SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 30, 2000
-----------------------------
Commodore Applied Technologies, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
Delaware 1-11871 11-3312952
-------- ------- ----------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
150 East 58th Street, 32nd Floor
New York, New York 10155
--------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
--------------
------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
Acquisition of Dispute Resolution Management, Inc.
On August 30, 2000, our company, Commodore Applied Technologies, Inc.
entered into a stock purchase agreement with Dispute Resolution Management,
Inc., William J. Russell and Tamie P. Speciale. This agreement amended and
restated in its entirety the terms of an agreement and plan of merger, dated
August 18, 2000, and an asset transfer agreement, dated as of January 31, 2000,
which we had previously entered into with Dispute Resolution Management, Inc.
Mr. Russell and Ms. Speciale.
Under the terms of the current agreement we will purchase from Mr.
Russell and Ms. Speciale, the stockholders of Dispute Resolution Management,
Inc., 81% of the issued and outstanding capital stock of Dispute Resolution
Management, Inc. The consideration to the shareholders of Dispute Resolution
Management, Inc. will consist of the following:
o An aggregate of 8,859,000 shares of our common stock to Mr. Russell and
Ms. Speciale, and an additional 1,641,000 shares to Dispute Resolution
Management, Inc., 1.5 million of which are to be distributed to certain
key employees and an unaffiliated third party. Of these 10.5 million
shares, 9.5 million will be subject to our one-year option to
repurchase any or all of those shares at a price equal to the greater
of $1.50 per share or 65% of the average closing price per share of our
common stock for the three trading days immediately prior to our
exercise of this option. Our one-year repurchase option period
commences August 30, 2000.
o We will also issue an additional 5.0 million shares of our common stock
to Mr. Russell and Ms. Speciale in exchange for an option to purchase
the remaining 19% interest in Dispute Resolution Management, Inc. from
Mr. Russell and Ms. Speciale. If and when exercised, the option price
will be based upon the relative appraised value of the business of
Dispute Resolution Management, Inc. as compared to the consolidated
appraised value of our company as a whole. For purposes of calculating
the value of the business of Dispute Resolution Management, Inc., all
e-commerce initiatives of our company and our subsidiaries will be
excluded (but will be included in valuing our company as a whole). The
appraisals will be conducted by a mutually acceptable investment
banker, and a final valuation of the 19% minority interest in Dispute
Resolution Management, Inc. will be paid in additional shares of our
common stock, based on the market value of our common stock at that
time. It is our intention to exercise this option as soon as
contractually permitted.
o We will issue to Mr. Russell, Ms. Speciale and a key employee of
Dispute Resolution Management, Inc. five-year warrants to purchase up
to an aggregate of 1,000,000 shares of our common stock at an exercise
price of $2.00 per share.
o Mr. Russell and Ms. Speciale will be entitled to receive quarterly
earn-out distributions equal to 35% of the cash flow of Dispute
Resolution Management, Inc. over an earnout period commencing as of
September 1, 2000 and ending December 31, 2005. These distributions
will not exceed approximately $37.0 million in total. Pursuant to a
make whole agreement, dated as of August 30, 2000, we have agreed that
if Dispute Resolution Management, Inc. has not distributed to Mr.
Russell and Ms. Speciale a total of $10.0 million in cash in earn-out
payments by December 31, 2003, we will make up any difference between
$10.0 million and the actual cash distributed to them in either cash
payments or, at our sole option, additional shares of our common stock
valued at the time of issuance. If this obligation requires us to issue
more than 2.0 million shares of our common stock, we have the right to
defer the issuance of any shares in excess of 2.0 million shares to
December 31, 2005, based on the market price at that later date.
We have agreed to register for resale under the Securities Act of 1933,
as amended, the 15.5 million shares of our common stock that will be issued
under the agreement, as well as the 1.0 million shares of our common stock
underlying the warrants that will be issued under the agreement, not later than
90 days after August 29, 2000. Notwithstanding our agreement to register these
shares, Mr. Russell, Ms. Speciale and the other holders of the 15.5 million
shares of our common stock have agreed not to sell any of those shares during
our one-year repurchase option period commencing August 30, 2000.
We have an absolute and irrevocable obligation to repurchase, by the
end of the one-year option period, that number of the 9.5 million shares of our
common stock subject to the repurchase option so as to provide the holders of
those shares with a total of $14.5 million, less any proceeds previously
received by them from the exercise of our one-year option to repurchase our
common stock. The price at which we will be required to repurchase these shares
will be equal to the greater of $1.50 per share or 65% of the average closing
price per share of our common stock for the three trading days immediately prior
to our repurchase.
Mr. Russell and Ms. Speciale can terminate our repurchase option and
their agreement not to sell the shares subject to the option at any time prior
to the end of the one-year option period, as to either 1,000,000 of the optioned
shares or as to all 9,500,000 optioned shares. However, if they elect to
terminate our entire option, our obligation to repurchase $14.5 million of our
common stock from them will also terminate.
To secure our obligations under the make whole agreement, our $14.5
million repurchase obligation with respect to the shares of our common stock
issued in the transaction, and other covenants of ours under the stock purchase
agreement, we have pledged to Mr. Russell and Ms. Speciale our entire 81% equity
interest in Dispute Resolution Management, Inc., as well as our shares that are
subject to our repurchase option and obligation. Once the $14.5 million
repurchase obligation amount has been paid (or waived by Mr. Russell and Ms.
Speciale by terminating our repurchase option and their obligation not to sell
their shares of our common stock) under the stock purchase agreement after one
year, 50% of our pledged equity will be released from the pledge agreement. At
such time as the $10.0 million in cash or shares of our common stock is timely
paid or issued under the make whole agreement, our pledge of our entire 81%
equity interest in Dispute Resolution Management, Inc. will terminate.
At the closing of the transaction, Mr. Russell and Ms. Speciale will
each enter into five-year employment agreements with Dispute Resolution
Management, Inc. providing for starting salaries of $262,000 per year, with
annual increases of not more than 5%. In addition, Mr. Russell and Ms. Speciale
will also enter into five-year non-competition agreements with Dispute
Resolution Management, Inc. and our company. It is also intended that specified
key employees of Dispute Resolution Management, Inc. will continue to be
employed by the company after the transaction.
Commodore Environmental Services, Inc., a Delaware corporation, and
Paul E. Hannesson, our Chairman of the Board, President and Chief Executive
Officer, which together own an aggregate of 50.35% of our issued and outstanding
shares of common stock, have consented in writing to the transaction and all the
transactions contemplated by the stock purchase agreement and have agreed to
deliver to Mr. Russell and Ms. Speciale, their irrevocable proxy to vote their
shares in our company in favor of the transaction at any special meeting of our
stockholders called for the purpose of approving the transaction.
The transactions contemplated by the stock purchase agreement were
consummated as of August 31, 2000 and, as of that date, we own 81% of Dispute
Resolution Management, Inc. However, in order to comply with the Rules of the
American Stock Exchange, we may not issue more than 20% of our outstanding
common stock in any acquisition transaction until our stockholders have received
a proxy statement in compliance with the Securities Exchange Act of 1934, as
amended, and have approved and ratified the transaction at a stockholders
meeting called, in whole or in part, for that purpose. Accordingly, at closing
only 6.0 million shares of our common stock were issued to Mr. Russell and Ms.
Speciale, with the 9.5 million balance and the warrants to purchase 1.0 million
shares of our common stock to be issued following the stockholders meeting. We
have covenanted with the Dispute Resolution Management, Inc. stockholders to
promptly file a proxy statement with the SEC and cause the stockholders meeting
to be held and stockholder approval obtained by not later than November 15,
2000. Since the holders of a majority of the outstanding shares of our common
stock have issued their proxies to vote in favor of the transaction, absent the
issuance of a significant number of additional shares, the required approval of
our stockholders appears to be assured.
All of the terms and conditions of the stock purchase agreement were
determined as a result of arm's-length negotiations among representatives of the
parties to the stock purchase agreement.
All of the foregoing information is qualified in its entirety by
reference to the stock purchase agreement and the exhibits to the stock purchase
agreement, a copy of which is attached to this Current Report as Exhibit 99.1.
We have included in Item 7 of this Current Report historical financial
statements of Dispute Resolution Management, Inc. for the three years ended
December 31, 1999, as well as pro forma financial information for the twelve
months ended December 31, 1999 giving effect to our acquisition of substantially
all of the assets of Dispute Resolution Management, as if such transaction had
occurred on January 1, 1999.
<PAGE>
Item 5. Other Events
Agreement with Kobe Steel Ltd.
On August 30, 2000, we announced that our joint venture with Teledyne
Technologies, Inc., Teledyne-Commodore, LLC, entered into an agreement with Kobe
Steel Ltd. to use its proprietary solvated electron technology for the
neutralization and destruction of recovered chemical weapons found in the
vicinity of Lake Kussharo, Japan.
Please see the press release filed with this Current Report as Exhibit
99.2, which is incorporated herein by reference, for additional information
relating to this agreement.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Consolidated Balance Sheet of Dispute Resolution Management,
Inc. as of December 31, 1999 and 1998 and as of June 30, 2000
(unaudited);
Consolidated Statements of Earnings of Dispute Resolution
Management, Inc. for the years ended December 31, 1999, 1998 and 1997
and for the six months ended June 30, 2000 and 1999 (unaudited);
Consolidated Statements of Stockholders' Equity of Dispute
Resolution Management, Inc. for the years ended December 31, 1999, 1998
and 1997 and for the six months ended June 30, 2000 (unaudited);
Consolidated Statements of Cash Flows of Dispute Resolution
Management, Inc. for the years ended December 31, 1999, 1998 and 1997
and for the six months ended June 30, 2000 and 1999 (unaudited);
(b) Pro Forma Financial Information (unaudited).
Pro Forma Condensed Consolidated Statement of Operations Data
for the Six Months Ended June 30, 2000;
Pro Forma Condensed Consolidated Statement of Operations Data
for the Year Ended December 31, 1999;
Pro Forma Condensed Consolidated Balance Sheet at June 30,
2000
(c) Exhibits.
27.1 Financial Data Schedule
99.1 Stock Purchase Agreement, dated as of August 30, 2000, among
Commodore Applied Technologies, Inc., Dispute Resolution
Management, Inc., William Russell and Tamie Speciale.
99.2 Press Release Dated August 30, 2000
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet at June
30, 20000 of Commodore Applied Technologies, Inc. ("Commodore") and Dispute
Resolution Management, Inc. ("DRM") assumes the acquisition of DRM by Commodore.
The agreement is dated as of August 30, 2000. It combines the historical balance
sheets of Commodore and DRM. The business combination has been accounted for as
a purchase of DRM giving effect to the acquisition of 100% of the outstanding
common shares of DRM. The unaudited condensed pro forma combined balance sheet
should be read in conjunction with the historical financial statements and
related notes.
The following unaudited condensed pro forma combines statements of
operations for the year ended December 31, 1999 and six months ended June 30,
2000 for Commodore and DRM assumes the acquisition of DRM by Commodore as of
January 1, 1999.
The pro forma results of operations are not necessarily indicative of the
results of operations that would actually have been obtained if the transactions
had occurred as of the beginning of the year and six month period. These
statements should be read in conjunction with the historical financial
statements and related notes.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
(In thousands, except per share data)
The
Commodore Acquisition Acquisition
(1) of DRM (2) Adjustments Pro-Forma
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $8,870 $3,689 $0 $12,559
Costs and expenses:
Cost of sales 7,858 924 0 8,782
Research and development 600 566 0 1,166
General and Administrative 1,845 0 0 1,845
Depreciation and amortization 379 0 890 (3) 1,269
Minority interest 0 0 406 (6) 406
0
---------------- -------------- --------------- ---------------
Total costs and expenses 10,682 1,490 1,296 13,468
---------------- -------------- --------------- ---------------
Loss from operations (1,812) 2,199 (1,296) (909)
Gain on sale of affiliate 0 0 0 0
Equity in losses of
unconsolidated subsidiary 0 0 0 0
Option and other income 0 66 0 66
Interest Income 39 6 0 45
Interest Expense (103) 0 (389) (5) (492)
---------------- -------------- --------------- ---------------
Loss before income taxes and
extraordinary item (1,876) 2,271 (1,685) (1,290)
Income tax benefit 0 0 0 0
---------------- -------------- --------------- ---------------
Net loss (1,876) 2,271 (1,685) (1,290)
================ ============== =============== ===============
Net loss per share - basic and
diluted ($0.06) ($0.03)
================ ===============
Weighted average number of common
shares outstanding (in thousands) (4) 31,525 47,025
================ ===============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
(In thousands, except per share data)
The
Commodore Acquisition Acquisition
(1) of DRM (2) Adjustments Pro-Forma
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenue $18,147 $6,438 $0 $24,585
Costs and expenses:
Cost of sales 16,127 1,647 0 17,774
Research and development 1,145 0 0 1,145
General and Administrative 4,037 555 0 4,592
Depreciation and amortization 696 0 1,780 (3) 2,476
Minority interest 0 1,293 811 (6) 811
(1,293) (6)
---------------- --------------- ---------------- --------------
Total costs and expenses 22,005 3,495 1,299 26,799
---------------- --------------- ---------------- --------------
Income (Loss) from operations (3,858) 2,943 (1,299) (2,214)
Gain on sale of affiliate 0 0 0 0
Equity in losses of
unconsolidated subsidiary 0 0 0 0
Other Income 0 8 0 8
Interest Income 39 35 0 74
Interest Expense (166) (8) (778) (5) (2,330)
(1,378) (7)
---------------- --------------- ---------------- --------------
Income (Loss) before income taxes (3,985) 2,978 (3,455) (4,462)
Income tax benefit 0 0 0 0
---------------- --------------- ---------------- --------------
Net Income (loss) ($3,985) $2,978 ($3,455) ($4,462)
================ =============== ================ ==============
Net loss per share - basic and
diluted ($0.16) ($0.11)
================ ==============
Weighted average number of common
shares outstanding (in thousands) (4) 24,819 40,319
================ ==============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations
<PAGE>
Notes to Pro Forma Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands)
(1) Represents the historical results of Commodore.
(2) Represents the historical results of DRM.
(3) Represents amortization of DRM goodwill over a twenty-year period and
covenants not to compete over five years.
(4) Assumes historical Commodore shares outstanding and the proposed issuance
of 15,500,000 common shares with the purchase of DRM. As exercise of
warrants and/or options will only dilute the loss per share so they are not
considered in this calculation.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1999 2000
--------------- -----------------------
<S> <C> <C>
Historical weighted number of shares 24,819 31,525
Anticipated shares added with DRM purchase 15,500 15,500
--------------- -----------------------
Pro Forma weighted average number of shares after Acquisition 40,319 47,025
=============== =======================
</TABLE>
(5) Discount on guarantee payment debt is amortized over 3 Years at an
effective interest rate of 10.5%.
(6) DRM principals will be entitled to a special distribution of 16% of the
LLC's annual EBIT until December 31, 2005. In addition, they are entitled
to 19% of the LLC's EBIT as minority shareholders. DRM has settled its
amount due to KPMG, thus the minority interest shown by DRM in 1999 will be
eliminated for purposes of this pro forma.
(7) Amortization of interest imputed on purchase obligation on 9.5 million
option shares.
<PAGE>
<TABLE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 2000
(Unaudited)
(In thousands, except per share data)
<CAPTION>
The
Acquisition Acquisition
Commodore of DRM Adjustments Pro-Forma
------------- ------------- ---------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $1,155 $238 ($500) (2) $1,393
$500 (2)
Account receivable, net 3,115 2,291 (2,000) (1) 3,406
Notes and advances to
related parties 310 310
Prepaid assets and other
current assets 500 29 529
------------- ------------- ---------------- ------------
Total current assets 5,080 2,558 (2,000) 5,638
Investments and Advances 325 40 365
Property and equipment, net 2,143 120 2,263
Other assets
Patents and completed
Technology, net 929 929
Goodwill, net 6,713 25,103 (2) 31,816
Covenants not to compete 0 0 2,625 2,625
------------- ------------- ---------------- ------------
Total Assets $15,190 $2,718 $25,728 $43,636
============= ============= ================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,289 $110 $1,399
Current portion of LT debt and notes payable 953 0 13,122 (2) 14,075
Line of credit 823 823
Other accrued liabilities 1,661 87 1,748
------------- ------------- ---------------- ------------
Total current liabilities 4,726 197 13,122 18,045
Long term debt 162 7,412 (2) 8,191
Notes payable to related parties 185 0 185
------------- ------------- ---------------- ------------
Total liabilities 5,073 197 19,005 24,275
Minority interest in subsidiary 0 0 194 (2) 194
Stockholder's Equity 10,117 2,521 (2,000) (1) 17,639
6,563 (2)
959 (2)
(1,021) (2)
500 (2)
------------- ------------- ---------------- ------------
Total Liabilities and
Stockholders' Equity $15,190 $2,718 $25,728 $43,636
============= ============= ================ ============
See Accompanying Notes to Unaudited Pro Forma Condensed Balance Sheet
</TABLE>
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
(Dollars in Thousands)
(1) The agreement with DRM provides that the current owners will be allowed to
take approximately $2,000 from the business prior to closing. Thus the
historical numbers for DRM for December 31, 1999 must be restated before
they are consolidated. This is the purpose of this entry.
DRM Contribution to new DRM:
Equity before adjustment $2,521
Less cash to DRM shareholders (2000) (2000)
---------
Net DRM contribution to new DRM $521
=========
(2) Represents the adjustments to the historical financial statements of
Commodore to record Commodore's investment in the new DRM and to establish
the amount of goodwill that will be recorded as a result of the formation
of DRM. This note also calculates the amount of net equity of the new DRM
that will appear in the consolidated financial statements:
<TABLE>
<S> <C> <C> <C>
Commodore contribution: DRM:
9,500,000 Option Merger common shares (A)$ 13,122 Cash contributed by Commodore $ 500
5,000,000 Merger common shares (B) 5,469 Stock and warrant contributed by Commodore 2,084
1,000,000 common shares (C) 1,094 NBV contributed by DRM 521
Warrant to purchase 1,000,000 shs (C) 959 0
Future payment guarantee 10,000 Stock and warrant distribution (2,084)
-----------
DRM Beginning Equity $1,021
===========
Interest discount on net guarantee (D) $ (2,588)
Cash 500 DRM Equity owned by Commodore (81%) $827
----------- ===========
Total invested by Commodore $ 28,556
===========
DRM Equity owned by former
shareholders (19%) $194
===========
Excess of Commodore investment over value of its
interest in DRM equity $ 27,728
===========
Covenants not to compete $ 2,625 (E)
Goodwill 25,103
-----------
$ 27,728
===========
</TABLE>
(A) Option merger common shares are restricted and can't be sold for one year
and are subject to an absolute and irrevocable obligation by Commodore to
purchase any and all of the shares by the end of one year. Commodore's
total obligation to fund is $14.5 million. The present value of $14.5
million using a discount factor of 10.5% is $13,122. It is the Company's
intention to exercise its option to repurchase these shares throughout the
year and immediately resell these shares to pay off this entire obligation.
(B) 5,000,000 merger common shares are unregistered and are restricted as to
sale for 13 months. These shares are valued at the average trading value of
common stock ($1.09375 per share - see Note C).
(C) Average stock value for the five days before and five days after August 11,
2000, the date this acquisition was announced, was $1.09375 per share and
the option value computed using the Black-Scholes model was $.959 per
share.
(D) Net guarantee discounted at 10.5% for three years.
(E) Covenants not to compete will last five years. Value was estimated to be
the same as value of salary guarantees to former DRM owners based on
employment agreements with these former owners.
<PAGE>
DISPUTE RESOLUTION MANAGEMENT INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1999 AND 1998
AND AS OF JUNE 30, 2000 (UNAUDITED)
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999
AND 1998 AND AS OF JUNE 30, 2000 (UNAUDITED) 2
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX
MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Dispute Resolution Management Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Dispute
Resolution Management Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of earnings and stockholders' equity and
cash flows for the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dispute Resolution
Management and Subsidiary as of December 31, 1999 and 1998, and the results of
their operations and cash flows for the three years then ended, in conformity
with generally accepted accounting principles.
/s/ Foote, Passey, Griffin & Co., LC
Salt Lake City, Utah
January 20, 2000, except for Notes A and I which are dated August 10, 2000
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
June 30, ---------------------------
2000 1999 1998
----------- ------------ -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 238,277 $ 545,944 $ 809,381
Accounts receivable 2,291,332 464,797 175,411
Prepaid expenses 28,430 1,350 37,224
Notes and interest receivable
from stockholders - 124,000 -
----------- ------------ -----------
Total current
assets 2,558,039 1,136,091 1,022,016
----------- ------------ -----------
FURNITURE AND EQUIPMENT,
at cost 179,780 140,882 94,814
Less accumulated
depreciation 59,788 44,593 22,717
----------- ------------ -----------
119,992 96,289 72,097
----------- ------------ -----------
OTHER ASSETS
Notes and interest receivable
from stockholders - - 116,000
Investment in joint venture 40,420 - -
----------- ------------ -----------
40,420 - 116,000
----------- ------------ -----------
$ 2,718,451 $ 1,232,380 $ 1,210,113
=========== ============ ============
The accompanying notes are an integral part of these statements.
2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
June 30, ---------------------------
2000 1999 1998
----------- ------------ -----------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 110,446 $ 70,276 $ 55,930
Accrued liabilities 86,925 58,367 7,000
Notes and interest payable
to stockholders - 120,280
----------- ------------ -----------
Total current liabilities 197,371 248,923 62,930
----------- ------------ -----------
LONG-TERM DEBT
Notes and interest payable
to stockholders - - 112,520
----------- ------------ -----------
MINORITY INTEREST - 183,830 339,807
----------- ------------ -----------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value
Authorized 50,000 shares;
issued and outstanding
30,000 shares 3,000 3,000 3,000
Retained earnings 2,518,080 796,627 691,856
----------- ------------ -----------
2,521,080 799,627 694,856
----------- ------------ -----------
$ 2,718,451 $ 1,232,380 $ 1,210,113
=========== =========== ===========
The accompanying notes are an integral part of these statements.
3
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
Six months
ended June 30,
----------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Consulting fees $ 3,689,277 $ 4,835,150
----------- -----------
Operating expenses
Salaries, benefits and
payroll taxes 924,155 864,895
General and administrative 565,695 294,312
----------- -----------
1,489,850 1,159,207
----------- -----------
Operating income 2,199,427 3,675,943
----------- -----------
Other income (expense)
Interest income 5,601 30,045
Other income 88,176 -
Interest expense (530) (3,880)
Other expense (21,605) (4,000)
----------- -----------
71,642 22,165
2,271,069 3,698,108
NET EARNINGS -
MINORITY INTEREST - (969,577)
----------- -----------
NET EARNINGS $ 2,271,069 $ 2,728,531
=========== ===========
BASIC AND DILUTED NET EARNINGS
PER SHARE $ 75.70 $ 90.95
=========== ===========
(Unaudited) (Unaudited)
Unaudited pro forma information:
Pro forma earnings from operations $ 2,271,069 $ 2,728,531
Pro forma provision for income taxes (885,717) (1,064,127)
Pro forma net earnings $ 1,385,352 $ 1,664,404
=========== ===========
Unaudited pro forma basic and diluted
earnings per share $ 46.18 $ 55.48
=========== ===========
The accompanying notes are an integral part of these statements.
3
<PAGE>
Years ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
$ 6,438,322 $ 5,189,410 $ 1,074,083
1,646,948 1,063,830 591,758
555,296 342,646 232,674
----------- ----------- -----------
2,202,244 1,406,476 824,432
----------- ----------- -----------
4,236,078 3,782,934 249,651
----------- ----------- -----------
34,503 21,773 8,000
24,954 - -
(7,760) (7,760) (7,760)
(17,050) (3,000) -
----------- ----------- -----------
34,647 11,013 240
----------- ----------- -----------
4,270,725 3,793,947 249,891
1,292,963 1,000,637 215,293
----------- ----------- -----------
$ 2,977,762 $ 2,793,310 $ 34,598
=========== =========== ===========
$ 99.26 $ 93.11 $ 1.16
=========== =========== ===========
$ 2,977,762 $ 2,793,310 $ 34,598
(1,161,327) (1,089,391) (13,493)
----------- ----------- -----------
$ 1,816,435 $ 1,703,919 $ 21,105
=========== =========== ===========
$ 60.55 $ 56.80 $ .71
=========== =========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997 and for the six
months ended June 30, 2000 (unaudited)
Common Retained
Stock Earnings Total
----------- ----------- -----------
Balance as of January 1, 1997 $ 3,000 $ (11,900) $ (8,900)
Net earnings for period - 34,598 34,598
Distributions to stockholders - (23,817) (23,817)
----------- ----------- -----------
Balance as of December 31, 1997 3,000 (1,119) 1,881
Net earnings for period - 2,793,310 2,793,310
Distributions to stockholders - (2,100,335) (2,100,335)
----------- ----------- -----------
Balance as of December 31, 1998 3,000 691,856 694,856
Net earnings for period - 2,977,762 2,977,762
Distributions to stockholders - (2,872,991) (2,872,991)
----------- ----------- -----------
Balance as of December 31, 1999 3,000 796,627 799,627
Net earnings for period
(unaudited) - 2,271,069 2,271,069
Distributions to stockholders
(unaudited) - (549,616) (549,616)
----------- ----------- -----------
Balance as of June 30, 2000
(unaudited) $ 3,000 $ 2,518,080 $ 2,521,080
=========== =========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months
ended June 30,
--------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and
Cash Equivalents
Cash flows from operating activities
Net earnings $ 2,271,069 $ 2,728,531
Adjustments to reconcile change in
net assets to net cash provided
by operating activities
Deemed note payment - -
Depreciation 15,195 9,526
Changes in assets and liabilities
Accounts, notes and interest
receivable (1,802,535) (13,435)
Prepaid expenses (27,080) 31,811
Accounts payable 40,170 15,418
Accrued liabilities, notes and
interest payable 8,278 198,253
Minority interest (183,830) 159,147
----------- -----------
Net cash provided by
operating activities 321,267 3,129,251
----------- -----------
Cash flows used in investing
activities
Purchase of equipment (38,898) (18,365)
Investment in joint venture (40,420) -
----------- -----------
Net cash used in
investing activities (79,318) (18,365)
----------- -----------
Cash flows used in financing
activities
Distributions to shareholders (549,616) (2,860,568)
----------- -----------
Net increase (decrease) in cash
and cash equivalents (307,667) 250,318
Cash and cash equivalents at
beginning of period 545,944 809,381
----------- -----------
Cash and cash equivalents
at end of period $ 238,277 $ 1,059,699
=========== ===========
(Continued)
The accompanying notes are an integral part of these statements.
5
<PAGE>
Years ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
$ 2,977,762 $ 2,793,310 $ 34,598
- (200,000) -
21,876 12,680 9,499
(297,386) (96,946) (50,927)
35,874 (29,902) 3,462
14,346 24,462 18,842
59,127 14,760 7,375
(155,977) 238,920 88,987
----------- ----------- -----------
2,663,622 2,765,284 119,836
(46,068) (36,378) (22,285)
----------- ----------- -----------
(54,068) (44,378) (30,285)
----------- ----------- -----------
(2,872,991) (2,100,335) (23,817)
----------- ----------- -----------
(263,437) 620,571 65,734
809,381 188,810 123,076
----------- ----------- -----------
$ 545,944 $ 809,381 $ 188,810
=========== =========== ===========
The accompanying notes are an integral part of these statements.
6
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six months
ended June 30,
--------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flows:
Cash paid during the period for
Interest $ 530 $ -
State income taxes$ 14,546 $ 18,629
The accompanying notes are an integral part of these statements.
6
<PAGE>
Years ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
$ - $ - $ -
$ 13,000 $ 1,087 $ -
The accompanying notes are an integral part of these statements.
7
<PAGE>
Dispute Resolution Management Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
and for the six months ended June 30, 2000 and 1999 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
1. Business
Dispute Resolution Management Inc., an S corporation (the
Company) and its 80% owned subsidiary, Dispute Resolution, Ltd.,
a partnership, engage in management consulting specializing in
settlements of environmental and insurance related disputes.
The Company has operations in Utah, Colorado, Pennsylvania,
Maryland, New Jersey and Texas.
2. Principles of consolidation
The Company consolidates the accounts of its 80 percent owned
subsidiary, Dispute Resolution, Ltd. All intercompany trans- actions
have been eliminated. During the period ended June 30, 2000, the
Company dissolved its interest in its subsidiary (Note C).
3. Investment in joint venture
The Company accounts for a 50% interest in a joint venture under the
equity method and is included in other assets. The Company's share of
loss from the joint venture is included in other expense. Condensed
financial information is not presented as the amounts are immaterial.
4. Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
5. Accounts receivable
All trade accounts are considered to be collectible and no allowance
for doubtful accounts is required.
(Continued)
7
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
6. Revenue recognition
Revenue is recognized on retainers according to the terms of each
contract and as services are provided and payment for services is
reasonably assured. Revenue is recognized on contingent success fees as
each dispute with each insurer is resolved and settlement proceeds have
been recovered by the client.
7. Furniture and equipment
Furniture and equipment are recorded at cost. Depreciation is
calculated using the straight-line method based on estimated useful
lives of three to seven years.
8. Income taxes
Tax returns are filed annually and income taxes on earnings are paid by
the shareholders and partners as specified in the Internal Revenue Code
for S Corporations and Partnerships. No provision has been made for
income taxes. The Company is subject to State franchise tax in several
of the states in which it operates.
The unaudited pro forma income tax information included in the
Statement of Earnings is presented in accordance with the Statement of
Financial Accounting Standards No. 109 Accounting for Income Taxes, as
if the Company had been subject to federal and state income taxes for
all periods presented.
There are differences between the financial carrying amounts and the
tax basis of existing assets and liabilities, primarily resulting from
the Company reporting taxable income on the cash basis. In connection
with the proposed merger discussed in Note I, the Company's S
Corporation election will terminate and the tax effect of the net
difference between the book and tax basis of net assets at that date
will be recorded in the combined Company's financial statements.
9. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
(Continued)
8
<PAGE>
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
10. Advertising
Advertising costs of $78,966, $29,583, and $60,464 for the years ended
December 31, 1999, 1998 and 1997, respectively, were expensed as
incurred.
11. Net earnings per share
Net earnings per share is based on weighted average shares outstanding
of 30,000 shares for the years ended December 31, 1999, 1998, and 1997,
and six months ended June 30, 2000 and 1999. There is no difference on
earnings per share on a fully diluted basis because average shares
outstanding are the same for both the basic and fully diluted shares
outstanding.
12. Unaudited information
In the opinion of management, the accompanying unaudited financial
statements for the six month periods ended June 30, 2000 and 1999
contain all adjustments (consisting only of normal recurring items)
necessary to represent fairly the results of operations and cash flows
for the Company for the six month periods ended June 30, 2000 and 1999.
The results of operations for the six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the entire
year.
13. New accounting standards
In June 1998, the Financial Accounting Standard Board issued SFAS 133
Accounting for Derivative Instruments and Hedging Activities, which is
effective for fiscal years beginning after June 15, 1999. SFAS 133 is
not expected to have a material effect on the financial position or
results of operations of the Company.
NOTE B - NOTES AND INTEREST RECEIVABLE FROM STOCKHOLDERS
The Company has a note receivable of $50,000 from each of the two
stockholders. The notes have an interest rate of 8%. The notes have no
specific repayment terms and have been classified as long term.
1999 1998
Stockholder notes $100,000 $100,000
Accrued interest 24,000 16,000
$124,000 $116,000
The notes and interest were paid during the period ended June 30, 2000.
9
<PAGE>
NOTE C - PARTNERSHIP AGREEMENT
Dispute Resolution Ltd. (DRLTD) was formed in 1996. As part of the
agreement, the limited partner, KPMG Peat Marwick LLP (KPMG), transferred
service contracts to DRLTD and made a cash advance of $200,000. DRLTD is
obligated to pay KPMG twenty percent of gross fees collected on these
contracts until the work is completed or until a total amount of $5,000,000
has been paid to KPMG. Total disbursements under this agreement for the
years ended December 31, 1999, 1998 and 1997 were $1,448,000, $761,717, and
$126,306, respectively. The $200,000 advance was deemed paid by KPMG and
recognized as income by DRLTD in 1998. Effective as of December 31, 1999,
the Company has negotiated a termination of the DRLTD partnership agreement
with KPMG. The Company received approximately $86,000 of other income as a
result of the negotiated termination. In addition, KPMG has a security
interest equal to 20% of gross revenues which may be collected from a
certain client in the future. The amount has not been determined or accrued
at June 30, 2000.
NOTE D - CONCENTRATIONS
Cash balances
The Company maintains its cash balances in one financial institution
located in Salt Lake City, Utah. These balances are insured by the Federal
Deposit Insurance Corporation up to $100,000. Uninsured cash balances were
approximately $350,000 at December 31, 1999.
Customers
The Company's customer base consists primarily of business entities in the
United States. Substantially all revenues are from these customers.
The following clients accounted for 10% or more of total revenue:
Six months ended Years ended
June 30, December 31,
---------------- ---------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
Company A - - - - 12%
Company B - - - - 12%
Company C - - - - 21%
Company D - - - 24% -
Company E - 44% 40% 16% -
Company F - 35% 29% 13% -
Company G 24% - - - -
Company H 55% - - - -
(Continued)
10
<PAGE>
NOTE D - CONCENTRATIONS - CONTINUED
The following individual clients accounts for 10% or more of accounts
receivable:
June 30, December 31,
----------------- -----------------
2000 1999 1999 1998
---- ---- ---- ----
Company A 72% - - 26%
Company B - - - 20%
Company C - - - 22%
Company D - - 24% -
Company E - - 57% -
Company F - 91% - -
NOTE E - NOTES AND INTEREST PAYABLE - STOCKHOLDERS
The Company has a note payable of $48,500 from each of two stockholders.
Interest has been accrued at the rate of 8% per annum. The notes are due
subsequent to January 1, 2000, and have been classified as long term.
1999 1998
-------- --------
Stockholder notes $ 97,000 $ 97,000
Accrued interest 23,280 15,520
-------- --------
$120,280 $112,520
======== ========
The notes and interest were offset and distributed during the period ended
June 30, 2000.
NOTE F - OPERATING LEASE
The Company leases office space for its Colorado, Maryland, New Jersey,
Pennsylvania, Texas and Utah operations on a month to month basis. Total
lease payments for the years ended December 31, 1999, 1998 and 1997 were
$81,887, $58,479, $10,037, respectively. Future operating lease commitments
are as follows:
2000 $ 47,342
2001 26,444
--------
$ 73,786
========
11
<PAGE>
NOTE G - RETIREMENT PLAN
The Company maintains a retirement plan qualified under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may elect to
contribute up to 15% of their salaries, and the Company may elect a
discretionary contribution. Both the employee and employer contributions
are limited to the maximum allowable amounts specified in the IRS
Regulations. No discretionary contributions have been made by the Company.
Employees are eligible to participate in the plan as soon as they are
employed by the Company.
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS
None of the Company's financial instruments are held for trading purposes.
The Company estimates that the fair value of all financial instruments at
1999 and 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
Considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value, and, accordingly, the estimates are
not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
NOTE I - SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company entered into a letter of
intent to merge with another entity. The closing of the transaction is
dependent upon certain provisions being met including financing and
shareholder approval.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMODORE APPLIED TECHNOLOGIES, INC.
Date: August 30, 2000 By:/s/ James M. DeAngelis
---------------------------
James M. DeAngelis
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
99.1 Stock Purchase Agreement, dated as of August 30, 2000, among
Commodore Applied Technologies, Inc., Dispute Resolution
Management, Inc., William Russell and Tamie Speciale.
99.2 Press Release Dated August 30, 2000
