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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.
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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 ........................ 4,141,35