<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 JUNE 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 August 12, 1998 was
23,103,200.
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COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I . FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . 3
- -------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 . . . . . . . . . 3
Condensed Consolidated Statement of Operations -
Three months ended June 30, 1998 and 1997
Six months ended June 30, 1998 and 1997 . . . . . . . 5
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1998 and
June 30, 1997 . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 10
PART II . OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 14
- -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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</TABLE>
2
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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>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,676 $ 13,151
Accounts receivable, net 3,156 3,064
Notes and advances to related parties 196 866
Inventory 550 360
Restricted cash and certificates of deposit 230 260
Prepaid assets and other current receivables 339 403
----------- -----------
Total Current Assets 12,147 18,104
Other receivables 3 18
Investments and advances 1,115 554
Property and equipment, net 3,407 2,498
Other assets
Patents and completed technology, net of
accumulated amortization of $339 and
$238, respectively 1,200 1,150
Goodwill, net of accumulated amortization
Of $448 and $320, respectively 7,225 7,353
Other 98 19
----------- -----------
Total Assets $ 25,195 $ 29,696
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
LIABILITIES AND 1998 1997
STOCKHOLDER'S EQUITY ----------- -----------
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 522 $ 1,930
Notes payables/related parties 14 55
Current portion of long term debt 8 27
Line of credit 844 1,199
Other accrued liabilities 3,771 3,723
----------- -----------
Total Current Liabilities 5,159 6,934
Long term debt 9 19
Notes payable to related parties 5,494 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 (37,091) (29,910)
----------- -----------
Total Stockholders' Equity 7,862 11,654
----------- -----------
Total Liabilities and Stockholders' Equity $ 25,195 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenues $ 4,413 $ 4,792 $ 8,627 $ 9,819
Costs and expenses:
Cost of sales 4,164 4,666 8,280 9,288
Research and development 726 827 1,253 1,433
General and administrative 2,057 2,585 4,049 4,845
Depreciation and amortization 312 239 607 482
Minority Interest 150 (228) 300 (228)
-------- -------- -------- --------
Total costs and expenses 7,409 8,089 14,489 15,820
-------- -------- -------- --------
Loss from operations (2,996) (3,297) (5,862) (6,001)
-------- -------- -------- --------
Other income (expense):
Interest income 59 215 222 320
Interest expense (367) (126) (611) (300)
-------- -------- -------- --------
Net other income (expense) (308) 89 (389) 20
-------- -------- -------- --------
Loss before income taxes and affiliate losses (3,304) (3,208) (6,251) (5,981)
Income taxes -- 2 -- 2
-------- -------- -------- --------
Loss before affiliate losses (3,304) (3,210) (6,251) (5,983)
Equity in losses of unconsolidated subsidiaries (481) (528) (930) (954)
-------- -------- -------- --------
Net loss $ (3,785) $ (3,738) $ (7,181) $ (6,937)
======== ======== ======== ========
Loss per share $ (.16) $ (.17) $ (.31) $ (.32)
======== ======== ======== ========
Number of weighted average shares outstanding (000's) 23,103 21,650 23,016 21,650
======== ======== ======== ========
</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>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,181) $ (6,937)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 607 481
Undistributed losses of unconsolidated subsidiary 930 954
Minority interest in subsidiary 300 (228)
Non-cash interest expense 344 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (92) 4,330
Prepaid assets 64 (248)
Inventory (190) --
Other assets (79) (54)
Accounts payable (1,394) (1,404)
Payables to related parties (56) (249)
Other liabilities 48 (275)
-------- --------
Net cash provided/(used) in operating activities (6,699) (3,630)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,302) (932)
Acquisition of patents (137) (116)
Investments (1,750) --
Advances to related parties 1,315 429
Decrease (increase) in restricted cash 31 20
Other investments 259 (1,000)
Other receivables 15 (196)
-------- --------
Net cash provided/(used) in investing activities (1,569) (1,795)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing from principal stockholder 3,450 --
Increase in (repayment of) line of credit (355) (3,034)
Proceeds from subsidiary's sale of stock 26 11,087
Increase (decrease) in notes and loans payable (28) 65
Preferred stock dividend paid by subsidiary (300) --
Preferred stock dividend paid -- (138)
-------- --------
Net cash provided/(used) in financing activities 2,793 7,980
Increase (decrease) in cash (5,475) 2,555
Cash, beginning of period 13,151 12,076
-------- --------
Cash, end of period $ 7,676 $ 14,631
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 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 six month period ended June 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 43% as of
June 30, 1998.
7
<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 June 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.
8
<PAGE> 9
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 in
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, 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.
Note D - Subsequent Events
In July 1998, Commodore Applied Technologies, Inc. (the "Company") was
notified that the U.S. Army is considering recommending that the Company's
wholly owned subsidiary, Commodore Advanced Sciences, Inc. ("Advanced Sciences")
be proposed for debarment from future contracting with any agency in the
executive branch of the U.S. Government. In a letter, the U.S. Army stated that
the basis for its proposed action is the alleged participation of Advanced
Sciences in the alleged wrongdoing of a third party in connection with the
submission of a bid in August 1996.
The Army has provided the Company until August 28, 1998 to respond to
its allegations. Advanced Sciences has initiated an investigation of the Army's
allegations. Advanced Sciences intends to timely respond to the Army by denying
any knowledge or any reason to know of the alleged wrongdoing and arguing that,
as a result of its lack of actual or constructive knowledge of any wrongdoing,
the rules and regulations concerning debarment do not require that Advanced
Sciences be debarred from future contracting with the U.S. government. The
Company would also support its position by supplying the Army with supporting
documentation.
There can be no assurance that it will prevail in its opposition to
the Army's allegations. An adverse determination by the U.S. Army would have a
material adverse affect on the Company's business, financial condition and
results of operations.
On August 12, 1998, the Company's Teledyne-Commodore LLC joint venture
announced that it has filed an official protest with the General Accounting
Office of the U.S. Army as a result of the omission of the Company's SET
technology from the U.S. Army's Assembled Chemical Weapons Assessment program
technology demonstrations.
<PAGE> 10
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 Six Months Ended June 30, 1998 Compared to Three and Six Months Ended
June 30, 1997
Revenues were $4,413 and $8,627 for the three and six months ended
June 30, 1998, as compared to $4,792 and $9,819 for the three and six months
ended June 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 incurred and include estimated fees in the proportion that
costs to date bear to total estimated costs. Cost of sales were $4,164 and
$8,280 for the three and six months ended June 30, 1998, as compared to $4,666
and $9,288 for the three and six months ended June 30, 1997. Gross margin
percentages were 5.6% and 4.0% for the three and six months ended June 30,
1998, as compared to 2.6% and 5.4% for the three and six months ended June 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
increase in the gross margin percentage for the three months ended June 30,
1998 as compared to the three months ended June 30, 1997 is the result of lower
sales volumes of subcontracting work. Subcontracting revenue has a very low
gross margin, therefore, reducing subcontracting volume increases the gross
margin percentage. The overall decrease in the gross margin percentage for the
six months ended June 30, 1998 as compared to the six months ended June 30,
1997 is the result of higher cost of sales for the Company's majority owned
subsidiary, Commodore Separation Technologies, Inc. ("Separation") 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.
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<PAGE> 11
For the three and six months ended June 30, 1998, the Company incurred
research and development costs of $726 and $1,253 as compared to $827 and
$1,433 for the three and six months ended June 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 six months ended
June 30, 1998 were $2,057 and $4,049, as compared to $2,585 and $4,845 for the
three and six months ended June 30, 1997. The decrease resulted from lower
allocated overhead expenses from Commodore to the Company pursuant to a change
in the intercorporate services agreement between Commodore and the Company.
Minority interest in 1998 represents the parent company recording
preferred stock dividend 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 $59 and $222 for the three and six months ended
June 30, 1998, as compared to $215 and $320 for the three and six months ended
June 30, 1997. This decrease is consistent with the decrease in cash and cash
equivalents.
Interest expense for the three and six months ended June 30, 1998 was
$367 and $611, as compared to $126 and $300 for the three and six months ended
June 30, 1997. Interest changes in 1998 result from indebtedness to Commodore
for advances made to the Company.
Equity in losses of unconsolidated subsidiary for the three and six
months ended June 30, 1998 was $481 and $930, as compared to $528 and $954 for
the three and six months ended June 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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<PAGE> 12
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 June 30, 1998 and December 31, 1997, the Company had a $844 and
$1,199 outstanding balance, respectively, on a revolving line of credit due
July 31, 1998. 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. The line of credit
contains certain financial covenants and restrictions that ASI must comply. 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 six months ended June 30, 1998 the Company incurred
net losses of $3,785 and $7,181, respectively. At June 30, 1998 and December
31, 1997, the Company had working capital of $6,988 and $11,170, respectively.
This working capital should fund the company's operations through December 31,
1998. Before that date, 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.
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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
through 1997.
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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 1998, the Company conducted its 1998 Annual Meeting of
Stockholders (the "Annual Meeting"). As of the record date of
April 27, 1998, there were 23,103,200 shares of Company Common Stock
eligible to vote. Of these shares, 18,927,571, (81.9%) were
represented either in person or by proxy at the Annual Meeting. The
following matters were submitted to a vote at the Annual Meeting with
the following results:
(a) Election of Directors:
----------------------
Each of the following nominees for election to the Board of
Directors of the Company were elected by an affirmative vote
of 18,843,537 shares, or 81.6% of all eligible shares: Paul
E. Hannesson, Bentley J. Blum, Thomas E. Noel, Kenneth L.
Adelman, PhD., Herbert A. Cohen, David L. Mitchell, Ed L.
Romero, Tom J. Fatjo, Jr., and William R. Toller. 39,554
shares were "withheld" with respect to each of the foregoing
nominees; 44,480 shares "abstained"; and no shares were
represented as "broker non-votes".
(b) Ratification of Independent Auditors:
-------------------------------------
By an affirmative vote of 18,898,464 shares, 81.8% of all
eligible shares, the stockholders of the Company ratified
the appointment of Price Waterhouse Coopers LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1998. 10,887 shares were voted "against"
approval of this proposal; 18,220 shares "abstained"; and
no shares were represented as "broker non-votes".
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 June
25, 1998, regarding the resignation of Messrs. Ed L.
Romero, Thomas E. Noel, and Tom J. Fatjo, Jr. from the
Company's Board of Directors and the resignation of Mr.
Michael D. Fullwood as Senior Vice President, Chief
Financial and Administrative Officer and Secretary and
General Counsel of the Company and the Company's 87% owned
subsidiary, Commodore Separation Technologies, Inc.
The Company filed a Current Report on Form 8-K, dated, May
27, 1998, regarding the death of the Company's 87% owned
subsidiary, Commodore Separation Technologies, Inc's
president, Kenneth J. Houle, and the announcement of the
interim president Carl O. Magnell.
14
<PAGE> 15
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: AUGUST 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)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,676
<SECURITIES> 0
<RECEIVABLES> 3,156
<ALLOWANCES> 0
<INVENTORY> 550
<CURRENT-ASSETS> 12,147
<PP&E> 6,309
<DEPRECIATION> (2,902)
<TOTAL-ASSETS> 25,195
<CURRENT-LIABILITIES> 5,159
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 7,839
<TOTAL-LIABILITY-AND-EQUITY> 25,195
<SALES> 0
<TOTAL-REVENUES> 8,627
<CGS> 8,280
<TOTAL-COSTS> 14,489
<OTHER-EXPENSES> 930<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 611<F2>
<INCOME-PRETAX> (7,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,181)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
<FN>
<F1>Equity in loss of unconsolidated subsidiary
<F2>Does not include interest income of $222
</FN>
</TABLE>
