<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11871
COMMODORE APPLIED TECHNOLOGIES, INC.
------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3312952
---------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
150 EAST 58TH STREET
NEW YORK, NEW YORK 10155
-------------------- ------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 308-5800
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares of common stock outstanding at November 5, 1997
was 22,350,000.
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COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I . FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 . . . . . . . . . . . . 3
Condensed Consolidated Statement of Operations -
Nine months ended September 30, 1997 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows - Nine months
ended September 30, 1997 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,839 $ 4,617
Temporary investments 12,997 7,459
Accounts receivable, net 3,372 7,149
Notes and advances to related parties 1,715 1,680
Restricted cash and certificates of deposit -- 670
Prepaid assets and other current receivables 716 581
------- -------
Total Current Assets 20,639 22,156
Other receivables -- 63
Other investments 604 505
Property and equipment, net 2,768 2,044
Other assets
Patents and completed technology, net of
accumulated amortization of $146 and
$140, respectively 1,114 1,004
Goodwill, net of accumulated amortization
of $256 and $113, respectively 7,417 7,560
Other 93 124
------- -------
Total Assets $32,635 $33,456
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 2,309 $ 3,804
Notes payable 55 --
Payables to related parties -- 252
Current portion of long term debt 48 89
Line of credit 1,309 7,042
Other accrued liabilities 2,536 1,978
-------- --------
Total Current Liabilities 6,257 13,165
Long term debt 22 29
Payables to related parties 3,092 186
Minority Interest in Subsidiary 5,226 --
Commitments and contingencies -- --
Redeemable Securities
Series A Preferred Stock, par value $0.001 per share, 7% cumulative,
80,000 shares authorized and 18,000 issued and outstanding 1,626 --
Stockholders' equity
Common Stock, par value $0.001 per share, 50,000,000 shares
authorized and 21,650,000 issued and outstanding 22 22
Additional paid-in capital 41,688 34,270
Accumulated deficit (25,298) (14,216)
-------- --------
Total stockholders' equity 16,412 20,076
-------- --------
Total Liabilities and Stockholders' Equity $ 32,635 $ 33,456
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract revenues (Note 2) $ 5,898 $ 21 $ 15,717 $ 35
Costs and expenses:
Cost of sales 4,460 64 12,479 64
Research and development (Note 2) 752 650 2,185 1,604
General and administrative 3,284 655 9,398 1,346
Depreciation and Amortization 289 -- 771 --
Minority Interest 27 -- (201) --
-------- -------- -------- --------
Total costs and expenses 8,812 1,369 24,632 3,014
-------- -------- -------- --------
Loss from operations (2,914) (1,348) (8,915) (2,979)
-------- -------- -------- --------
Other income (expense):
Interest income 187 225 507 229
Interest expense (862) (14) (1,162) (383)
-------- -------- -------- --------
Net other income (expense) (675) 211 (655) (154)
-------- -------- -------- --------
Loss before income taxes and affiliate losses (3,589) (1,137) (9,570) (3,133)
Income taxes -- -- 2 --
-------- -------- -------- --------
Loss before affiliate losses (3,589) (1,137) (9,572) (3,133)
Equity in losses of unconsolidated subsidiaries (512) -- (1,466) --
-------- -------- -------- --------
Net loss $ (4,101) $ (1,137) $(11,038) $ (3,133)
======== ======== ======== ========
Net (Loss) per share
(Based on weighted average shares of
21,650,000 and 21,650,000 in 1997 and
20,750,000 and 16,971,000 in 1996) $ (.19) $ (.05) $ (.51) $ (.18)
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,038) $ (3,133)
Adjustments to reconcile net loss to net cash use in
operating activities:
Depreciation and amortization 771 92
Undistributed losses of unconsolidated subsidiary 1,466 --
Minority ownership in losses (201) --
Changes in assets and liabilities:
Accounts receivable 3,777 (40)
Prepaid assets (135) (64)
Other assets 31 8
Accounts payable (1,495) 316
Payables to related parties (252) --
Other liabilities 558 --
-------- --------
Net cash provided from (used in) operating (6,518) (2,821)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,346) (184)
Acquisition of patents (116) --
Temporary investments purchased (5,538) (17,789)
Advances to related parties (35) --
Decrease (increase) in restricted cash 670 (8,000)
Other investments (1,565) (1,000)
Other receivables 63 --
-------- --------
Net cash provided from (used in) investing (7,867) (19,973)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from principal stockholder 4,000 (5,925)
Increase in line of credit -- 2,000
Payment on line of credit (5,733) (2,000)
Proceeds from sale of stock 1,666 30,568
Change in due to related parties 176 (244)
Proceeds from subsidiary's sale of stock 11,087 --
Increase in notes and loans payable 7 --
Preferred stock dividend paid (288) --
Loan conversion feature 750 --
Other (58) --
-------- --------
Net cash provided from (used in) financing 11,607 24,399
activities
Increase (decrease) in cash (2,778) 1,605
Cash, beginning of period 4,617 4
-------- --------
Cash, end of period $ 1,839 $ 1,609
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1997
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries ("the Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. The financial statement information was derived from
unaudited financial statements unless indicated otherwise. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 1997,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
On March 29, 1996, Commodore Environmental Services, Inc.
("Commodore"), the Company's sole shareholder at that date, in exchange for the
issuance of 15,000,000 shares of the Company's Common Stock, capitalized the
Company as follows: (1) contributed 90.05 percent of the outstanding Common
Stock of Commodore Laboratories, Inc. ("Labs") and 100 percent of the
outstanding capital stock of Commodore Technologies, Inc. ("Technologies"),
Commodore Government Environmental Technologies, Inc. ("Government"), Commodore
Remediation Technologies, Inc. ("Remediation"), and Sandpiper Properties, Inc.
("Sandpiper"), (2) assigned all rights, titles, and interest in its contracts,
assets, and properties related to Commodore's SET(TM) technology to the Company,
and (3) contributed $3,000 of a promissory note to the Company for the purpose
of funding the development of SET(TM). This exchange (along with the July 1996
transaction described in the second succeeding paragraph) were recorded by the
Company at Commodore historical book value.
In June of 1996, the Company completed an initial public offering of
5,750,000 shares of its Common Stock, par value $.001 per share (the "Common
Stock"), at a price to the public of $6.00 per share. Along with each share was
one detachable warrant valued at $.10, which entitles the holder to purchase one
share of Common Stock at the price of $8.40 per share from the period from
June 28, 1997 until June 28, 2001. These warrants are redeemable by the
Company for $.01 per share if the average trading price of the Company Common
Stock for any consecutive 20 day period is greater than or equal to $18.00 per
share. Net proceeds from the offering were $30,551.
In July 1996, Commodore acquired the remaining 9.95 percent of Labs and
contributed its investment to the Company. The excess of Commodore's purchase
price of $3,000 over the $2,294 fair value of the net assets acquired has been
recorded as completed technology and is being amortized over 7 years.
7
<PAGE> 8
On October 1, 1996, the Company acquired all of the outstanding voting
common stock of Advanced Sciences, Inc. ("ASI") and A.S. Environmental, Inc.
("ASE"). This transaction also included the purchase of ASI's foreign
subsidiaries, Advanced Sciences Integrada, S.A., ("ASI Argentina") and Advanced
Sciences Integrated Mexico, S.A., ("ASI Mexico"). The acquisition has been
recorded using the purchase method of accounting. Accordingly, the results of
operations of ASI have been included in those of the Company for the period
subsequent to the date of acquisition.
In consideration for the ASI and ASE stock, the Company issued 900,000
shares of Common Stock to ASI and ASE shareholders, with a fair value of $2,250.
Assets and liabilities acquired are as follows:
<TABLE>
<S> <C>
Cash $ 199
Accounts Receivables 4,783
Prepaid expenses 286
Restricted cash 151
Property and equipment 377
Trade Payables (3,234)
Accrued expenses (1,931)
Line of credit (5,681)
Notes payable (200)
Capital leases and other long-term obligations (173)
-------
Net liabilities in excess of assets purchased (5,423)
Issuance of Common Stock (2,250)
-------
Goodwill $(7,673)
=======
</TABLE>
On December 2, 1996 the Company purchased Commodore Separation
Technologies, Inc. ("Separation"), Commodore CFC Technologies, Inc. ("CCFC") and
CFC Technologies, Inc. ("CFC") from Commodore for $5,400, consisting of $3,000
in cash and warrants to purchase 7,500,000 shares of the Company's Common Stock
at an exercise price of $15.00 per share and with termination date of December
2, 2003. The acquisition has been accounted for as a transaction between
entities under common control. The Company has recorded its investment in
Separation, CFC and CCFC as $753, which is equal to Commodore's historical basis
in these subsidiaries. The difference between this amount and the $5,400 paid to
Commodore has been recorded as a direct reduction in the paid-in capital of the
Company.
Substantially all of the company's revenues are from ASI, and consist
of engineering and scientific services performed for the U.S. Government and
prime contractors that serve the U.S. Government under a variety of contracts,
most of which provide for reimbursement of cost plus fixed fees. Revenue under
cost-reimbursement contracts is recorded under the percentage of completion
method as costs are incurred and include estimated fees in the proportion that
costs incurred to date bear to total estimated costs.
Anticipated losses on contracts are provided for by a charge to income
during the period such losses are identified. Changes in job performance, job
conditions, estimated profitability (including those arising from contract
penalty provisions) and final contract settlements may result in revisions to
cost and income and are recognized in the period in which the revisions are
determined. Allowances for anticipated losses totaled $2,306 at December 31,
1996, and $993 at September 30, 1997.
8
<PAGE> 9
The condensed consolidated financial statements for the nine month
period ended September 30, 1996, only include the accounts for Labs, the
predecessor company and are therefore not comparable to the condensed
consolidated financial statements of the Company for subsequent periods. The
consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The investment in Teledyne-Commodore, LLC, a
50% owned joint venture with Teledyne Environmental, Inc., has been accounted
for under the equity method as the Company does not have a controlling interest
in the venture.
In April 1997, Separation completed an initial public offering of its
equity securities from which it received net proceeds of approximately $11.1
million. These funds were recorded as additional paid-in-capital by Separation.
This offering reduced the Company's equity ownership in Separation from 100
percent to 87 percent. On June 30, 1997, and September 30, 1997, Separation paid
dividends on its outstanding convertible redeemable Preferred Stock of $138 and
$150, respectively, which were charged directly to paid-in-capital. These
dividends have been considered in computing the Company's loss per common share.
On August 15, 1997, pursuant to a Series A Convertible Preferred Stock
Purchase Agreement, the Company completed the sale to six investors, for an
aggregate purchase price of $1.8 million of 18,000 shares of newly created
Series A Preferred Stock of the Company (the "Preferred Stock").
The 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 in cash or
shares of common stock at the Conversion Price (as defined). The 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 Preferred Stock has separate class voting rights as to matters
affecting such securities (which require the consent or approval of holders of
66 2/3% of the Preferred Stock), and votes together with holders of common stock
on all matters requiring stock holder approval on an "as converted" basis, as
though such shares of 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 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 Preferred Stock may not convert more than 20% of
his or her shares of Preferred Stock in any one month, subject to the right to
accumulated conversion so that any shares of Preferred Stock not converted in
any one calendar month may be accumulate with the number of convertible shares
of Preferred Stock in the next calendar month. To the extent not converted
voluntarily, as of August 1, 1999, all remaining shares of Preferred Stock will
be automatically converted into shares at the Conversion Price then in effect.
The 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 Preferred Stock or (ii)
88% of the Average Share Price for the five consecutive trading days immediately
prior to the Conversion Date (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
Preferred Stock may either demand mandatory redemption of such Preferred Stock
(at $100 per share plus accrued and unpaid dividends) or convert their shares of
Preferred Stock into shares without regard to such minimum $2.00 per share
price.
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<PAGE> 10
The 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 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 Preferred Stock and
fails to obtain such requisite stockholder approval within 90 calendar days.
In connection with the sale of the Preferred Stock, the Company issued
warrants, expiring on August 15, 2002, to the placement agent entitling the
placement agent to purchase 19,407 shares of the Company's common stock at $5.80
per share. Net proceeds from the preferred stock sale were $1.6 million.
On September 23, 1997, Commodore provided the Company with a $4.0
million unsecured loan, evidenced by the Company's 8 percent convertible
subordinated note due August 31, 2002 (the "Convertible Loan"). Pursuant to the
terms of such note, the Company is obligated to pay Commodore 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 upon penalty, upon 30 days advance written notice. Such
right of prepayment is subject to Commodore'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.
Commodore 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 principle 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 Commodore and the Company authorized the Convertible
Loan. The value of the beneficial conversion privilege has been estimated at
$750 and was recognized as interest expense in September, 1997.
In consideration of the Convertible Loan, Commodore received warrants
expiring August 21, 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. The estimated
value of this warrant, $1,270, has been recorded as a discount on the note to be
amortized to interest expense over the life of the loan.
On October 2, 1997, the Company completed the sale of 600,000 Private
Placement Shares to four investors for an aggregate price of $2.2 million.
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 convertible securities or warrants, or (iii) issue any shares of
common stock during such Anniversary Period (but not thereafter) upon conversion
of its currently outstanding 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
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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 Commodore upon conversion of outstanding
shares of Series D Preferred Stock or upon exercise of outstanding Commodore
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. The Stock Purchase Agreement in connection with such
sales contains terms identical to those contained in the Stock Purchase
Agreements in connection with the Sale of the 600,000 Private Placement Shares,
except 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.
In connection with the Private Placements Shares, the Company
issued warrants, expiring on September 30, 2002, to the placement agent
entitling the placement agent to purchase 60,000 shares of the Company's common
stock at $3.67 per share. Net proceeds from the Private Placements were $2.4
million.
The October 2, 1997, and October 8, 1997, Private Placement
transactions of 600,000 shares and 100,000 of the Company's common stock,
respectively, were recorded by the Company in October 1997; therefore, the
transactions are not reflected in the condensed consolidated financial
statements for the nine month period ended September 30, 1997.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
General
The Company, a majority-owned subsidiary of Commodore Environmental
Services, Inc. ("Commodore"), is engaged in the destruction and neutralization
of hazardous waste and the separation of hazardous waste from other materials.
The Company owns technologies related to the separation and destruction of
polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
The Company is currently working on the commercialization of these
technologies through various acquisitions, licensing agreements and joint
ventures. Through Advanced Sciences, Inc. ("ASI"), a subsidiary acquired on
October 1, 1996, the Company has contracts with various government agencies and
private companies in the United States and abroad. As some government contracts
are funded in one year increments, there is a possibility for cutbacks. As these
contracts constitute a major portion of the subsidiary's revenues, such a
reduction would materially affect the operations. However, management believes
the subsidiary's existing client relationships will allow the Company to obtain
new contracts in the future.
The Company, since Commodore's acquisition of Labs in December 1993,
has not generated material revenues, except from the acquisition of ASI, or any
profits. Prior to the acquisition of ASI, the Company was considered to be a
developmental stage company.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 Compared to Three and Nine Months
Ended September 30, 1996
Revenues were $5,898 and $15,717 for the three and nine months ended
September 30, 1997, compared to $21 and $35 for the three and nine months ended
September 30, 1996. Such revenues for 1997 were primarily due to the Company's
acquisition of ASI, effective October 1, 1996, and consisted of engineering and
scientific services performed for the United States government under a variety
of contracts, most of which provide for reimbursement of cost plus fixed fees.
Revenue under cost-reimbursements contracts is recorded under the percentage of
completion method as costs incurred and include estimated fees in the proportion
that costs to date bear to total estimated costs. Cost of sales increased to
$4,460 and $12,479 from $64 and $64 for the same periods in 1996. Anticipated
losses on contracts are provided for by a charge to income during the period
such losses are first identified.
For the three and nine months ended September 30, 1997, the Company
incurred research and development costs of $752 and $2,185, as compared to $650
and $1,604 for the three and nine months ended September 30, 1996. Research and
development costs include salaries, wages, and other related costs of personnel
engaged in research and development activities, contract services and materials,
test equipment and rent for facilities involved in research and development
activities. Research and development costs are expensed when incurred, except
that those costs related to the design or construction of an asset having an
economic useful life are capitalized, and then depreciated over the estimated
useful life of the asset. Research and development increased for the three and
nine months ended September 30, 1997, as compared to the three and nine months
ended September 30, 1996, primarily due to the continued use of independent
consultants in the development of SET(TM). Also, the Company hired additional
technical and operational personnel to develop the SET(TM) and separation
processes.
12
<PAGE> 13
General and administrative expenses for the three and nine months ended
September 30, 1997, were $3,284 and $9,398, as compared to $655 and $1,346 for
the three and nine months ended September 30, 1996. The increase was primarily
due to hiring executives and staff to support the increased activities of the
Company caused by its own and its subsidiary's change to "public" status and
efforts to commercialize its technology. Approximately $1,046 and $2,693 of the
increase relates to expenses incurred at the newly acquired ASI subsidiary.
In April, Commodore Separation Technologies, Inc. ("Separation") completed
a sale of stock which reduced the Company's ownership percent from 100 percent
to 87 percent. As a result, the financial statements report $201 as that portion
of the subsidiary's loss applicable to the minority interest.
Interest income was $187 and $507 for the three and nine months ended
September 30, 1997, as compared to $225 and $229 for the three and nine months
ended September 30, 1996. The increase resulted from the investment of the
proceeds of the Company and its subsidiary's initial public offerings.
Interest expense for the three and nine months ended September 30,
1997, was $862 and $1,162 as compared to $14 and $383 for the three and nine
months ended September 30, 1996. Interest charges in 1996 result from
indebtedness to Commodore for advances made to the Company and from indebtedness
by a wholly-owned subsidiary. Interest expense in 1997 was due to the debt
assumed in connection with the acquisition of a wholly-owned subsidiary. Also,
$750, interest expense was recognized in September, 1997, related to the
beneficial conversion privilege attached to the convertible note payable to
Commodore.
Equity in losses of unconsolidated subsidiary for the three and nine
months ended September 30, 1997, was $512 and $1,466, as compared to $0 for the
three and nine months ended September 30, 1996. The Company's
Teledyne-Commodore, LLC joint venture commenced operations in October 1996.
LIQUITY AND CAPITAL RESOURCES
From its inception through the second quarter of 1996, the Company's
operations were financed principally by loans and investments from its
stockholders. On September 28, 1996, the Company successfully completed an
initial public offering of its common stock and warrants from which it received
net proceeds of approximately $30,551. In connection with the initial public
offering, the Company incurred transaction costs of approximately $649. The
Company allocated approximately $12.0 million of the net proceeds for the
funding of proposed collaborative joint ventures, $2.0 million of which was
allocated to Teledyne-Commodore, LLC.
In July 1996, the Company utilized a portion of the net proceeds from
its initial offering to repay an outstanding line of credit of $2.0 million, as
well as a $5,925 promissory note to its principal stockholder. The Company set
aside $1.0 million cash collateral to support a loan made by a commercial bank
to the Company's principal stockholder in December 1993. In September 1996, such
cash collateral was released by the bank.
In August 1997, the Company completed a sale of 18,000 shares of
newly-created Series A Preferred Stock of the Company from a which it received
net proceeds of $1.6 million. In connection with the sale, the Company incurred
transaction costs of approximately $117 and issued warrants, expiring on August
15, 2002, to the placement agent.
In October 1997, the Company completed sales of 600,000 and 100,000
Private Placement Shares of common stock of the Company, from which it received
aggregate net proceeds of $2.4 million. In connection with the Private
Placements, the Company incurred transaction costs of approximately $209 and
issued warrants, expiring on September 30, 2002, to the placement agent.
13
<PAGE> 14
In September 1997, Commodore provided the Company with a $4.0 million
unsecured loan, evidenced by the Company's 8% convertible subordinated note due
August 31, 2002.
At September 30, 1997 and December 31, 1996, the Company had a $1,309
and $7,042 outstanding balance on a revolving line of credit, respectively. This
decrease in debt was attributable to the line of credit resulting from
collections on accounts receivable balances and a $2.8 million paydown on a
$9,250 revolving line of credit due September 30, 1997. The Company refinanced
that portion of the line of credit secured by receivables which is now due March
31, 1998. The Company is pursuing various options to finance its anticipated
capital expenditures for 1997 and 1998, and to refinance its line of credit
secured by receivables.
For the three and nine months ended September 30, 1997, the Company
incurred net losses of $4,101 and $11,038, respectively. At September 30, 1997,
and December 31, 1996, the Company had working capital of $15,652 and $8,991,
respectively.
Effective as of December 1, 1996, the Company transferred certain of
its operating assets related to its SET(TM) technology to Commodore Advanced
Sciences, Inc. ("CAS"), subject to certain liabilities related to such assets,
in exchange for 100 shares of Common Stock, par value $.01 per share, of CAS,
representing all of the issued and outstanding shares of capital stock of CAS.
CAS agreed to assume all of the net assets of the Company relating to its
SET(TM) technology at December 1, 1996, which assets had an aggregate value of
approximately $4.0 million at such date, and all known or all unknown contingent
or unliquidated liabilities of and claims against the Company and its
subsidiaries to the extent they relate to or arise out of the transferred
assets. The Company retained, among other things, (a) all temporary cash
investments of the Company at December 1,1996, aggregating approximately $14.1
million, and (b) the executive offices and related assets of the Company located
in Virginia.
Effective as of December 2, 1996, the Company acquired (i) all of the
outstanding capital stock of Separation and (ii) all of the outstanding capital
stock of Refrigerant from Commodore, the owner of 65.9% of the outstanding
Common Stock of the Company, as part of a corporate restructuring of Commodore
to consolidate all of its current environmental technology businesses with the
Company. In addition, Commodore assigned to the Company outstanding Separation
notes aggregating $976 at December 2, 1996, representing advances previously
made by Commodore to Separation, which the Company has contributed to the equity
of Separation. In consideration for the transfer of all of the outstanding
capital stock of Separation and Refrigerant to the Company, the Company paid
Commodore $3.0 million in cash and, issued to Commodore a warrant expiring
December 2, 2003, to purchase 7,500,000 shares of Company Common Stock at an
exercise price of $15.00 per share, valued at $2.4 million.
In April 1997, Separation successfully completed an initial public
offering of its equity securities, from which it received net proceeds of
approximately $11.1 million. Such funds will be used primarily to finance
Separation's operations through 1997. This offering reduced the Company's equity
ownership in Separation from 100 percent to 87 percent.
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
Commodore. 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> 15
NET OPERATING LOSSES
The Company has net operating loss carry forwards which expire in the
years 2000 through 2011. The amount of net operating loss carry forward that can
be used in any one year will limited by the applicable tax laws which are in
effect at the time such carry forward can be utilized. A valuation allowance has
been established to offset any benefit from the net operating loss carry
forwards as it cannot be determined when or if the Company will be able to
utilize the net operating losses.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of, among other factors, competitive conditions in the
industries in which the Company operates, failure to commercialize one or more
of the technologies of the Company and general economic conditions that are less
favorable than expected. In light of these risks and uncertainties, there can be
no assurance that the forward-looking information contained in this respect will
in fact occur.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no legal proceedings to which the Company is a
party which have not been disclosed in previous filings with the Securities
Exchange Commission. There are no material developments to be reported in any
previously reported legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER EVENTS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) Reports on Form 8-K -
The Company filed a Current Report on Form 8-K, dated
August 15, 1997, regarding the sale of 18,000 shares of 7
percent Series A Convertible Preferred Stock, a loan by
Commodore to the Company of $4,000,000, and the private
placement sale of 700,000 shares of Company common stock.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: NOVEMBER 13, 1997 COMMODORE APPLIED TECHNOLOGIES, INC.
(REGISTRANT)
BY /s/ MICHAEL D. FULLWOOD
---------------------------------------------
MICHAEL D. FULLWOOD - SENIOR VICE PRESIDENT,
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER,
SECRETARY, AND GENERAL COUNSEL
(AS BOTH A DULY AUTHORIZED OFFICER OF THE
REGISTRANT AND THE PRINCIPAL FINANCIAL
OFFICER OR CHIEF ACCOUNTING OFFICER OF THE
REGISTRANT)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,839
<SECURITIES> 12,997
<RECEIVABLES> 4,365
<ALLOWANCES> (993)
<INVENTORY> 0
<CURRENT-ASSETS> 20,639
<PP&E> 5,458
<DEPRECIATION> (2,690)
<TOTAL-ASSETS> 32,635
<CURRENT-LIABILITIES> 6,257
<BONDS> 0
0
1,626
<COMMON> 22
<OTHER-SE> 16,390
<TOTAL-LIABILITY-AND-EQUITY> 32,635
<SALES> 15,717
<TOTAL-REVENUES> 15,717
<CGS> 12,479
<TOTAL-COSTS> 24,632
<OTHER-EXPENSES> 1,466<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 655<F1>
<INCOME-PRETAX> (11,038)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,038)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,038)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
<FN>
<F2>EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES
<F1>NET OF INTEREST INCOME OF $507
</FN>
</TABLE>
