2002.
Interest expense/other expense increased by $56,712 to $33,981 for year
ended December 31, 2002 from interest income/other income of $22,731 for the
year ended December 31, 2001.
COMPARISON OF 2001 AND 2000
For the year ended December 31, 2001 and year ended December 31, 2000,
we incurred operating losses of $8,782,966 and $9,770,410 respectively. The
losses result principally from expenses incurred in the acquisition and
development of our technologies, consulting costs, general and administrative
expenses and the absence of revenues. The smaller loss in the 2001 period
resulted principally from a reduction in research and development expenditures.
In 2001, we recognized $19,000 in revenue from operations relating to
demonstrations of EKOR(TM) and Firesil(TM) Products. For the year ended December
31, 2000, we had $350,000 of revenue from our completion of our sale of the
TetraPak and Re-sealable Can Technologies to Advanced Technology Industries,
Inc. (ATI, formerly the Kurchatov Research Holdings, Ltd.) pursuant to an
agreement we entered into in 1999.
Research and development expenses decreased by $2,263,000 to $747,000
for the year ended December 31, 2001 from $3,010,000 for the year ended December
31, 2000. During 2001, we spent $400,000 on further EKOR(TM) development and
$374,000 on development of other technologies. We are continuing to fund the
commercialization of EKOR(TM), including variants and product improvements,
developed and being developed in Russia by scientists and researchers at
Kurchatov Institute and members of Euro-Asian Physical Society (EAPS). During
32
2001, we paid consulting fees to and travel expenses for several EAPS members to
arrange for EKOR(TM) performing testing at Chernobyl in Ukraine and to transfer
the key EKOR(TM) technology to our manufacturing partner in California.
Consulting expenses increased by $661,000 to $2,712,000 for the year
ended December 31, 2001 from $2,051,000 for the year ended December 31, 2000,
which includes $535,000 for 2001 and $926,000 for 2000 of compensatory element
of stock issuances pursuant to consulting and other agreements. The increase in
consulting expense resulted principally from an increase in the number of
consultants working in the EKOR(TM) business development area.
Other general and administrative expenses increased by $7,000 to
$3,435,000 for year ended December 31, 2001 from $3,428,000 for the year ended
December 31, 2000. The increase is attributable principally to increases in fees
associated with securing capital financing, SEC filings, office rent, employee
benefits, patents and trademark expenses.
Depreciation and amortization increased by $268,000 to $1,899,000 for
the year ended December 31, 2001 from $1,631,000 for the year ended December 31,
2000, of which $1,610,000 in each period was for the amortization of acquired
EKOR(TM) technology rights and related to our November 1999 purchase of
technology rights from the company now called Advanced Technology Industries,
Inc. ("ATI"). The increase is attributable to the amortization of Acoustic Core
technology rights of our July 2001 license of technology rights from Trylon
Metrics, Inc.
Interest income/other income increased by $125,110 to $22,731 for the
year ended December 31, 2001 from interest expense/other expense of $102,379 for
the year ended December 31, 2000. The increase is from recognizing revenue as
other income due to the fact that the Company has fulfilled all of its
obligations under the January 28, 1997 agreement with American Autopark, Ltd.
Interest expense decreased by $121,000 to $294,000 for year ended December 31,
2001 from $415,000 for the year ended December 31, 2000. This decrease was due
principally to the conversion of $2,160,000 principal amount convertible
debentures, and the repayment in cash of $500,000 principal amount, of
previously outstanding convertible debentures.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF WORKING CAPITAL AND STOCKHOLDERS' DEFICIENCY/EQUITY
As of December 31, 2002, we had a working capital deficiency of
approximately $3,159,106 and Stockholders' Deficiency of $4,892,872 compared
with a working capital deficiency of $3,166,021 and Stockholders' Equity of just
under $4,033,000 as of December 31, 2001. Stockholders' Equity declined mainly
for three reasons. First, our operating losses increased due primarily to the
fact that we increased the number of consultants working in the EKOR(TM)
business development area and in the financial consulting area. Second, we were
unable to obtain infusions of additional capital in amounts sufficient to fund
our operating and impairment losses and our other uses of cash described in our
financial statements and otherwise discussed below. But, the losses also
resulted from the lack of significant sales, transfers or licensing of our
technology.
LIQUIDITY
SOURCES OF WORKING CAPITAL
Since our inception, our primary sources of working capital have been
the net proceeds of:
o $842,000 from a limited offering of our common stock;
o $2,000,000 from a bridge financing completed in 1996 and
subsequently repaid;
33
o $3,000,000, $3,000,000 and $1,000,000 from private placements
of our 8% convertible debentures completed November, 1997,
February, 1998 and July, 1998, respectively;
o $450,000 from a secured financing obtained in January 1999 and
repaid in January 2000;
o $2,508,000 from private offerings of 7,205,000 shares of our
common stock during the year ended 1999 (these shares were
sold at deep discounts from market quotations for outstanding
shares because of the large number of shares placed compared
with the size of quotations in the market; the trading
restrictions on the shares placed; and our precarious
financial condition at the time of the placement);
o $2,832,000 from the issuance on December 31, 1999 of 1,882,353
shares and of a warrant to buy an additional 200,000 shares of
our common stock to Woodward LLC;
o $6,000,000 from the issuance on March 2, 2000 of 1,200,000
shares of our common stock to Woodward LLC;
o $9,500,000 (later increased to $10,687,500) from the issuance
on April 25, 2000 of 2,000,000 shares and of a warrant to buy
an additional 500,000 shares of our common stock to Woodward
LLC;
o $2,840,000 from the issuance as of March 30, 2001 of 1,333,333
shares of our common stock to Woodward LLC;
o $972,400 from the issuance as of September 6, 2001 of
3,000,000 shares of our common stock to five (5) individuals
and one corporation; and
o $2,350,380 from the issuance as of August 23, 2002 of 25,000
shares of Series A 3% Convertible Preferred Stock to Woodward,
LLC.
o $175,000 from the purchase as of September 30, 2002 of 175
shares of Series B 5% Convertible Preferred stock.
o $250,000 from the issuance as of December 12, 2002 of
5,000,000 shares of common stock in connection with the
private equity financing.
o $250,000 from the exercise as of December 12, 2002 of warrants
and purchased 5,000,000 shares of common stock.
o $318,234 from the issuance as of December 31, 2002 of 70,145
shares of its common stock as consideration for consulting
services performed by various consultants.
o $275,000 from the issuance as of January 3, 2003 of 5,500,000
shares of common stock in connection with the private equity
financing.
34
CONVERTIBLE DEBENTURES
During the years ended December 31, 1999, debenture holders converted
$410,000 of principal and $161,788 of accrued interest into 1,204,665 shares of
common stock.
During the year ended December 31, 2000, the obligation under
convertible debentures totaling $902,276 was satisfied for cash payment of
$451,138 and issuance of 289,655 shares of common stock valued at $451,138.
During the year ended December 31, 2000, the obligation under
convertible debentures dated July 1998 of $900,000, plus accrued interest of
$123,600, was satisfied by the issuance of 965,661 shares of common stock.
During the year ended December 31, 2000, the obligation under
convertible debentures dated November 1997 of $2,160,000, plus accrued interest
of $117,120, was satisfied by the issuance of 827,412 shares of common stock.
We paid in cash, after maturity, the remaining $500,000 principal
amount of the November 1997 convertible debenture, together with accrued
interest of $43,000 in the first quarter of 2001.
The remaining $3,000,000 principal amount of debentures held by JNC
Opportunity Fund Ltd., or JNC, along with any outstanding charges and interest,
were converted into 6,000,369 non-restricted, shares of common stock. In
addition, we issued a Warrant to purchase 500,000 shares of common stock at
$1.00, and reimbursed JNC for legal fees up to $25,000.
SECURED FINANCING
On January 6, 1999, Dr. David Wilkes, then our Chairman, and the holder
of most of our then outstanding convertible debentures between them provided
$450,000 of short-term financing to us, evidenced by $50,000 and $400,000
secured promissory notes, respectively. Each secured promissory note bore
interest at 13% per annum and was due January 6, 2000. The promissory notes were
collateralized by our intangible assets and could be exchanged for 8%
convertible debentures under terms similar to the current outstanding
debentures. We repaid the $400,000 note on its due date from the proceeds of the
December 31, 1999, $3,000,000 stock and warrant issue. Dr. Wilkes converted his
$50,000 note plus accrued interest into 200,000 shares of our common stock.
TREASURY STOCK
During 2000, we expended a total of $8,477,721 to repurchase 3,531,976
previously issued shares of common stock, of which we spent $4,350,000 to buy
2,500,000 shares in private transactions and the balance of which we spent to
buy 1,131,976 shares in the market.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of December 31, 2002 and the date of this Report, we had no exposure
to market risk associated with activities in derivative financial instruments,
other financial instruments, or derivative commodity instruments because we did
not engage in any such activities during the past fiscal year.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and Notes thereto and the report of Marcum
& Kliegman LLP, our independent certified public accountant, are set forth on
pages F-1 through F-69 of this Report.
EUROTECH, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
NO.
----
INDEPENDENT AUDITORS' REPORT............................................. F-2
CONSOLIDATED BALANCE SHEETS
At December 31, 2002 and December 31, 2001............................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended
December 31, 2002, 2001 and 2000
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended
December 31, 2002, 2001 and 2000
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-24
SELECTED FINANCIAL DATA
For the Five Years Ended December 31, 2002............................. (*)
(*) Included in Part II, Item 6 of the Form.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our directors and executive officers and their ages as of April 1, 2003
are as follows:
- ------------------------------------- ----------- ----------------------------------------------------------------
NAME AGE POSITION(S) HELD
---- --- ----------------
- ------------------------------------- ----------- ----------------------------------------------------------------
Don V. Hahnfeldt 58 Chief Executive Officer, President and Director
- ------------------------------------- ----------- ----------------------------------------------------------------
Carey Naddell 60 Chairman of the Board and Chief Operating Officer
- ------------------------------------- ----------- ----------------------------------------------------------------
Dr. Randolph A. Graves, Jr. 64 Vice President, Secretary, Chief Financial Officer and Director
- ------------------------------------- ----------- ----------------------------------------------------------------
Dr. Leonid Khotin 71 Director
- ------------------------------------- ----------- ----------------------------------------------------------------
There are no family relationships between any director, executive
officer, or person nominated or chosen to become a director or executive
officer.
DON V. HAHNFELDT, 58, serves as a member of our board of directors and
as our President and Chief Executive Officer. He has served as a member to our
Board of Directors since January 15, 2000 and served as Chairman of the Board
until late March 2003. He joined Eurotech on July 7, 1999 following a
twenty-nine year career in public and government service. Mr. Hahnfeldt served
as our Chief Executive Officer from July 7, 1999, until February 28, 2002 and
again from August 20, 2002 to present. From September 1998 to July 1999, Mr.
Hahnfeldt served as City Manager of Sunnyside, Washington. Prior to that, he
served in the U.S. Navy, retiring in July 1998 as the Commodore of a Trident
Submarine squadron. Mr. Hahnfeldt received a B.S. in Business Administration
from Roosevelt University, an equivalent M.S. in Nuclear Engineering from the
U.S. Navy Nuclear Power School, an M.S. in Operations Research from the Navy
Post Graduate School, and an M.P.A. from Valdosta State University.
CAREY NADDELL, 60, serves as our Chairman of the Board and our Chief
Operating Officer. From April 2002 until late March 2003, Mr. Naddell served as
a director of our company. He is a graduate of Brooklyn College with a degree in
economics. From 1960 to 1981, he was associated with Murphy & Durieu, a New York
Stock Exchange member investment firm, where he held several positions,
including managing partner. From 1981 to April 2002, when he joined our board,
Mr. Naddell was a private financial consultant. He is a past member of the
Securities Traders Association and the former President of the Polo Club of Boca
Raton, Florida. He is currently an active supporter of cancer research,
especially kidney cancer.
DR. RANDOLPH A. GRAVES, JR., 64, serves as a member of our board of
directors and as Secretary, Chief Financial Officer and Vice President. He has
been a member of our Board of Directors from our incorporation to January 23,
1998, February 4, 1999 to July 10, 2001, and again since August 8, 2001 to the
present. He was a consultant to the aerospace, computing and small business
communities through Graves Technology, Inc., a company he founded in 1991. He is
currently a member of George Washington University National Advisory Council for
the School of Engineering Applied Science. From 1963 to 1980, Dr. Graves was
employed by NASA's Langley Research Center in a number of research and research
management positions before moving to NASA Headquarters where he served as
Director of Aerodynamics from 1980 to 1989. He served on numerous managerial and
technical panels and committees including a member of the White House's Federal
Coordinating Council on Science Engineering and Technology Subcommittee on High
37
Performance Computing from 1983 to 1989, and as NASA's member of NATO's Advisory
Group on Aerospace Research and Development Fluid Dynamics Panel from 1984 to
1989. Dr. Graves holds B.S. and M.S. degrees in Mechanical Engineering from
Virginia Tech, a Doctor of Science degree in Mechanical Engineering from George
Washington University, and a M.S. degree in Management from Stanford (Sloan
Fellowship).
DR. LEONID KHOTIN, 71, serves as a member of our board of directors. He
was elected to our Board of Directors at the 1999 Annual Stockholders Meeting.
Since 1986, he has been a researcher at the University of California's Center
for Slavic and East European Studies. Since 1981, he has been the
Editor-in-Chief, Informatics and Prognostics, Publishing House, Monterey,
California.
CODE OF ETHICS
The Sarbanes-Oxley Act of 2002 requires public companies to disclose
whether they have adopted a Code of Ethics. As of the date of this Report, we
have not adopted a Code of Ethics as a result of several transactions we have
been working on in late 2002 and early 2003. We intend to adopt such a policy
and comply with applicable regulatory requirements relating thereto.
CHANGES IN BOARD OF DIRECTOR COMPOSITION
On February 26, 2002, our board of directors approved the nomination of
Don V. Hahnfeldt to become Chairman and Mr. Chad A. Verdi (until that time
Chairman) to become Vice Chairman, effective March 1, 2002. At our Annual
Meeting of its shareholders held on March 29, 2002, the shareholders added Mr.
Todd Broms and Mr. Carey Naddell as directors. Mr. Broms resigned in August of
2002.
Effective November 15, 2002, Mr. Nemzow resigned from our board of
directors. Effective April 2, 2003, Mr. Verdi resigned from our board of
directors and Carey Naddell was appointed Chairman of the Board to replace Mr.
Hahnfeldt, who will remain a director.
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows the compensation of the current Chief
Executive Officer, former Chief Executive Officer, and the four most highly
compensated executive officers other than the Chief Executive Officer. Other
than the executive officers listed below, no other executive officer was
compensated in excess of $100,000 during 2002.
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
NAME AND YEAR(b) SALARY ($) BONUS($) OTHER ANNUAL RESTRICTED STOCK OPTION/
PRINCIPAL POSITION(a) (c) (d) COMPENSATION STOCK WARRANT
($)(e) AWARDS(f) AWARDS(g)
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Todd J. Broms 2000 - - - - -
Former President and CEO (1) 2001 - - - - 100,000
2002 $93,115 - - - -
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Don V. Hahnfeldt, 2000 $142,231 $78,000 - - 100,000
President and CEO (2) 2001 $138,091 $28,000 (aa) $12,215 - 100,000
2002 $119,492 - $15,677 - 1,000,000
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Dr. Randolph A. Graves, Jr.,
Chief Financial Officer, Vice 2000 $78,547 - - - -
President, Secretary, and 2001 $77,879 - - - -
Director (3) 2002 $73,384 - $6,800 - -
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
38
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Teofil Grochowski, Jr., 2000 $42,845 - $3,155 - 75,000
Director of Business Development 2001 $126,190 - $11,810 -
(4) 2002 $126,057 - $11,943 -
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Jeffrey W. Stephen, 2000 $103,385 - $80,621 - 325,000
Former Senior Vice President and 2001 $121,436 - $33,020 - -
COO (5) 2002 - - - - -
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Jon W. Dowie, 2000 $99,385 $30,000 - $11,000(bb) 100,000
Former Vice President, Treasurer 2001 $159,923 - $7,339 - -
and CFO (6) 2002 - - - - -
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
Paul Childress, Former Vice 2000 - - - - -
President, Nuclear and 2001 $151,596 - $9,654 - 50,000
Environmental Division (NETS) (7) 2002 $52,800 - $6,046 - 75,000
- ---------------------------------- ---------- -------------- -------------- ------------------- --------------- --------------
(aa) During 2001, Mr. Hahnfeldt received payment of $28,000 of the $78,000
deferred bonus, leaving $50,000 in a deferred status.
(bb) Mr. Dowie owned 10,000 restricted shares as of the fiscal-year-end
December 31, 2001. The value of his restricted shares are calculated by
multiplying 10,000 shares by the December 31, 2001's closing price of
$1.10.
(1) Mr. Broms served as our President and Chief Executive Officer until
August 2002. His employment agreement granted him an annual salary of
$210,000. His designee, Broms Holdings LLC also received a ten-year
option to purchase 1,300,000 shares, of which 775,000 shares will have
vested as of June 1, 2002 with the rest to vest at a rate of 25,000
shares per month, at a price equal to the closing price of the
Company's stock on the date of the grant, which was $.50. Upon Mr.
Broms resignation, his ten-year option to purchase 1,300,000 shares was
revoked. Before becoming President and Chief Executive Officer, Mr.
Broms served as advisor to the Company (October 1, 2001 to February 28,
2002) primarily advising its former Chairman and former Chief Executive
Officer about matters including corporate finance and governance;
development of financial and non-financial reporting; the further
implementation of corporate development; operations; contract review
and negotiation. For these services, the Company granted to him a
warrant to purchase 100,000 shares of its Common Stock at an exercise
price of $.34 and paid him $39,000 from October 2001 through February
2002. The warrants vested immediately and expire in 10 years from the
grant date.
(2) Upon the resignation of Mr. Todd Broms, the Board of Directors
appointed Mr. Hahnfeldt as our acting President and CEO. His new
employment agreement, which supercedes and terminates all prior
agreements, grants him an annual salary of $180,000, $6,000 annually
for automobile allowance, and $4,800 annually for medical and dental
coverage. He also received a ten-year option to purchase 1,000,000
shares, of which 580,000 shares will have vested as of June 1, 2002 and
the rest will vest at a rate of 20,000 per month, at a price equal to
the closing price of the Company's stock on the date of the grant,
which was $.50 at the date of purchase. Mr. Hahnfeldt will receive an
annual bonus to be determined at the discretion of the Board of
Directors to be paid on or before December 31 of each year. Prior to
assuming the duties of Executive Vice President, Mr. Hahnfeldt was our
President and CEO, serving since July 15, 1999. He was initially paid a
salary of $104,000 per year, beginning on the date on which he was
employed by us and took office as President. He also received a
five-year warrant to purchase 50,000 shares of our Common Stock at
$0.75 per share. On September 1, 1999, Mr. Hahnfeldt was awarded, under
the 1999 Stock Option Plan, an option to purchase 150,000 shares at
$0.71. In November, 1999, Mr. Hahnfeldt entered into a three-year
employment contract with us that provided for base compensation in the
first contract year of $104,000; in the second contract year, the sum
39
of that amount plus the bonus awarded to him in the first contract
year; and in the third contract year, that amount plus the bonus
awarded to him in the second contract year. The bonus to which Mr.
Hahnfeldt was entitled in each contract year was an amount, not to
exceed 50% of base salary, determined by applying to that year's base
salary the percentage by which the market price of our Common Stock had
increased between the beginning and the end of the contract year. The
first contract year ended on November 5, 2000, but no bonus was paid to
Mr. Hahnfeldt which respect to that year because he deferred his bonus
of $78,000. In addition, for each contract year Mr. Hahnfeldt was
issued a five-year warrant to purchase 100,000 shares of our Common
Stock for $1.00, $2.00, and $3.00 per share, successively. In July,
2000, our Board of Directors increased Mr. Hahnfeldt's salary to $3,700
per week, where it remained until February 28, 2002.
(3) Dr. Graves serves as our Chief Financial Officer and Vice President.
Dr. Graves' 2002 salary was $73,384 along with $6,800 of other
compensation. From June 2001 to December 2001, Dr. Graves deferred
$26,921 of his 2001 annual compensation.
(4) Mr. Grochowski is our current Director of Business Development,
effective August 28, 2000. He was initially paid a salary of $138,000
per year and on August 28, 2001, he was awarded, under the 1999 Stock
Option Plan, an option to purchase 25,000 shares at $3.00, 25,000
shares at $3.50, and 25,000 shares at $4.00. In September 2002, Mr.
Grochowski agreed to defer approximately 48% of his annual
compensation.
(5) Mr. Stephen was our Senior Vice President and Chief Operating Officer,
having joined us on May 3, 2000. During 2000, his annual salary was
$160,000, and we paid him $80,621 in connection with his move and
relocation to Company headquarters. During 2000, Mr. Stephen was issued
ten-year non-qualified stock options to purchase a total 325,000 shares
of our Common Stock. Mr. Stephens resigned from the company effective
June 30, 2001.
(6) Mr. Dowie was our Vice President, Treasurer, and Chief Financial
Officer, having joined us on February 7, 2000. He was initially hired
at an annual salary of $100,000 and was granted an initial bonus of
10,000 shares of our Common Stock and $10,000 cash. His annual salary
was increased to $140,000 on September 15, 2000, and he was awarded a
bonus of $20,000. On January 1, 2001, Mr. Dowie was issued two,
five-year incentive stock options to purchase 100,000 shares in total
(50,000 shares for each option). Mr. Dowie's contract was not renewed
and he subsequently resigned from the company effective December 31,
2001.
(7) Mr. Childress was our Vice President, Nuclear and Environmental
Division, until August 2002. He was initially paid a salary of $175,000
per year and awarded, under the 1999 Stock Option Plan, an option to
purchase 50,000 shares at $2.50. Starting October 1, 2001 and ending
November 30, 2001 (nine weeks), thirty-three percent of his $6,731
bi-weekly salary was deferred, $10,096 in total. Starting December 1,
2001, his annual salary was decreased to $96,000, and he will also
receive 1.75 percent of gross revenue of NETS with a markup of thirty
percent or greater, or 0.75 percent of gross revenue with a markup
between zero to thirty percent.
DIRECTOR COMPENSATION
On October 12, 2000, our board of directors approved compensation for
non-employee directors (Mr. Chad A. Verdi, Mr. Simon Nemzow, and Dr. Leonid
Khotin) in the amount of $6,600 per calendar quarter, which was to be paid in
monthly installments of $2,200. The employee members of our board of directors,
Dr. Graves and Mr. Hahnfeldt, receive $3,000 per calendar quarter for their
services on the board of directors, which is paid in monthly installments of
40
$1,000. As of June 1, 2002, Chad Verdi, Don Hahnfeldt, Dr. Randolph Graves and
Simon Nemzow, agreed to defer receiving their board fee until further notice.
Dr. Leonid Khotin agreed to defer half of his board fee, or $1,100.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of April 1, 2003, certain
information as to the stock ownership of each person known by us to own
beneficially 5% or more of our outstanding common stock, by each of our named
officers and directors who owns any shares and by all officers and directors as
a group. For the purpose of calculating the ownership percentages, we have
considered to be outstanding both the total number of shares actually
outstanding on April 1, 2003, which is 94,923,797, and the total number of
shares that various people then had the right to acquire within 60 days.
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
NAME OWNED BENEFICIALLY COMMON SHARES
---- ------------------ -------------
Randolph A. Graves, Jr.
Officer and Director
3299 Villanova Ave.
San Diego, CA 92122 600,000 *
Encore Capital Management Inc. 6,996,798(1) 7.37%
Teofil Grochowski
Officer
215 Jefferson Woods Drive
Forest, VA 24551 50,000(2) *
Don V. Hahnfeldt
Officer and Director
8201 Roxborough Loop
Gainesville, VA 20155 200,000 *
Leonid Khotin
Director
755 Anderson Avenue, Apt. 2F
Cliffside Park, NJ 07010 45,000(3) *
Carey Naddell
Officer and Director
5155 Suffolk Drive
Boca Raton, FL 33496 300,000 *
Woodward LLC 2,450,000(4) 1.84%
Directors and officers as a group 1,195,000(5) 1.18%
- ---------------------------------
* Less than 1%
41
(1) Includes 6,000,369 shares owned of record and beneficially after
conversion, on January 9, 2002, of $3 million convertible debentures
owned by JNC Opportunity Fund Ltd., and 750,000 shares that it has the
right to acquire upon exercise of an immediately exercisable warrants,
for all of which Encore Capital Management, Inc., a registered
investment adviser, serves as investment manager. There is a provision
in the warrant agreement that prohibits the conversion of warrants if
exercising those warrant would result in them owning more than 9.999%
of the issued and outstanding shares of Common Stock.
(2) Includes 50,000 shares that Mr. Grochowski has the right to acquire
upon exercise of an immediately exercisable option.
(3) Includes 25,000 shares that Dr. Khotin has the right to acquire upon
exercise of an immediately exercisable warrant. Includes 20,000 shares
owned by his wife.
(4) Includes 700,000 shares that Woodward, LLC has the right to acquire
upon exercise of an immediately exercisable warrants.
(5) Six people.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 2002, we were party to the following transactions with the
following persons and entities:
Prior to the his resignation from our board of directors and the
termination of his consulting agreement in April 2003, Chad A. Verdi was a party
to an agreement with us effective on February 1, 2002, through Verdi
Consultants, Inc., which superceded and terminated all prior consulting
agreements. Mr. Verdi provided consulting services to us in the area of
corporate finance. For these services, Verdi Consultants, Inc. was compensated
at the rate of $15,000 per month and received $750 per month for automobile and
$2,000 per month for rent and other expenses to maintain an office in Rhode
Island. Of this total $15,000 compensation, Verdi Consultants deferred $5,000
per month until the time this agreement was terminated on April 5, 2003. Verdi
Consultants also received a ten-year option to purchase 1,000,000 shares at a
price equal to the closing price of our common stock at the date of grant, which
was $.50 per share. Pursuant to this option grant, 125,000 shares are
immediately exercisable and an additional 375,000 will vest immediately upon
shareholder approval to increase the authorized capital of the company and the
options to purchase the remaining 500,000 shares will then vest in equal monthly
installments for the duration of the term of the company's consulting agreement
with Verdi Consultants, Inc.
Prior to February 1, 2002, Mr. Verdi was a party to an agreement with
us to provide consulting services in the area of corporate finance. For these
services, he was compensated at the rate of $1,000 per week, and granted the
right through warrants to purchase up to an aggregate of 375,000 shares of our
common stock, of which 225,000 were issued: a five-year warrant issued on
October 1, 1999 to purchase 75,000 shares at $1.00 per share; a five-year
warrant issued on October 1, 2000 to purchase 75,000 shares at $2.00 per share;
a five-year warrant to be issued on October 1, 2001 to purchase 75,000 shares at
$3.00 per share and the remaining warrants issuable under the prior consulting
agreements were superceded and terminated by the new agreement. On October 12,
2000, the Board approved alternative deferred compensation of $104,000 for 2000
for Mr. Verdi for his services as a full-time consultant to be paid in 2001, and
his weekly compensation for these consulting services was increased to $3,000.
During 2001, Mr. Verdi was paid $104,000 of deferred compensation.
42
Crypto.com, Inc. is a Delaware corporation and a subsidiary of
Eurotech. Crypto was organized to develop cryptographic systems for secure
communication. Eurotech owns 66.04% of the outstanding equity of Crypto and the
remaining equity is owned as follows: the inventor owns 18.87%; Peter Gulko, one
of the holders of more than 5% of our common stock and a former officer and
director owns 9.43%; Jeffery W. Stephen, a former officer, owns 1.89%; John W.
Dowie, a former officer, owns 0.94%; Don V. Hahnfeldt, a current officer and
director, owns 0.94%; Randolph A. Graves, a current officer and director, owns
0.94%; and Chad A Verdi, a former director and consultant, owns 0.94%. All of
the assets of Crypto were transferred to Markland in December 2002.
ITEM 14. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
(based on their evaluation of these controls and procedures as of a date within
90 days of the filing of this report) that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in this report is accumulated and communicated to the Company's
management, including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosure. The Certifying Officers also
have indicated that there were no significant changes in the Company's internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The exhibits list on the exhibit pages hereto are filed with or
incorporated by reference into this Report.
(b) Reports on Form 8-K. We filed the following Current Reports on Form 8-K
during the fourth quarter of 2002.
(i) Form 8-K/A as of September 9, 2002 (filed with the SEC on
October 7, 2002).
(ii) Form 8-K as of September 24, 2002 (filed with the SEC on
October 7, 2002).
(iii) Form 8-K as of September 25, 2002 (filed with the SEC on
October 7, 2002).
(iv) Form 8-K as of November 15, 2002 (filed with the SEC on
December 13, 2002).
(v) Form 8-K as of December 19, 2002 (filed with the SEC on
December 23, 2002)
43
EUROTECH, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
NO.
----
INDEPENDENT AUDITORS' REPORT............................................. F-2
CONSOLIDATED BALANCE SHEETS
At December 31, 2002 and December 31, 2001............................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended
December 31, 2002, 2001 and 2000
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended
December 31, 2002, 2001 and 2000
For the Period from Inception (May 26, 1995) to December 31, 2002...... F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-24
SELECTED FINANCIAL DATA
For the Five Years Ended December 31, 2002............................. (*)
(*) Included in Part II, Item 6 of the Form.
F-1
Board of Directors and Stockholders
Eurotech, Ltd.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Eurotech, Ltd.
and Subsidiaries (the "Company") (a development stage company) as of December
31, 2002 and 2001 and the related consolidated statements of operations,
stockholders' (deficiency) equity, and cash flows for the years ended December
31, 2002, 2001 and 2000 and for the period from inception (May 26, 1995) to
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eurotech, Ltd. and
Subsidiaries (a development stage company) at December 31, 2002 and 2001 and the
results of its operations and its cash flows for each of the three years ended
December 31, 2002, 2001 and 2000 and for the period from inception (May 26,
1995) to December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred net losses of approximately
$12,443,000, $8,760,000 and $9,873,000 during the years ended December 31, 2002,
2001 and 2000, respectively. As of December 31, 2002, the Company had a working
capital deficiency of approximately $3,159,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
New York, New York
March 22, 2003 (except for Note 13,
which is dated April 15, 2003)
F-2
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
At December 31,
--------------------------
2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 386,835 $ 465,346
Prepaid expenses and other current assets 220,413 253,840
----------- -----------
TOTAL CURRENT ASSETS 607,248 719,186
PROPERTY AND EQUIPMENT - NET 138,938 193,661
OTHER ASSETS:
Technology rights (EKOR) - net -- 4,694,484
Technology rights (Acoustic Core) - net of accumulated amortization
of $724,888 and $232,527 at December 31, 2002 and 2001,
respectively 2,450,112 2,267,473
Patent costs - net 19,314 21,067
Other assets -- 224,039
----------- -----------
TOTAL ASSETS $3,215,612 $8,119,910
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
-------------------------------------------------
At December 31,
-------------------------------
2002 2001
------------- -------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,117,763 $ 885,207
Current portion of notes payable - related parties 473,591 --
Current portion of convertible debentures -- 3,000,000
Advance on sale of common stock 175,000 --
------------- -------------
TOTAL CURRENT LIABILITIES 3,766,354 3,885,207
NOTES PAYABLE - RELATED PARTIES -- 202,091
SECURED CONVERTIBLE PROMISSORY NOTE - Less debt discount of $125,000
at December 31, 2002 375,000 --
------------- -------------
TOTAL LIABILITIES 4,141,354 4,087,298
------------- -------------
Minority Interest 3,967,130 --
------------- -------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 1, 3, 6, 10, 12, and 13)
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Series A non-voting 3% Convertible Preferred stock - $.01 par value; 25,000
and -0- shares authorized at December 31, 2002 and 2001, respectively;
25,000 and -0- shares issued and outstanding at
December 31, 2002 and 2001, respectively 250 --
Series B non-voting 5% Convertible Preferred stock - $.01 par value;
25,000 and -0- share authorized at December 31, 2002 and 2001, respectively;
11,450 and -0- shares issued and outstanding
December 31, 2002 and 2001, respectively 114 --
Common stock - $0.00025 par value; 100,000,000 shares authorized;
91,723,891 shares issued and 88,191,915 shares outstanding
at December 31, 2002; 59,673,377 shares issued and 56,141,401
outstanding at December 31, 2001 22,933 14,919
Additional paid-in capital 69,087,322 61,998,255
Unearned compensation (86,085) (131,911)
Deficit accumulated during the development stage (65,439,685) (49,370,930)
Treasury stock, at cost; 3,531,976 shares at December 31, 2002
and 2001, respectively (8,477,721) (8,477,721)
------------- -------------
TOTAL STOCKHOLDERS' (DEFICIENCY) EQUITY (4,892,872) 4,032,612
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 3,215,612 $ 8,119,910
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
For the Years Ended December 31, from Inception
------------------------------------------------- (May 26, 1995) to
2002 2001 2000 December 31, 2002
------------- ------------- ------------- -----------------
REVENUES $ 88,821 $ 18,873 $ 350,000 $ 607,694
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 5,807 8,160 -- 13,967
Research and development 912,861 747,073 3,010,391 9,408,872
Consulting fees 1,135,300 2,176,848 1,125,477 6,306,242
Compensatory element of stock
and options issuances for
consulting fees 1,270,075 535,031 925,717 6,514,729
Other general and administrative
expenses 3,475,562 3,435,381 3,427,588 15,488,985
Depreciation and amortization 2,159,315 1,899,346 1,631,237 5,848,254
Loss on impairment of technology
rights 3,084,947 -- -- 3,084,947
------------- ------------- ------------- -------------
TOTAL COSTS AND EXPENSES 12,043,867 8,801,839 10,120,410 46,665,996
------------- ------------- ------------- -------------
OPERATING LOSS (11,955,046) (8,782,966) (9,770,410) (46,058,302)
------------- ------------- ------------- -------------
OTHER EXPENSES/(INCOME):
Interest expense 40,663 294,106 415,425 2,205,815
Interest income (6,682) (91,837) (313,046) (412,029)
Amortization of deferred and
unearned financing costs -- -- -- 13,276,591
Debt conversion expense 390,000 -- -- 390,000
Litigation settlement in shares
of stock -- -- -- 456,278
Other income -- (225,000) -- (225,000)
Minority interest in subsidiary 64,369 -- -- 64,369
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES/(INCOME) 488,350 (22,731) 102,379 15,756,024
------------- ------------- ------------- -------------
NET LOSS (12,443,396) (8,760,235) (9,872,789) (61,814,326)
PREFERRED STOCK DIVIDENDS -
NON-CASH 3,625,359 -- -- 3,625,359
------------- ------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(16,068,755) $ (8,760,235) $ (9,872,789) $(65,439,685)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE
(Notes 2, 10 and 11) $ (.23) $ (.18) $ (.23)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
USED IN BASIC AND DILUTED NET LOSS
PER SHARE (Notes 2, 10 and 11) 70,129,726 48,835,959 42,750,339
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
----------- ----------- -----------
(1)
Period Ended December 31, 1995:
- -------------------------------
Founder shares issued
($0.00025 per share) 4,380,800 $ 1,095 $ (1,095)
Issuance of stock for offering
consulting fees ($0.0625 per share) 440,000 110 27,390
Issuance of stock
($0.0625 and $0.25 per share) 4,080,000 1,020 523,980
Issuance of stock for license
($0.0625 per share) 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
=========== =========== ===========
Deficit
Accumulated
Unearned During the
Due from Financing Development
Stockholders Costs Stage Total
------------ ----------- ----------- -----------
Period Ended December 31, 1995:
- -------------------------------
Founder shares issued
($0.00025 per share) $ - $ - $ - $ -
Issuance of stock for offering
consulting fees ($0.0625 per share) - - - 27,500
Issuance of stock
($0.0625 and $0.25 per share) (3,000) - - 522,000
Issuance of stock for license
($0.0625 per share) - - - 37,500
Issuance of stock options for offering
legal and consulting fees - - - 75,000
Offering expenses - - - (105,398)
Net loss - - (513,226) (513,226)
------------ ----------- ----------- -----------
Balance - December 31, 1995 $ (3,000) $ - $ (513,226) $ 43,376
============ =========== =========== ===========
(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
consolidated financial statements.
F-6
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------ ------------ ------------
(1)
Year Ended December 31, 1996:
- -----------------------------
Balance - January 1, 1996 9,500,800 $ 2,375 $ 557,227
Issuance of stock ($0.25 per share) 1,278,000 320 319,180
Exercise of stock options 600,000 150 -
Issuance of stock for consulting fees
($0.06 to $1.82 per share) 4,345,036 1,086 1,208,391
Issuance of stock pursuant to bridge
financing ($1.81325 per share) 1,500,000 375 2,719,500
Amortization of unearned financing costs - - -
Repayment by stockholders - - -
Net loss - - -
------------ ------------ ------------
Balance - December 31, 1996 17,223,836 $ 4,306 $ 4,804,298
============ ============ ============
Deficit
Accumulated
Unearned During the
Due from Financing Development
Stockholders Costs Stage Total
------------ ------------ ------------ ------------
Year Ended December 31, 1996:
- -----------------------------
Balance - January 1, 1996 $ (3,000) $ - $ (513,226) $ 43,376
Issuance of stock ($0.25 per share) - - - 319,500
Exercise of stock options - - - 150
Issuance of stock for consulting fees
($0.06 to $1.82 per share) - - - 1,209,477
Issuance of stock pursuant to bridge
financing ($1.81325 per share) - (2,719,875) - -
Amortization of unearned financing costs - 226,656 - 226,656
Repayment by stockholders 3,000 - - 3,000
Net loss - - (3,476,983) (3,476,983)
------------ ------------ ------------ ------------
Balance - December 31, 1996 $ - $(2,493,219) $(3,990,209) $(1,674,824)
============ ============ ============ ============
(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
consolidated financial statements.
F-7
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Additional
------------------------------ Paid-in
Shares Amount Capital
------------ ------------ ------------
Year Ended December 31, 1997:
- -----------------------------
Balance - January 1, 1997 17,223,836 $ 4,306 $ 4,804,298
Issuance of stock for consulting fees
($2.50 to $5.45 per share) 162,000 40 667,510
Issuance of stock pursuant to penalty
provision of bridge financing
($5.45 per share) 500,000 125 2,724,875
Value assigned to conversion feature of
Convertible Debentures - - 1,337,143
Value assigned to issuance of warrant to
purchase 127,500 shares in
consideration for interest and
placement fees in connection with
Convertible Debentures - - 284,480
Value assigned to issuance to
shareholder of warrant to purchase
399,000 shares for consulting services - - 902,268
Issuance of stock for consulting fees
($4.00 per share) 43,000 11 171,989
Accrual of stock issued January 1998
pursuant to penalty provision of
bridge financing ($2.00 per share) 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
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit
Accumulated
Unearned During the
Financing Development
Costs Stage Total
------------ ------------- -------------
Year Ended December 31, 1997:
- -----------------------------
Balance - January 1, 1997 $(2,493,219) $ (3,990,209) $ (1,674,824)
Issuance of stock for consulting fees
($2.50 to $5.45 per share) - - 667,550
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 warrant to
purchase 127,500 shares in consideration
for interest and placement fees in
connection with Convertible Debentures (284,480) - -
Value assigned to issuance to shareholder of
warrant to purchase 399,000 shares for
consulting services (902,268) - -
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
consolidated financial statements.
F-9
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Additional
---------------------------- Paid-in
Shares Amount Capital
------------ ------------ ------------
Year Ended December 31, 1998:
- -----------------------------
Balance - January 1, 1998 18,928,836 $ 4,732 $12,892,313
Issuance of stock for consulting fees
($0.32 to $2.58 per share) 468,044 117 515,833
Issuance of stock pursuant to penalty
provision of bridge financing
($1.0625 per share) 500,000 125 531,124
Value assigned to conversion feature of
Convertible Debentures and warrant to
purchase 185,000 shares issued as
additional interest - - 1,575,000
Cancellation of stock issued for
consulting fees (375,000) (94) (93,656)
Issuance of stock for conversion of
debenture payable ($0.32 per share) 100,002 25 32,169
Amortization of unearned financing costs - - -
Net loss - - -
------------ ------------ ------------
Balance - December 31, 1998 19,621,882 $ 4,905 $15,452,783
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit
Accumulated
Unearned During the
Financing Development
Costs Stage Total
------------ ------------- -------------
Year Ended December 31, 1998:
- -----------------------------
Balance - January 1, 1998 $(1,315,317) $(16,431,451) $ (4,849,723)
Issuance of stock for consulting fees
($0.32 to $2.58 per share) - - 515,950
Issuance of stock pursuant to penalty
provision of bridge financing
($1.0625 per share) (531,249) - -
Value assigned to conversion feature of
Convertible Debentures and warrant to
purchase 185,000 shares issued as
additional interest (1,575,000) - -
Cancellation of stock issued for
consulting fees - - (93,750)
Issuance of stock for conversion of
debenture payable ($0.32 per share) - - 32,194
Amortization of unearned financing costs 3,374,066 - 3,374,066
Net loss - (7,814,143) (7,814,143)
------------ ------------- -------------
Balance - December 31, 1998 $ (47,500) $(24,245,594) $ (8,835,406)
============ ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Additional
---------------------------- Paid-in
Shares Amount Capital
------------ ------------ ------------
Year Ended December 31, 1999:
- -----------------------------
Balance - January 1, 1999 19,621,882 $ 4,905 $15,452,783
Issuance of stock on consulting fees
($0.77 to $2.04 per share) 1,286,561 322 1,202,301
Issuance of stock on conversion of
debenture payable ($0.35 per share) 987,201 247 341,029
Issuance of stock for finder's fee
($0.77 to $1.94 per share) 112,098 27 110,029
Value assigned to conversion feature of
Convertible Debentures and warrant to
purchase 94,750 shares issued as
additional interest - - 175,425
Value assigned to additional
consideration for financing activities
($0.72 per share) 100,000 25 71,975
Issuance of stock ($0.25 to $0.50 per share) 7,205,000 1,802 2,505,698
Issuance of stock in settlement of
litigation ($2.51 per share) 181,784 45 456,233
Issuance of stock on exercise of
warrants ($1.50 per share) 200,000 50 299,950
Acquisition of 6,795,000 shares of ATI,
previously Kurchatov Research
Holdings, Ltd. ($1.07 per share) 4,530,000 1,133 4,840,305
Acquisition from ATI of EKOR technology
interest ($1.069 per share) 2,000,000 500 2,137,000
Issuance of stock to retire debt of ATI
assumed with purchase of EKOR
technology interest ($1.06 per share) 1,000,000 250 1,068,500
Issuance of stock on exercise of
warrants ($0.36 per share) 75,000 19 26,981
Issuance of stock on conversion of
debenture note payable, interest and
penalties ($0.36 per share) 217,464 54 230,458
Issuance of stock in private sale
($1.59 per share) 1,882,353 471 2,831,529
Modification of warrants issued - - 123,500
Amortization of unearned financing costs - - -
Net loss - - -
------------ ------------ ------------
Balance - December 31, 1999 39,399,343 $ 9,850 $31,873,696
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit
Accumulated
Unearned During the
Financing Development
Costs Stage Total
------------ ------------- -------------
Year Ended December 31, 1999:
- -----------------------------
Balance - January 1, 1999 $ (47,500) $(24,245,594) $ (8,835,406)
Issuance of stock for consulting fees
($0.77 to $2.04 per share) - - 1,202,623
Issuance of stock on conversion of
debenture payable ($0.35 per share) - - 341,276
Issuance of stock for finder's fee
($0.77 to $1.94 per share) - - 110,056
Value assigned to conversion feature of
Convertible Debentures and warrant to
purchase 94,750 shares issued as
additional interest (175,425) - -
Value assigned to additional consideration
for financing activities ($0.72 per share) (72,000) - -
Issuance of stock ($0.25 to $0.50 per share) - - 2,507,500
Issuance of stock in settlement of
litigation ($2.51 per share) - - 456,278
Issuance of stock on exercise of warrants
($1.50 per share) - - 300,000
Acquisition of 6,795,000 shares of ATI,
previously Kurchatov Research Holdings,
Ltd. ($1.07 per share) - - 4,841,438
Acquisition from ATI of EKOR technology
interest ($1.069 per share) - - 2,137,500
Issuance of stock to retire debt of ATI
assumed with purchase of EKOR technology
interest ($1.06 per share) - - 1,068,750
Issuance of stock on exercise of warrants
($0.36 per share) - - 27,000
Issuance of stock on conversion of
debenture note payable, interest and
penalties ($0.36 per share) - - 230,512
Issuance of stock in private sale
($1.59 per share) - - 2,832,000
Modification of warrants issued - - 123,500
Amortization of unearned financing costs 294,925 - 294,925
Net loss - (6,492,312) (6,492,312)
------------ ------------- -------------
Balance - December 31, 1999 $ - $(30,737,906) $ 1,145,640
============ ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock
---------------------------
Shares Amount
----------- ----------
For the Year Ended December 31, 2000
- ------------------------------------
Balance - January 1, 2000 39,399,343 $ 9,850
Issuance of stock for consulting fees
($1.93 to $5.00 per share) 140,674 34
Issuance of stock ($5.00 to $5.37 per share) 3,200,000 800
Issuance of stock in payment of note payable and
related interest ($0.28 per share) 200,000 50
Issuance of stock for interest on convertible
debentures ($1.56 per share) 289,655 74
Issuance of stock and warrants to settle
penalties of convertible debentures
($2.00 per share) 300,000 75
Issuance of stock on conversion of
debentures and interest ($1.06 to $2.75 per share) 1,793,073 449
Accrual of shares under reset provisions 8,500,000 2,125
Issuance of stock for price reset 741,085 185
Issuance of stock on exercise of warrants
($1.00 to $2.00 per share) 320,000 79
Compensatory element of options to purchase
337,500 shares issued to employee as
additional compensation - -
Value assigned to warrants issued to consultants - -
Compensatory element of warrants issued to
employees - -
Exercise of stock options 50,000 13
Shares repurchased - -
Amortization of unearned compensation - -
Net loss - -
----------- ----------
Balance - December 31, 2000 54,933,830 $ 13,734
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Treasury Stock Additional
----------------------------- Paid-in Unearned
Shares Amount Capital Compensation
----------- ------------ ------------ ------------
For the Year Ended December 31, 2000
- ------------------------------------
Balance - January 1, 2000 - $ - $31,873,696 $ -
Issuance of stock for consulting fees
($1.93 to $5.00 per share) 174 348 582,144 -
Issuance of stock ($5.00 to $5.37 per share) - - 16,749,170 -
Issuance of stock in payment of note
payable and related interest
($0.28 per share) - - 56,343 -
Issuance of stock for interest on
convertible debentures ($1.56 per share) - - 451,064 -
Issuance of stock and warrants to settle
penalties of convertible debentures
($2.00 per share) - - 1,119,925 -
Issuance of stock on conversion of
debentures and interest ($1.06 to $2.76
per share) - - 3,300,271 -
Accrual of shares under reset provisions - - (2,125) -
Issuance of stock for price reset - - (185) -
Issuance of stock on exercise of warrants
($1.00 to $2.00 per share) - - 437,421 -
Compensatory element of options to
purchase 337,5000 shares issued to
employee as additional compensation - - 206,375 (187,750)
Value assigned to warrants issued to
consultants - - 204,718 -
Compensatory element of warrants issued to
employees - - 78,125 -
Exercise of stock options - - 16,487 -
Shares repurchased (3,532,150) (8,478,069) - -
Amortization of unearned compensation - - - 41,723
Net loss - - - -
----------- ------------ ------------ ------------
Balance - December 31, 2000 (3,531,976) $(8,477,721) $55,073,429 $ (146,027)
=========== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit
Accumulated
During the
Development
Stage Total
------------- ------------
For the Year Ended December 31, 2000
- ------------------------------------
Balance - January 1, 2000 $(30,737,906) $ 1,145,640
Issuance of stock for consulting fees
($1.93 to $5.00 per share) - 582,526
Issuance of stock ($5.00 to $5.37 per share) - 16,749,970
Issuance of stock in payment of note payable
and related interest ($0.28 per share) - 56,393
Issuance of stock for interest on convertible
debentures ($1.56 per share) - 451,138
Issuance of stock and warrants to settle
penalties of convertible debentures
($2.00 per share) - 1,120,000
Issuance of stock on conversion of
debentures and interest ($1.06 to $2.75 per share) - 3,300,720
Accrual of shares under reset provisions - -
Issuance of stock for price reset - -
Issuance of stock on exercise of warrants
($1.00 to $2.00 per share) - 437,500
Compensatory element of options to purchase
337,500 shares issued to employee as
additional compensation - 18,625
Value assigned to warrants issued to
consultants - 204,718
Compensatory element of warrants issued to
employees - 78,125
Exercise of stock options - 16,500
Shares repurchased - (8,478,069)
Amortization of unearned compensation - 41,723
Net loss (9,872,789) (9,872,789)
------------- ------------
Balance - December 31, 2000 $(40,610,695) $ 5,852,720
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Common Stock Treasury Stock
------------------------- ---------------------------
Shares Amount Shares Amount
----------- ---------- ----------- ------------
For the Year Ended December 31, 2001
- ------------------------------------
Balance - January 1, 2001 54,933,830 $ 13,734 (3,531,976) $(8,477,721)
Compensatory element of warrants to
purchase 210,000 shares issued to
consultant as compensation - - - -
Issuance of stock for consulting fees
($0.35 to $2.15 per share) 194,894 49 - -
Exercise of warrants ($1.10 per share) 50,000 13 - -
Issuance of stock ($2.25 per share) 1,333,333 333 - -
Modification of warrants issued - - - -
Issuance of stock for acquisition of
Acoustic Core Technology ($1.00 per
share) 2,500,000 625 - -
Shares issued under repricing
agreements for March 2000 financing 2,279,463 570 - -
Shares issued under repricing
agreements for April 2000 financing 1,352,566 338 - -
Issuance of stock ($.33 per share) 3,000,000 750 - -
Compensatory element of warrants to
purchase 500,000 shares issued to
consultant as additional compensation - - - -
Compensatory element of warrants to
purchase 455,000 shares issued to
consultants as compensation - - - -
Issuance of stock for consulting fees
($.345 per share) 29,291 7 - -
Shares issued under repricing
agreements for April 2000 financing 2,500,000 625 - -
Reversal of December 2000 accrual under
repricing agreements (8,500,000) (2,125) - -
Amortization of unearned compensation - - - -
Net loss - - - -
----------- ---------- ----------- ------------
Balance - December 31, 2001 59,673,377 $ 14,919 (3,531,976) $(8,477,721)
=========== ========== =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-17
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit
Accumulated
Additional During the
Paid-in Unearned Development
Capital Compensation Stage Total
------------ ----------- -------------- ------------
For the Year Ended December 31, 2001
- ------------------------------------
Balance - January 1, 2001 $55,073,429 $ (146,027) $ (40,610,695) $ 5,852,720
Compensatory element of warrants to purchase
210,000 shares issued to consultant as
compensation 182,400 - - 182,400
Issuance of stock for consulting fees
($0.35 to $2.15 per share) 128,966 - - 129,015
Exercise of warrants ($1.10 per share) 54,987 - - 55,000
Issuance of stock ($2.25 per share) 2,839,667 - - 2,840,000
Modification of warrants issued 29,000 - - 29,000
Issuance of stock for acquisition of Acoustic
Core Technology ($1.00 per share) 2,499,375 - - 2,500,000
Shares issued under repricing agreements for
March 2000 financing (570) - - -
Shares issued under repricing agreements for
April 2000 financing (338) - - -
Issuance of stock ($.33 per share) 999,250 - - 1,000,000
Compensatory element of warrants to purchase
500,000 shares issued to consultant as
additional compensation 90,000 (90,000) - -
Compensatory element of warrants to purchase
455,000 shares issued to consultants as
compensation 90,500 (38,000) - 52,500
Issuance of stock for compensation
($.345 per share) 10,089 - - 10,096
Shares issued under repricing agreements for
April 2000 financing (625) - - -
Reversal of December 2000 accrual under
repricing agreements 2,125 - - -
Amortization of unearned compensation - 142,116 - 142,116
Net loss - - (8,760,235) (8,760,235)
------------ ----------- -------------- ------------
Balance - December 31, 2001 $61,998,255 $ (131,911) $ (49,370,930) $ 4,032,612
============ =========== ============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-18
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Preferred Stock Common Stock
------------------------ ---------------------------
Shares Amount Shares Amount
--------- ----------- ----------- -----------
For the Year Ended December 31, 2002:
- ------------------------------------
Balance - January 1, 2002 - $ - 59,673,377 $ 14,919
Issuance of stock on conversion of
convertible debentures including
interest ($.60 per share) - - 6,000,369 1,500
Value assigned to warrants issued on
conversion of convertible debentures - - - -
Issuance of preferred stock
($100 per share) 25,000 250 - -
Issuance of stock for price reset - - 6,000,000 1,500
Value assigned to options issued to
consultants - - - -
Modification of warrants issued - - - -
Issuance of stock for consulting services
($0.21 to $0.64 per share) - - 16,145 5
Value assigned to options issued for
legal services - - - -
Offering cost - preferred stock - - - -
Issuance of stock for price reset - - 4,350,000 1,088
Value assigned to options issued for
consulting services - - - -
Cancellation of warrants issued - - - -
Cancellation of shares accrued but not
issued ($.001 per share) - - (120,000) (30)
Issuance of stock for consulting services - - 54,000 13
Issuance of stock in connection with
private financing agreement
($.05 per share) - - 5,000,000 1,250
Exercise of warrants ($.05 per share) - - 5,000,000 1,250
Issuance of stock for technology rights
($.15 per share) - - 4,000,000 1,000
Issuance of stock for price reset - - 1,750,000 438
Sale of Series B Convertible Preferred
Stock 11,450 114 - -
Obligation satisfied by issuance of
Markland stock - - - -
Amortization of unearned compensation - - - -
Effect of exchange agreement with
Markland - - - -
Effect of exchange agreement with Markland -
Markland preferred stock - - - -
Common stock of Markland issued for
directors compensation - - - -
Preferred stock dividends - parent - - - -
Preferred stock dividends - Markland - - - -
Gain on sale of Markland common stock - - - -
Net loss
--------- ----------- ----------- -----------
36,450 $ 364 91,723,891 $ 22,933
Balance - December 31, 2002 ========= =========== =========== ===========
Series A 3% Convertible Preferred Stock 25,000 $ 250
Series B 5% Convertible Preferred Stock 11,450 114
--------- -----------
36,450 $ 364
========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-19
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Treasury Stock Additional
----------------------------- Paid-in Unearned
Shares Amount Capital Compensation
------------ ------------- ------------ ------------
For the Year Ended December 31, 2002:
- ------------------------------------
Balance - January 1, 2002 (3,531,976) $(8,477,721) $61,998,255 $ (131,911)
Issuance of stock on conversion of
convertible debentures including interest
($.60 per share) - - 3,572,919 -
Value assigned to warrants issued on
conversion of convertible debentures - - 390,000 -
Issuance of preferred stock ($100 per share) - - 2,499,750 -
Issuance of stock for price reset - - (1,500) -
Value assigned to options issued to
consultants - - 490,000 (490,000)
Modification of warrants issued - - 77,000 -
Issuance of stock for consulting services
($0.21 to $0.64 per share) - - 6,392 -
Value assigned to options issued for
legal services - - 47,250 -
Offering cost - preferred stock - - (149,620) -
Issuance of stock for price reset - - (1,088) -
Value assigned to options issued for
consulting services - - 66,270 (66,270)
Cancellation of warrants issued - - (13,345) 13,345
Cancellation of shares accrued but not
issued ($.001 per share) - - (90) -
Issuance of stock for consulting services - - 311,824 -
Issuance of stock in connection with
private financing agreement
($.05 per share) - - 248,750 -
Exercise of warrants ($.05 per share) - - 248,750 -
Issuance of stock for technology rights
($.15 per share) - - 599,000 -
Issuance of stock for price reset - - (438) -
Sale of Series B Convertible Preferred
Stock - - 174,886 -
Obligation satisfied by issuance of
Markland stock - - 300,000 -
Amortization of unearned compensation - - 9,960 588,751
Effect of exchange agreement with -
Markland - - (1,854,201) -
Effect of exchange agreement with Markland -
Markland preferred stock - - (3,918,750) -
Common stock of Markland issued for
directors compensation - - 4,000 -
Preferred stock dividends - parent - - 3,625,359 -
Preferred stock dividends - Markland - - 15,989 -
Gain on sale of Markland common stock - - 340,000 -
Net loss - - - -
------------ ------------- ------------ ------------
Balance - December 31, 2002 (3,531,976) $ (8,477,721) $69,087,322 $ (86,085)
============ ============= ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 26, 1995) TO DECEMBER 31, 2002
Deficit Accumulated
During the
Development Stage Total
------------- -------------
For the Year Ended December 31, 2002:
- ------------------------------------
Balance - January 1, 2002 $(49,370,930) $ 4,032,612
Issuance of stock on conversion of
convertible debentures including interest
($.60 per share) - 3,574,419
Value assigned to warrants issued on
conversion of convertible debentures - 390,000
Issuance of preferred stock
($100 per share) - 2,500,000
Issuance of stock for price reset - -
Value assigned to options issued to
consultants - -
Modification of warrants issued - 77,000
Issuance of stock for consulting services
($0.31 to $0.64 per share) - 6,397
Value assigned to options issued for
legal services - 47,250
Offering cost - preferred stock - (149,620)
Issuance of stock for price reset - -
Value assigned to options issued for
consulting services - -
Cancellation of warrants issued - -
Cancellation of shares accrued but not issued
($.001 per share) - (120)
Issuance of stock for consulting services - 311,837
Issuance of stock in connection with
private financing agreement
($.05 per share) - 250,000
Exercise of warrants ($.05 per share) - 250,000
Issuance of stock for technology rights
($.15 per share) - 600,000
Issuance of stock for price reset - -
Sale of Series B Convertible Preferred
Stock - 175,000
Obligation satisfied by issuance of
Markland stock - 300,000
Amortization of unearned compensation - 598,711
Effect of exchange agreement with
Markland - (1,854,201)
Effect of exchange agreement with Markland -
Markland preferred stock - (3,918,750)
Common stock of Markland issued for
directors compensation - 4,000
Preferred stock dividends - parent (3,625,359) -
Preferred stock dividends - Markland - 15,989
Gain on sale of Markland common stock - 340,000
Net loss (12,443,396) (12,443,396)
------------- -------------
Balance - December 31, 2002 $(65,439,685) $ (4,892,872)
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-21
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
For the Years Ended December 31, from Inception
------------------------------------------------- (May 26, 1995) to
2002 2001 2000 December 31, 2002
------------- ------------- ------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,443,396) $ (8,760,235) $ (9,872,789) $(61,814,326)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,159,315 1,899,346 1,631,237 5,848,254
Amortization of deferred and
unearned financing costs -- -- -- 13,276,619
Loss on impairment of technology
rights (EKOR) 3,084,947 -- -- 3,084,947
Stock issued for license -- -- -- 37,500
Compensatory element of stock
issuances 1,270,075 535,031 925,717 6,514,729
Modification of warrants issued -- -- -- 123,500
Issuance of stock in settlement
of litigation -- -- -- 456,278
Debt conversion expense 390,000 -- -- 390,000
Minority interest in subsidiary 64,369 -- -- 64,369
Changes in assets (increase) decrease:
Prepaid expenses and other current
assets 33,427 (191,565) (62,075) (220,413)
Other assets 224,039 3,588 (217,876) --
Changes in liabilities increase (decrease):
Accounts payable and accrued
liabilities 1,339,273 (342,149) 118,242 4,062,523
Deferred revenue -- (225,000) -- --
------------- ------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,877,951) (7,080,984) (7,477,544) (28,176,020)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (940) (67,776) (176,610) (287,518)
Patent costs -- -- -- (31,358)
------------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (940) (67,776) (176,610) (318,876)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advance on sale of common stock 175,000 -- -- 175,000
Proceeds from sale of Series B 5%
Convertible Preferred stock 175,000 -- -- 175,000
Proceeds from exercise of stock options -- -- 16,500 16,650
Net proceeds from sale of common
stock 250,000 5,090,000 15,499,970 27,026,970
Net proceeds from issuance of Series A
3% Convertible Preferred Stock 2,350,380 -- -- 2,350,380
Proceeds from notes payable 260,000 -- -- 710,000
Proceeds from exercise of warrants 250,000 55,000 437,500 1,069,500
Offering costs -- -- -- (2,898)
Repayment by stockholders -- -- -- 3,000
Repayment of notes payable -- -- (400,000) (400,000)
Proceeds from bridge notes -- -- -- 2,000,000
Repayment of bridge notes -- -- -- (2,000,000)
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
For the Years Ended December 31, from Inception
--------------------------------------------- (May 26, 1995) to
2002 2001 2000 December 31, 2002
------------- ----------- ------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Continued)
Proceeds from sale of common stock
of Markland subsidiary $ 340,000 $ -- $ -- $ 340,000
Proceeds from Convertible Debentures -- -- -- 7,000,000
Repayment of Convertible Debentures -- (500,000) -- (500,000)
Borrowings from stockholders -- -- -- 561,140
Repayment to stockholders -- -- -- (561,140)
Deferred financing costs -- -- -- (604,150)
Purchase of treasury stock -- -- (8,477,721) (8,477,721)
------------- ----------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,800,380 4,645,000 7,076,249 28,881,731
------------- ----------- ------------- -------------
(DECREASE) INCREASE IN CASH (78,511) (2,503,760) (577,905) 386,835
CASH - BEGINNING 465,346 2,969,106 3,547,011 --
------------- ----------- ------------- -------------
CASH - ENDING $ 386,835 $ 465,346 $ 2,969,106 $ 386,835
============= =========== ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ 43,889 $ 508,244 $ 824,691
============= =========== ============= =============
Income taxes $ -- $ -- $ -- $ --
============= =========== ============= =============
SUPPLEMENTAL DISCLOSURE OF FINANCING INFORMATION:
Consulting, legal, financing costs,
commissions and accrued expenses
satisfied by issuance of common stock
and stock options $ -- $ -- $ -- $ 2,555,733
============= =========== ============= =============
Acquisition of technology rights by
issuance of common stock $ -- $ -- $ -- $ 10,547,688
============= =========== ============= =============
Conversion of convertible debentures and
interest to common stock $ 3,574,419 $ 691,857 $ -- $ 5,475,840
============= =========== ============= =============
Notes payable and accrued interest
satisfied by issuance of common stock $ -- $ -- $ -- $ 66,489
============= =========== ============= =============
Increase of technology rights by
issuance of common stock $ 675,000 $ -- $ -- $ 675,000
============= =========== ============= =============
Assumption of indebtedness and preferred
stock related to Markland Exchange $ 5,772,951 $ -- $ -- $ 5,772,951
============= =========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION, GOING CONCERN AND MANAGEMENT PLANS
Eurotech, Ltd. and Subsidiaries (the "Company") is a development stage
technology transfer, holding, marketing and management company, formed to
commercialize new or existing but previously unrecognized technologies, with a
particular current emphasis on technologies developed by prominent research
institutes and individual researchers in the United States, former Soviet Union
and in Israel, and to license those technologies for business and other
commercial applications principally in the United States, Western and Central
Europe, Ukraine, and Russia. 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's portfolio of
technologically advanced products includes: (a) proprietary materials created to
specifically solve the serious problems of how nuclear and other hazardous
wastes are cost effectively contained, (b) advanced performance materials for
use in industrial products such as coatings and paints, (c) acoustic core
technologies, including nuclear remediation sites, marine dredging, oil
exploration sites, illicit material detection and (d) cryptographic systems for
secure communications, all of which can be used in homeland and environmental
security. The Company intends to commercialize its technologies using various
financial and transactional vehicles such as technology transfers, licensing,
joint ventures, strategic alliances, and distribution agreements. To date, the
Company has not generated any substantial revenues from operations.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, for the years ended December 31, 2002, 2001 and 2000, the Company
incurred net losses of approximately $12,443,000, $8,760,000 and $9,873,000,
respectively, and as of December 31, 2002, had a working capital deficiency of
approximately $3,159,000. The Company has limited finances and requires
additional funding in order to accomplish its growth objectives and marketing of
its products and services. There is no assurance that the Company can reverse
its operating losses, or that it can raise additional capital to allow it to
expand its planned operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in this
regard is to obtain other debt and equity financing until profitable operation
and positive cash flows are achieved and maintained.
The Company funded its operations during 2002, 2001 and 2000 through sales of
its Series A non-voting 3% Convertible Preferred stock, Series B non-voting 5%
Convertible Preferred stock, common stock, sale of a subsidiary's common stock,
proceeds from notes and convertible notes and the exercise of options and
warrants, resulting in approximate net proceeds to the Company of
$3,800,000, $5,145,000 and $15,954,000, respectively. The Company is
exploring other financing alternatives, including private placements,
acquisitions through the Company's public consolidated subsidiary and other
offerings.
The Company's ability to continue as a going concern is dependent upon obtaining
additional financing. These financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts that might be necessary
as a result of the above uncertainty.
F-24
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
- --------------------
The accompanying consolidated financial statements include the accounts of
Eurotech, Ltd. (a district of Columbia corporation) and its subsidiaries,
Crypto.com, Inc. ("Crypto"), and commencing December 19, 2002 Markland
Technologies, Inc. ("Markland") and its subsidiary, Secured Technology, Inc.
("STI"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Exchange Agreement - Markland
- -----------------------------
On December 19, 2002, the Company completed an exchange agreement with Markland,
a publicly-held, development-stage emerging technologies firm based in New
Haven, Connecticut, pursuant to which the Company agreed to license all of its
rights to the Acoustic Core technology relating to illicit materials detection
and exchange all rights related to certain cryptology technology held by Crypto
for 239,927,344 shares of Markland, representing approximately 80% of the
outstanding common shares at the time of closing.
The exchange has been accounted for as an asset transfer from the Company to its
Markland subsidiary. At the date of the exchange, Markland had no revenue from
continuing operations and the carrying value of its assets was $-0- and its
liabilities approximated $1.8 million. In addition, at the date of the exchange,
Markland had outstanding 5,225 shares of Preferred Stock with a liquidation
preference of $5,225,000 (see Note 10). The liquidation preference, less
$1,306,250 attributed to the value of a beneficial converstion feature, was
recorded at the date of the exchange as minority interest. The effect of the
Markland exchange on the consolidated balance sheet was to increase minority
interest by $3.9 million, increase liabilities by approximately $1.8 million and
decrease additional paid-in capital by $5.7 million. The Company includes the
results of operations of Markland from the exchange date, December 19, 2002. No
proforma financial information has been provided due to the insignificant
historical continuing operations of Markland.
Equity Method of Accounting for Unconsolidated Foreign Affiliates
- -----------------------------------------------------------------
Investment in companies in which the Company has a 20% to 50% interest and has
the ability to exercise significant influence over operating and financial
policies are accounted for on the equity method. In addition, investments in
Israeli-based technology companies, in which the Company has a 52% to 57%
interest in, have been accounted for under the equity method because the Company
does not have sufficient control in order to consolidate such entities,
including, among other things, no control over management, board of directors
and financial decisions. However, as of December 31, 2002, such investees do not
have any revenue nor any significant assets and liabilities. (See Note 3d)
F-25
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity Method of Accounting for Unconsolidated Foreign Affiliates (Continued)
- -----------------------------------------------------------------
At December 31, 2002, investments in companies accounted for under the equity
method consist of the following foreign companies, which are located in Israel:
Chemonol, Ltd. ("Chemonol") 57%
Rademate, Ltd. ("Rademate") 52%
Comsyntech, Ltd. ("Comsyntech") 52%
Remptech, Ltd. ("Remptech") 50%
Sorbtech, Ltd. ("Sorbtech") 52%
Amsil, Ltd. ("Amsil") 52%
Corpem, Ltd. ("Corpem") 20%
Gain on Issuance of Stock by Subsidiaries
- -----------------------------------------
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is not a newly-formed, non-operating
entity, nor a research and development, start-up or development stage company,
nor is there question as to the subsidiary's ability to continue in existence,
the Company records the increase in its consolidated statements of operations
operations. Otherwise, the increase is reflected in additional paid-in capital
in the Company's consolidated statements of stockholders' (deficiency) equity.
Cash and Cash Equivalents
- -------------------------
The Company considers all short-term highly liquid investments with a maturity
date of three months or less when purchased to be cash equivalents.
Property and Equipment
- ----------------------
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful lives of the
assets. Depreciation is computed on the straight-line method for financial
accounting purposes over 5 to 7 years. Maintenance and repairs are charged to
operations when incurred. Betterments and renewals are capitalized. When
machinery and equipment are sold or otherwise disposed of, the asset account and
related accumulated depreciation account are relieved, and any gain or loss is
included in operations.
Patent Costs
- ------------
Patent costs are being amortized on a straight-line basis over 17 years, which
represent both the statutory and economic lives of the patents.
F-26
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No.
109 employs an asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to the difference between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred income taxes of a change in tax rates is
recognized in the period that includes the enactment date.
Use of Estimates
- ----------------
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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.
Revenue Recognition
- -------------------
The Company expects that it will derive substantially all of its revenue from
the sale, licensing and sub-licensing of technology. Revenue from the sale of
technology will be recognized in the year of sale. Revenue from licensing and
sub-licensing will be recognized in the periods when the fees have been earned.
Research and Development
- ------------------------
Research and development expenditures are charged to expense as incurred, unless
they are reimbursed under specific contracts. The Company capitalizes costs
related to acquired technologies that have achieved technological feasibility
and have alternative uses. Acquired technologies, which are in-process at the
date of acquisition or have no alternative uses are expensed as research and
development costs. Losses incurred on the equity basis in the Company's interest
in seven Israeli research and development companies are included in research and
development expense. The Company's share of losses from its Israeli investees
approximates the funding payments under various agreements discussed in Note 3e.
The Company recognizes its share of losses from Israeli investees during the
quarter that the funding payments are made. In addition, expenditures in
connection with technology licensing agreements concluded during the years ended
December 31, 2002, 2001 and 2000, aggregate $-0-, $-0- and $250,000,
respectively, and were charged to research and development (see Note 3).
F-27
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized Software Development Costs
- --------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high-risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenue for a product bears to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software net realizable value, any remaining capitalized
amounts are written-off.
Advertising
- -----------
Advertising costs are charged to operations when incurred. Advertising expense
was $-0-, $2,405 and $8,732, respectively, for the years ended December 31,
2002, 2001 and 2000, respectively.
F-28
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
- ------------------------
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes accounting and reporting standards for stock-based
employee compensation plans. This statement allows companies to choose between
the fair value based method of accounting as defined in this statement and the
intrinsic value based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. We have adopted the increased disclosure
requirements of SFAS No. 148 for the fiscal year ended December 31, 2002.
The additional disclosures required by SFAS No. 148 are as follows:
Years Ended December 31,
2002 2001 2000
------------- ------------ -------------
Net loss attributable to common stockholders, as reported $(16,068,755) $(8,760,235) $ (9,872,789)
Add: Stock-based employee compensation expense
included in reported net loss applicable to
common stockholders 62,580 65,580 41,723
Less: Total stock-based employee compensation expense
determined under the fair value-based method of
all awards (980,000) (172,500) (5,024,011)
------------- ------------ -------------
Proforma Net Loss Attributable to Common Stockholders $(16,986,175) $(8,867,155) $(14,855,077)
============= ============ =============
Basic and Diluted net loss attributable to common
stockholders:
As reported
Proforma $ (.23) $ (.18) $ (.23)
============= ============ =============
$ (.24) $ (.18) $ (.33)
============= ============ =============
F-29
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Amortization of Unearned Financing Costs and Debt Discounts
- -----------------------------------------------------------
Financing costs and beneficial conversion features related to debt financings
are being amortized over the period of the related debt agreements.
Loss Per Common Share
- ---------------------
Basic loss per common share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted loss per share reflects
the potential dilution from the exercise or conversion of all dilutive
securities into common stock based on the average market price of common shares
outstanding during the period. No effect has been given to outstanding options,
warrants or convertible preferred stock in the diluted computation, as their
effect would be antidilutive.
Fair Value of Financial Instruments
- -----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
that the Company disclose estimated fair values of financial instruments. The
carrying amounts reported in the consolidated balance sheets for current assets
and current liabilities qualifying as financial instruments are a reasonable
estimate of fair value. The carrying amount of long-term debt is estimated to
approximate fair value based on the current rates offered to the Company for
debt of the same remaining maturities.
Segment Reporting
- -----------------
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires a new basis of determining reportable business segments,
i.e., the management approach. This approach requires that business segment
information used by management to assess performance and manage company
resources be the source for information disclosure. On this basis, the Company
is organized and operates as one business segment to acquire and manage the
commercialization of advanced technologies from research institutes and
individual inventors worldwide and to select the optimum approach to
commercialization from acquiring technologies through licensing, joint venture,
spinning-out or sale.
F-30
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
- -------------------------------
Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company evaluates its long-lived assets, including
property and equipment, intangibles and technology rights, for financial
impairment and continues to evaluate them as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values.
During the year ended December 31, 2002, the Company recorded an impairment loss
of $3,084,947 related to its EKOR technology rights (see Note 3a).
Reclassifications
- -----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of
Opinion No. 30 will distinguish transactions that are part of an entity's
recurring operations from those that are unusual and infrequent that meet the
criteria for classification as an extraordinary item. The Company is required to
adopt SFAS No. 145 no later than the first quarter of fiscal 2003, although
early adoption is allowed. The Company has not yet evaluated the impact from
SFAS No. 145 on its financial position and results of operations.
F-31
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including certain costs incurred in a restructuring." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. These costs include lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement. A fundamental conclusion reached by the FASB in
this statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company has not yet determined the impact of
SFAS No. 146 on its financial position and results of operations, if any.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002 and adoption of the disclosure requirements are effective for
the Company as of December 31, 2002. Adoption of the disclosure requirements on
FIN 45 did not have a significant impact on the Company's consolidated statement
of financial position or results of operations. The Company does not expect the
adoption of the recognition requirements of FIN 45 will have a significant
impact on its consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
F-32
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY, RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND
LICENSING AGREEMENTS
a) EKOR Technology
---------------
The Company funds 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."
Pursuant to an agreement dated August 26, 1996, with Advanced Technology
Industries, Inc. ("ATI"), a Delaware corporation, which at such time was
beneficially owned by ERBC Holdings, Ltd. ("ERBC") and individual Russian
scientists, researchers and academics, who were affiliated with Kurchatov and
EAPS, the Company agreed to pay ATI 50% of the net profits (after deducting
development costs and related expenses) derived from the sale, license or
commercialization of a silicon geopolymer compound technology known as EKOR. The
managing director and one former business representative of ERBC were then
stockholders of the Company.
In September 1996, the Company entered into a licensing agreement with ERBC,
whereby ERBC sublicensed to the Company its license to use and exploit the EKOR
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 this
agreement, the Company is obligated to pay royalties equal to 3%, increasing in
May of 2005 to 3.1% of its revenue from such technology. In addition, the
Company agreed to continue to fund EAPS $10,000 per month until May 15, 2005.
Disbursements made by the Company related to the above described collaboration
arrangement, including expenses related to the EKOR technology, are charged to
research and development expenses and amounted to approximately $289,000,
$400,000 and $979,000, respectively, during the years ended December 31, 2002,
2001 and 2000.
In an agreement, dated as of November 30, 1999, the Company purchased all of the
rights in EKOR held by ATI.
The total consideration provided to ATI for the acquired technology interest in
EKOR totaled $8,047,687 and was being amortized over a 5-year period commencing
November 30, 1999. Amortization expense related to this intangible asset was
$1,609,537, $1,609,537 and $1,609,538 for the years ended December 31, 2002,
2001 and 2000, respectively.
F-33
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY, RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND
LICENSING AGREEMENTS (Continued)
a) EKOR Technology (Continued)
---------------
Loss on Impairment of EKOR Technology Rights
--------------------------------------------
At December 31, 2002, management concluded that certain conditions and events
were such that impairment testing was required to be performed with respect to
the technology rights of EKOR. In December of 2002, management reevaluated its
estimated cash flows from the EKOR technology. Due to the absence of current
sales and sales contracts and due to governmental budget constraints and lack of
funding available to the Company, the Company recorded an impairment loss of
$3,084,947 during the quarter ended December 31, 2002.
The following table presents the carrying amounts of the technology rights of
EKOR at December 31, 2002 and 2001:
2002 2001
------------ ------------
Technology rights - EKOR $ 8,047,687 $ 8,047,687
Less: Accumulated amortization (4,962,740) (3,353,203)
Less: Loss from impairment (3,084,947) --
------------ ------------
Total
$ -- $ 4,694,484
============ ============
b) Acoustic Core
-------------
In an Agreement dated as of July 2001, and amended in October 2001, the Company
acquired the rights to certain technologies for certain markets that are in-situ
remote sensing of toxic, nuclear waste material and explosives. To evaluate
these technologies, the Company relied on an evaluation performed and completed
by a certified independent third party appraisal firm. In connection with this
transaction, the Company issued 2,500,000 fully paid and non-accessible shares
of its restricted common stock, valued at $2,500,000, and is being amortized
over a five-year period (life of long-term government contracts) commencing July
2001. Amortization expense related to this intangible asset was $492,361 and
$232,527 for the years ended December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, the Company capitalized software
development costs of $675,000 for product enhancements related to this
technology.
F-34
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY, RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND
LICENSING AGREEMENTS (Continued)
c) Exchange Agreement - Markland
-----------------------------
On December 19, 2002, in connection with the Exchange Agreement dated as of
December 9, 2002, by and among Eurotech, Markland, Crypto, STI, ipPartners,
Inc., Market LLC and James LLC (the "Exchange"), Eurotech agreed to license and
transfer certain intellectual property to a newly-formed subsidiary of Markland,
STI, in exchange for 239,927,344 shares of Markland's newly issued common stock
(the "Exchange Shares"). The Exchange Shares, on December 9, 2002, constituted
80% of Markland's outstanding common stock making Markland a majority-owned
subsidiary of Eurotech. In addition, as part of the agreement, ipPartners was
issued 29,990,917 shares of Markland's common stock, valued at $300,000, in
exchange for their forgiveness and discharge of certain obligations owed to
ipPartners with respect to the property transferred to STI.
As a result of the Exchange and other subsequent stock issuances, the Company
owned 78.12% of Markland's voting securities at December 31, 2002. Prior to the
Exchange, Market LLC and James LLC controlled Markland. The Company's ownership
interest in Markland will be diluted as Markland issues additional common shares
and in the event Markland's Series C Preferred Stock is converted into common
shares.
The rights licensed from Eurotech in the Exchange consist of certain proprietary
technology known as Acoustic Core used to detect illicit substances, and certain
cryptology technology held by the Company's subsidiary, Crypto.
d) Investments in Israeli Technology Companies
-------------------------------------------
During 1997 and 1998, the Company acquired a 20% interest in six separate
Israeli technology, research and development companies. The Company made
additional investments in these entities during 2002, 2001 and 2000 and,
accordingly, increased its ownership interest in such investees. During 2001,
the Company acquired a 20% interest in one additional Israeli investee. The
Company's share of losses incurred from these research companies has been
accounted for on the equity basis and is included in research and development
expenses. The amount charged to research and development for the years ended
December 31, 2002, 2001 and 2000 approximated $610,816, $344,393 and $1,781,006,
respectively, which reduced the Company's investment in these seven companies to
zero. The payments remitted to such investees were used to fund the investees'
operating expenses for the corresponding period of each payment. The Company has
the right to suspend the payments under the agreements at any time.
All seven of these investees' technologies are in the development stage and have
not generated any significant revenues to-date. During 2002 and 2001, the
Company has temporarily curtailed five of the seven investees' operations.
Six of the seven investees have each received research grants of $300,000 under
an Israeli-backed incubator program. Each investee is to pay a royalty based on
revenue generated from each technology up to a maximum of $300,000.
F-35
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY, RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND
LICENSING AGREEMENTS (Continued)
d) Investments in Israeli Technology Companies (Continued)
-------------------------------------------
A summary of the investments in the seven Israeli technology research and
development companies are as follows:
Ownership
Year of Description of Interest at Investments Made
Initial Development-Stage December 31, During Last
Investment Company 2002 Three Years
---------- ----------------- ------------ ----------------
Chemonol, Ltd. 1997 Hybrid non-isocyanate 57% 2002 - $ -0-
polyurethane 2001 - $ 95,000
2000 - $265,000
Rademate, Ltd. * 1998 Rapid biodegradable composite 52% 2002 - $ -0-
materials 2001 - $ -0-
2000 - $370,000
Comsyntech, Ltd. * 1997 Continuous combustion synthesis 52% 2002 - $ -0-
and continuous action reactor 2001 - $ -0-
2000 - $200,000
Remptech, Ltd. * 1997 Cobalt and nickel powders 50% 2002 - $ -0-
2001 - $ -0-
2000 - $ 80,000
Amsil, Ltd. * 1998 Highly stable organomineral 52% 2002 - $ -0-
polymers based on quarternary 2001 - $ -0-
ammonium silicates 2000 - $230,000
Sorbtech, Ltd. * 1998 High capacity absorbent 52% 2002 - $ -0-
2001 - $ -0-
2000 - $260,000
Corpem, Ltd. ** 2001 Sulfochlorinated polyethylene 20% 2002 - $ 15,000
coatings 2001 - $ 30,000
2000 - -0-
For all seven investees Common charges funded by Company 2002 - $418,816
2001 - $219,393
2000 - $376,006
* Due to limited working capital, management decided to temporarily curtail the
funding of the operations and further development of the technologies for five
of the Israeli-based technology companies, Comsyntech, Ltd., Remptech, Ltd. and
Sorbtech, Ltd. during year ended December 2001 and Rademate, Ltd. and Amsil,
Ltd. during the first quarter of 2002. The Company may or may not choose to
resume the funding of these five companies in the future.
** The Company has failed to make the 4th and last payment of $15,000 during
2002 and upon notice will forfeit its interest in the incubator.
F-36
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TECHNOLOGY RESEARCH, COLLABORATION, INVESTMENTS, TRANSFER AND
LICENSING AGREEMENTS (Continued)
e) Cryptology Technology
---------------------
During February 2000, the Company entered into an employment/development
agreement with an individual to develop a cryptology technology. The Company
formed Crypto.com, Inc. for the purpose of funding the development and
commercialization of such technology. The Company is a 66% controlling
shareholder of Crypto.
At December 31, 2001, the Company, through its subsidiary, Crypto, entered into
a five year agreement to market, license and commercialize its cryptology
technology. During the year ended December 31, 2002, Crypto terminated such
licensing agreement relating to Crypto's technology with mutual consent.
On December 9, 2002, in connection with the exchange agreement, the cryptology
technology was transferred to Markland in exchange for certain shares of
Markland's newly issued common stock (see Note 3(c)).
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
-------------------------
2002 2001
---------- ----------
Machinery and equipment $ 248,150 $ 247,210
Leasehold improvements 39,369 39,369
---------- ----------
287,519 286,579
Less: Accumulated depreciation
and amortization (148,581) (92,918)
---------- ----------
$ 138,938 $ 193,661
========== ==========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
amounted to $55,663, $55,528 and $19,947, respectively.
F-37
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PATENT COSTS
Patent costs consisted of the following:
December 31,
--------------------
2002 2001
-------- --------
Cost of patents $31,358 $31,358
Less: Accumulated amortization 12,044 10,291
-------- --------
$19,314 $21,067
======== ========
Patent costs capitalized represent legal and other costs related to filing of
patent applications in various countries.
Amortization expense for the years ended December 31, 2002, 2001 and 2000
amounted to $1,753, $1,753 and $1,753, respectively.
NOTE 6 - NOTES PAYABLE
Related Parties
- ---------------
On December 23, 2001, the Company converted accrued salaries and accrued
consulting fees into five promissory notes with three employees and two
consultants, totalling $212,187. The Company agreed to pay the principal and the
interest, at a rate per annum equal to 3.23%, on February 1, 2003. On December
28, 2001, the Company issued 29,291 shares of its common stock valued at $.345
per share to one of the consultants for the payment of one note. As of December
23, 2002, the remaining principal balance was $202,091.
On August 1, 2002, the Company converted accrued salaries into two promissory
notes, with two Israeli employees, totaling $164,000. The Company agreed to pay
the principal and the interest at a rate per annum equal to 5% on August 1,
2003.
On November 1, 2002, the Company converted accrued salaries into two promissory
notes, with two Israeli employees, totalling $96,000. The Company agreed to pay
the principal and the interest at a rate per annum equal to 5% on November 1,
2003.
On December 4, 2002, Markland entered into a note payable agreement with Market
LLC for the principal amount of $11,500. Principal, together with interest,
which accrues at the rate of 10% per annum, are both due upon demand. As of
December 31, 2002, accrued interest under this note was approximately $100.
F-38
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE (Continued)
Secured Convertible Promissory Note
- -----------------------------------
On December 10, 2002, Markland entered into a Restated and Amended Secured
Convertible Revolving Credit Note Agreement for $500,000. Interest under this
note accrues at an annual interest rate of 6% per annum. The principal and
accrued interest under this note is due on June 30, 2004, however, may be
prepaid by the Company at any time without penalty. As of December 31, 2002,
approximately $2,000 of interest has been accrued on this note and is included
in accrued expenses on the consolidated balance sheet.
The note may be converted at any time, in whole or in part, into shares of
Markland's common stock. The total number of shares of common stock issuable
upon conversion will be determined by dividing the principal amount of this note
being converted by 80% of the closing bid price of Markland's common stock based
on the average of the five trading days immediately preceding the date of
conversion. The value of the beneficial conversion feature of $125,000 will be
amortized as interest expense over the period ending June 30, 2004.
NOTE 7 - 8% CONVERTIBLE DEBENTURES
On February 23, 1998, the Company sold in a private placement a principal amount
of $3,000,000, 8% Convertible Debentures (the "Debentures"), originally due
February 23, 2001.
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.
On February 20, 2001, the Company entered into an agreement with the holders of
the Debentures to extend the original due date of February 23, 2001 by one year
to February 23, 2002.
On January 9, 2002, the Company converted $3,000,000 principal amount of the
Debentures, plus the amount of all accrued and unpaid interest aggregating
$574,419, into 6,000,369 shares of the Company's common stock in full
satisfaction of the Debentures. In connection with the conversion, the Company
issued a warrant to purchase 500,000 shares of common stock at an exercise price
of $1.00 per share. The warrants are exercisable over five years. The warrants
were valued at $390,000 based on the Black-Scholes option pricing model and such
amount was recorded as a debt conversion expense during the year ended December
31, 2002.
F-39
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31,
--------------------------
2002 2001
----------- -----------
Liabilities from discontinued former
subsidiary of Markland (a) $1,298,713 $ --
Interest 26,956 547,953
Insurance 113,644 --
Professional fees 746,857 53,475
Rent 59,562 --
Consulting fees 534,432 138,420
Deferred compensation and board fees (b) 163,246 --
Other 174,353 145,359
----------- -----------
$3,117,763 $ 885,207
=========== ===========
(a) Represents liabilities related to two former subsidiaries of Markland, CWTel
and Quest Net Corp. The Company is currently determining which of the
liabilities were discharged in the CWTel bankruptcy. Any adjustments as a result
of this review will be credited to paid-in capital.
(b) During the year ended December 31, 2002, three employees of the Company
agreed to defer a certain percentage of their salaries, totaling $112,946.
During the year ended December 31, 2002, six board members of the Company agreed
to defer their board fees totaling $50,300.
NOTE 9 - INCOME TAXES
The components of deferred tax assets and liabilities are as follows:
December 31,
-------------------------------
2002 2001
------------- -------------
Deferred Tax Assets:
Net operating losses carryforwards $ 17,600,000 $ 14,500,000
Technology rights 1,900,000 811,000
Capitalized research and
development expenses 1,100,000 1,100,000
Compensatory element of stock
issuances 432,000 182,000
------------- -------------
Total Gross Deferred Tax Assets 21,032,000 16,593,000
Less: Valuation allowance (21,032,000) (16,593,000)
------------- -------------
Net Deferred Tax Assets $ -- $ --
============= =============
F-40
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $4,439,000.
As of December 31, 2002, the Company had available approximately $51,872,000 of
net operating losses ("NOL") for income tax purposes that may be carried forward
to offset future taxable income, if any. The NOL carryforwards for December 31,
1997 and prior expire during the year 2011 through 2012, and the NOL subsequent
to 1997 expire, if unused, 20 years from the year of loss. 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.
Year Net Operating Losses
---- --------------------
2011 $ 2,372,000
2012 12,423,000
2018 8,191,000
2019 5,443,000
2020 9,039,000
2021 7,834,000
2022 6,570,000
-------------
$ 51,872,000
=============
A reconciliation between the statutory federal income tax rate (34%) and the
Company's effective rate is as follows:
Year Ended December 31,
2002 2001 2000
------- ------- -------
Federal statutory rate (34.0)% (34.0)% (34.0)%
Non-deductible expenses and losses 2.0 1.0 1.0
Increase in valuation allowance 32.0 33.0 33.0
------- ------- -------
Effective rate -0- % -0- % -0- %
======= ======= =======
F-41
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY
Series A 3% Convertible Preferred Stock
- ---------------------------------------
On February 1, 2002, the Company amended its Articles of Incorporation to
designate 25,000 of its 5,000,000 authorized preferred stock as a "Series A 3%
Convertible Preferred Stock," par value $.01 per share, with a liquidation
preference of $100 per share. In February 2002, the Company entered into a
securities purchase agreement with Woodward LLC to purchase 25,000 shares of
Series A 3% Convertible Preferred Stock for $2,500,000. Through December 31,
2002, the Company received, from the sale of such Preferred Stock, $2,500,000,
less commissions and expenses of $149,620.
The holder of the Series A 3% Convertible Preferred Stock is entitled to receive
dividends at a rate of three percent per annum of the liquidation preference of
$100 per share, which is fully cumulative. The dividends on the Series A 3%
Convertible Preferred stock accrue from the date of issuance of each share and
are payable semi-annually on June 30 and December 30 of each year, commencing on
June 30, 2002. The dividends on the Series A 3% Preferred Stock are payable only
when, as and if, declared by the Board of Directors out of funds legally
available.
At December 31, 2002, cumulative dividends in arrears on the Series A 3%
Convertible Preferred Stock was $57,700.
Pursuant to a registration rights agreement dated February 1, 2002, the
purchaser of the Series A 3% Convertible Preferred stock was granted mandatory
registration rights, which required the Company to complete the registration of
such shares by August 20, 2002. The purchaser agreed to suspend this obligation
until November 30, 2003.
The holder of the Series A 3% Convertible Preferred Stock has no voting rights.
As of September 1, 2002, each Series A 3% Preferred Stock can be converted to
fully paid and non-assessable shares of common stock, at the option of the
holder by dividing $.50 into the liquidation preference. At the Company's
option, all accrued or declared, but unpaid dividends on the Series A 3%
Convertible Preferred Stock may be paid in cash or in common stock. Under a
repricing rights agreement dated February 1, 2002, common shares issued upon
conversion were subject to monthly repricing on or after October 1, 2002, if the
average bid price for any of the lowest five business days during the repricing
period were not equal or greater than $3.618.
On September 30, 2002, the Company entered into a termination and modification
agreement with Woodward LLC, with respect to the repricing rights agreement, and
all repricing rights with respect to the Series A Convertible Preferred stock
were satisfied in full in exchange for 17,000 shares of Series B 5% Convertible
Preferred stock of the Company.
Under certain circumstances, the Company, at its option, may redeem the Series A
3% Convertible Preferred Stock at $732.60 per share.
F-42
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Series A 3% Convertible Preferred Stock (Continued)
- ---------------------------------------
In accordance with EITF Issue 00-27, "Application of EITF Issue No. 98-5 to
Certain Convertible Instruments", in the third quarter of 2002, the Company
recorded a non-cash preferred stock dividend in the amount of $2,350,380,
representing the beneficial conversion feature that the holder of the Series A
3% Convertible Preferred Stock received in connection with the repricing rights.
The pronouncement limits the amount of the beneficial conversion feature to the
net proceeds received under the financing.
On March 27, 2003, in connection with an exchange agreement, the Company agreed
to retire all shares of its outstanding Series A 3% Convertible Preferred Stock
(see Note 13, Subsequent Events).
Series B 5% Convertible Preferred Stock
- ---------------------------------------
On October 8, 2002, the Company amended its Articles of Incorporation to
designate 25,000 of its 5,000,000 authorized preferred stock as a "Series B 5%
Convertible Preferred stock", par value $.01 per share, with a liquidation
preference of $1,000 per share.
The holder of the Series B 5% Convertible Preferred stock is entitled to receive
dividends at a rate of five percent per annum of the liquidation preference of
$1,000 per share, which is fully cumulative. The dividends on the Series B 5%
Convertible Preferred stock accrue from the date of issuance of each share and
are payable annually.
As discussed above, on September 30, 2002, the Company agreed to issue to
Woodward LLC 17,000 shares (reduced by 5,725 shares as discussed in Note 10) of
its Series B 5% Convertible Preferred stock in exchange for the cancellation of
all repricing rights with respect to the Series A 3% Convertible Preferred
Stock. In addition, during the year ended December 31, 2002, Woodward LLC
purchased 175 shares of Series B 5% Convertible Preferred stock for $175,000.
At December 31, 2002, cumulative dividends on the Series B 5% Convertible
Preferred stock was $148,279.
F-43
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Series B 5% Convertible Preferred Stock (Continued)
- ---------------------------------------
At the option of the Company, each share of the Series B Preferred stock is
redeemable by the Company for $1,000. The Series B Preferred stock was
convertible by the holder at various prices as defined in the agreement.
However, on March 27, 2003, in connection with an exchange agreement with
Woodward LLC, the Company agreed to retire the rights of Woodward LLC to receive
shares of the Company's Series B 5% Convertible Preferred stock (see Note 13,
Subsequent Events).
F-44
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Sale of Common Stock - March 2, 2000
- ------------------------------------
On March 2, 2000, under the agreement with Woodward LLC, the Company sold
1,200,000 shares of its common stock for net proceeds of $6,000,000. The
agreement, pursuant to which these shares were sold, provides that the Company
may be required to issue to Woodward LLC additional shares of common stock in
the event that the average bid price in the market for outstanding Eurotech
shares during September and October 2000 is below $6.58. On September 30, 2000,
both parties agreed to amend its March 2000 agreement solely with respect to the
number of reset periods. It was agreed that there will be four reset periods,
each of one calendar month duration (20 trading days) starting September 5,
2000. Each reset period covers 25% of the shares originally sold previous to
this agreement. All repricing rights have been satisfied. See below.
Sale of Common Stock - April 24, 2000
- -------------------------------------
On April 24, 2000, under the agreement with Woodward LLC, the Company sold to
Woodward LLC 2,000,000 of its common shares, together with a warrant to purchase
500,000 shares at $10 per share, for $10,749,970 and certain other
consideration. The agreement, pursuant to which these shares were sold, provides
that the Company may be required to issue to Woodward LLC additional shares of
common stock under a repricing provision after March 31, 2001, if the average
bid price of outstanding Eurotech shares is not then at least $9.375. The
parties amended this agreement on June 29, 2000 to provide for the payment by
Woodward LLC of a further $1,250,000. The Company received the $1,250,000 on
March 13, 2001. All repricing rights have been satisfied. See below.
Sale of Common Stock - March 31, 2001
- -------------------------------------
The Company entered into an additional common stock purchase agreement with
Woodward LLC on March 31, 2001. Pursuant to this agreement, the Company sold to
Woodward LLC 1,333,333 shares for a payment of $3,000,000, less related expenses
of $160,000. The shares were subject to repricing after March 1, 2002, if the
bid price of outstanding Eurotech shares for any lowest five business days
during the repricing period is not equal to greater than $3.15. All repricing
rights have been satisfied. See below.
F-45
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Modification and Amendments to Woodward LLC Agreements
- ------------------------------------------------------
On February 1, 2002, the Company and Woodward LLC entered into an agreement to
extend and modify their existing agreement as further amended and modified
effective as of April 12, 2002 as follows:
- - On February 1, 2002, the Company issued to Woodward LLC 6,000,000 shares of
its common stock in satisfaction of the fourth and fifth repricing period from
the April 2000 Agreement. On April 12, 2002, the Company committed to issue an
additional 6,100,000 shares of its common stock in satisfaction of the sixth and
final repricing period pursuant to the April 2000 Agreement, of which 4,350,000
shares were issued in April of 2002. During the quarter ended December 31, 2002
the Company issued an additional 1,750,000 shares of common stock to complete
this agreement.
- - The exercise price of the two warrants that were previously issued to Woodward
LLC for 200,000 and 500,000 shares, respectively, was reduced to $1.00 per
share.
On September 30, 2002, the Company and Woodward LLC entered into an agreement
that provided for the termination of the outstanding repricing rights associated
with the common stock purchase agreement dated as of March 30, 2001. The Company
will issue to Woodward LLC 10,000,000 additional shares of common stock in full
and complete satisfaction of canceling all outstanding repricing rights
associated with the March 2001 agreement. In addition, subsequent to signing the
restructuring agreements, Woodward LLC has agreed to defer receiving the
10,000,000 shares, subject to the approval by stockholders of an increase in the
Company's authorized capital.
On March 27, 2003, in connection with an exchange agreement with Woodward LLC,
the Company agreed to exchange $1.069 million worth of Series G Preferred stock
of HomeCom Communications, Inc. (see Note 13) in exchange for the cancellation
of the obligation to issue to Woodward LLC 10 million shares of the Company's
common stock (see Note 13, Subsequent Events).
In accordance with EITF Issue 00-27, during the quarter ended December 31, 2002,
the Company recorded a non-cash preferred stock dividend in the amount of
$1,069,000, representing the beneficial conversion feature related to the
Company's obligation to issue 10 million shares of the Company's common stock.
The beneficial conversion feature (preferred dividend) was recorded during the
quarter ended December 31, 2002 because the contingency was eliminated.
F-46
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Pledge and Security Agreement
- -----------------------------
On December 19, 2002, the Company executed a definitive Pledge and Security
Agreement with Woodward LLC, pursuant to which Woodward LLC surrendered its
rights to receive 5,725 shares of the Company's Series B 5% Convertible
Preferred stock, in exchange for a security interest in the shares of Markland
common stock. In addition, Woodward LLC was granted the right to receive 50% of
the proceeds generated by the Company from the sale of Markland common stock as
a payment against the liquidation preference of the Series A and Series B
Convertible Preferred Stock held by Woodward LLC. The Company subsequently
agreed with Woodward, LLC to terminate the Security Arrangement.
Terminated Equity Agreement
- ---------------------------
In February of 2002, the Company entered into a Private Equity Agreement with an
investor under which the Company, at its option, could put shares to the
investor to sell up to $10 million of its common shares. The common shares to be
sold must be registered to commence the sales of common stock under this
agreement.
As of December 31, 2002, the Company was notified that the above equity
agreement was terminated.
Other Significant Common Stock Issuances During 2002
- ----------------------------------------------------
On January 9, 2002, the Company issued 6,000,369 shares of its common stock from
the conversion of $3,000,000 principal amount of February 1998 Convertible
Debentures, plus the amount of all accrued and unpaid interest, totaling
$3,574,419.
On December 12, 2002, the Company sold 5,000,000 shares of common stock for
$250,000 in connection with the private equity financing.
On December 12, 2002, a warrant holder exercised its warrants and purchased
5,000,000 shares of common stock. Proceeds from warrants exercised total
$250,000.
On December 7, 2002, the Company issued 4,000,000 shares of its common stock for
capitalized technology development costs valued at $600,000.
As of December 31, 2002, the Company issued 70,145 shares of its common stock as
consideration for consulting services performed by various consultants, totaling
$318,234.
F-47
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Minority Interest in Subsidiary
- -------------------------------
On December 9, 2002, Markland entered into an Exchange Agreement with Market LLC
and James LLC who agreed to exchange a note payable in the amount of $3,812,000
and $1,413,000, respectively ($5,225,000 in value) of convertible promissory
notes, inclusive of accrued interest for 5,225 shares (8,000 authorized, $.0001
par value, $1,000 per share liquidation preference) of Markland's newly issued
Series C Cumulative Convertible Preferred Stock, ("Series C Preferred Stock").
The holders of the Series C Preferred Stock are entitled to receive dividends on
each share of preferred stock, which shall accrue on a daily basis at the rate
of 5% per annum on the sum of the liquidation preference plus all accumulated
and unpaid dividends thereon. These dividends shall accrue whether or not they
have been declared or there are legally available funds with which to pay them,
and at the option of the holders are payable either in cash or in unrestricted
Markland common stock.
The Series C Preferred Stock is redeemable at any time by Markland, and cannot
be converted by the holders without written permission for a period of 6 months
following the issuance of the shares and then only 10% may be converted per
month thereafter. The Series C Preferred Stock is convertible at the option of
the holder at a conversion price ranging from 65% to 80% of the Markland common
stock's market price at the time of the conversion, subject to an adjustment
pursuant to any stock split. The amount of the associated discount is dependent
upon the market price at the time of the conversion.
As of the date of issuance in accordance with EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," the Company calculated that as of the date of
issuance there was a beneficial conversion feature in the amount of $1,306,250.
In accordance, with the EITF, Markland has recorded a deemed dividend of
$48,380, in the quarter ended December 31, 2002, relating to the accretion of
the beneficial conversion feature of the Series C Preferred Stock, which was
included in minority expense. The deemed dividend increases the loss
attributable to common stockholders in the calculation of basic and diluted net
loss per common share and is included in stockholders' deficiency as a charge to
deficit accumulated during the development stage and a credit to additional
paid-in capital. As the Series C Preferred Stock is convertible in stages over a
period of 16 months, Markland will record the accrual of the deemed dividend of
the beneficial conversion feature over this same period.
In addition, Markland has determined that the maximum potential exposure under
the beneficial conversion feature using the assumption that the fair market
value of the Markland common stock is $.15 at the date of conversion and,
accordingly, a conversion price at 65% of market value should be used, amounts
to approximately $2,800,000.
F-48
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Minority Interest in Subsidiary (Continued)
- -------------------------------------------
For the quarter ended December 31, 2002, dividends of approximately $16,000 were
accrued for the Preferred Stock and were included in minority interest expense.
The holders are not subject to any limitations on the number of conversions of
Series C Preferred Stock or subsequent sales of the corresponding Markland
common stock that they can effect, other than a prohibition on any holder having
a beneficial ownership of more than 9.999% of the outstanding shares of
Markland's common stock.
Sale of Markland Common Stock
- -----------------------------
In December of 2002, Markland sold 6,800,000 of its common shares for net
proceeds of $340,000. In connection with this transaction, the Company
recognized a gain of $340,000, which has been reflected in additional paid-in
capital.
Other Significant Common Stock Issuances During 2001
- ----------------------------------------------------
On January 31, 2001, the Company issued 5,574 shares of its common stock as
consideration for consulting services performed by two consultants at $2.15 per
share, totaling $12,000.
On September 6, 2001, pursuant to the Registration Statement on Form S-3 with
the Securities and Exchange Commission, which became effective on February 14,
2001, the Company issued 3,000,000 shares of its shelf-registered common stock
to five individuals and one corporation at $.33 per share for $1,000,000.
As of December 31, 2001, the Company issued 12,000 shares of its common stock as
consideration for consulting services performed by a consulting company for
3,000 shares per quarter, totaling $9,655.
In June 2001, the Company issued 120,000 shares of its restricted common stock
at $.73 per share for consulting services, totaling $87,600.
F-49
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Warrants
- --------
As part of a consulting agreement with the Company's Chairman of the Board,
during 2000 the Company granted warrants to purchase 375,000 common shares over
the 5-year term of the agreement, of which 75,000 warrants become exercisable
each year at exercise prices of $1.00, $2.00, $3.00, $4.00 and $5.00,
respectively. In February 2002, the remaining unvested 150,000 warrants were
cancelled.
As part of an employment agreement with an officer, during 2000 the Company
granted warrants to purchase 300,000 common shares over the 3-year term of the
agreement, of which 100,000 warrants become exercisable each year, at exercise
prices of $1.00, $2.00 and $3.00, respectively.
Pursuant to the settlement of penalties related to convertible debentures, the
Company issued to the placement agent warrants to purchase 250,000 shares of
common stock at $3.00 per share. The warrants may be exercised over a four-year
period ending March 2004. The warrants were valued at $250,000 and were charged
to operations during the year ended December 31, 2000.
In April of 2000, as part of the sale of the Company's securities, a warrant to
purchase 500,000 shares of the Company's common stock was issued at an exercise
price of $10.00. The warrants are exercisable over a five-year period. On May
18, 2001, the exercise price was reduced to $4.00, resulting in a charge to
operations of $29,000 for the year ended December 31, 2001.
In June of 2000, two consultants were granted warrants to purchase a total of
58,000 common shares at an exercise price of $1.00 per share. The warrants were
valued at $204,718 and were charged to operations during the year ended December
31, 2000. The warrants are exercisable over a three-year period.
During the year ended December 31, 2000, two consultants were granted warrants
to purchase a total of 50,000 shares of common stock at an exercise price of
$1.00. The warrants are exercisable over a six-year period. The warrants were
valued at $78,125 and were charged to operations during the year ended December
31, 2001.
F-50
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Warrants (Continued)
- --------
In January 2001, a consultant was granted warrants to purchase a total of
150,000 common shares at an exercise price of $2.00 per share. The warrants are
exercisable over a five-year period. The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model was
$0.94, totalling $141,000, which was charged to operations during the year ended
December 31, 2001.
In February 2001, a consultant was granted warrants to purchase a total of
60,000 common shares at an exercise price of $3.00 per share. The warrants
vested on the grant date and are exercisable over a five-year period. The fair
value of the stock warrants on the date of grant using the Black-Scholes option
pricing model was $.69, or $41,400, which was charged to operations during the
year ended December 31, 2001.
On July 10, 2001, the Company elected an individual as a director of the Company
and as Co-Chairman of the Board. The Company agreed in connection with a
consulting agreement the Company issued five-year warrants to purchase 500,000
shares of the Company's common stock at $.70 per share, 50% issued upon signing
the agreement and the balance issued quarterly over a 24-month period. The
warrants are exercisable over a five-year period. The individual subsequently
left the Board and became Chairman of the Advisory Board. The fair market value
of the warrants on the date of grant using the Black-Scholes option pricing
model was $.18, or $90,000, of which $66,868 were charged to operations during
the year ended December 31, 2001. In June 2002, due to the resignation of the
individual, warrants to purchase 166,667 shares of the Company's common stock
were cancelled.
On October 1, 2001, the Company granted a consulting company warrants to
purchase 100,000 shares of its common stock at an exercise price of $.34. The
warrants vested on the grant date and expire 10 years from the grant date. The
fair value of stock warrants estimated on the date of grant using the
Black-Scholes option pricing model was $.27, or $27,000, which was charged to
operations during the year ended December 31, 2001.
On October 26, 2001, the Company granted a consulting firm warrants to purchase
280,000 shares of its common stock between $1.00 and $5.00. The warrants vested
on the grant date and expire five years from the grant date. The fair value of
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model ranging from $.09 to $.20 totaled $38,000, of which $12,667 was
charged to operations during the year ended December 31, 2001 and $25,333 was
charged to operations during the year ended December 31, 2002.
On October 26, 2001, the Company granted a law firm warrants to purchase 75,000
shares of its common stock at an exercise price of $.60. The fair value of the
warrants estimated on the date of grant using Black-Scholes option pricing model
was $25,500 and were charged to operations during the year ended December 31,
2001.
F-51
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Warrants (Continued)
- --------
In January 2002, in connection with the conversion of the February 1998
convertible debentures, the Company issued warrants to purchase 500,000 shares
of its common stock at an exercise price of $1.00. The warrants vested
immediately and expire five years from the grant date. The fair value of stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model was $390,000, which was charged to debt conversion expense during the year
ended December 31, 2002.
At December 31, 2002, the Company had outstanding warrants to purchase 3,231,333
shares of the Company's common stock at prices ranging from $0.34 to $5.00 per
share.
The following table summarizes the common stock warrant transactions during the
three years ended December 31, 2002:
Number of Warrants Exercise Prices Expiration Date
----------------- --------------- ---------------
Balance outstanding at January 1, 2000 1,171,250 $ .75 - $5.02 12/00 - 12/04
Granted 1,533,000 $1.00 - $5.00 03/04 - 10/07
Exercised (320,000) $1.06 - $2.30
Cancelled/Expired (441,250) $ .36 - $5.02
------------
Balance outstanding at December 31, 2000 1,943,000 $ .75 - $5.00
Granted 1,165,000 $ .34 - $5.00 01/06 - 10/11
Exercised - -
Cancelled/expired - -
------------
Balance outstanding at December 31, 2001 3,108,000 $ .34 - $5.00
Granted 5,500,000 $ .05 - $1.00 09/04 - 01/07
Exercised (5,000,000) $ .05
Cancelled/expired (376,667) $ .70 - $5.00
------------
Balance outstanding at December 31, 2002 3,231,333
============
F-52
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Warrants (Continued)
- --------
The following table summarizes information about stock warrants outstanding at
December 31, 2002:
Warrants Granted Warrants Exercisable
-------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Ranges of Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------------- ----------- ----------- -------- ----------- --------
$ .34 100,000 10 $ .34 100,000 $ .34
$ .35 to $. 75 408,333 5.3 $ .64 408,333 $ .64
$ .76 to $1.00 863,000 4.9 $1.00 863,000 $1.00
$1.01 to $2.00 475,000 4.7 $1.84 475,000 $1.84
$2.01 to $3.00 585,000 4.6 $2.90 585,000 $2.90
$4.00 700,000 4 $4.00 700,000 $4.00
$5.00 100,000 5 $5.00 100,000 $5.00
---------- ----- ------ ----------- ------
3,231,333 4.9 $2.18 3,231,333 $2.18
========== ===== ====== =========== ======
F-53
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
Earnings Per Share
- ------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future, and that were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented, consist of the
following:
Common shares potentially issuable in connection
with conversion of the Series A and B preferred
stock (see Note 13) (A)
Options to purchase common stock 3,906,500
Warrants to purchase common stock 3,231,333
Repricing rights provisions under common stock
sales (see Note 13, Subsequent Events) 10,000,000
------------
17,137,833
============
Substantial issuances after December 31, 2002
through April 1, 2003:
Conversion of Series A Preferred stock 703,800
============
Private equity financing 5,500,000
============
Settlement agreement 528,082
============
(A) The potential dilution of the Series A and Series B Convertible Preferred
stock as of December 31, 2002 is not reflected above since as of March 27, 2003,
all Series A and Series B Convertible Preferred shares have been retired
pursuant to an exchange agreement dated March 27, 2003 (see Note 13).
F-54
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS
Stock Option Plans
- ------------------
The Company's 2002 Stock Option Plan was adopted by the Board of Directors of
the Company on April 30, 2002 subject to stockholders' approval. Under the
Option Plan, a total of 6,000,000 shares of the Company's common stock, subject
to certain adjustments, are reserved for issuance upon the exercise of options.
The Plan shall be administered by the Board or a Committee, or a combination
thereof, as determined by the Board. The Plan may be administered by different
administrative bodies with respect to different classes of participants and, if
permitted by the applicable laws, the Board may authorize one or more officers
(who may (but need not) be officers) to grant options to employees, outside
directors and consultants.
The Company's 1995 Stock Option Plan was adopted by the Board of Directors and
stockholders of the Company on November 12, 1995. The Company's 1999 Stock
Option Plan was adopted by the Board of Directors during August 1999 and
approved by the stockholders in June 2000. Under the Option Plans, a total of
1,250,000 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 Plans 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 Plans to employees (including officers) of the Company or a subsidiary
corporation thereof on the date of grant. Non-qualified options may be granted
to (i) non-employees of the Company or a subsidiary thereof on the date of the
grant, and (ii) consultants or 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 Plans are 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 Plans, 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 Plans 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 Plans will expire not more than ten
years from the date of the grant subject to earlier termination under the Option
Plans. 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 1995 Option Plan will
terminate on November 12, 2005 and the 1999 Option Plan will terminate in August
of 2009.
F-55
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS (Continued)
On August 28, 2000, the Company granted options to a Vice-President under the
1999 Option Plan to purchase 75,000 shares of common stock. The exercise price
is from $3.00 to $3.50, exercisable equally on the anniversary date over the
next three years. These options expire in five years from the grant date.
On December 1, 2000, the Company granted options to its General Manager of
Business Development to purchase 12,500 shares of common stock. The exercise
price is $4.00. The Options expire in five years from the grant date.
During the year ended December 31, 2000, a retiring officer exercised options
and purchased 50,000 shares of the Company's stock for $16,500.
In January 2001, the Company granted options to its Chief Operating Officer
under the 1999 Option Plan to purchase 275,000 shares of common stock. The
exercise price is from $2.50 to $3.50, with 50,000 vesting and exercisable
immediately and the remaining 225,000 vesting and exercisable equally on the
anniversary date over the next three years. These options expire in five years
from the grant date.
In January 2001, the Company granted options to its former Chief Financial
Officer under the 1999 Option Plan to purchase 100,000 shares of common stock.
The exercise price is from $1.50 to $2.50, with 50,000 vesting and exercisable
immediately and the remaining 50,000 exercisable on June 30, 2001. These options
expire in five years from the grant date.
Options Granted Outside of the Plan
- -----------------------------------
In February 2002, pursuant to employment agreements, two employees were issued
non-qualified stock options to purchase a total of 2,300,000 common shares at an
exercise price of $.50 per share. The options are exercisable over a ten-year
period. During August 2002, one of the above employees resigned, which by doing
so forfeited his interest and rights to 1,300,000 non-qualified stock options.
In February 2002, pursuant to a one-year consulting agreement, a consultant was
issued non-qualified stock options to purchase a total of 1,000,000 common
shares at an exercise price of $.50 per share. The options are exercisable over
a ten-year period. The fair value of stock options estimated on the date of
grant using the Black-Scholes option pricing model was $0.49, or $490,000, of
which $423,894 was charged to operations during the year ended December 31,
2002.
F-56
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- STOCK OPTION PLANS (Continued)
In March 2002, in connection with legal services provided, the Company issued to
a law firm options to purchase 225,000 shares of common stock at an exercise
price of $.44. The fair value of the stock options estimated on the date of
grant using the Black-Scholes option pricing model was $0.21, or $47,250, which
was charged to operations during the year ended December 31, 2002. The warrants
are exercisable over a ten-year period and vested at the grant date.
In April 2002, pursuant to a consulting agreement, a consulting company was
issued non-qualified stock options to purchase a total of 249,000 common shares
at an exercise price of $.28. The options vested at the grant date and are
exercisable over a ten-year period. The fair value of stock options estimated on
the date of grant using the Black-Scholes option pricing model was $67,230,
which was charged to operations during the year ended December 31, 2002.
In May 2002, pursuant to a consulting agreement, a consultant was issued
non-qualified stock options to purchase a total of 45,000 common shares at an
exercise price of $0.31. The options vested at the grant date and are
exercisable over a ten-year period. The fair value of the stock options
estimated on the date of grant using the Black-Scholes option pricing model was
$0.20, or $9,000, which was charged to operations during the year ended December
31, 2002.
On May 3, 2000, the Company granted to its then Chief Operating Officer
non-qualified stock options, outside of the Company's stock option plans, to
purchase a total of 325,000 shares of common stock. Of the options granted,
options on 25,000 shares vested immediately at $1.00 per share and 100,000
shares will vest on each subsequent anniversary date at exercise prices of
$2.50, $3.00 and $3.50, respectively. All stock options expire on May 2, 2010.
The Company recorded a total of $187,750 as unearned stock compensation during
the year ended December 31, 2000, based on the excess of the closing price of
the common stock at the date of the grant over the exercise price of the
options. The unearned stock compensation is being amortized over the vesting
periods. During the years ended December 31, 2002, 2001 and 2000, the Company
recorded $62,580, $62,580 and $41,723 of compensation expense related to such
stock options, respectively.
F-57
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- STOCK OPTION PLANS (Continued)
A summary of the Company's stock option activity and related information for the
three years ended December 31, 2002 is as follows:
Weighted
Weighted Outside the Average
Under the Plans Average Plans Exercise
Stock Options Exercise Price Stock Options Price
--------------- -------------- ---------------- ----------
Balance at January 1, 2000 650,000 $ .69 - $ -
Options granted:
In the 1999 plan 87,500 3.57 - -
Options granted:
Outside the option plan - - 325,000 2.85
Options exercised in the 1995
Plan (50,000) .33 - -
----------- ------ ----------- --------
Outstanding - December 31, 2000 687,500 1.07 325,000 2.85
Options granted:
In the 1999 plan 375,000 2.72 - -
----------- ------ ----------- --------
Outstanding - December 31, 2001 1,062,500 $1.65 325,000 2.85
Options granted:
Outside the option plan - - 3,819,000 .47
Options cancelled:
Outside the option plan - - (1,300,000) (.50)
----------- ------ ----------- --------
Outstanding - December 31, 2002 1,062,500 $1.65 2,844,000 $ .75
=========== ====== =========== ========
Options Outstanding Options Exercisable
------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life in Years Prices Shares Prices
- ------------------------ ---------- ------------- -------- --------- --------
$0.31 - $0.71 3,119,000 9.4 $0.52 3,119,000 $0.52
$1.00 - $1.50 75,000 5.3 $1.33 75,000 $1.33
$2.50 - $3.00 475,000 6.1 $2.75 400,000 $2.70
$3.50 - $4.00 237,500 4.6 $3.58 37,500 $3.67
--------- ---------
3,906,500 8.6 $0.99 3,631,500 $0.81
========= =========
F-58
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- STOCK OPTION PLANS (Continued)
At December 31, 2002, -0-, 137,500 and 6,000,000 options are available under the
1995 plan, 1999 plan and 2002 plan, respectively.
The weighted average fair value of exercised options during the year ended
December 31, 2000 was $1.07.
As disclosed in Note 2, the fair value of options and warrants at date of grant
was estimated using the Black-Scholes option-pricing model using the following
assumptions:
Year Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Expected stock price
volatility 130-143% 57% 138%
Risk-free interest rate 5% 5% 5%
Expected option life in
years 10 years 5 years 3 years
Expected dividend yield 0% 0% 0%
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Office Lease and Required Security Deposit
- ------------------------------------------
On August 30, 2000, the Company entered into a lease agreement for office space
in Fairfax, Virginia for a period of five years. Under the lease agreement,
annual rent approximates $224,000 subject to certain escalation adjustments. In
connection with this lease, the Company is required to provide the landlord with
a stand-by letter of credit in the amount of $224,038. The stand-by letter of
credit is to be renewed annually and at September 1, 2002, the Company did not
renew this stand-by letter of credit.
F-59
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Office Lease and Required Security Deposit (Continued)
- ------------------------------------------
The Company's future minimum lease payments are as follows:
Year Ending December 31, Amount
----------------------- ----------
2003 $ 240,059
2004 247,261
2004 168,105
----------
Total $ 655,425
==========
Rent expense for all premise operating leases was $255,299, $245,794 and
$180,468 for the years ended December 31, 2002, 2001 and 2000, respectively.
The landlord, SMII Fairfax, LLC, as of December 31, 2002, claims that the
Company owes back rent of $59,562 which has been accrued by the Company. On
February 14, 2003, the landlord filed suit in the Fairfax County General
District Court alleging breach of contract for unlawful detainer. Without
admitting or denying liability, the Company is currently negotiating with the
landlord and expects a settlement in the near future.
Employment/Consulting Agreements
- --------------------------------
During January 2001, the Company entered into an employment agreement with an
individual to provide services as a general manager of its Nuclear and
Environmental Division. The Company agreed to pay $175,000 annually, plus a
five-year option to purchase 275,000 shares of common stock, at prices ranging
from $2.50 to $3.50 per share.
On February 28, 2002, the Company entered into an employment agreement with its
then Chairman, Don Hahnfeldt. Under the terms of the agreement, the Company is
to pay to Mr. Hahnfeldt a salary equal to $15,000 per month, plus benefits. The
agreement is for a term of two years and provides for a severance payment in the
amount of $180,000 and immediate vesting of all stock options in the event his
employment is terminated without cause. Mr. Hahnfeldt was granted options to
acquire 1,000,000 shares of the Company's common stock at an exercise price of
$.50 per share, of which 500,000 vested at the grant date and the remaining
500,000 shall vest equally over a 24 month period beginning March 1, 2002 and
are exercisable only in the event that the Company increases the number of
authorized shares of common stock to at least 130,000,000 shares. These stock
options expire on February 28, 2012.
F-60
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Employment/Consulting Agreements (Continued)
- --------------------------------
On February 28, 2002, the Company entered into a consulting agreement with one
of the board of directors' companies, Verdi Consultants, Inc. Under the terms of
the agreement, the Company is to pay to Verdi Consultants, Inc. a consulting fee
equal to $15,000 per month plus benefits. The agreement is for a term of three
years and provides for a severance payment in the amount of $180,000 and
immediate vesting of all stock options in the event the consulting agreement is
terminated without cause. Verdi Consultants, Inc. was granted options to acquire
1,000,000 shares of the Company's common stock at an exercise price of $.50 per
share, of which 125,000 vested at the grant date and the remaining 875,000 shall
vest equally over a 24 month period beginning March 1, 2002 and are exercisable
only in the event that the Company increases the number of authorized shares of
common stock to at least 200,000,000 shares. These stock options expire on
February 28, 2012. Commencing August 8, 2002, Verdi Consultants, Inc. has agreed
to defer $5,000 per month of its consulting fees subject to future cash
availability.
Employee Benefit Plan
- ---------------------
The Company adopted a non-contributory 401(k) plan effective January 1, 2000.
The plan covers all employees who are at least 21 years of age with no minimum
service requirements. The contributions to the plan for the years ended December
31, 2002, 2001 and 2000 totalled $15,537, $23,300 and $12,400, respectively.
Effective February 13, 2003, the Company suspended its 401(k) plan.
Software Development Agreement
- ------------------------------
In July 2002, the Company signed agreements and subsequently issued 4,000,000
shares of common stocks to ipPartners, Inc., an affiliate of Trylon Metrics,
Inc., for development of prototypes based upon the Company's Acoustic Core
technology. These shares were valued at $600,000 and such amount was capitalized
as software development costs related to the Acoustic Core technology rights.
F-61
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Joint Technology Development Agreement
- --------------------------------------
The Company entered into a Joint Technology Development Agreement (the "JTDA")
with Logstor Ror A/S ("Logstor"), a Danish corporation, dated as of September
24, 2002.
The Company and Logstor will act as independent contractors to develop a foam
incorporating the Company's proprietary HNIPU binder for use in pre-insulated
pipes manufactured by Logstor. The Company and Logstor will initially
collaborate to tailor the foam chemistry according to Logstor's specifications.
Logstor has exclusive worldwide rights to specific defined markets to
incorporate this technology into its product line and will pay the Company a
royalty fee. In return for worldwide exclusivity, Logstor has committed to
convert its production facilities to use of HNIPU in its product line based on
successful achievement of the technical and cost criteria.
Pursuant to the JTDA, Logstor and the Company will jointly own all intellectual
property rights resulting from work performed under the Agreement. The Company
will retain sole ownership of rights to other forms, applications and markets of
HNIPU preceding and or independent of the Agreement.
Termination of Acquisition of Swissray International, Inc.
- ----------------------------------------------------------
The Company entered into a non-binding letter of intent with Hillcrest Avenue
LLC ("Hillcrest") to acquire Hillcrest's majority controlling interest in
Swissray International, Inc. ("Swissray") (OTC Bulletin Board: SRMI.OB) in an
all stock transaction. Swissray is engaged in the design, manufacturing and
marketing of proprietary direct digital radiography (ddR) technology. This
technology is radiographic images in seconds and at a lower cost than
conventional radiography.
During October 2002, both parties decided not to take any further actions
regarding this acquisition.
F-62
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
- ----------------------------
The Company maintains cash balances in two financial institutions. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000 per
institution. From time to time, the Company's balance may exceed these limits.
At December 31, 2002 and 2001, uninsured cash balances were approximately
$113,000 and $718,000, respectively. The Company believes it is not exposed to
any significant credit risk for cash.
Business Risks
- --------------
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.
F-63
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
Series A 3% Convertible Preferred Stock
- ---------------------------------------
On January 16, 2003, Woodward LLC converted 3,519 shares of Series A 3%
Convertible Preferred stock with a liquidation preference of $351,900 into
703,800 shares of common stock at a conversion price of $.50 per share.
Private Placements
- ------------------
During January 2003, the Company entered into private placements with four
individuals and sold 5,500,000 shares of the Company's common stock for a price
of $.05 per share. The Company during December 2002 received advances against
these private placements in the amount of $175,000. The Company recorded these
advances at December 31, 2002 as an advance on sale of common stock.
Settlement Agreement - Related Party
- ------------------------------------
On February 24, 2003, the Company entered into a creditor settlement agreement
with a company owned by the Chairman of the Board. The Company agreed to issue
528,082 restricted shares of the Company's common stock in satisfaction of
$84,493 owed by the Company to Verdi Consultants, Inc.
Exchange Agreements
- -------------------
On March 27, 2003, the Company entered into a license and exchange agreement
with HomeCom Communications, Inc. ("HomeCom"). As part of the agreement, HomeCom
agreed to issue 11,250 shares of Series F Convertible Preferred stock of
HomeCom, $.01 par value per share, which will represent, upon conversion, 75% of
the issued and outstanding shares of HomeCom stock, par value $.001 per share,
subject to dilution related to common stock issuable upon conversion of
HomeCom's outstanding Series B-E Convertible Preferred stock and warrants or
options, and the Series G Convertible Preferred stock of HomeCom convertible
into common stock. The Company has agreed to license the rights it owns to the
EKOR, HNIPU and Electro Magnetic Radiography (EMR) technologies to HomeCom. The
Company and HomeCom plan to file a proxy to authorize the issuance of the
additional shares. Upon the closing of the sale of the HomeCom's exiting web
hosting business (which also requires stockholder approval), the Company will
have rights to majority control of the HomeCom Board of Directors and
responsibility for the assignment of any new executive management positions in
HomeCom. The proposed transactions are subject to the satisfaction of certain
conditions set forth in the transaction documents.
On March 27, 2003, the Company entered into an exchange agreement with Markland.
As an owner of 239,927,344 restricted shares of Markland's common stock, the
Company agreed to exchange 100 million shares of Markland's common stock for
16,000 shares of Series D Convertible Preferred stock of Markland having a
liquidation value of $16 million.
F-64
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Exchange Agreements (Continued)
- -------------------
The preferred stock is convertible into shares of Markland's common stock at a
variable percentage of the then current market price, subject to certain
adjustments. If the market price of Markland common stock is less than, or equal
to $0.05, it is convertible at 80% of the market price. If the market price is
greater than $0.05, but less than or equal to $0.10, at 75% of the market value.
If the market price is greater than $0.10, but less than or equal to $0.15, at
70% of the market price. And if the market price is greater than $0.15, at 65%
of the market price.
Markland can redeem the Series D Preferred according to the following schedule.
During the first 180 days after the closing, it can be redeemed at 120% of the
stated value and accrued dividends. From 181 days until 270 days, it can be
redeemed for 125% of the stated value and dividends. From 271 days and ending
360 days after the closing, it can be redeemed for 135% of the stated value and
dividends.
On March 27, 2003, the Company entered into an exchange agreement with Woodward
LLC. The Company agreed to cancel the obligation to issue Woodward LLC 10
million shares of the Company's common stock due to the price reset, and in
exchange for $1.069 million worth of HomeCom Series G Preferred stock. In
addition, the Company agreed to retire all shares of its outstanding Series A 3%
Convertible Preferred stock held by Woodward LLC and the rights of Woodward LLC
to receive shares of the Company's Series B 5% Convertible Preferred stock in
exchange for 16,000 shares of Series D Convertible Preferred stock of Markland.
Intellectual Property Sales Agreement
- -------------------------------------
On March 5, 2003, the Company acquired from Polymate, Ltd. the remaining 1%
ownership in the following technologies acquired or developed by Polymate, Ltd.
- - HNIPU, Firesel, RAD-Y, Rubcon, Electronic Glues, Liquid Ebonite Materials
("LEM"), Kauton and Hypocorr. As part of the above March 27, 2003 license and
exchange agreement with Homecom, Polymate, Ltd. will receive 1,500 shares of
Homecom Series F Convertible Preferred stock for the relinquishment of its
rights to the above technologies.
F-65
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Acquisition of Ergo Systems, Inc.
- ---------------------------------
On January 14th, 2003, Markland completed the acquisition of Ergo Systems, Inc.,
a Virginia corporation ("Ergo") from Ocean Data Equipment Corporation, a
Delaware corporation ("ODEC"). Markland agreed to pay ODEC $400,000 in cash,
payable without interest over a period of one year. The purchase price was
determined through arms-length negotiations, and was based on estimated future
earnings from the contract.
Ergo's only asset is a US government General Services Administration multi-year
contract to provide border security logistic support and product development
services to the United States Government. Markland will continue to provide
these support services to five US Border ports of entry in the states of
California, Texas, Michigan and New York.
New Compensation Agreements
- ---------------------------
Effective January of 2003, Markland entered into four new compensation
agreements with its two officers and two consultants, which provide for
aggregate monthly remuneration of $47,500.
In addition, these agreements provide for the issuance of 7.07% of Markland's
outstanding common stock and 2.4% of Markland's outstanding common stock, of
which 4.67% is scheduled to be issued by October 31, 2003, and 2.4% is issuable
after the first anniversary of the compensation agreements. Based on the total
common shares outstanding as of December 31, 2002, a total of approximately
21,705,000 shares of Markland's common stock are issuable under these
compensation agreements.
On March 28, 2003, the Company entered into a two-year employment agreement with
Carey Naddell. Under the terms of the agreement, Mr. Naddell shall be the
Company's Chief Operating Officer during the transition period which will be
completed within three months. After that, he will assume the office of the
President and Chief Executive Officer and any additional duties assigned by the
Board of Directors. The Company agreed to pay a salary of $10,000 per month and
1,000,000 shares of the Company's common stock.
F-66
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Technology Purchase Agreement
- -----------------------------
On March 19, 2003, Markland and ASI Technology Corporation, a Nevada
corporation, ("ASI") entered into a Technology Purchase Agreement (the
"Agreement"). Under the Agreement, ASI agreed to sell and Markland agreed to
purchase certain assets relating to ASI's gas plasma antenna technology,
including patents, patent applications, equipment, government contract rights
and other intellectual property rights. The closing of the transaction will
occur on the earlier of the date the last of the government contracts are
assigned to Markland or ninety days after the date of the Agreement (June 17,
2003). ASI will be responsible for the performance of its obligations under the
contracts until they are assigned to Markland and will pay Markland all of its
revenues from the contracts billed for periods after April 1, 2003. Markland has
agreed to use its best efforts to manage and administer the contracts during
this period prior to closing and to pay ASI a fee of $2,500 per month for
administrative support.
In consideration, Markland agreed to pay ASI $1,150,000. $150,000 in cash,
$10,000, of which was paid on execution of the Agreement and $10,000 of which is
payable every thirty days following the date of execution of the Agreement until
the closing, at which time the remaining balance is due and payable. In addition
to the cash payment, Markland is required to issue to ASI, on closing,
$1,000,000 worth of Markland common stock at the then current market price. In
the event that Markland fails to register such stock on behalf of ASI, Markland
will have to issue an additional $150,000 of stock to ASI.
ASI may be entitled to receive additional shares of Markland common stock in
certain circumstances if Markland effects a reverse split of its outstanding
stock within 18 months after the closing date, or if a registration statement
for the shares is delayed.
In connection with the Agreement, ASI and Markland entered into a registration
rights agreement entitling ASI to include its shares of Markland common stock in
future registration statements filed by Markland under the Securities Act of
1933 in connection with public offerings of Markland common stock.
Also in connection with the Agreement, ASI and Markland entered into a
sublicense agreement pursuant to which ASI has sublicensed to Markland the right
to develop and sell products to certain government, military and homeland
security customers in the United States and Canada using the Company's plasma
sterilization and decontamination technology.
The closing of the sale of the plasma antenna technology is subject to a number
of conditions and the Agreement may be terminated prior to closing under certain
circumstances.
F-67
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Options/Warrants Cancellation Agreement
- ---------------------------------------
In March 2003, in order to assist the Company to raise additional working
capital, the Company entered option/warrant cancellation agreements with three
individuals cancelling 1,075,000 options with exercise prices ranging from $.50
to $.71 and cancelling 525,000 warrants with exercise prices ranging from $1.00
to $3.00. The Company agreed to issue those options and warrants back to three
individuals once the filing of all necessary amendments to the Articles of
Incorporation of the Company to authorize an increase in the number of
authorized shares of common stock to at least 200,000,000 shares.
Legal Settlement Agreement
- --------------------------
On October 21, 2002, the Company's former legal counsel filed a Demand for
Arbitration before the American Arbitration Association seeking $288,755 in
alleged unpaid legal fees from the Company. The dispute was subsequently
resolved pursuant to a Settlement Agreement dated April 15, 2003 pursuant to
which the Company is to pay such counsel the sum of $310,581 by a combination of
cash and stock in accordance with a schedule and on the terms set forth in the
Settlement Agreement. The satisfaction of this payment obligation is to occur no
later than by December 22, 2003. The entire settlement amount was accrued as of
December 31, 2002.
NOTE 14 - QUARTERLY RESULTS (UNAUDITED)
Quarter Ended
------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total Year
------------- ------------- ------------- ------------- -------------
2002:
- -----
Revenues $ 55,585 $ 23,236 $ -- $ 10,000 $ 88,821
Net loss attributable to
common stockholders (3,061,153) (2,006,547) (4,464,818) (6,536,237) (16,068,755)
Loss per share - basic
and diluted (a) $ (.05) $ (.03) $ (.06) $ (.09) $ (.23)
2001:
- -----
Revenues $ -- $ -- $ 10,215 $ 8,160 $ 18,873
Net loss attributable to
common stockholder (2,901,268) (2,332,679) (2,462,801) (1,063,487) (8,760,235)
Loss per share - basic
and diluted (a) $ (.05) $ (.05) $ (.05) $ (.04) $ (.18)
F-68
EUROTECH, LTD. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Per common share amounts for the quarters and full year have been calculated
separately. Accordingly, quarterly amounts do not add to the annual amount
because of differences in the weighted average common shares outstanding during
each period due to the effect of the Company issuing shares of its common stock
during the year.
F-69
SIGNATURES
Pursuant to the requirements 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.
EUROTECH, LTD.
Date: May 6, 2003 By: /s/ Don V. Hahnfeldt
-------------------------
Name: Don V. Hahnfeldt
Title: CEO and President
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
PERSON CAPACITY DATE
/s/ Don V. Hahnfeldt
- ----------------------------------- President, Chief Executive Officer and May 6, 2003
Don V. Hahnfeldt Director (Principal Executive Officer)
/s/ Randolph A. Graves, Jr. Vice President, Secretary, Chief Financial May 6, 2003
- ----------------------------------- Officer and Director (Principal Accounting
Randolph A. Graves, Jr. Officer)
/s/ Carey Naddell
- ----------------------------------- Chairman of the Board, Chief Operating May 6, 2003
Carey Naddell Officer and Director
/s/ Leonid Khotin
- -----------------------------------
Leonid Khotin Director May 6, 2003
S-1
CERTIFICATION
I, Randolph A. Graves, Jr., hereby certify that:
1. I have reviewed the Annual Report on Form 10-K of Eurotech, Ltd.
(the "Registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 6, 2003
/s/ Randolph A. Graves, Jr.
-----------------------------
Randolph A. Graves, Jr.
Vice President, Secretary and
Chief Financial Officer
CERTIFICATION
I, Don V. Hahnfeldt, hereby certify that:
1. I have reviewed the Annual Report on Form 10-K of Eurotech, Ltd.
(the "Registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 6, 2003
/s/ Don V. Hahnfeldt
-----------------------------------------------
Don V. Hahnfeldt
Chairman, President and Chief Executive Officer
EXHIBIT INDEX
The following exhibits are filed with, or incorporated by reference
into, this Annual Report on Form 10-K.
Location
Exhibit Description Reference
- ------- ----------- ---------
No.
- ---
2.1 Technology Transfer Agreement dated July 13, 2001, between Eurotech, Ltd., and Trylon Metrics,
Inc., 15
2.1.1 Amendment, dated October 3, 2001, to Technology Transfer Agreement dated July 13, 2001, between
Eurotech, Ltd., and Trylon Metrics, Inc., 23
3.1.1 Articles of Incorporation of Eurotech, Ltd. and amendment thereto 1
3.1.2 Articles of Amendment adopted June 20, 2000 and corresponding Certificate of Amendment dated
June 21, 2000 10
3.1.3 Articles of Amendment to the Articles of Incorporation to state the terms of the Series A 3%
Convertible Preferred Stock dated February 1, 2002 20
3.2.1 Bylaws of Eurotech Ltd. 1
3.2.2 Amendment to Bylaws adopted February 23, 2000 to fix the number of directors at 5. 9
3.2.3 Amendment to Bylaws adopted on August 27, 2001 to fix the number of directors at 7 23
4.1 Form of Common Stock certificate 1
10.1.1 License Agreement dated September 6, 1996 between Euro-Asian Physical Society and ERBC Holding,
Ltd. 1
10.1.2 Sub-License Agreement dated September 16, 1996 between ERBC Holding, Ltd. and Eurotech, Ltd.
1
10.1.2.1 EKOR Agreement dated as of May 15, 2000 between Euro-Asian Physical Society and Eurotech, Ltd.
Modifying the EKOR license 12
10.1.3 Agreement dated January 28, 1997 between Eurotech, Ltd. and Kurchatov Research Holdings, Ltd.
1
10.1.4 Memorandum of Intent among Chernobyl Nuclear Power Plant, I. V. Kurchatov Institute, Ukrstroj
and Eurotech, Ltd. 1
10.1.5 Agreement dated December 10, 1996 between Ukrstroj and Chernobyl Nuclear Power Plant (in past
filings, this agreement was identified as dated December 6, 1996 when in fact the agreement is
dated December 10, 1996) 1
10.1.6 Agreement dated December 11, 1996 among Ukrstroj, Eurotech, Ltd. and Euro-Asian Physical Society 1
10.2.1 Technology Purchase Agreement between Eurotech, Ltd. and Oleg L. Figovsky 2
10.2.2 Technology Purchase Agreement between Eurotech, Ltd. and Oleg L. Figovsky 2
10.2.3 Technology Purchase Agreement between the Company and Oleg L. Figovsky 2
10.2.4 Agreement dated February 27, 2000 between Eurotech, Ltd. and Oleg L. Figovsky (acquisition of
the rights to 49% of net profits) 8
10.3 Preliminary EKOR (Component A)/Block Copolymer manufacturing licensing agreement between
Eurotech, Ltd. and NuSil Technology 9
10.4.1 Agency Contract dated May 19, 2000 between Eurotech, Ltd. and McPhee Environmental Supply 10
10.4.2 McPhee Environmental Supply Cancellation dated March 14, 2001 12
10.5.1 Share Purchase Agreement dated June 29, 2000 between Zohar Gendler and Eurotech, Ltd. (Rademate
Ltd.) 10
10.5.2 Share Purchase Agreement dated June 29, 2000 between Technion Entrepreneurial Incubator Co.,
Ltd. and Eurotech, Ltd. (Rademate Ltd.) 10
10.5.3 Investment Agreement date July 23, 2000 between Sorbtech Ltd. and Eurotech, Ltd. (in past
filings, this agreement was identified as "share purchase agreement" when in fact it is titled
"Investment Agreement") 10
10.5.4 Investment Agreement entered into in May, 2000 between Amsil, Ltd. and Eurotech, Ltd. 10
10.6.1 Form of Agreement among Eurotech, Ltd., V. Rosenband and C. Sokolinsky, and Ofek Le-Oleh
Foundation 2
10.6.2 Equity Sharing Agreement between the Company, V. Rosenband and C. Sokolinsky 2
10.6.3 Voting Agreement among Eurotech, Ltd., V. Rosenband and C. Sokolinsky 2
10.7.1 Investment Agreement between Eurotech, Ltd. and Chemonol, Ltd. 2
10.7.2 Equity Sharing Agreement between the Company and Leonid Shapovalov 2
10.7.3 Voting Agreement between Eurotech, Ltd. and Leonid Shapovalov 2
10.8.1 Agreement between Eurotech, Ltd. and Separator, Ltd. 2
10.8.2 Equity Sharing Agreement between Eurotech, Ltd. and Efim Broide 2
10.8.3 Voting Agreement between Eurotech, Ltd. and Efim Broide 2
10.9.1 Form of Agreement among Eurotech, Ltd., Ofek Le-Oleh Foundation and Y. Kopit 2
10.9.2 Equity Sharing Agreement among Eurotech, Ltd., Y. Kopit and V. Rosenband 2
10.9.3 Voting Agreement among Eurotech, Ltd., Y. Kopit and V. Rosenband 2
10.10 Form of License Agreement between the Company and ERBC Holdings, Ltd. 2
10.11.1 Cooperation Agreement between Eurotech, Ltd. and Forschungszentrum Julich GmbH 2
10.11.2 Agreement among Eurotech, Ltd., Forschungszentrum Julich and two other entities for the testing
of EKOR in Germany 7
10.11.3 Letters of cancellation of German EKOR testing agreement 12
10.12.1 Convertible Debenture Purchase Agreement among Eurotech, Ltd., JNC Opportunity Fund, Ltd. and
Diversified Strategies Fund, L.P. 2
10.12.2 Escrow Agreement among Eurotech, Ltd., JNC Opportunity Fund, Ltd. and Diversified Strategies
Fund, L.P. and Robinson, Silverman, Pearce, Aronsohn & Berman, LLP 2
10.12.3 Registration rights Agreement among Eurotech, Ltd., JNC Opportunity Fund, Ltd. and Diversified
Strategies Fund, L.P. 2
10.12.4 Form of 8% Convertible Debenture Due November 27, 2000 issued by Eurotech, Ltd. to JNC
Opportunity Fund, Ltd. 2
10.12.5 Form of 8% Convertible Debenture Due November 27, 2000 issued by Eurotech, Ltd. to Diversified
Strategies Fund, L.P. 2
10.12.6 Warrant No. 1 issued by Eurotech, Ltd. to JNC Opportunity Fund, Ltd. 2
10.12.7 Warrant No. 2 issued by Eurotech, Ltd. to Diversified Strategies Fund, L.P. 2
10.12.8 Warrant No. 3 issued by Eurotech, Ltd. to Diversified Strategies Fund, L.P. 2
10.13.1 Convertible Debenture Purchase Agreement between Eurotech, Ltd. and JNC Opportunity Fund, Ltd. 2
10.13.2 Escrow Agreement among Eurotech, Ltd., JNC Opportunity Fund, Ltd. and Robinson, Silverman,
Pearce, Aronsohn and Berman, LLP 2
10.13.3 Registration Rights Agreement between Eurotech, Ltd. and JNC Opportunity Fund Ltd. 2
10.13.4 Form of 8% Convertible Debenture Due February 23, 2001 issued by Eurotech, Ltd. to JNC
Opportunity Fund, Ltd. 2
10.13.5 Warrant No. 3 issued by Eurotech, Ltd. to JNC Opportunity Fund Ltd. 2
10.14.1 Debenture Purchase Agreement between Eurotech, Ltd. and JNC Strategic Fund Ltd. 2
10.14.2 Form of 8% Convertible Debenture No.1 Due July 20, 2001 issued by Eurotech, Ltd. to JNC
Strategic Fund Ltd. 3
10.14.3 Form of 8% Convertible Debenture No.2 Due February 23, 2001 issued by Eurotech, Ltd. to JNC
Opportunity Fund, Ltd. 3
10.14.4 Warrant No. 4 issued by Eurotech, Ltd. to JNC Strategic Fund Ltd. 3
10.14.5 Registration Rights Agreement issued by Eurotech, Ltd. to JNC Strategic Fund Ltd. 3
10.14.6 Amended and Revised 8% Convertible Debenture No.1 Due February 23, 2001issued by Eurotech, Ltd.
to JNC Opportunity Fund, Ltd. 3
10.14.7 Amended and Revised 8% Convertible Debenture No.2 Due July 20, 2001 issued by Eurotech, Ltd. to
JNC Strategic Fund Ltd. 3
10.14.8 Amended and Revised 8% Convertible Debenture No.13 Due November 27, 2000 issued by Eurotech,
Ltd. to JNC Opportunity Fund, Ltd. 3
10.14.9 Amended and Revised 8% Convertible Debenture No.14 due November 27, 2000 issued by Eurotech,
Ltd. to Diversified Strategies Fund, L.P. 3
10.14.10 Agreement dated February 25, 2000 regarding conversion price 8
10.14.11 Agreement dated February 21, 2001 regarding extension of maturity 12
10.15.1 Agreement between Eurotech, Ltd. and David Wilkes 3
10.15.2 Secured Promissory Note issued by Eurotech, Ltd. to JNC Strategic Fund Ltd. 3
10.15.3 Secured Promissory Note issued by Eurotech, Ltd. to David Wilkes 3
10.15.4 Secured Promissory Note issued by Eurotech, Ltd. to David Wilkes 3
10.15.5 Escrow Agreement among the Company, JNC Strategic Fund Ltd. and Encore Capital Management, L.L.C. 3
10.15.6 Security Agreement by Eurotech, Ltd. in favor of JNC Strategic Fund Ltd. and David Wilkes 3
10.15.7 Warrant issued by Eurotech, Ltd. to JNC Strategic Fund Ltd. 3
10.15.8 Warrant issued by the Company to David Wilkes 4
10.15.9 Form of 8% Convertible Debenture Due Three Years from Original Issue Date issued by Eurotech,
Ltd. to JNC Strategic Fund Ltd. 4
10.15.10 Employment Agreement between Eurotech, Ltd. and Frank Fawcett 4
10.15.11 Disengagement Agreement between Eurotech, Ltd. and Frank Fawcett 7
10.16.1 Employment Agreement between Eurotech, Ltd. and Don V. Hahnfeldt 4
10.16.2 Revised employment agreement between Eurotech, Ltd. and Don V. Hahnfeldt 7
10.17 Agreement dated September 9, 1999 between Eurotech, Ltd. and Peter Gulko (acquisition of KRHL
shares) 5
10.18.1 Agreement dated as of November 30, 1999 between Eurotech, Ltd. and Kurchatov Research Holdings,
Ltd. 7
10.18.2 Agreement dated June 20, 2000 between Eurotech, Ltd. and Advanced Technology Industries, Inc.
(formerly Kurchatov Research Holdings, Ltd.) 10
10.19 Agreement dated as of December 15, 1999 between Eurotech, Ltd. and Spinneret Financial Systems,
Inc. 7
10.20.1 Common Stock Purchase Agreement dated December 31, 1999 between Eurotech, Ltd. and Woodward LLC 7
10.20.2 Warrant issued by Eurotech, Ltd. to Woodward LLC on December 31, 1999 7
10.20.3 Registration Rights Agreement dated December 31, 1999 between Eurotech, Ltd. and Woodward LLC 7
10.20.4 Commitment Agreement ($22,000,000) between Eurotech, Ltd. and Woodward LLC 7
10.20.5 Escrow Agreement dated December 31, 1999 among Eurotech, Ltd., Woodward LLC and Krieger & Prager 7
10.20.6 Common Stock Purchase Agreement dated as of March 1, 2000 between Eurotech, Ltd. and Woodward
LLC 9
10.20.7 Common Stock Purchase Agreement dated as of April 24, 2000 between Eurotech, Ltd. and Woodward
LLC 10
10.20.8 Registration Rights Agreement dated as of April 17, 2000 between Eurotech, Ltd. and Woodward LLC
10
10.20.9 Warrant issued by Eurotech, Ltd. to Woodward LLC on June 22, 2000 10
10.20.10 Amendment Agreement dated June 29, 2000 between Eurotech, Ltd. and Woodward LLC, amending April
24, 2000 Common Stock Purchase Agreement and Registration Rights Agreement and December 31,
2000 Commitment Agreement 10
10.20.11 Amendment Agreement dated September 28, 2000 between Eurotech, Ltd. and Woodward LLC, amending
March 1, 2000 Common Stock Purchase Agreement 11
10.20.12 Modification Agreement dated as of February 28, 2001, amending March 1 and April 24, 2000
Common Stock Purchase Agreements 12
10.20.13 Common Stock Purchase Agreement as of March 30, 2001 between Eurotech, Ltd. and Woodward LLC 13
10.20.14 Registration Rights Agreement dated as of March 30, 2001 between Eurotech, Ltd. and Woodward LLC 13
10.20.15 Modification Agreement dated as of May 18, 2001, amending March 1, 2000, April 24, 2000, and
March 30, 2001 Common Stock Purchase Agreements 14
10.20.16 Securities Purchase Agreement as of February 1, 2002 between Eurotech, Ltd. and Woodward LLC 20
10.20.17 Repricing Rights Agreement dated as of February 1, 2002 between Eurotech, Ltd. and Woodward LLC 20
10.20.18 Registration Rights Agreement dated as of February 1, 2002 between Eurotech, Ltd. and Woodward
LLC 20
10.20.19 Letter Agreement dated December 28, 2001 between Eurotech, Ltd. and Woodward LLC 20
10.20.21 Private Equity Agreement dated February 22, 2002, between Eurotech, Ltd. and Jenks & Kirkland,
Ltd 21
10.20.22 Registration Rights Agreement dated as of February 22, 2002 between Eurotech, Ltd. and Jenks &
Kirkland, Ltd. 21
10.20.23 Restated Amendment To Repricing Rights Agreement And Securities Purchase Agreement dated as of
May 7, 2002 between Eurotech, Ltd. and Woodward LLC 24
10.21 Technology Acquisition and Development Agreement related to Cypto.Com, Inc. 9
10.22.1 Investment Banking Consulting Agreement dated January 15, 2001 between Eurotech, Ltd. and
Adolph Komorsky Investments, together with addendum thereto 12
10.22.2 Cancellation of Investment Banking Consulting Agreement dated March 30, 2001 between Eurotech,
Ltd. and Adolph Komorsky Investments 13
10.23.1 Consulting Agreement as of January 18, 2001 between Eurotech, Ltd. and Davis Manafort, Inc. 13
10.23.2 Second Consulting Agreement dated April 25, 2001 between Eurotech, Ltd. and Davis Manafort, Inc. 13
10.24 Consulting Agreement dated April 25, 2001 between Eurotech, Ltd. and Harborstone Financial
Group, Inc. 13
10.25 Consulting Agreement dated March 23, 2001 between Eurotech, Ltd. and Robert Tarini/ip Partners 13
10.26 Consulting Agreement dated October 22, 2001 between Eurotech, Ltd. and Race Rock Design Partners 18
10.27 Employment Agreement between Eurotech, Ltd. and Todd J. Broms dated February 28, 2002 23
10.27.1 Stock Option Grant for Broms Holding LCC dated February 28, 2002 23
10.27.2 Employment Agreement between Eurotech, Ltd. and Don V. Hahnfeldt dated February 28, 2002 23
10.27.3 Stock Option Grant for Don V. Hahnfeldt dated February 28, 2002 23
10.27.4 Consultant Agreement between Eurotech, Ltd. and Verdi Consultants, Inc. dated February 28, 2002 23
10.27.5 Stock Option Grant for Verdi Consultants, Inc. dated February 28, 2002 23
10.27.6 Lease Agreement between SMII FAIRFAX, LLC and Eurotech, Ltd dated August 30, 2000 23
10.27.7 Consultant Agreement between Eurotech, Ltd. and EB Associates, LLC dated April 29, 2002 24
10.27.8 Stock Option Grant for EB Associates, LLC dated April 29, 2002 24
10.27.9 Technology Development Agreement between Eurotech, Ltd. and ipPartners, Inc. dated as of July
24, 2002 27
10.27.10 Acknowledgment and Release Agreement by and between Eurotech, Ltd, Trylon Metrics, Inc., and
ipPartners, Inc. dated as of July 24, 2002 27
10.27.11 Letter Agreement between Eurotech, Ltd. and Trylon Metrics, Inc. dated as of July 24, 2002 27
10.27.12 Letter Agreement by and between Eurotech, Ltd., ipPartners, Inc. and Robert Tarini,
individually dated as of July 24, 2002 27
10.27.13 Joint Escrow Instructions Agreement dated July 30, 2002 27
10.27.14 Letter Agreement between Eurotech, Ltd. and Woodward LLC Suspending Certain Obligations of the
Company Pending Negotiations of Definitive Restructuring Agreement 28
10.27.15 Letter Agreement between Eurotech, Ltd. and Spinneret Financial Services Terminating
Spinneret's Fees 28
10.28 Joint Technology Development Agreement between Eurotech, Ltd. and Lostor Ror A/S dated as of
September 24, 2002 32
10.29 USAF CRADA Number 02-263-AMWC-02 Cooperative Research and Development Agreement between USAF
Air Mobility Battlelab and the Company. 35
10.30.1 Exchange Agreement, dated as of December 9, 2002 by and among the Company, Crypto.com, Inc.,
Markland Technologies, Inc., Security Technology, Inc., and, solely with respect to Article V
and Article XI thereof, ipPartners, Inc. and, solely with respect to Article VI and Article XI
thereof, Markland LLC and James LLC. 35
10.30.2 First Amendment to Exchange Agreement, dated as of December 19, 2002, by and among the Company,
Crypto.com, Inc., Markland Technologies, Inc., Security Technology, Inc., ipPartners, Inc.,
Markland LLC and James LLC. 36
10.30.3 Pledge and Security Agreement, dated as of December 19, 2002, by and among the Company,
Woodward LLC and Krieger & Prager, LLP, as agent. 36
10.30.4 Assignment and Assumption Agreement, dated as of December 19, 2002, between Crypto.com, Inc.
and Security Technology, Inc. 36
10.31 Termination and Modification to Repricing Rights Agreement (Common Stock)
by and between Eurotech, Ltd. and Woodward LLC, dated September 30, 2002 33
10.31.1 License and Exchange Agreement, dated as of March 27, 2003, by and between Eurotech Ltd.,
Homecom Communications, Inc. and, solely with respect to Article V and Article XI thereof,
Polymate, Ltd. and Greenfield Capital Partners LLC 37
10.31.2 Exchange Agreement, dated as of March 27, 2003, by and between Eurotech Ltd. and Markland
Technologies, Inc. 37
10.31.3 Exchange Agreement, dated as of March 27, 2003, by and between Eurotech Ltd. and Woodward LLC
(relating to Markland Series D Stock) 37
10.31.4 Exchange Agreement, dated as of March 27, 2003, by and between Eurotech Ltd. and Woodward LLC
(relating to HomeCom Series G Stock) 37
10.32 Securities Exchange and Purchase Agreement by and between Eurotech, Ltd.
and Woodward LLC, dated September 30, 2002 33
10.33 Registration Rights Agreement, dated September 30, 2002 33
10.34 Certificate of Designation of Eurotech, dated September 30, 2002 33
16.1 Letter dated September 10, 2002, from Grassi & Co. CPA's, P.C. to the Securities and Exchange
Commission regarding change in certifying accountants. 31
21.1 Subsidiaries of the Registrant *
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 - Mr. Don V. Hahnfeldt, President and Chief Executive Officer *
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 - Dr. Randolph A. Graves, Chief Financial Officer and Vice President *
Legend:
- -------
* Filed herewith.
1 Incorporated by reference to such Exhibit filed with our registration
statement on Form 10 on file with the SEC, file number 000-22129
2 Incorporated by reference to such Exhibit filed with Pre-Effective
Amendment No. 2 to our registration statement on Form S-1, File No.
333-26673, on file with the SEC
3 Incorporated by reference to such Exhibit filed with our current report
on Form 8-K dated August 3, 1998, on file with the SEC as of August 25,
1998
4 Incorporated by reference to such Exhibit filed with Post-Effective
Amendment No. 1 to our registration statement on Form S-1, File No.
333-26673, on file with the SEC
5 Incorporated by reference to such Exhibit filed by Peter Gulko with his
Statement on Schedule 13D
6 Incorporated by reference to such Exhibit filed with our current report
on Form 8-K as of November 30, 1999, on file with the SEC
7 Incorporated by reference to such Exhibit filed with Post-Effective
Amendment No. 2 to our registration statement on Form S-1, File No.
333-26673, on file with the SEC
8 Incorporated by reference to such Exhibit filed with our annual report
on Form 10-K for the year ended December 31, 1999, on file with the SEC
9 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended March 31, 2000, on file with
the SEC
10 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended June 30, 2000, on file with
the SEC
11 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended September 30, 2000, on file
with the SEC
12 Incorporated by reference to such Exhibit filed with our annual report
on Form 10-K for the year ended December 31, 2000, on file with the SEC
13 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended March 31, 2001, on file with
the SEC
14 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended June 30, 2001, on file with
the SEC
15 Incorporated by reference to such Exhibit filed on Form 8-K as of
September 21, 2001 (filed with the SEC on October 5, 2001)
16 Incorporated by reference to such Exhibit filed on Form 8-K as of
October 5, 2001 (filed with the SEC on October 11, 2001)
17 Incorporated by reference to such Exhibit filed on Form 8-K as of
November 9, 2001 (filed with the SEC on November 13, 2001)
18 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the quarter ended September 30, 2001, on file
with the SEC
19 Incorporated by reference to such Exhibit filed on Form 8-K as of
December 30, 2001 (filed with the SEC on January 25, 2002)
20 Incorporated by reference to such Exhibit filed on Form 8-K as of
February 1, 2002 (filed with the SEC on March 1, 2002)
21 Incorporated by reference to such Exhibit filed on Form 8-K as of
February 22, 2002 (as filed with the SEC on March 5, 2002)
22 Incorporated by reference to such Exhibit filed on Form 8-K as of March
29, 2002 (filed with the SEC on the same date)
23 Incorporated by reference to such Exhibit filed with our annual report
on Form 10-K for the year ended December 31, 2001, on file with the SEC
24 Incorporated by reference to such Exhibit filed with our annual report
on Form 10-Q for the year ended March 31, 2002, on file with the SEC
25 Incorporated by reference to such Exhibit filed on Form 8-K as of May
17, 2002 (filed with the SEC on the same date)
26 Incorporated by reference to such Exhibit filed on Form 8-K as of June
13, 2002 (filed with the SEC on June 17, 2002)
27 Incorporated by reference to such Exhibit filed on Form 8-K as of 24
July, 2002 (filed with the SEC on August 6, 2002)
28 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the year ended June 30, 2002, on file with the
SEC
29 Incorporated by reference to such Exhibit filed on Form 8-K as of 23
August, 2002 (filed with the SEC on August 26, 2002)
30 Incorporated by reference to such Exhibit filed on Form 8-K as of 26
August, 2002 (filed with the SEC on August 30, 2002)
31 Incorporated by reference to such Exhibit filed on Form 8-K/A as of 9
September, 2002 (filed with the SEC on October 7, 2002)
32 Incorporated by reference to such Exhibit filed on Form 8-K as of 24
September, 2002 (filed with the SEC on October 7, 2002)
33 Incorporated by reference to such Exhibit filed on Form 8-K as of 25
September, 2002 (filed with the SEC on October 7, 2002)
34 Incorporated by reference to such Exhibit filed with our quarterly
report on Form 10-Q for the year ended September 30, 2002, on file with
the SEC
35 Incorporated by reference to such Exhibit filed on Form 8-K as of
November 15, 2002 (filed with the SEC on December 13, 2002)
36 Incorporated by reference to such Exhibit filed on Form 8-K as of
December 19, 2002 (filed with the SEC on December 23, 2002)
37 Incorporated by reference to such Exhibit filed on Form 8-K as of March
27, 2003 (filed with the SEC on April 7, 2003)