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Filed pursuant to Rule 424(b)(3)
of the Securities Act of 1933,
as amended, Registration No. 333-38357
PROSPECTUS
4,933,895 Shares
Commodore Applied Technologies, Inc.
Common Stock
This Prospectus relates to an aggregate of 4,933,895 shares (each, a
"Share" and collectively, the "Shares") of common stock, par value $0.001 per
share (the "Common Stock"), of Commodore Applied Technologies, Inc., a Delaware
corporation (the "Company"), which may be offered from time to time by or for
the accounts of the holders thereof (such holders being hereinafter described as
the "Selling Stockholders"). The number of Shares includes: (i) 2,308,651 Shares
(subject to adjustment) which may be transferred to certain Selling Stockholders
upon conversion of an aggregate of 83,400 shares of 7% Series D Convertible
Preferred Stock, par value $0.01 per share and liquidation preference of $100
per share (the "Series D Preferred Stock"), of Commodore Environmental Services,
Inc., a Delaware corporation and the owner of 66.6% of the outstanding shares of
Common Stock of the Company ("Environmental"); (ii) 1,260,000 Shares (subject to
adjustment) which may be transferred to certain Selling Stockholders upon
exercise of certain five-year common stock purchase warrants (the "Environmental
Warrants"), which were issued to the holders of the Series D Preferred Stock;
(iii) 460,948 Shares (subject to adjustment) which may be issued to certain
Selling Stockholders upon conversion of 18,000 shares of 7% Series A Convertible
Redeemable Preferred Stock, par value $0.001 per share and liquidation
preference of $100 per share (the "Series A Preferred Stock"), of the Company;
(iv) 700,000 Shares (the "Private Placement Shares") issued to certain investors
in connection with a private placement of Common Stock by the Company on October
2, and October 8, 1997 (the "Common Stock Private Placement"); (v) 79,407 Shares
(subject to adjustment) which may be issued to certain Selling Stockholders upon
exercise of certain five-year common stock purchase warrants (the "Company
Warrants"), which were issued to affiliates of the placement agents in
connection with the sale of the Series A Preferred Stock and the Common Stock
Private Placement; and (vi) 124,889 Shares transferred to certain investors upon
conversion of an aggregate of 4,600 shares of Series D Preferred Stock on
September 29, and October 14, 1997. The Shares which have been and may be
received by certain Selling Stockholders upon conversion of the Series D
Preferred Stock and upon exercise of the Environmental Warrants have been and
will be transferred to such Selling Stockholders from the account of
Environmental, which currently owns 14,875,111 shares of Common Stock of the
Company and warrants entitling Environmental to purchase an additional 8,500,000
shares of Common Stock. See "Selling Stockholders" and "Plan of Distribution."
The number of Shares offered hereby includes the resale of such
presently indeterminable number of Shares as may be received by the Selling
Stockholders upon conversion of the Series D Preferred Stock and the Series A
Preferred Stock, and upon exercise of the Environmental Warrants and the Company
Warrants. The number of Shares indicated to be transferable by Environmental
upon conversion of the Series D Preferred Stock and offered for resale hereby is
an estimate that assumes a Series D Preferred Stock conversion price of $3.6125
per share (based upon 85% of the average of the low prices of the Common Stock
on the American Stock Exchange ("AMEX") as reported by Bloomberg, L.P.
("Bloomberg") for the five consecutive trading days immediately prior to October
15, 1997) and is subject to adjustment. The number of Shares indicated to be
issuable by the Company upon conversion of the Series A Preferred Stock and
offered for resale hereby is an estimate that assumes a Series A Preferred Stock
conversion price of $3.905 per share (based upon 88% of the average of the last
sale prices of the Common Stock on AMEX as reported by Bloomberg for the five
consecutive trading days immediately prior to October 15, 1997) and is also
subject to adjustment. The actual number of Shares to be received by the Selling
Stockholders upon conversion of the Series D Preferred Stock and the Series A
Preferred Stock could be materially less or more than such estimated amounts
depending upon factors which cannot be predicted at this time, including, among
others, the actual conversion prices of the Series D Preferred Stock and the
Series A Preferred Stock, and the decisions by the Selling Stockholders as to
when to convert such securities. This presentation is not intended to constitute
a prediction as to the future market price of the Common Stock or as to when
Selling Stockholders will elect to convert their shares of Series D Preferred
Stock or Series A Preferred Stock into Common Stock. See "Selling Stockholders"
and "Plan of Distribution."
The Common Stock is traded on AMEX under the symbol "CXI." On October
30, 1997, the closing sale price of the Common Stock on AMEX was $3.3125 per
share.
(cover page continued on next page)
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. THE
COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THIS OFFERING. SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 31, 1997.
<PAGE>
The Series D Preferred Stock and the Environmental Warrants were
issued by Environmental, and the Series A Preferred Stock, the Private Placement
Shares and the Company Warrants were issued by the Company, in transactions
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities laws. 60,000 shares of Series
D Preferred Stock and Environmental Warrants to purchase 750,000 Shares at an
exercise price of $7.14 per Share (subject to adjustment) were issued to three
investors in connection with a $6.0 million private placement by Environmental
consummated on May 20, 1997 (as amended on August 14, 1997). An additional
28,000 shares of Series D Preferred Stock and Environmental Warrants to purchase
425,000 Shares at an exercise price of $5.15 per Share (subject to adjustment)
were issued to three additional investors on August 18, 1997 in connection with
a $2.8 million private placement by Environmental. Affiliates of the placement
agent in connection with such private placements received Environmental Warrants
to purchase an aggregate of 85,000 Shares at exercise prices of $7.14 as to
60,000 Shares and $5.15 as to 25,000 Shares. 18,000 shares of Series A Preferred
Stock were issued to six investors in connection with a $1.8 million private
placement by the Company consummated on August 15, 1997. The placement agent in
connection with the sale of the Series A Preferred Stock received, among other
things, Company Warrants to purchase 19,407 Shares at $5.80 per Share. 700,000
Private Placement Shares were issued to five investors in connection with the
$2.6 million Common Stock Private Placement by the Company on October 2, and
October 8, 1997. Affiliates of the placement agent in connection with the Common
Stock Private Placement received Company Warrants to purchase 60,000 Shares at
$3.67 per Share. 41,599 Shares were transferred from the account of
Environmental to certain Selling Stockholders upon the conversion of 1,600
shares of Series D Preferred Stock on September 29, 1997. 83,290 Shares were
transferred from the account of Environmental to a Selling Stockholder upon the
conversion of 3,000 shares of Series D Preferred Stock on October 14, 1997. See
"Recent Developments," "Summary Financial Data," "Capitalization" and "Selling
Stockholders."
The Series D Preferred Stock is convertible into Shares at a conversion
price per Share equal to 85% of the lower of (a) the average of the low prices,
or (b) the average of the closing bid prices of the Common Stock of the Company
as reported by Bloomberg for the previous five business days ending on the day
prior to conversion (the "Average Closing Bid Price"). The conversion price of
the Series D Preferred Stock will be equal to certain amounts set forth in the
Certificate of Designation for the Series D Preferred Stock if the Average
Closing Bid Price of the Common Stock, as reported by Bloomberg, for any
consecutive 30 days is equal to or less than $2.00, provided that in no event
will the conversion price of the Series D Preferred Stock be less than $1.50.
The Series A Preferred Stock is convertible into Shares at a conversion price
per Share equal to the lesser of (a) $4.64, or (b) 88% of the average of the
last sale price per share of the Common Stock on AMEX as reported by Bloomberg
for the five consecutive trading days immediately prior to the date of
conversion. Subject to customary anti-dilution provisions, the minimum
conversion price of the Series A Preferred Stock is $2.00 per Share, provided
that if the last sale price per share of the Common Stock on AMEX as reported by
Bloomberg is less than $2.00 for any 60 consecutive calendar days, the holders
of Series A Preferred Stock may, among other things, elect to convert their
shares of Series A Preferred Stock into Shares without regard to such minimum
$2.00 per Share price. If required, the actual number of Shares to be received
by the Selling Stockholders upon conversion of the Series D Preferred Stock and
Series A Preferred Stock and resold hereby will be reflected in a supplement to
this Prospectus following the conversion of such securities. See "Recent
Developments."
The Shares may be sold from time to time by the Selling
Stockholders or their transferees. To the knowledge of the Company, no
underwriting arrangements have been entered into by the Selling Stockholders as
of the date hereof. The distribution of the Shares by the Selling Stockholders
may be effected in one or more transactions that may take place on AMEX,
including ordinary broker's transactions, privately negotiated transactions, or
through sales to one or more dealers for resale of such Shares as principals, at
prevailing market prices, or negotiated prices. Underwriting discounts and usual
and customary or specifically negotiated brokerage fees or commissions will be
paid by the Selling Stockholders in connection with the sale of the Shares. The
Selling Stockholders, and any broker-dealers, agents, or underwriters through
whom the Shares are sold, may be deemed "underwriters" within the meaning of the
Securities Act with respect to securities offered by them, and any profits
realized or commissions received by them may be deemed underwriting
compensation. See "Plan of Distribution."
The Company will not receive any proceeds from the sale of the
Shares by the Selling Stockholders. See "Use of Proceeds." By agreement with the
Selling Stockholders, the Company will pay all of the expenses incurred in
connection with the registration of the Shares under the Securities Act (other
than agent's or underwriter's commissions and discounts), estimated to be
approximately $57,400. See "Plan of Distribution."
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED HEREIN BY REFERENCE MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH
PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
--------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's Regional Offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and at the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Additionally, the Company files such reports, proxy statements and other
information with the Commission electronically via the Commission's EDGAR
system. The Commission maintains a Web site that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission via the EDGAR system. The address of the Commission's Web
site is "http://www.sec.gov".
The Common Stock is traded on AMEX under the symbol "CXI." Reports,
proxy statements and other information concerning the Company can also be
inspected at the offices of AMEX located at 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a registration statement
on Form S-3 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information regarding the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. The Registration Statement, including the exhibits
and schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and copies of all or any part thereof may be
obtained from such office upon payment of the prescribed fees.
--------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission (File No. 1-11871) pursuant to the Exchange Act are hereby
incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997;
(c) The Company's Current Report on Form 8-K, dated January 22, 1997;
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(d) Amendment No. 1 on Form 8-K/A to the Company's Current Report on Form
8-K, dated January 22, 1997;
(e) The Company's Current Report on Form 8-K, dated August 15, 1997;
(f) The Company's definitive Proxy Statement, dated May 28, 1997, filed in
connection with the Company's 1997 Annual Meeting of Stockholders held
on June 17, 1997; and
(g) The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A, dated June 24, 1996, as amended by
the Company's Registration Statement on Form 8-A/A, dated June 26,
1997, including any other amendment or report filed for the purpose of
updating such description.
In addition, all documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of Common Stock
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the respective dates of filing of such documents. Any
statement contained herein or in a document all or part of which is incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including
any beneficial owner, to whom this Prospectus is delivered, upon the written or
oral request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into the documents that this
Prospectus incorporates). Written requests for copies should be directed to
Michael D. Fullwood, Senior Vice President, Chief Financial and Administrative
Officer, Secretary and General Counsel, at the principal executive offices of
Commodore Applied Technologies, Inc., 150 East 58th Street, Suite 3400, New
York, New York 10155. Telephone requests may be directed to Mr. Fullwood at
(212) 308-5800.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS PROSPECTUS OR IN DOCUMENTS
INCORPORATED HEREIN BY REFERENCE THAT ARE NOT HISTORICAL FACTS, INCLUDING,
WITHOUT LIMITATION, IN PARTICULAR, STATEMENTS MADE (1) UNDER THE CAPTION
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" IN THE COMPANY'S ANNUAL REPORTS ON FORM 10-K, IN THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q AND IN ANY AMENDMENTS TO SUCH REPORTS AND (2) IN
THE COMPANY'S CURRENT REPORTS ON FORM 8-K AND IN ANY AMENDMENTS TO SUCH REPORTS,
MAY, IN SOME CASES, INCLUDE STATEMENTS OF FUTURE EXPECTATIONS, PROJECTIONS OF
REVENUE AND INCOME, STATEMENTS OF FUTURE ECONOMIC PERFORMANCE AND OTHER
"FORWARD-LOOKING" STATEMENTS (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995) THAT ARE SUBJECT TO IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC
AND BUSINESS CONDITIONS; COMPETITIVE FACTORS IN THE INDUSTRY, INCLUDING
ADDITIONAL COMPETITION FROM EXISTING COMPETITORS OR FUTURE ENTRANTS TO THE
INDUSTRY; SOCIAL AND ECONOMIC CONDITIONS; LOCAL, STATE AND FEDERAL REGULATIONS;
CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; THE AVAILABILITY, TERMS AND
DEPLOYMENT OF CAPITAL; THE AVAILABILITY OF QUALIFIED PERSONNEL; AND OTHER
FACTORS DETAILED HEREIN IN THE SECTION ENTITLED "RISK FACTORS," ELSEWHERE HEREIN
AND IN THE COMPANY'S OTHER COMMISSION FILINGS.
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THE COMPANY
The following summary is qualified in its entirety by reference to,
and should be read in conjunction with, the more detailed information appearing
elsewhere in this prospectus or incorporated herein by reference. Investors
should also carefully consider the information set forth under the heading "Risk
Factors." As used herein, the term "Company" shall include Commodore Applied
Technologies, Inc. and its subsidiaries.
The Company, through its four principal subsidiaries, is primarily
engaged in (i) the development and commercialization of a variety of
environmental technologies for the destruction of hazardous materials, (ii)
providing environmental, technical and remediation services, and (iii) the
separation and recovery of metals, organics and other chemical compounds.
o Decontamination and Neutralization of Hazardous Materials. Commodore
Advanced Sciences, Inc. ("CAS"), a wholly owned subsidiary of the Company,
uses a patented non-thermal, portable and scalable process known as SET(TM)
for treating and decontaminating soils and other materials and surfaces
containing PCBs, pesticides, dioxins and other toxic contaminants to an
extent sufficient to satisfy current federal environmental guidelines.
Based on the results of laboratory testing, SET(TM) also appears capable of
neutralizing substantially all known chemical weapons materials and warfare
agents. On October 8, 1997, the U.S. Army announced that Teledyne-Commodore
LLC, a fifty-fifty joint venture of Teledyne Environmental, Inc. and
Commodore Government Environmental Technologies, Inc., had been named a
finalist in the Alt Tech II program to select an alternative technology
to incineration. Teledyne-Commodore LLC employes the SET(TM) technology.
On March 15, 1996, the United States Environmental Protection
Agency ("EPA") issued to the Company a Nationwide Permit for PCB Disposal,
which allows CAS to use SET(TM) on-site to treat PCB-contaminated soils and
metallic surfaces at any location in the United States. Based on currently
published lists of EPA national operating permits, the Company believes
that CAS possesses the only non-thermal PCB treatment technology for
multiple applications permitted under the EPA's Alternate Destruction
Technology Program. On April 3, 1996, the Company was selected by the U.S.
Department of Commerce as one of nine companies to participate in the Rapid
Commercialization Initiative ("RCI"), which is a component of the Clinton
Administration's efforts to streamline the commercialization process for
new environmental technologies, and to build cooperative interactions
between businesses and government to bring environmental technologies to
market more rapidly and efficiently. CAS is currently negotiating potential
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations. CAS, through its
wholly owned subsidiary Advanced Sciences, Inc. ("Advanced Sciences"),
received a Notice of Award on October 1, 1997 of a subcontract to remediate
mixed waste (a combination of radioactive and hazardous waste) at a U.S.
Department of Energy ("DOE") facility at Weldon Spring, Missouri, utilizing
the SET(TM) technology. The Notice of Award was made by the MK-Ferguson
Group of Morrison Knudsen Corporation, the DOE's site contractor. This is
the first award to the Company of a contract employing the SET(TM)
technology in the remediation of mixed waste.
o CFC Destruction, Separation and Recycling. Commodore CFC Technologies, Inc.
("CFC Technologies"), a wholly owned subsidiary of the Company, is applying
certain environmental technologies to the destruction, separation and
recycling of CFCs and other ozone-depleting substances. CFC Technologies
received an exclusive, worldwide license from Environmental for the SET(TM)
technology for use relating to destruction of refrigerants. CFC
Technologies also owns a selective refrigerant destruction technology based
on its aqueous process for which patents are pending. In addition to these
technologies, CFC Technologies, through its wholly-owned subsidiary,
Commodore Refrigerant Technologies, Inc. ("CORT"), has acquired an interest
in a refrigerant separation technology owned by Climate Supply (Atlantic)
Inc. ("Climate Supply"), a Canadian corporation located near Halifax, Nova
Scotia. Climate Supply owns patented equipment and a patented process which
separates refrigerants by the "fractional distillation" method. On
September 1, 1996, CORT entered into a joint venture, known as CORTCLIMATE,
with Climate Supply to pursue, with certain limited territorial exceptions,
worldwide refrigerant destruction, selective destruction and separation
based on the SET(TM) process, the aqueous technology and Climate Supply's
fractional distillation technology. To date, CORTCLIMATE has entered into a
series of agreements with certain companies throughout the world to
establish refrigerant processing centers where used refrigerant can be
destroyed, selectively destroyed or separated based on the SET(TM), aqueous
and fractional distillation separation technologies.
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o Environmental, Technical and Remediation Services. Advanced Sciences, a
wholly owned subsidiary of CAS, provides a full range of environmental,
technical and remediation services, including identification,
investigation, remediation and management of hazardous and mixed waste
sites, to government agencies, including the DOE and U.S. Department of
Defense ("DOD"), and to private-sector domestic and foreign industrial
clients. Advanced Sciences offers alternative remediation approaches which
may involve providing on-site waste containment or management of on-site/
off-site remediation and waste removal. Advanced Sciences can also redesign
ongoing production processes and develop engineering plans and technical
specifications to minimize or eliminate the generation of hazardous waste.
The Company believes that Advanced Sciences' integration of engineering and
environmental skills, plus its access to innovative technologies, provide
Advanced Sciences with a competitive advantage in redesigning production
processes. Advanced Sciences has been awarded environmental support
services contracts by the DOE and DOD that will be performed over the next
several years and are valued at approximately $132 million. The Company
intends to incorporate CAS' SET(TM) technology into the products and
services offered by Advanced Sciences, with a view to increasing the
quality and scope of services offered by Advanced Sciences and providing
the Company with a broader customer base for the SET(TM) technology.
o Separation and Recovery Technology. Commodore Separation Technologies, Inc.
("Separation"), an 87% owned subsidiary of the Company, has developed and
intends to commercialize its separation technology and recovery system
known as SLiM(TM) (Supported Liquid Membrane technology). Based on the
results of more than 100 laboratory and other tests to date, the Company
believes that SLiM(TM) can separate and recover chromium, cadmium, silver,
mercury, platinum, lead, zinc, nickel, trichlorethylene, polychlorinated
biphenyls, methylene chloride, amino acids, antibiotics, radionuclides, and
other organic and inorganic targeted substances from liquid and gaseous
feedstreams. In August 1996, Separation completed an on-site demonstration
of SLiM(TM) for the decontamination of chromium-contaminated groundwater at
the Port of Baltimore, Maryland. During this demonstration, an SLiM(TM)
unit, in a single feedstream pass-through, reduced the contamination level
of chromium from over 630 parts per million (ppm) to less than one ppm. The
results of this test were verified by Artesian Laboratories, Inc., an
independent testing laboratory. Separation has since completed additional
on-site demonstrations of SLiM(T)M at the Port of Baltimore with similar
results. Due to the success of such demonstrations, in February 1997 the
State of Maryland informed Separation that it will recommend including the
SLiM(TM) process as an eligible technology in the bid specifications to
remediate the groundwater at the Port of Baltimore. In January 1997,
Separation entered into a license agreement with Lockheed Martin Energy
Research Corporation ("Lockheed Martin"), manager of the Oak Ridge National
Laboratory, a U.S. Department of Energy national laboratory ("Oak Ridge"),
pursuant to which Separation received the exclusive worldwide license,
subject to a government use license, to use and develop the technology
related to the separation of the radionuclides technetium and rhenium from
mixed wastes containing radioactive materials. Separation is currently
negotiating potential collaborative joint working and marketing
arrangements with established engineering and environmental service
organizations. However, neither Separation nor any of such joint working
arrangements has been awarded any specific projects.
The Company believes that its chemical processes and technologies offer
a safe, efficient and cost-effective alternative to traditional methods for the
separation, destruction and disposal of toxic substances, which can be utilized
in a wide variety of industrial, military and other applications. The Company is
currently in the process of introducing these processes and technologies on a
commercial scale. In July 1996, the Company completed an initial public offering
(the "Initial Public Offering") of Common Stock and Class A Warrants from which
it received net proceeds of approximately $30.5 million. In April 1997,
Separation completed an initial public offering of its equity securities from
which it received net proceeds of approximately $11.1 million.
The Company was incorporated in the State of Delaware in March 1996,
and is a 66.6% owned subsidiary of Environmental. The principal executive
offices of the Company are located at 150 East 58th Street, Suite 3400, New
York, New York 10155, and its telephone number is (212) 308-5800.
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RECENT DEVELOPMENTS
Sale of Series D Preferred Stock by Environmental
On May 20, 1997, pursuant to 7% Preferred Stock Purchase Agreements
(the "Series D Purchase Agreements"), Environmental completed the sale to three
investors, for an aggregate purchase price of $6,000,000, of (i) 60,000 shares
of Series D Preferred Stock, and (ii) Environmental Warrants entitling the
holders to purchase from Environmental an aggregate of 600,000 Shares. In
connection with an August 18, 1997 amendment to the May 20, 1997 Series D
Purchase Agreements, Environmental Warrants entitling the holders to purchase
from Environmental an additional 150,000 Shares were issued to the investors.
On August 14, 1997, Environmental completed the sale to three
additional investors, for an aggregate purchase price of $2,800,000, of (i)
28,000 additional shares of Series D Preferred Stock, and (ii) Environmental
Warrants entitling the holders to purchase from Environmental an additional
425,000 Shares.
The Series D Preferred Stock has a liquidation preference of $100 per
share (plus accumulated and unpaid dividends) (the "Liquidation Preference") and
pays a 7% per-annum cumulative dividend, payable, at Environmental's option, at
the time of conversion in cash or shares of Common Stock which are owned by
Environmental, at the Conversion Price (as defined). Environmental currently
owns 14,875,111 shares of Common Stock of the Company and will reserve from such
holdings a sufficient number of shares of Common Stock to permit the conversion
in full of the outstanding Series D Preferred Stock.
The Series D Preferred Stock has separate class voting rights as to
matters affecting such securities and votes together with the holders of
Common Stock on all matters requiring stockholder approval on an "as
converted" basis, as though such shares of Series D Preferred Stock had been
converted into Common Stock on the record date used to determine Company
Common Stock entitled to vote on such transaction or matter.
The Series D Preferred Stock may be converted by the holders at any
time or from time to time at the Conversion Price (as defined). However, each
holder of Series D Preferred Stock may not convert more than 20% of its shares
of Series D Preferred Stock in any one month, subject to the right to accumulate
conversions so that any shares of Series D Preferred Stock not converted in any
one calendar month may be accumulated with the number of convertible shares of
Series D Preferred Stock in the next calendar month.
The Series D Preferred Stock is convertible by the holders into that
number of Shares equal to the Liquidation Preference divided by the Conversion
Price. The Conversion Price is defined to mean an amount equal to a 15% discount
from the lower of (i) the average of the low prices, or (ii) the Average Closing
Bid Price of the Common Stock as reported by Bloomberg for the previous five
business days ending on the day before the Conversion Date (as defined). The
Conversion Price will be equal to certain amounts set forth in the Certificate
of Designation for the Series D Preferred Stock if the Average Closing Bid Price
of the Common Stock, as reported by Bloomberg, for any consecutive 30 days is
equal to or less than $2.00; provided, however, that in no event will the
Conversion Price be less than $1.50. In the event that the Common Stock is not
traded on AMEX, the Average Closing Bid Price will be based on the average
closing bid price (or, if not available, the mean of the high and low price) of
such Common Stock on the over-the-counter market or the principal national
securities exchange or the Nasdaq National Market or Nasdaq SmallCap Market
system on which the Common Stock then trades.
The Environmental Warrants entitle the registered holders thereof to
purchase an aggregate of 1,260,000 Shares owned by Environmental. The
Environmental Warrants to purchase an aggregate of 750,000 Shares issued to the
investors in connection with the May 20, 1997 sale, as amended, are exercisable
at an initial exercise price equal to $7.14 per Share. The Environmental
Warrants to purchase 425,000 Shares issued to the investors in
connection with the August 14, 1997 sale transaction are exercisable at an
initial exercise price of $5.15 per Share. Such exercise prices are (in addition
to customary anti-dilution adjustments) subject to reset on August 18, 1998 to
an exercise price equal to the lesser of (i) the exercise price in effect
immediately prior to August 18, 1998, or (ii) 110% of the closing bid price of
the Common Stock on August 17, 1998. In addition, if the Common Stock trades at
less than 50% of the August 17, 1998 closing bid price for any 10 consecutive
trading days, the exercise price is subject to further reset (on one occasion
only) to 50% of such August 17, 1998 closing bid price. The above reset
provisions terminate in the event that the Common Stock trades at $10.00 or more
at any time after 90 days from the date of this Prospectus.
6
<PAGE>
The transactions described above were deemed exempt from registration
under the Securities Act as transactions by an issuer not involving any public
offering. The recipients of the Series D Preferred Stock and the Environmental
Warrants in connection with the foregoing transactions represented their
intentions to acquire such securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were contained in the Environmental Warrants and affixed to the share
certificates representing the Series D Preferred Stock. Environmental engaged
Avalon Research Group, Inc. as a finder in connection with the sale of the
Series D Preferred Stock and the Environmental Warrants. Such firm received fees
aggregating $792,000 and, together with other transaction costs of approximately
$176,000, Environmental received aggregate net proceeds of approximately $7.8
million from the sale of the Series D Preferred Stock and Environmental
Warrants. In addition to its commissions, affiliates of Avalon Research Group,
Inc. received Environmental Warrants to purchase an aggregate of 85,000 Shares
at exercise prices of $7.14 as to 60,000 Shares and $5.15 as to 25,000 Shares.
On September 29, 1997, two investors elected to convert 20% of their
Series D Preferred Stock (a total of 1,600 shares of Series D Preferred Stock)
into Common Stock. Such conversion resulted in the transfer by Environmental of
41,599 shares of its Common Stock to such investors. On October 14, 1997, one
additional investor elected to convert 3,000 shares of Series D Preferred Stock
into Common Stock, resulting in the transfer by Environmental of 83,290 shares
of its Common Stock to such investor.
If conversion of all of the remaining shares of Series D Preferred
Stock were to occur at the lowest possible Conversion Price, the 83,400 shares
of Series D Preferred Stock would convert to approximately 5,560,000 of the
14,875,111 shares of Common Stock currently owned by Environmental. Such
conversion would not cause any increase in the number of outstanding shares of
Common Stock.
Sale of Company Series A Preferred Stock
On August 15, 1997, pursuant to a Series A Convertible Preferred Stock
Purchase Agreement (the "Series A Purchase Agreement"), the Company completed
the sale to six investors, for an aggregate purchase price of $1,800,000, of
18,000 shares of newly-created Series A Preferred Stock of the Company.
The Series A Preferred Stock has a liquidation preference of $100 per
share (plus accumulated and unpaid dividends) (the "Liquidation Preference") and
pays a 7% per-annum cumulative dividend, payable, at the Company's option, at
the time of conversion in cash or shares of Common Stock at the Conversion Price
(as defined). The Series A Preferred Stock ranks prior to all other classes of
equity securities of the Company, including Common Stock, as to distributions of
assets upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary.
The Series A Preferred Stock has separate class voting rights as to
matters affecting such securities (which requires the consent or approval of
holders of 66-2/3% of the Series A Preferred Stock), and votes together with
holders of Common Stock on all matters requiring stockholder approval on an "as
converted" basis, as though such shares of Series A Preferred Stock had been
converted into Common Stock on the record date used to determine Company Common
Stock entitled to vote on such transaction or matter.
The Series A Preferred Stock may be converted by the holders thereof at
any time or from time to time at the Conversion Price (as defined). However,
prior to July 31, 1999, each holder of Series A Preferred Stock may not convert
more than 20% of his or her shares of Series A Preferred Stock in any one month,
subject to the right to accumulate conversions so that any shares of Series A
Preferred Stock not converted in any one calendar month may be accumulated with
the number of convertible shares of Series A Preferred Stock in the next
calendar month. To the extent not converted voluntarily, as of August 1, 1999
all remaining shares of Series A Preferred Stock will be automatically converted
into Shares at the Conversion Price then in effect.
The Series A Preferred Stock is convertible by the holders thereof into
that number of Shares equal to the Liquidation Preference divided by the
Conversion Price. The Conversion Price is defined to mean an amount equal to the
lesser of 100% of the Average Share Price (as defined) for the five consecutive
trading days preceding the August 15, 1997 issuance date of the Series A
Preferred Stock, or (ii) 88% of the Average Share Price for the five consecutive
trading days immediately prior to the Conversion Date
7
<PAGE>
(as defined). Subject to customary anti-dilution provisions, the minimum
conversion price is $2.00 per Share; provided, that if the Average Share Price
(defined as the last sale price per share of the Company's Common Stock reported
by Bloomberg on AMEX or any other exchange on which such stock trades for the
applicable number of consecutive trading days) is less than $2.00 for any 60
consecutive calendar days, the holders of the Series A Preferred Stock may
either demand mandatory redemption of such Series A Preferred Stock (at $100 per
share plus accrued and unpaid dividends) or convert their shares of Series A
Preferred Stock into Shares without regard to such minimum $2.00 per Share
price.
If conversion of all shares of Series A Preferred Stock were to occur
based upon the Average Share Price on August 15, 1997 of $4.64, the 18,000
shares would convert to 388,000 Shares, representing approximately 1.7% of the
total Common Stock outstanding. If conversion of all Series A Preferred Stock
were to occur based upon a minimum Conversion Price of $2.00 per Share, the
18,000 shares would convert to 900,000 Shares, representing approximately 4.0%
of the total Common Stock outstanding.
So long as the Shares issuable upon conversion of the Series A
Preferred Stock are subject to a current registration statement under the
Securities Act , the Company has the right to voluntarily redeem the shares of
Series A Preferred Stock on not more than 60 and not less than 15 days prior
notice, at a redemption price equal to the sum of $100 per share, plus accrued
and unpaid dividends, and a redemption premium designed to provide the investor
with a 12% annual yield on its shares of Series A Preferred Stock.
The Series A Preferred Stock is subject to mandatory redemption at $100
per share plus accrued and unpaid dividends upon the occurrence of certain
events, including (i) the Average Share Price for any 60 consecutive days shall
be less than $2.00, (ii) the Common Stock is not listed on any exchange or
over-the-counter market for 15 consecutive trading days, or (iii) the Company is
required to obtain stockholder approval under AMEX or other stock exchange
regulations in order to issue shares of Common Stock upon conversion of the
Series A Preferred Stock and fails to obtain such requisite stockholder approval
within 90 calendar days.
Pacific Continental Securities Corp. acted as placement agent in
connection with the sale of the Series A Preferred Stock and received $117,000
as compensation therefor, as well as Company Warrants expiring on August 15,
2002 entitling the placement agent to purchase 19,407 Shares at $5.80 per
Share.
The above transaction was deemed exempt from registration under the
Securities Act as a transaction by an issuer not involving any public offering.
The recipients of the Series A Preferred Stock represented their intentions to
acquire such 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 certificates representing the shares of Series A Preferred Stock.
Environmental and the Company have agreed to pay certain penalties to
the holders of the Series D Preferred Stock and the Series A Preferred Stock in
the event that the Company shall fail by certain specified dates to cause to
become effective under the Securities Act a registration statement on Form S-3,
or other applicable form of registration statement, covering all Shares issuable
upon (a) conversion of all shares of Series D Preferred Stock, (b) exercise of
all Environmental Warrants, and (c) conversion of all shares of Series A
Preferred Stock. Upon the effective date of the Registration Statement of which
this Prospectus is a part, no such penalties are payable by either Environmental
or the Company.
Sale of 700,000 Private Placement Shares
On October 2, 1997, the Company completed the Sale of 600,000
Private Placement Shares to four investors for an aggregate purchase price of
$2,205,000. Pursuant to stock purchase agreements, dated September 26, 1997 (the
"Common Stock Purchase Agreements"), by and between the Company and each of four
private investors, if, during the twelve-month period following October 2,
1997 (the "Anniversary Period"), the Company shall (i) sell any shares of Common
Stock, (ii) issue any security convertible into or exercisable for Common
Stock, or (iii) issue any shares of Common Stock during such Anniversary Period
(but not
8
<PAGE>
thereafter) upon conversion of its currently outstanding Series A Preferred
Stock, in each case, for a selling price, conversion price or exercise price per
share which shall be lower than the $3.675 per share purchase price of the
600,000 Private Placement Shares (such lower price being the "Reset Price"), the
$3.675 per share purchase price will be adjusted downward at the end of the
Anniversary Period so as to equal the Reset Price. The lowest selling price,
conversion price or exercise price per share at which the Company issues Common
Stock or securities convertible or exercisable into Common Stock during the
Anniversary Period will determine the applicable Reset Price, except that (a)
the lowest sales, exercise or conversion prices associated with issuance by the
Company of up to 10,000 shares of Common Stock, and (b) the transfer of Shares
by Environmental upon conversion of outstanding shares of Series D Preferred
Stock or upon exercise of outstanding Environmental Warrants shall be excluded
in determining the Reset Price.
On October 8, 1997, the Company completed the sale of an additional
100,000 Private Placement Shares to one additional investor for an aggregate
purchase price of $393,125. The Stock Purchase Agreement in connection with such
sale contains terms identical to those contained in the Stock Purchase
Agreements in connection with the Sale of the 600,000 Private Placement Shares,
except that the Anniversary Period is defined to mean the twelve-month period
following October 8, 1997, and the Reset Price is calculated based on a purchase
price of $3.93125 per Private Placement Share.
Cappello Capital Corp. acted as placement agent in connection with the
Common Stock Private Placement and received $209,475 in compensation therefor.
Affiliates of the placement agent received Company Warrants expiring September
30, 2002 to purchase an aggregate of 60,000 Shares at $3.67 per share.
The Company has granted certain "demand" and "piggyback" registration
rights to the investors in the Common Stock Private Placement and has agreed to
pay certain penalties to such investors in the event that the Company shall fail
by certain specified dates to cause to become effective under the Securities Act
a registration statement on Form S-3 covering the Private Placement Shares held
by such investors, and the Shares underlying the Company Warrants.
The above transaction was deemed exempt from registration under the
Securities Act, as a transaction by an issuer not involving any public offering.
The recipients of the Private Placement Shares represented their intentions to
acquire such 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 certificates representing the Private Placement Shares.
The Company received aggregate net proceeds of approximately $4.0
million from the sale of the Series A Preferred Stock and the Private Placement
Shares.
Convertible Loan from Environmental to the Company
On September 23, 1997, Environmental provided the Company with a
$4,000,000 unsecured loan, evidenced by the Company's 8% convertible
subordinated note due August 31, 2002 (the "Convertible Loan").
Pursuant to the terms of such note, the Company is obligated to pay
Environmental interest only at the rate of 8% per annum, payable quarterly on
the last day of December, March, June and September. Unless converted into
Common Stock, the unpaid principal amount of the note is due and payable,
together with accrued and unpaid interest, on the 2002 maturity date.
The Company may at its option prepay the note at any time or from time
to time, without premium or penalty, upon 30 days advance written notice. Such
right of prepayment is subject to Environmental's right to convert the note into
Common Stock prior to the date fixed for prepayment. Payments of principal and
accrued interest under the Company note is fully subject and subordinated to all
other indebtedness for money borrowed of the Company.
9
<PAGE>
Environmental has the right to convert the note into shares of Common
Stock at a conversion price of $3.89 per share (one full share of Common Stock
for each $3.89 principal amount of the note so converted). Such conversion price
was fixed at approximately 85% of the five-day average closing bid price of
Common Stock ($4.575 per share) as traded on AMEX for the five trading days
prior to August 22, 1997, the date that the executive committees of the
respective boards of directors of each of Environmental and the Company
authorized the Convertible Loan.
In consideration of the Convertible Loan, Environmental received
warrants expiring August 31, 2002 to purchase 1,000,000 shares of Common Stock
at an exercise price of $5.0325 per share (approximately 110% of the $4.575
five-day average closing bid price of Common Stock through August 22, 1997).
Such exercise price is subject to customary anti-dilution adjustments.
With the proceeds from the sale of the Series A Preferred Stock and the
Private Placement Shares, and the proceeds from the Convertible Loan, the
Company believes that it has sufficient cash reserves to meet expenses incurred
in the ordinary course of business until the third quarter of 1998. The
foregoing does not, however, include funds that may be required to finance
capital equipment or acquisition opportunities which may arise in the future.
Although the Company believes that funds will be available for such purposes and
that it will secure sufficient commercial business to achieve operating profits
in the second half of 1998, there is no assurance that this will be the case or
that the Company will ever be able to achieve profitability.
10
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The summary financial data included in the following table as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 are
derived from the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, incorporated by
reference herein. The summary financial data as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are derived from the unaudited Consolidated
Financial Statements included in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, incorporated by reference herein. Financial
data for the year ended December 31, 1996 and for the six months ended June 30,
1997 are not necessarily indicative of the results of operations to be expected
in the future. The summary financial data should be read in conjunction with the
Consolidated Financial Statements referenced above.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
----------------------- ------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Contract revenue $ -- $-- $ 5,123 $ 14 $ 9,819
Cost of sales:
Cost of sales -- -- 4,136 -- 8,019
Research and development 380 1,815 2,364 954 1,433
General and administrative 1,369 1,773 3,412 691 6,114
Amortization -- -- 219 -- 482
Minority interests -- -- -- -- (228)
Write-off of in-process technology 2,424 -- -- -- --
------ ------ ------- ------- ------
Loss from operations (4,173) (3,588) (5,008) (1,631) (6,001)
Interest income 7 6 477 4 320
Interest expense (551) (274) (617) (369) (300)
Income taxes -- -- -- -- (2)
Equity in net losses of subsidiary -- -- (495) -- (954)
------ ------ -------- ------- ------
Net loss $(4,717) $(3,856) $(5,643) $ (1,996) $ (6,937)
======== ======== ======== ========= =========
Net loss per share $ (0.31) $ (0.26) $ (0.31) $ (0.13) $ (0.33)
======= ======= ======== ========= =========
Weighted average number of shares 15,000 15,000 18,100 15,082 21,650
Pro forma information (1):
Net loss (2) $ (6,888) $ (7,197)
Preferred dividends (3) (342) (63)
--------- ---------
Net loss attributable to common stockholders $ (7,230) $ (7,260)
========= =========
Weighted average number of shares outstanding (4) 18,800 22,350
========= =========
Net loss per share $ (0.38) $ (0.33)
========= =========
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, June 30, 1997
---------------- ---------------------
Pro Forma
As
1995 1996 Actual Adjusted (5)
---- ---- ------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4 $ 4,617 $ 1,434 $ 9,581
Temporary investments -- 7,459 13,197 13,197
Total assets 1,091 33,456 32,602 40,749
Long term debt -- 118 95 2,825 (6)
Total liabilities 9,633 13,380 8,743 11,473
Minority interests -- -- 5,479 5,479
Redeemable securities -- -- -- 3,931 (7)
Stockholders' equity (8,542) 20,076 18,380 19,866 (8)
</TABLE>
11
<PAGE>
(1) Gives effect to the sale of the Series A Preferred Stock, the sale of
700,000 Private Placement Shares, and the Convertible Loan from
Environmental to the Company as described herein as if such transactions had
occurred on January 1, 1996. Management has estimated the fair values of the
warrants issued in connection with the Convertible Loan from Environmental
and the beneficial conversion feature associated with the sale of Series A
Preferred Stock. Management is in the process of engaging an expert in the
field of valuations to determine the actual fair values of these items.
(2) Includes pro forma interest expense for the year ended December 31, 1996 of
$320 of cash to be paid and estimated amounts for (a) the beneficial
conversion feature of $750 immediately recognized and (b) the discount
amortization of $175 on the Convertible Loan from Environmental. Includes
pro forma interest expense for the six months ended June 30, 1997 of $160
cash to be paid and $100 of estimated discount amortization on the
Convertible Loan from Environmental, based on the assumption in (1).
(3) Pro forma preferred dividends represent the 7% dividend rate on the Series A
Preferred Stock plus the amortization of the beneficial conversion feature
based on the assumption in (1).
(4) Pro forma weighted average shares outstanding include the 600,000 Private
Placement Shares issued on October 2, 1997 and the 100,000 Private
Placement Shares issued on October 8, 1997, based on the assumption in (1).
Pro forma weighted average shares outstanding does not assume conversion of
any options, warrants, or other securities as such conversion would have an
antidilutive effect.
(5) Gives effect to the sale of the Series A Preferred Stock, the sale of
700,000 Private Placement Shares, and the Convertible Loan from
Environmental to the Company as described herein as if such transactions had
occurred on June 30, 1997. Management has estimated the fair values of the
warrants issued in connection with the Convertible Loan from Environmental
and the beneficial conversion feature associated with the sale of Series A
Preferred Stock. Management is in the process of engaging an expert in the
field of valuations to determine the actual fair values of these items.
(6) Includes the $4,000 face amount of the Convertible Loan from Environmental
to the Company, less the estimated $1,270 discount on the loan.
(7) Represents the estimated fair value of the Series A Preferred Stock at the
time of issuance and the proceeds from the sale of 700,000 Private Placement
Shares. The estimated fair value of the Series A Preferred Stock is
calculated as the $1,800 face amount of the securities less the estimated
value of the beneficial conversion feature, $216. The price reset feature
associated with the sale of 700,000 Private Placement Shares contains
certain provisions which may require the refund of a portion of the cash
proceeds from the sale. Accordingly, this security has been classified as a
redeemable security until such time as the reset feature lapses.
(8) Includes the $1,270 estimated value of the warrant associated with the
Convertible Loan from Environmental, and the $216 and $750 estimated values
of the beneficial conversion features related to the sale of the Series A
Preferred Stock and the Convertible Loan from Environmental, respectively,
offset by the immediate recognition of interest expense related to the
estimated value of the beneficial conversion feature of the Convertible Loan
from Environmental.
12
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative in nature and
involve a high degree of risk. Prior to making an investment decision,
prospective investors in the Shares offered hereby should give careful
consideration to the information set forth in this Prospectus or incorporated
by reference herein and, in particular, should evaluate the risk factors set
forth below.
Limited Operating History; History of Losses; Future Losses;
Initial Commercialization Stage
The Company's limited operating history has consisted primarily of
development of SET(TM) and remediation equipment, conducting laboratory tests,
and planning on-site tests and demonstrations. The Company is subject to all of
the business risks associated with a new enterprise, including, but not limited
to, risks of unforeseen capital requirements, failure of market acceptance,
failure to establish business relationships, and competitive disadvantages as
against larger and more established companies. For the fiscal year ended
December 31, 1996, the Company had total revenues of $5,123,000 and a net loss
of $5,643,000, compared to total revenues of $0 and a net loss of $3,856,000 for
the fiscal year ended December 31, 1995. For the six months ended June 30, 1997,
the Company had total revenues of $9,819,000 and a net loss of $6,937,000,
compared to total revenues of $14,000 and a net loss of $1,996,000 for the six
months ended June 30, 1996. At December 31, 1996, the Company had stockholders'
equity of $20,076,000, and working capital of $8,991,000, compared to an
accumulated stockholders' deficit of $8,542,000 and a working capital deficit of
$9,200,000 at December 31, 1995. At June 30, 1997, the Company had stockholders'
equity of $18,380,000, and working capital of $12,169,000.
The Company anticipates that it will continue to incur significant
operating losses through 1997 and may incur additional losses thereafter,
depending upon its ability to consummate collaborative working arrangements or
licenses with third parties and the operation and financial success of any
environmental projects which the Company and its potential working partners may
be awarded. Other than revenues generated by Advanced Sciences, which the
Company acquired effective October 1, 1996, the Company has generated nominal
revenues to date, and there can be no assurance as to whether or when it will
generate material revenues or achieve profitable operations.
SET(TM) and SLiM(TM) Unproven on Large-Scale Commercial Basis
SET(TM) and SLiM(TM) have never been utilized on a large-scale
basis, and there can be no assurance that such technologies will perform
successfully on a large-scale commercial basis or that they will be profitable
to the Company. The Company has never utilized SET(TM) and SLiM(TM) under the
conditions and in the volumes that will be required to be profitable and cannot
predict all of the difficulties that may arise. In addition, most of the results
of the tests conducted by the Company on SET(TM) and SLiM(TM) have not been
verified by an independent testing laboratory. Thus, it is possible that the
Company's SET(TM) and SLiM(TM) technologies may require further research,
development, design and testing, as well as regulatory clearances, prior to
larger-scale commercialization. Additionally, the Company's ability to operate
its business successfully will depend on a variety of factors, many of which are
outside the Company's control, including competition, cost and availability of
supplies, changes in governmental initiatives and requirements, changes in EPA
and other regulatory requirements, and the costs associated with equipment
repair and maintenance.
No Assurance of Collaborative Agreements, Licenses or Project Contracts
The Company's business strategy is based upon entering into
collaborative joint working arrangements with established engineering and
environmental companies, or formal joint venture agreements relative to the
application of SET(TM) and SLiM(TM) as enabling technologies for specified
industries or markets. To date, only Advanced Sciences and its collaborative
joint working partners have been awarded material project contracts. There can
be no assurance that the Company will enter into any definitive joint project
arrangements or joint venture collaborative agreements with its prospective
working partners or others, or that such agreements, if entered into, will be on
terms and conditions that are sufficiently attractive to the Company to enable
it to generate profits. In the event the Company is unable to enter into
commercially attractive collaborative working arrangements for one or more
commercial or industrial remediation projects, in order to produce revenues for
the Company, it may be necessary to license SET(TM) and/or SLiM(TM) to
unaffiliated third parties. There is no assurance that the Company will be able
to enter into such license arrangements or that such licenses will produce any
income to the
13
<PAGE>
Company. Even if the Company is able to complete additional joint working
arrangements, there is no assurance that the Company and its working partners
will be awarded contracts to perform decontamination or remediation projects.
Even if such contracts are awarded, there is no assurance that these contracts
will be profitable to the Company. In addition, any project contract which may
be awarded to the Company and/or any of its joint working partners may be
curtailed, delayed, redirected or eliminated at any time. Problems experienced
on any specific project, or delays in the implementation and funding of
projects, could materially adversely affect the Company's business and financial
condition.
Uncertainty of Market Acceptance
Many prospective users of SET(TM) have already committed
substantial resources to other forms of environmental remediation technology,
including incineration, plasma arc, vitrification, molten metal, molten salt,
chemical neutralization, catalytic electrochemical oxidation and supercritical
wet oxidation. In addition, many prospective users of SLiM(TM) have committed
substantial resources to other forms of process stream treatments or
technologies. The Company's growth and future financial performance will depend
on demonstrating to prospective collaborative partners and users the advantages
of SET(TM), SLiM(TM) and the Company's other environmental technologies over
alternative technologies. There can be no assurance that the Company and its
prospective collaborative partners will be successful in this effort.
Furthermore, it is possible that competing alternatives may be perceived to
have, or may actually have, certain advantages over SET(TM), SLiM(TM) and/or the
Company's other environmental technologies for certain industries or
applications.
Risk of Environmental Liability
The Company's operations, as well as the use of the specialized
technical equipment by its customers, are subject to numerous federal, state and
local regulations relating to the storage, handling, emission and transportation
of certain regulated materials. There is always the risk that such materials
might be mishandled, or that there might be equipment or technology failures,
which could result in significant claims against the Company. Any such claims
against the Company could materially adversely affect the Company's business,
financial condition and results of operations.
As SET(TM), SLiM(TM) and the Company's other environmental
technologies are commercialized, the Company may be required to obtain
environmental liability insurance in the future in amounts greater than those it
currently maintains. There can be no assurance that such insurance will provide
coverage against all claims, and claims may be made against the Company (even if
covered by the Company's insurance policy) for amounts substantially in excess
of applicable policy limits. Any such event could have a material adverse effect
on the Company's business, financial condition and results of operations.
Potential Need for Additional Financing
In July 1996, the Company completed the Initial Public Offering,
from which it received net proceeds of approximately $30.5 million. In April
1997, Separation completed an initial public offering of its equity securities,
from which it received net proceeds of approximately $11.1 million. In August
and October 1997, the Company completed the private placement of 18,000 shares
of Series A Preferred Stock and the Common Stock Private Placement of 700,000
Private Placement Shares, respectively, from which the Company received
aggregate net proceeds of approximately $4.0 million. In addition, in September
1997, the Company received the $4.0 million Convertible Loan from Environmental.
Prior to such financings, financing for all of the Company's
activities had been provided in the form of direct equity investments and loans
by Environmental. While the Company believes that it has sufficient cash
reserves to meet expenses incurred in the ordinary course of business until the
third quarter of 1998, the Company's future capital requirements will depend on
certain factors, many of which are not within the Company's control. These
include the ongoing development and testing of SET(TM), SLiM(TM) and the
Company's other environmental technologies; the nature and timing of remediation
and clean-up projects and permits required; and the availability of financing.
14
<PAGE>
In the environmental remediation market, the Company may not be
able to enter into favorable business collaborations and might thus be required
to bid upon projects for its own account. If such bids were successful, the
Company would be required to make significant expenditures on personnel and
capital equipment which would require significant financing in amounts
substantially in excess of the net proceeds of the above financings. In
addition, the Company's lack of operational experience and limited capital
resources could make it difficult, if not highly unlikely, to successfully bid
on major reclamation or clean-up projects. In such event, the Company's business
development could be limited to remediation of smaller commercial and industrial
sites with significantly lower potential for profit.
In addition, the expansion of the Company's business will require
the commitment of significant capital resources toward the hiring of technical
and operational support personnel, the development of a manufacturing and
testing facility for SET(TM) and SLiM(TM) equipment, and the building of
equipment to be used both for on-site test demonstrations and the remediation of
contaminated elements. In the event the Company is presented with one or more
significant reclamation or clean-up projects, individually or in conjunction
with collaborative working partners, it may require additional capital to take
advantage of such opportunities. There can be no assurance that such financing
will be available or, if available, that it will be on favorable terms. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its research and development programs, to
relinquish rights to certain of its technologies, or to license third parties to
commercialize technologies that the Company would otherwise seek to develop
itself.
Competition and Technological Alternatives
The Company anticipates that the primary markets for its
technologies will be for hazardous and toxic waste and industrial by-products
treatment and disposal, the destruction or neutralization of chemical weapons
materials and warfare agents, and the concentration of radioactive wastes. The
Company has had limited experience in marketing its technologies and has a small
sales and marketing organization, whereas other participants in both the private
and public sectors include several large domestic and international companies
and numerous small companies, many of whom have substantially greater financial
and other resources and more manufacturing, marketing and sales experience than
the Company. Any one or more of the Company's competitors or other enterprises
not presently known to the Company may develop technologies which are superior
to SET(TM), SLiM(TM) or other technologies utilized by the Company. To the
extent that the Company's competitors are able to offer more cost-effective
remediation alternatives, the Company's ability to compete could be materially
and adversely affected.
Unpredictability of Patent Protection and Proprietary Technology
The Company has seven United States patents which issued between
1987 and 1996, and which relate to SET(TM), electrochemistry of halogenated
organic compounds, separation and destruction of CFCs and decontamination of
soils containing mercury and radioactive metals. The Company also has one
Canadian patent relating to its SET(TM) technology. The Company has filed five
additional United States patent applications relating to separation and
destruction of CFCs and removal of heavy metals from soil. In November 1995, the
Company filed a provisional patent application relating to the destruction of
chemical warfare agents. On September 15, 1997, Separation filed two United
States continuation-in-part ("CIP") provisional patent applications and, on
September 16, 1997, filed one international patent application covering the
principal features of its SLiM(TM) technology. One of the CIP provisional patent
applications covers the joint inventions of Srinivas Kilambi, Ph.D.,
Separation's Senior Vice President-Technology, and Lockheed Martin. The other
CIP provisional patent application and the international patent application
cover the sole inventions of Dr. Kilambi.
The Company's success depends, in part, on its ability to obtain
additional patents, protect the patents which it owns, maintain trade secrecy
protection and operate without infringing on the proprietary rights of third
parties. The patents currently owned by the Company are improvement patents
which are more difficult to monitor for infringement than those that would be
contained in a patent covering a pioneering invention or technology. There can
be no assurance that any of the Company's pending patent applications will be
approved, that the Company will develop additional proprietary technology that
is patentable, that any patents issued to the Company will provide the Company
with competitive advantages or will not be challenged by third parties or that
15
<PAGE>
the patents of others will not have an adverse effect on the Company's ability
to conduct its business. Furthermore, there can be no assurance that others will
not independently develop similar or superior technologies, duplicate any
elements of SET(TM), SLiM(TM) or the Company's other technologies, or design
around such technologies. It is possible that the Company may need to acquire
licenses to, or to contest the validity of, issued or pending patents of third
parties. There can be no assurance that any license acquired under such patents
would be made available to the Company on acceptable terms, if at all, or that
the Company would prevail in any such contest. In addition, the Company could
incur substantial costs in defending itself in suits brought against the Company
for alleged infringement of another party's patents or in defending the validity
or enforceability of the Company's patents, or in bringing patent infringement
suits against other parties based on the Company's patents.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in part,
by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others.
Government Regulation
The Company and its customers are required to comply with a number
of federal, state and local laws and regulations in the areas of safety, health
and environmental controls, including, without limitation, the Resource
Conservation and Recovery Act, as amended ("RCRA"), and the Occupational Safety
and Health Act of 1970 ("OSHA"), which may require the Company, its prospective
working partners or its customers to obtain permits or approvals to utilize
SET(TM) and/or SLiM(TM), or the Company's other environmental technologies and
related equipment on certain job sites. In addition, if the Company begins to
market SET(TM) and SLiM(TM) internationally, the Company will be required to
comply with laws and regulations and, when applicable, obtain permits or
approvals in those other countries. There is no assurance that such required
permits and approvals will be obtained. Furthermore, particularly in the
environmental remediation market, the Company may be required to conduct
performance and operating studies to assure government agencies that SET(TM)
and/or SLiM(TM), and their by-products, do not pose environmental risks. There
is no assurance that such studies, if successful, will not be more costly or
time-consuming than anticipated.
In addition, the Company's Nationwide Permit issued by the EPA
contains numerous conditions for maintaining the Nationwide Permit, including
notification of all job sites, periodic reporting to the EPA as to activities at
the job sites, prior notification to and approval by the EPA with respect to any
single-site centralized remediation facility that the Company may seek to
establish and certain restrictions on the disposal of by-products from the use
of SET(TM), and there can be no assurance that the Company will be able to
comply with such conditions in order to maintain and/or obtain renewal of the
Nationwide Permit.
Further, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended, or are interpreted
or enforced differently, the Company, its prospective working partners and/or
its customers may be required to meet stricter standards of operation and/or
obtain additional operating permits or approvals. There can be no assurance that
the Company will meet all of the applicable regulatory requirements.
Unspecified Acquisition-Related Risks
As part of its growth strategy, the Company will seek to acquire or
invest in complementary (including competitive) businesses, products or
technologies. The Company may allocate a significant portion of its available
working capital to finance a portion of the purchase price relating to possible
acquisitions of, or investments in, complementary (including competitive)
business, products or technologies. In the event any such acquisition or
investment opportunity arises in the future, it is probable that the Company
will also be required to obtain additional financing to complete such
transaction. The process of integrating such acquired assets into the Company's
operations may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for the ongoing development of the Company's business. There can be no assurance
that the anticipated benefits of any acquisitions will be realized. In addition,
16
<PAGE>
future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and financial position. Acquisitions also involve other risks, including
entering markets in which the Company has no or limited prior experience. The
Company currently has no commitments or agreements with respect to any possible
acquisitions or investments.
Dependence on Key Management and Other Personnel
The Company is dependent on the efforts of its senior management
and scientific staff, including Paul E. Hannesson, Chairman of the Board,
President and Chief Executive Officer, Edwin L. Harper, Vice Chairman, Michael
D. Fullwood, Senior Vice President, Chief Financial and Administrative Officer,
Secretary and General Counsel, Kenneth L. Adelman, Executive Vice President -
Marketing and International Development of the Company and President and Chief
Operating Officer of CAS, Albert E. Abel, Vice President, Carl O. Magnell, P.E.,
Vice President, Rayburn Hanzlik, Vice President, Andrew P. Oddi, Vice President
and Treasurer, and William E. Ingram, Vice President and Controller. The Company
is also dependent on the efforts of Kenneth J. Houle, President and Chief
Operating Officer of Separation. The proceeds of key-man life insurance policies
on the lives of certain of such individuals may not be adequate to compensate
the Company for the loss of any of such individuals. The loss of the services of
any one or more of such persons may have a material adverse effect on the
Company.
The Company's future success will depend in large part upon its
ability to attract and retain skilled scientific, management, operational and
marketing personnel. The Company faces competition for hiring such personnel
from other companies, government entities and other organizations. There can be
no assurance that the Company will continue to be successful in attracting and
retaining such personnel.
Potential Conflicts of Interest
Paul E. Hannesson and Michael D. Fullwood, the Chairman of the Board,
President and Chief Executive Officer and the Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel of the
Company, respectively, also serve in the same capacities with, and devote a
significant portion of their business and professional time and efforts to the
business of, Environmental and Separation. In addition, Bentley J. Blum, Kenneth
L. Adelman, Ph.D. and David L. Mitchell (the "Environmental Directors"), all of
whom are directors of the Company, also serve as directors of Environmental.
While the Company believes that its business and technologies are
distinguishable from those of Environmental, and that it does not compete in the
markets in which Environmental competes, Messrs. Hannesson and Fullwood and the
Environmental Directors may have potential conflicts of interest with respect
to, among other things, potential corporate opportunities, business
combinations, joint ventures and/or other business opportunities that may become
available to them, the Company and/or Environmental. Moreover, while Messrs.
Hannesson and Fullwood have agreed to devote a portion of their business and
professional time and efforts to the Company, potential conflicts of interest
also include the amount of time and effort devoted by them to the affairs of
Environmental and Separation. The Company may be materially adversely affected
if Messrs. Hannesson and Fullwood and/or the Environmental Directors choose to
place the interests of Environmental or Separation before those of the Company.
Each of Messrs. Hannesson and Fullwood and the Environmental Directors has
agreed that, to the extent such opportunities arise, he will carefully consider
a number of factors, including whether such opportunities are within the
Company's line of business or consistent with its strategic objectives and
whether the Company will be able to undertake or benefit from such
opportunities. In addition, the Company's Board of Directors has adopted a
policy whereby any future transactions between the Company and any of its
subsidiaries, affiliates, officers, directors, principal stockholders or any
affiliates of the foregoing will be on terms no less favorable to the Company
than could reasonably be obtained in "arms length" transactions with independent
third parties, and any such transactions will also be approved by a majority of
the Company's disinterested outside directors. Messrs. Hannesson and Fullwood
and the Environmental Directors also owe fiduciary duties of care and loyalty to
the Company under Delaware law. However, the failure of the Company's management
to resolve any conflicts of interest in favor of the Company could materially
adversely affect the Company's business, financial condition and results of
operations.
17
<PAGE>
Control by Principal Stockholder
Environmental, a public company whose common stock trades in the
so-called "pink sheets" of the National Quotation Bureau, Inc. (the "Pink
Sheets") and is quoted in the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. (the "OTCBB"), currently owns 66.6% of
the outstanding Common Stock of the Company. Accordingly, events or
circumstances having an adverse effect on Environmental, including fluctuations
in the market price of its common stock, could have a material adverse effect on
the market price of the Shares.
Bentley J. Blum, a director of the Company and Environmental,
beneficially owned, directly and through entities controlled by him,
approximately 51.3% of the outstanding common stock of Environmental as of
October 15, 1997. Paul E. Hannesson, the Chairman of the Board, President and
Chief Executive Officer of the Company and Environmental, beneficially owned
approximately 11.9% of the outstanding common stock of Environmental as of such
date. Accordingly, through his ownership or control of a controlling stock
interest in Environmental, Mr. Blum will be able to control, subject to the
terms of a voting agreement, the voting of Environmental's shares at all
meetings of stockholders of the Company and, because the Common Stock does not
have cumulative voting rights, will be able to determine the outcome of the
election of all of the Company's directors and determine corporate and
stockholder action on other matters. Messrs. Blum and Hannesson are
brothers-in-law.
Potential Adverse Effect on Market Price of Securities from Future Sales of
Common Stock
No assurance can be given as to the effect, if any, that future sales
of Common Stock, or the availability of shares of Common Stock for future sales,
will have on the market price of the Common Stock from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of warrants or stock options), or the possibility that such sales could occur,
could adversely affect the market price of the Common Stock and could also
impair the Company's ability to raise capital through an offering of its equity
securities in the future. Assuming conversion of all of the Series D Preferred
Stock and Series A Preferred Stock, and the exercise of all of the Environmental
Warrants and the Company Warrants, upon completion of this offering the Company
will have approximately 22,890,355 shares (subject to adjustment) of Common
Stock outstanding, of which approximately 5,750,000 currently publicly traded
shares of Common Stock, 2,894,488 Shares (subject to adjustment) issued and to
be issued to the Selling Stockholders upon conversion of the Series D Preferred
Stock and the Series A Preferred Stock, 1,339,407 Shares (subject to adjustment)
to be issued to the Selling Stockholders upon exercise of the Environmental
Warrants and the Company Warrants, and 700,000 Private Placement Shares issued
in connection with the Common Stock Private Placement will be transferable
without restriction under the Securities Act. The remaining 12,206,460 shares of
Common Stock to be outstanding upon completion of this offering are "restricted
securities" (as that term is defined in Rule 144 promulgated under the
Securities Act) which may be publicly sold only if registered under the
Securities Act, or if sold in accordance with an applicable exemption from
registration such as Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has beneficially owned restricted
securities for at least one year, is entitled to sell (together with any person
with whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or, if the stock is
quoted on the Nasdaq Stock Market or a national securities exchange, the average
weekly trading volume during the four calendar weeks preceding the sale. A
person who has not been an affiliate of the Company for at least the immediately
preceding three months, and who has beneficially owned restricted securities for
at least two years, is entitled to sell such restricted shares under Rule 144
without regard to any of the limitations described above.
Volatility of Market Prices of Common Stock
The market price for the Company's Common Stock has been
historically volatile. Future announcements of new technologies and changing
policies and regulations of the federal government and state governments and
other external factors, as well as potential fluctuations in the Company's
financial results, may have a significant impact on the price of the Common
Stock in the future.
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<PAGE>
Effect of Series A Preferred on Holders of Common Stock
The Series A Preferred Stock has separate class voting rights as to
matters affecting such securities (which requires the consent or approval of
holders of 66-2/3% of the Series A Preferred Stock), and votes together with the
holders of Common Stock on all matters requiring stockholder approval on a "as
converted" basis, as though such shares of Series A Preferred Stock had been
converted into Common Stock on the record date used to determine Common Stock
entitled to vote on such transaction or matter. As a result, depending on the
applicable conversion rate of the Series A Preferred Stock on such record date,
each share of Series A Preferred Stock will be entitled to cast multiple votes
with respect to transactions or matters on which each share of Common Stock may
only cast one vote. In addition, in the event of a liquidation of the Company,
the holders of the Series A Preferred Stock would be entitled to receive
distributions in preference to the holders of the Common Stock.
Certain Anti-Takeover Provisions and Potential Adverse Effect on Market Price of
Securities from Issuance of Preferred Stock
The Company's certificate of incorporation (the "Certificate of
Incorporation") and by-laws (the "By-Laws") contain certain provisions that
could have the effect of delaying or preventing a change of control of the
Company, which could limit the ability of security holders to dispose of their
Shares in such transactions. The Certificate of Incorporation authorizes the
Board of Directors to issue one or more series of preferred stock without
stockholder approval. Such preferred stock could have voting and conversion
rights that adversely affect the voting power of the holders of Common Stock, or
could result in one or more classes of outstanding securities that would have
dividend, liquidation or other rights superior to those of the Common Stock.
Issuance of such preferred stock may have an adverse effect on the then
prevailing market price of the Common Stock. Additionally, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Section 203 could have the effect of delaying or preventing a change of control
of the Company.
Potential Adverse Effect on Market Price of Shares as a Result of
Environmental Common Stock
As of October 15, 1997, there were an aggregate of approximately
58,883,583 shares of common stock of Environmental issued and outstanding, of
which approximately 16,000,000 shares are publicly held. Environmental's common
stock trades in the Pink Sheets and is quoted on the OTCBB. On October 15, 1997,
the closing bid price of such Environmental common stock was $0.81 per share.
The prevailing per share trading price of Environmental common stock may have a
direct impact on the future trading price of the Common Stock, especially since
the approximately $48,000,000 market capitalization of Environmental at October
15, 1997 is less than the approximately $65,000,000 market value of
Environmental's interest in the Company. In addition, potential negative
developments affecting Environmental which may be unrelated to the Company's
business may adversely affect the market value of the Shares.
Limitations on Liability of Directors and Officers
The Company's Certificate of Incorporation includes provisions to
eliminate, to the full extent permitted by the Delaware General Corporation Law
as in effect from time to time, the personal liability of directors of the
Company for monetary damages arising from a breach of their fiduciary duties as
directors. The Certificate of Incorporation also includes provisions to the
effect that (subject to certain exceptions) the Company shall, to the maximum
extent permitted from time to time under the laws of the State of Delaware,
indemnify, and upon request shall advance expenses to, any director or officer
to the extent that such indemnification and advancement of expenses is permitted
under such law, as it may from time to time be in effect. In addition, the
Company's By-Laws require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Company for acts which
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Certificate of Incorporation. As a result of such
provisions in the Certificate of Incorporation and the By-Laws, stockholders may
be unable to recover damages against the directors and officers of the Company
for actions taken by them which constitute negligence, gross negligence or a
violation of their fiduciary duties, which may discourage or deter stockholders
from suing directors, officers, employees and agents of the Company for breaches
of their duty of care, even though such action, if successful, might otherwise
benefit the Company and its stockholders.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale or other
disposition of the Shares by the Selling Stockholders hereunder.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997, and as adjusted giving effect to the sale of the Series A
Preferred Stock, the sale of 700,000 Private Placement Shares and the
Convertible Loan from Environmental to the Company as described herein. This
table should be read in conjunction with the Company's Consolidated Financial
Statements incorporated herein by reference.
<TABLE>
<CAPTION>
(in thousands)
June 30, 1997
---------------------
Pro Forma
As
Actual Adjusted
------ ------------
<S> <C> <C>
Long-term debt, including current portion:
Leases payable $ 95 $ 95
Convertible Loan from Environmental to the Company,
net of estimated $1,270 discount -- 2,730
------- ----------
Total long-term debt 95 2,825
------- ----------
Redeemable securities:
Series A Preferred Stock, $.001 par value;
80,000 shares authorized; 0 shares and
18,000 shares issued and outstanding,
respectively -- 1,584
Common Stock with reset feature -- 2,347 (1)
------- ----------
Total redeemable securities -- 3,931
------- ----------
Stockholders' equity:
Common Stock, $.001 par value; 50,000,000 shares
authorized; 21,650,000 and 22,350,000 shares
issued and outstanding, respectively 22 22
Additional paid-in capital 39,512 41,748 (2)
Accumulated deficit (21,154) (21,904)(3)
--------- --------
Total stockholders' equity 18,380 19,866
--------- --------
Total capitalization $ 18,475 $ 26,622
========= ========
</TABLE>
(1) The price reset feature associated with the sale of 700,000 Private
Placement Shares contains certain provisions which may require the refund of
a portion of the cash proceeds from the sale. Accordingly, this security
has been classified as a redeemable security until such time as the reset
feature lapses.
(2) Includes the estimated $1,270 fair value of warrants issued in connection
with the Convertible Loan from Environmental and the estimated $216 and $750
fair values of the beneficial conversion features associated with the sale
of the Series A Preferred Stock and the Convertible Loan from Environmental,
respectively. Management is in the process of engaging an expert in the
field of valuations to determine the actual fair values of these items.
(3) Includes the effect of immediately recognizing additional interest expense
relating to the estimated $750 fair value of the beneficial conversion
feature associated with the Convertible Loan from Environmental.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling
Stockholder, the number of Shares owned by the Selling Stockholders (where
indicated by footnote, on a pro forma basis as of October 15, 1997 as if all the
outstanding shares of Series D Preferred Stock and Series A Preferred Stock had
been converted into Common Stock, and all the outstanding Environmental Warrants
and Company Warrants had been exercised in full, as of such date), and the
number of Shares which may be offered for resale pursuant to this Prospectus
(also on a pro forma basis where indicated). The information included below is
based upon information provided by the Selling Stockholders. The actual number
of Shares owned or offered could be materially less or more than such estimated
amount depending upon factors which cannot be predicted at this time and, if
required, will be reflected in a supplement to this Prospectus. Because each
Selling Stockholder may offer all, some or none of the Shares it holds, and
because there are currently no agreements, arrangements or understandings with
respect to the sale of any of the Shares, no definitive estimate as to the
number of Shares that will be held by each such Selling Stockholder after such
offering can be provided, and the following table has been prepared on the
assumption that all Shares offered under this Prospectus will be sold to parties
unaffiliated with the Selling Stockholders. Except as indicated, none of the
Selling Stockholders has had a material relationship with the Company within the
past three years, other than as a result of the ownership of the Shares or other
securities of the Company.
<TABLE>
<CAPTION>
Shares Shares
Owned Prior to Owned After
the Offering Number of Shares the Offering
-------------------------------- Which May be Sold ----------------------
Name Number Percent(1) in this Offering Number Percent
- ----------------------------- -------------- -------------- -------------------- --------- -------
<S> <C> <C> <C> <C> <C>
American Investment
Group of New York, L.P..... 1,205,450(2) 5.4% 1,205,450 * *
Okemo Partners Limited..... 402,062(3) 1.8% 402,062 * *
Milton Partners............ 803,633(2) 3.6% 803,633 * *
Elara Ltd.................. 978,633(4) 4.4% 978,633 * *
Porter Partners, L.P....... 278,917(5) 1.2% 278,917 * *
EDJ Limited................ 39,845(6) * 39,845 * *
Michael Margolies.......... 63,750(2) * 63,750 * *
Adam B. Cohen.............. 10,625(2) * 10,625 * *
Adam P. Jacobs............. 10,625(2) * 10,625 * *
Nelson Partners............ 115,237(7) * 115,237 * *
Olympus Securities, Ltd.... 140,845(7) * 140,845 * *
Leonardo, L.P.............. 64,021(7) * 64,021 * *
Raphael, L.P............... 25,608(7) * 25,608 * *
Ramius Fund, Ltd........... 38,412(7) * 38,412 * *
Fortune Fund............... 76,825(7) * 76,825 * *
DFA Group Trust - Small
Company Subtrust........... 300,300(8) 1.3% 300,300 * *
U.S. 9-10 Small Company
Portfolio.................. 157,700(8) * 157,700 * *
DFA Group Trust - 6-10
Subtrust................... 125,400(8) * 125,400 * *
U.S. 6-10 Small Company
Series..................... 16,600(8) * 16,600 * *
Linda Cappello ............ 27,000(9) * 27,000 * *
Gerard K. Cappello ........ 18,000(9) * 18,000 * *
Lawrence K. Fleischman .... 15,000(9) * 15,000 * *
Pacific Continental
Security Corp.............. 19,407(9) * 19,407 * *
</TABLE>
21
<PAGE>
- -------------------
* Represents less than 1% of the outstanding Common Stock.
(1) Percentages based on 22,350,000 shares of Common Stock outstanding as of
October 15, 1997.
(2) Includes a pro forma estimate of the number of Shares that would have been
owned by the Selling Stockholder if: (a) it had converted all of its shares
of Series D Preferred Stock on October 15, 1997; (b) the conversion price
of the Series D Preferred Stock were $3.6125 per share (based upon 85% of
the average of the low prices of the Common Stock on AMEX as reported
by Bloomberg for the five consecutive trading days immediately prior to
October 15, 1997); and (c) it had exercised all of its Environmental
Warrants in full on October 15, 1997. The actual number of Shares to be
received by the Selling Stockholder upon conversion of the Series D
Preferred Stock and exercise of the Environmental Warrants could be
materially less or more than such estimated amount depending upon factors
which cannot be predicted at this time, including, among others, the actual
conversion price of the Series D Preferred Stock. The actual conversion
price of the Series D Preferred Stock will be an amount equal to 85% of the
lower of (x) the average of the low prices, or (y) the Average Closing Bid
Price of the Common Stock of the Company as reported by Bloomberg for the
previous five business days ending on the day prior to conversion. The
conversion price will be equal to certain amounts set forth in the
Certificate of Designation for the Series D Preferred Stock if the Average
Closing Bid Price of the Common Stock, as reported by Bloomberg, for any
consecutive 30 days is equal to or less than $2.00, provided that in no
event will the conversion price be less than $1.50. If required, the actual
number of Shares to be received by such Selling Stockholder will be
reflected in a supplement to this Prospectus following the conversion of
such Series D Preferred Stock and exercise of such Environmental Warrants.
(3) Includes (i) 83,290 Shares transferred by Environmental to the Selling
Stockholder upon conversion of 3,000 shares of Series D Preferred Stock on
October 14, 1997, and (ii) a pro forma estimate of the number of additional
Shares that would have been owned by the Selling Stockholder if: (a) it had
converted all of its remaining shares of Series D Preferred Stock on
October 15, 1997; (b) the conversion price of the Series D Preferred Stock
were $3.6125 per share (based upon 85% of the average of the low prices of
the Common Stock on AMEX as reported by Bloomberg for the five consecutive
trading days immediately prior to October 15, 1997); and (c) it had
exercised all of its Environmental Warrants in full on October 15, 1997.
(4) Includes (i) 100,000 Shares issued by the Company to the Selling
Stockholder in connection with the Common Stock Private Placement on
October 8, 1997, and (ii) a pro forma estimate of the number of additional
Shares that would have been owned by the Selling Stockholder if: (a) it had
converted all of its shares of Series D Preferred Stock on October 15,
1997; (b) the conversion price of the Series D Preferred Stock were $3.6125
per share (based upon 85% of the average of the low prices of the Common
Stock on AMEX as reported by Bloomberg for the five consecutive trading
days immediately prior to October 15, 1997); and (c) it had exercised all
of its Environmental Warrants in full on October 15, 1997.
(5) Includes (i) 36,399 Shares transferred by Environmental to the Selling
Stockholder upon conversion of 1,400 shares of Series D Preferred Stock on
September 29, 1997, and (ii) a pro forma estimate of the number of
additional Shares that would have been owned by the Selling Stockholder if:
(a) it had converted all of its remaining shares of Series D Preferred
Stock on October 15, 1997; (b) the conversion price of the Series D
Preferred Stock were $3.6125 per share (based upon 85% of the average of
the low prices of the Common Stock on AMEX as reported by
Bloomberg for the five consecutive trading days immediately prior to
October 15, 1997); and (c) it had exercised all of its Environmental
Warrants in full on October 15, 1997.
(6) Includes (i) 5,200 Shares transferred by Environmental to the Selling
Stockholder upon conversion of 200 shares of Series D Preferred Stock on
September 29, 1997, and (ii) a pro forma estimate of the number of
additional Shares that would have been owned by the Selling Stockholder if:
(a) it had converted all of its remaining shares of Series D Preferred
Stock on October 15, 1997; (b) the conversion price of the Series D
Preferred Stock were $3.6125 per share (based upon 85% of the average of
the low prices of the Common Stock on AMEX as reported by Bloomberg for the
five consecutive trading days immediately prior to October 15, 1997); and
(c) it had exercised all of its Environmental Warrants in full on
October 15, 1997.
(7) Includes a pro forma estimate of the number of Shares that would have been
owned by the Selling Stockholder if: (a) it had converted all of its shares
of Series A Preferred Stock on October 15, 1997; and (b) the conversion
price of the Series A Preferred Stock were $3.905 per share (based upon 88%
of the average of the last sale prices of the Common Stock on AMEX as
reported by Bloomberg for the five consecutive trading days immediately
prior to October 15, 1997). The actual number of Shares to be issuable upon
conversion of the Series A Preferred Stock could be materially less or more
than such estimated amount depending upon factors which cannot be predicted
at this time, including, among others, the actual conversion price of the
Series A Preferred Stock. The actual conversion price of the Series A
Preferred Stock will be an amount
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equal to the lesser of (x) $4.64, or (y) 88% of the average of the last
sale price per share of the Common Stock on AMEX as reported by Bloomberg
for the five consecutive trading days immediately prior to the date of
conversion. Subject to customary anti-dilution provisions, the minimum
conversion price is $2.00 per share, provided that if the last sale price
per share of the Common Stock on AMEX as reported by Bloomberg is less than
$2.00 for any 60 consecutive calendar days, the holders of Series A
Preferred Stock may, among other things, elect to convert their shares into
Common Stock without regard to such minimum $2.00 per share price. If
required, the actual number of Shares to be received by such Selling
Stockholder will be reflected in a supplement to this Prospectus following
the conversion of such Series A Preferred Stock.
(8) Represents all of the Shares currently owned directly by the Selling
Stockholder.
(9) Includes a pro forma estimate of the number of Shares that would have been
owned by the Selling Stockholder if it had exercised all of its Company
Warrants in full on October 15, 1997.
PLAN OF DISTRIBUTION
The Shares offered hereby may be sold by the Selling Stockholders,
or by pledgees, donees, transferees or other successors in interest, from time
to time in transactions in AMEX, in the over-the-counter market, in transactions
independent of AMEX or the over-the-counter market, in negotiated transactions,
or a combination of such methods of sales, at fixed prices which may be changed,
at market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions).
Any or all of the sales or other transactions involving the Common
Stock described above, whether effected by a Selling Stockholder, any
broker-dealer or others, may be made pursuant to this Prospectus. In addition,
any shares of Common Stock that qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit received by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market-making activities with respect to the Common Stock of the Company for
a period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, each Selling Stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders. All of the foregoing may
limit the marketability of the Shares.
To the knowledge of the Company, no underwriting arrangements have
been entered into by the Selling Stockholders with respect to the Shares as of
the date hereof. Upon the Company being notified by a Selling Stockholder that
any material arrangement has been entered into with a broker or dealer for the
sale of Shares through a block trade, special offering or secondary
distribution, or a purchase by a broker or dealer, a supplement to this
Prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (a) the name of each such Selling Stockholder and of
the participating broker or dealer, (b) the number of Shares involved, (c) the
price at which such Shares were sold, (d) the commissions paid or the discounts
or concessions allowed to such broker or dealer, where applicable, (e) that such
broker or dealer did not conduct any investigation to verify the information set
out or incorporated by reference in this Prospectus, and (f) other facts
material to the transaction.
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The Company and the Selling Stockholders have agreed to indemnify
each other and their respective officers and directors and certain other persons
against liabilities in connection with any offering of the Shares, including
liabilities arising under the Securities Act.
By agreements with the Selling Stockholders, the Company will pay
all of the expenses incurred in connection with the registration of the Shares
under the Securities Act (other than agent's or underwriter's commissions and
discounts), estimated to be approximately $57,400.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon
for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, New York,
New York.
EXPERTS
The consolidated financial statements incorporated in this
Prospectus by reference, except as they relate to the unaudited six-month
periods ended June 30, 1997 and 1996, have been audited by various independent
accountants. The periods covered by these audits are indicated in the
individual accountants' reports. Such financial statements have been so
incorporated in reliance on the reports of the various independent accountants
given on the authority of such firms as experts in auditing and accounting.
24
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No dealer, salesperson or other person is authorized to give
any information or to make any representation not contained
in this Prospectus in connection with this offering, and any
information or representation not contained herein must not
be relied upon as having been authorized by the Company or
any other person. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any
securities other than the registered securities to which it
relates or an offer to or solicitation of any person in any
jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus at any
time nor any sale made hereunder shall, under any
circumstances, create any implication that the information
herein contained is correct as of any time subsequent to the
date of this Prospectus.
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TABLE OF CONTENTS
Page
----
Available Information...............................2
Incorporation of Certain
Documents by Reference.........................2
Special Note Regarding
Forward-Looking Statements.....................3
The Company.........................................4
Recent Developments.................................6
Summary Financial Data.............................11
Risk Factors.......................................13
Use of Proceeds....................................20
Capitalization.....................................20
Selling Stockholders...............................21
Plan of Distribution...............................23
Legal Matters......................................24
Experts............................................24
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4,933,895 Shares
COMMODORE APPLIED TECHNOLOGIES, INC.
Common Stock
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PROSPECTUS
--------------------------
October 31, 1997
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