<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, 1998
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)
REGISTRANT'S 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 the common stock outstanding at November 13, 1998 was
23,702,263.
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COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I . FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statement of Operations Three months
ended September 30, 1998 and 1997
Nine months ended September 30, 1998 and 1997. . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows Nine months
ended September 30, 1998 and
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 11
PART II . OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Defaults among Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,589 $ 13,151
Accounts receivable, net 3,384 3,064
Notes and advances to related parties 94 866
Inventory 631 360
Restricted cash and certificates of deposit 229 260
Prepaid assets and other current receivables 326 403
------- -------
Total Current Assets 9,253 18,104
Other receivables 3 18
Investments and advances 644 554
Property and equipment, net 3,839 2,498
Other assets
Patents and completed technology, net of
accumulated amortization of $383 and
$238, respectively 1,194 1,150
Goodwill, net of accumulated amortization
of $512 and $320, respectively 7,161 7,353
Other 19 19
------- -------
Total Assets $ 22,113 $ 29,696
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND 1998 1997
STOCKHOLDERS' EQUITY --------- ---------
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 758 $ 1,930
Notes payables/related parties 152 55
Current portion of long term debt 7 27
Line of credit 852 1,199
Other accrued liabilities 3,904 3,723
--------- ---------
Total Current Liabilities 5,673 6,934
Long term debt 6 19
Notes payable to related parties 5,181 3,568
Minority interest in subsidiary 6,671 6,645
Commitments and contingencies -- --
Redeemable Preferred Stock
Series A Preferred Stock, par value $0.001 per share, 7% cumulative
dividends 80,000 shares authorized, 0 and 9,600 outstanding
respectively, $986
redemption amount at December 31, 1997 -- 876
Stockholders' Equity
Common Stock, par value $0.001 per share,
75,000,000 shares authorized,
23,103,200 and 22,766,334 issued and
outstanding, respectively 23 23
Additional paid-in capital 44,930 41,541
Accumulated deficit (40,371) (29,910)
--------- ---------
Total Stockholders' Equity 4,582 11,654
--------- ---------
Total Liabilities and Stockholders' Equity $ 22,113 $ 29,696
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenues $ 4,604 $ 5,794 $ 13,231 $ 15,613
Costs and expenses:
Cost of sales 4,234 4,960 12,514 14,248
Research and development 547 648 1,800 2,081
General and administrative 1,692 2,784 5,741 7,629
Depreciation and amortization 327 289 934 771
Minority interest -- 27 300 (201)
-------- -------- -------- --------
Total costs and expenses 6,800 8,708 21,289 24,528
-------- -------- -------- --------
Loss from operations (2,196) (2,914) (8,058) (8,915)
-------- -------- -------- --------
Other income (expense):
Interest income 74 187 296 507
Interest expense (685) (862) (1,296) (1,162)
-------- -------- -------- --------
Net other income (expense) (611) (675) (1,000) (655)
-------- -------- -------- --------
Loss before income taxes and affiliate losses (2,807) (3,589) (9,058) (9,570)
Income taxes -- -- -- 2
-------- -------- -------- --------
Loss before affiliate losses (2,807) (3,589) (9,058) (9,572)
Equity in losses of unconsolidated subsidiaries (473) (512) (1,403) (1,466)
-------- -------- -------- --------
Net loss $ (3,280) $ (4,101 ) $(10,461) $(11,038)
======== ======== ======== ========
Loss per share $ (.14) $ (.19) $ (.45) $ (.51)
======== ======== ======== ========
Number of weighted average shares outstanding (000's) 23,103 21,650 23,042 21,650
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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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,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,461) $(11,038)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 934 771
Undistributed losses of unconsolidated subsidiary 1,403 1,466
Minority interest in subsidiary 300 (201)
Non-cash interest expense 860 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (320) 3,777
Prepaid assets 77 (135)
Inventory (271) --
Other Assets -- 31
Accounts payable (1,157) (1,495)
Payables to related parties 81 (252)
Other liabilities 182 558
-------- --------
Net cash provided/(used) in operating activities (8,372) (6,518)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,953) (1,346)
Acquisition of patents (174) (116)
Investments (1,750) (5,538)
Advances to related parties 1,416 (35)
Decrease (increase) in restricted cash 31 670
Other investments 257 (1,565)
Other receivables 15 63
-------- --------
Net cash provided/(used) in investing activities (2,158) (7,867)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing from principal stockholder 2,622 4,000
Increase in (repayment of) line of credit (347) (5,733)
Proceeds from sale of stock -- 1,666
Loan discount and conversion feature -- 750
Proceeds from subsidiary's sale of stock 26 11,087
Increase (decrease) in notes and loans payable (33) 7
Preferred stock dividend paid by subsidiary (300) --
Preferred stock dividend paid -- (288)
Other 118
-------- --------
Net cash provided/(used) in financing activities 1,968 11,607
Increase (decrease) in cash (8,562) (2,778)
Cash, beginning of period 13,151 4,617
-------- --------
Cash, end of period $ 4,589 $ 1,839
======== ========
</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, 1998
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied") 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, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
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, 1997.
Certain prior-year amounts have been reclassified to conform with the
current year presentation.
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.
To finance the working capital needs of Applied and to provide
resources to invest in its environmental markets, Commodore raised a net amount
equal to approximately $5,450 from a private placement of shares of Common
Stock, par value $0.001 per share (the "Common Stock"), held by Commodore and
warrants to purchase Common Stock held by Commodore in February 1998 (the
"February 1998 Private Placement"), which proceeds Commodore loaned to Applied
in February 1998. Commodore also raised approximately $7,800 from private
placements of preferred stock convertible into, and warrants exercisable for,
Common Stock held by Commodore in May and August 1997 (the "1997 Private
Placement"), of which proceeds Commodore loaned $4,000 to Applied in September
1997. Prior to the February 1998 Private Placement, Commodore held a controlling
equity interest in Applied and its operating subsidiaries. As a result of the
1997 Private Placement and the February 1998 Private Placement, Commodore's
ownership interest in Applied decreased to approximately 35% as of September 30,
1998.
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<PAGE> 8
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 $461 at December 31, 1997
and $490 at September 30, 1998.
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.
Note B - Redeemable Preferred Stock
Series A Preferred Stock
In August 1997, Applied sold 18,000 shares of its Series A Preferred
Stock for an aggregate purchase price of $1,800. 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% annual cumulative
dividend. The Series A Preferred Stock is convertible by investors into that
number of shares of Common Stock equal to the Liquidation Preference divided by
the Conversion Price. The Conversion Price is defined as the amount equal to the
lesser of (i) $4.64, representing 100% of the average of the closing sales
prices of the Common Stock for the five consecutive trading days preceding the
issuance date of the Series A Preferred Stock, or (ii) 88% of the average of the
closing sales price of the Common Stock for the five consecutive trading days
immediately prior to the date of conversion (beneficial conversion feature). The
Conversion Price is subject to certain floors based upon the trading price of
Common Stock.
After cash transaction costs of $132, Applied received net proceeds of
$1,668 from the sale of the Series A Preferred Stock. Of this total, $25 was
allocated to paid-in capital related to warrants issued to the placement agent
in connection with the transaction and $216 was allocated to paid-in capital
related to the beneficial conversion feature. The remaining $1,427 was recorded
as mandatorily redeemable preferred stock. The $216 beneficial conversion
feature was charged to income available to common shareholders over the earliest
possible conversion period of five months.
In December 1997, stockholders owning 8,400 shares of the Series A
Preferred Stock elected to convert their shares to Common Stock based upon
conversion prices ranging from $2.00 to $2.29 per share. The 1997 conversions
resulted in the issuance of 416,000 new shares of Common Stock valued at $790,
the carrying value of the underlying Series A Preferred Stock at the time of
conversion.
In the first quarter of 1998, stockholders owning the remaining 9,600
shares of the Series A Preferred Stock elected to convert their shares to Common
Stock based upon conversion prices ranging from $2.52 to $3.00. The 1998
conversion resulted in the issuance of 336,866 new shares of Common Stock valued
at $890, the carrying value of the underlying Series A Preferred Stock at the
time of conversion.
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Note C - Significant Transactions
Intercompany Convertible Note
In September 1997, Commodore provided a $4,000, 8% convertible
unsecured loan to Applied. Unless converted into Common Stock, the interest on
the convertible loan is payable quarterly and the unpaid principal amount is
payable on August 31, 2002. Commodore has the right to convert the loan into
shares of Common Stock at a conversion price of $3.89 per share, a 16% discount
from the market price at the date of closing (beneficial conversion feature),
subject to adjustment based on a number of factors. In connection with the
$4,000 loan, Applied issued Commodore a five-year warrant to purchase 1,000,000
shares of Common Stock at an exercise price of $5.03 per share, 109% of the
market price on the date of closing.
Related Party Note Receivable
During 1996, Applied advanced an aggregate amount of $1.5 million to
Lanxide Performance Materials, Inc. ("LPM"), a wholly-owned subsidiary of
Lanxide Corp ("Lanxide"). Lanxide is related to Commodore by substantial common
ownership. The promissory notes became due on February 28, 1998. At December 31,
1997 a $814 reserve against this receivable existed, reducing the net receivable
to its estimated fair value.
In March 1998, the Company prepaid $2.0 million of the intercompany
convertible note by (i) paying Commodore the sum of $500 in cash and (ii)
transferring to Commodore the $1.5 million LPM note receivable. In connection
with this transaction, Applied issued Commodore a warrant to purchase 514,000
shares of Common Stock. The estimated value of the warrant, $340 has been
recorded as a charge against the $814 reserve.
Intercompany Note
In February, 1998, Commodore provided a $5,450 unsecured loan to
Applied, evidenced by Applied's 8% non-convertible note (the "Intercompany
Note"). Pursuant to the terms of the Intercompany Note, interest on the unpaid
principal balance of the Intercompany Note is payable at the rate of 8% per
annum semiannually in cash. The unpaid principal amount of the Intercompany Note
is due and payable, together with accrued and unpaid interest, on the earlier to
occur of (a) December 31, 1999, or (b) consummation of any public offering or
private placement of securities of Applied with net proceeds aggregating in
excess of $6.0 million, other than in respect of working capital and general
corporate purposes and not for the satisfaction for any portion of Applied debt
or to redeem any Applied equity or equity-equivalent securities.
In connection with the loan, Applied amended a seven-year warrant to
purchase 7,500,000 shares of Common Stock issued to Commodore on December 2,
1996 to, among other things, reduce the exercise price of the warrant from
$15.00 per share to $10.00 per share. In addition, Applied issued to Commodore
an additional six-year warrant to purchase 1,500,000 shares of Common Stock at
an exercise price of $10.00 per share.
Subsidiary Preferred Stock Dividends
Commodore Separation Technologies, Inc. has announced that its Board of
Directors has elected not to pay the quarterly dividend on its publicly traded
preferred stock for the quarter ended September 30, 1998. The dividend will
accumulate without interest.
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Note D - Subsequent Events
In September, 1998, Commodore Applied Technologies, Inc. said that it
is restructuring it operations to focus its commercialization strategy for its
SET(TM) technology on the highest potential markets identified by its corporate
partners and government agencies. In connection with this reorganization, the
Company, in October 1998, identified and notified individuals in its workforce
that were affected. Also, in October 1998, the Company announced to its
employees its decision to close its facilities in McLean, Virginia and Houston,
Texas. While the Company expects to incur some non-recurring reorganization
costs, these efforts should result in a significant reduction of monthly
operating expenses. The Company expects to record a reorganization cost reserve
of approximately $1 million in the fourth quarter of 1998.
On September 29, 1998, the Company announced a debt restructuring and
partial debt repayment. The Company announced that, subject to the receipt of a
fairness opinion, it intends to transfer its 87% ownership interest in Commodore
Separation Technologies, Inc. to its creditor, Commodore Environmental Services,
Inc. in consideration for reduction in indebtedness of $1.25 million. As part of
the debt restructuring plan to eliminate $6.7 million in debt, CXI and COES have
agreed to , among other things, exchange CXI's remaining indebtedness of $5.5
million into convertible preferred stock. In addition, CXI also agreed to a
price reset for the warrant, owned by COES, to purchase 1.5 million shares of
the Company's common stock from $10.00 to $1.50. Although fair values have not
yet been established, the Company expects that this debt restructuring and debt
repayment will have a positive impact on net equity of approximately $9 million,
when this transaction is recorded in the fourth quarter.
In October, 1997, Applied sold 700,000 shares of common stock for an
aggregate purchase price of approximately $2,600. The sales agreement related to
these shares specified certain price reset provisions in the event new shares
were sold or issued within twelve months at a lower price than paid by these
investors. The company had recorded a $1,198 liability for this price reset
feature at September 30, 1998. In October, 1998, the Company issued 599,063
additional shares of its common stock to satisfy this price reset guarantee.
This transaction will be recorded in the fourth quarter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
General
The Company, formerly 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 Commodore 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 ASI's revenues,
such a reduction would materially affect the operations. However, management
believes ASI's existing client relationships will allow the Company to obtain
new contracts in the future.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months
Ended September 30, 1997
Revenues were $4,604 and $13,231 for the three and nine months ended
September 30, 1998, as compared to $5,794 and $15,613 for the three and nine
months ended September 30, 1997. Such revenues were primarily from the Company's
ASI subsidiary, 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-reimbursement contracts is recorded under the percentage of completion
method as costs are incurred and include estimated fees in the proportion that
costs to date bear to total estimated costs. Cost of sales were $4,234 and
$12,514 for the three and nine months ended September 30, 1998, as compared to
$4,960 and $14,248 for the three and nine months ended September 30, 1997. Gross
margin percentages were 8.0% and 5.4% for the three and nine months ended
September 30, 1998, as compared to 14.4% and 8.7% for the three and nine months
ended September 30, 1997. The overall decrease in revenues and cost of sales is
primarily the result of reduction in annual sales volumes since the middle of
1997 when ASI's major customer was forced to separately bid some professional
services that were originally subcontracted through ASI. This occurred because
the dollar volume of work had grown past the level where it could be
subcontracted. The overall decrease in the gross margin percentage for the three
and nine months ended September 30, 1998 as compared to the same periods in 1997
is the result of higher cost of sales for the Company's majority owned
subsidiary, Commodore Separation Technologies, Inc. ("Separation"), and its own
field operations group, with no corresponding revenue. Separation has not
commenced planned principal operations. As such, Separation is considered a
development stage company as defined in SFAS No. 7. Applied's field service
group had one project in 1998 which also had costs in excess of revenue,
primarily due to the use of a non production, test unit. A full scale production
unit will not be available until the fourth quarter of 1998.
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For the three and nine months ended September 30, 1998, the Company
incurred research and development costs of $547 and $1,800 as compared to $648
and $2,081 for the three and nine months ended September 30, 1997. The Company
is currently in the process of shifting its operations from research and
development activities to commercialization of its technologies. In 1998, some
personnel previously charged to research and development were reassigned to the
Company project in Weldon Spring. 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.
General and administrative expenses for the three and nine months ended
September 30, 1998 were $1,692 and $5,741, as compared to $2,775 and $7,629 for
the three and nine months ended September 30, 1997. The decrease resulted from
lower allocated overhead expenses from Commodore to the Company pursuant to a
change in the inter-corporate services agreement between Commodore and the
Company.
Minority interest in 1998 represents the parent company recording
preferred stock dividends of its subsidiary as an expense. The Company has
ceased to record any benefit from minority ownership of its subsidiaries losses
as the subsidiary's common equity is less than $0.
Interest income was $74 and $296 for the three and nine months ended
September 30, 1998, as compared to $187 and $507 for the three and nine months
ended September 30, 1997. This decrease is consistent with the decrease in cash
and cash equivalents.
Interest expense for the three and nine months ended September 30, 1998
was $685 and $1,296, as compared to $862 and $1,162 for the three and nine
months ended September 30, 1997. Interest changes in 1998 result from
indebtedness to Commodore for advances made to the Company. 1997 interest
expense includes the write off of a beneficial conversion privilege in September
1997 (see liquidity and capital resources).
Equity in losses of unconsolidated subsidiary for the three and nine
months ended September 30, 1998 was $473 and $1,403, as compared to $512 and
$1,466 for the three and nine months ended September 30, 1997. The expenses
recorded are a result of the Company's unconsolidated subsidiary, Teledyne -
Commodore, LLC joint venture, recognizing losses as incurred.
Teledyne-Commodore, LLC commenced operations in October 1996.
LIQUIDITY 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 June 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 August 1997, the Company completed the August 1997 Private Placement
from which it received net proceeds of approximately $1.6 million. In connection
with the sale, the Company incurred cash transaction costs of approximately $117
and issued warrants, expiring on August 15, 2002, to the placement agent.
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In October 1997, the Company completed the October 1997 Private
Placement from which it received aggregate net proceeds of approximately $2.4
million. In connection with the October 1997 Private Placement, the Company
incurred cash transaction costs of approximately $209 and issued warrants,
expiring on September 30, 2002, to the placement agent.
In September 1997, Commodore provided the Company with a $4.0 million
unsecured loan, evidenced by the Convertible Note due August 31, 2002. In
connection with the Convertible Note, the Company issued warrants to purchase
1,000,000 shares of Common Stock to Environmental valued at $660 and provided a
beneficial conversion privilege with an intrinsic value of $750 as of the date
of the transaction.
In February 1998, Commodore provided the Company with a $5,450
unsecured loan, evidenced by the Intercompany Note due on the earlier to occur
of (a) December 31, 1999, or (b) consummation of any public offering or private
placement of securities of the Company with net proceeds aggregating in excess
of $6.0 million, other than in respect of working capital financing or secured
financing of assets received by the Company in the ordinary course of business
from any bank or other lending institution, subject to certain conditions. The
Company will use the net proceeds of the loan solely for working capital and
general corporate purposes and not for the satisfaction of any portion of
Company debt or to redeem any Company equity or equity-equivalent securities.
At September 30, 1998 and December 31, 1997, the Company had a $852 and
$1,199 outstanding balance, respectively, on a revolving line of credit. This
debt will fluctuate based on new invoices and from collections on accounts
receivable balances. On August 11, 1998, ASI refinanced its line of credit by
entering into a $2,000 revolving line of credit with Finova Capital Corporation,
with interest payable monthly of prime plus 1.5 percent. The term of the line of
credit is 2 years, automatically renewing for periods of 1 year each unless
terminated by either party upon 60 days prior notice. The line of credit is
secured by all inventory, equipment, receivables, intellectual property, and
general intangibles of ASI. ASI is in compliance with the line of credit
financial covenants and restrictions. The Company is a guarantor of the line of
credit and subordinates the outstanding indebtedness owed to it by ASI. In
addition, the Company plans to pursue various options to finance its anticipated
capital expenditures for 1998.
For the three and nine months ended September 30, 1998 the Company
incurred net losses of $3,280 and $10,461, respectively. At September 30, 1998
and December 31, 1997, the Company had working capital of $3,580 and $11,170,
respectively. This working capital should fund the company's operations into
early 1999. Before then, the Company will have to complete a financing to obtain
the funds necessary to reach commercial operating status. The Company is
currently evaluating various financing options.
In August 1996, the Company loaned $1.5 million to LPM, a wholly-owned
subsidiary of Lanxide, evidenced by the LPM Note. Lanxide is related to the
Company by significant common beneficial ownership. The LPM Note is
collateralized by the assets of LPM and guaranteed by Lanxide. The LPM Note
became due on February 28, 1998. In March 1998, the Company transferred the LPM
Note to Commodore, together with $500 in cash, as partial prepayment of the $4.0
million unsecured loan from Commodore to the Company in September 1997.
13
<PAGE> 14
In December 1996, the Company acquired (i) all of the outstanding
capital stock of Separation and (ii) all of the outstanding capital stock of
Commodore CFC Technologies, Inc. ("CFC Technologies") from Commodore, 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 CFC Technologies 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 Common Stock at an exercise price of $15.00 per
share, valued at $2.4 million. Such warrant was subsequently amended to, among
other things, reduce the exercise price therof to $10.00 per share.
In April 1997, Separation completed an initial public offering of its
equity securities, from which it received net proceeds of approximately $11,100.
Such funds were used primarily to finance Separation's operations to date.
Separation has announced that its Board of Directors has elected not to pay the
quarterly dividend on its publicly traded preferred stock for the quarter
ended September 30, 1998.
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
The Company, or its executive officers and directors on behalf
of the Company, may from time to time make "forward-looking statements" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act") and
the Securities Exchange Act of 1934, as amended (the "Exchange Act" and together
with the Securities Act, the "Acts"). The Company is filing this Quarterly
Report on Form 10-Q to avail itself of the safe harbor provided in the Acts with
respect to any such (i) forward-looking statements that may be contained in the
Company's reports and other documents filed with the Securities and Exchange
Commission under sections 13 or 15(d) of the Exchange Act and (ii) oral
forward-looking statements made by the Company's executive officers and
directors on behalf of the Company to the press, potential investors, securities
analysts and others. Such forward-looking statements could involve, among other
things, statements regarding the Company's intent, belief or expectation with
respect to (i) the Company's results of operations and financial condition, (ii)
the consummation of acquisition and financing transactions and the effect
thereof on the Company's business, and (iii) the Company's plans and objectives
for future operations and expansion. Any such forward-looking statements would
be subject to the risks and uncertainties that could cause actual results of
operations, financial condition, acquisitions, financing transactions,
operations, expansion and other events to differ materially from those expressed
or implied in such forward-looking statements. Any such forward-looking
statements would be subject to a number of assumptions and would be based on
facts and conditions as they exist at the time such statements are made.
Further, the Company's business is subject to a number of risks that would
affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize its
technology; foreign and domestic competition; product demand and industry
pricing; cost of compliance with environmental regulations; and management's
estimates of niche market data. These risks and uncertainties could cause actual
results of the Company to differ materially from those projected or implied by
such forward-looking statements.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS AMONG SENIOR SECURITIES
The Company's subsidiary, Commodore Separation Technologies, Inc. did
not pay $150,000 dividends due September 30, 1998 on its preferred
stock.
ITEM 5. OTHER
(a) On September 25, 1998 The Company announced that its subsidiary,
Commodore Advanced Sciences, Inc. (CASI) had been notified that it
is entirely relieved of any risk of debarment by the U.S.
Government relating to the August, 1996 bid to the Army by a group
of contractors of which CASI was a member. (See July 29 8-K below).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits - 27.1 Financial Data Schedule
(b) Reports on Form 8-K -
The Company filed a Current Report on Form 8-K, dated July 29,
1998, regarding the notification about the investigation of
Advanced Sciences, Inc. by the Army and the filing of the protest
by the Company with the Army.
The Company filed a Current Report on Form 8-K, dated September
16, 1998, regarding that Teledyne-Commodore LLC announced it had
filed an official protest re ACWA and that the GAO had rejected
the protest based on administrative procedural issues.
15
<PAGE> 16
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, 1998 COMMODORE APPLIED TECHNOLOGIES, INC.
(REGISTRANT)
BY /S/ WILLIAM E. INGRAM
----------------------------------------
WILLIAM E. INGRAM - VICE PRESIDENT AND
CONTROLLER, (AS BOTH A DULY AUTHORIZED
OFFICER OF THE REGISTRANT AND THE
PRINCIPAL FINANCIAL OFFICER OR CHIEF
ACCOUNTING OFFICER OF THE REGISTRANT)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------
<S> <C>
27.1 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,589
<SECURITIES> 0
<RECEIVABLES> 3,874
<ALLOWANCES> (490)
<INVENTORY> 631
<CURRENT-ASSETS> 9,253
<PP&E> 6,870
<DEPRECIATION> (3,031)
<TOTAL-ASSETS> 22,113
<CURRENT-LIABILITIES> 5,673
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 4,559
<TOTAL-LIABILITY-AND-EQUITY> 22,113
<SALES> 13,231
<TOTAL-REVENUES> 13,231
<CGS> 12,514
<TOTAL-COSTS> 21,289
<OTHER-EXPENSES> 1,403<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (10,461)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,461)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
<FN>
<F1>EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY.
</FN>
</TABLE>
