<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-11813
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 5
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------
COMMODORE SEPARATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 3559 11-3299195
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
8000 Towers Crescent Drive, Suite 1350
Vienna, Virginia 22182
telephone: (703) 748-0200; facsimile: (703) 748-0201
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
EDWIN L. HARPER, Ph.D.
Chairman of the Board and Chief Executive Officer
Commodore Separation Technologies, Inc.
8000 Towers Crescent Drive, Suite 1350
Vienna, Virginia 22182
telephone: (703) 748-0200; facsimile: (703) 748-0201
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
STEPHEN A. WEISS, ESQ. LAWRENCE B. FISHER, ESQ.
SPENCER G. FELDMAN, ESQ. Orrick, Herrington & Sutcliffe LLP
Greenberg, Traurig, Hoffman, 666 Fifth Avenue
Lipoff, Rosen & Quentel New York, New York 10103
153 East 53rd Street telephone: (212) 506-5000
New York, New York 10022 facsimile: (212) 506-5151
telephone: (212) 801-9200
facsimile: (212) 223-7161
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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Item
Number Item Caption in Form S-1 Location in Prospectus
---------- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus; Additional
Prospectus Information; Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Be Registered Prospectus Summary; Capitalization; Description of
Securities; Certain Federal Income Tax
Considerations
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Use of Proceeds;
Capitalization; Dividend Policy; Dilution; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Executive
Compensation; Principal Stockholders; Certain
Relationships and Related Transactions; Description
of Securities; Shares Eligible for Future Sale;
Financial Statements; Outside Back Cover Page of
Prospectus
12. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
UNITS CONSISTING OF 1,500,000 SHARES OF 10% SENIOR
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNITS CONSISTING OF 1,500,000 SHARES OF COMMON STOCK
AND 1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
COMMODORE SEPARATION TECHNOLOGIES, INC.
------
Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), hereby offers (the "Offering") two separate units of securities
(together, the "Units") consisting of (a) 1,500,000 shares of 10% Senior
Convertible Redeemable Preferred Stock, par value $.001 per share and
liquidation preference of $10.00 per share (the "Convertible Preferred
Stock"), and 1,500,000 Redeemable Common Stock Purchase Warrants (the
"Warrants"), each unit (the "Preferred Units") consisting of one share of
Convertible Preferred Stock and one Warrant, and (b) 1,500,000 shares of
Common Stock, par value $.001 per share (the "Common Stock"), and 1,500,000
Warrants, each unit (the "Common Units") consisting of one share of Common
Stock and one Warrant. The Convertible Preferred Stock, Common Stock and
Warrants included in the Units are sometimes collectively referred to as the
"Securities." Until completion of the Offering, the Securities included in
the Preferred Units and Common Units may only be purchased together in their
respective Units, but each of the Securities will trade separately
immediately after the Offering. The Convertible Preferred Stock is
convertible into Common Stock at any time prior to redemption at the rate of
1.33 shares of Common Stock for each share of Convertible Preferred Stock, an
effective conversion price of $7.50 per share or 125% of the initial public
offering price per share of Common Stock (subject to adjustment under certain
circumstances). Commencing March , 2000, the Convertible Preferred Stock is
subject to redemption by the Company, in whole but not in part, at $10.00 per
share, plus accumulated and unpaid dividends on 30 days' prior written
notice, provided that the closing bid price of the Common Stock for at least
20 consecutive trading days ending not more than 10 trading days prior to the
date of the notice of redemption equals or exceeds $11.25 per share, or,
after March , 2001, at the cash redemption prices set forth herein, plus
accumulated and unpaid dividends. Cumulative dividends on the Convertible
Preferred Stock at the rate of $1.00 per share per annum are payable
quarterly, out of funds legally available therefor, on the last business day
of March, June, September and December of each year, commencing June 30,
1997. Each Warrant included in the Preferred Units and Common Units contains
identical terms and entitles the registered holder thereof to purchase one
share of Common Stock at an initial exercise price of $8.40 per share,
subject to adjustment, at any time commencing one year after the date of this
Prospectus until five years after the date of this Prospectus. Commencing 18
months after the date of this Prospectus, the Warrants are subject to
redemption by the Company, in whole but not in part, at $.10 per Warrant on
30 days' prior written notice provided that the average closing sale price of
the Common Stock equals or exceeds $18.00 per share (subject to adjustment
under certain circumstances) for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities."
Prior to this Offering, there has been no public market for the Securities
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It
is currently anticipated that the initial public offering prices of the
Preferred Units and the Common Units will be $10.10 per unit and $6.10 per
unit, respectively, with the Convertible Preferred Stock, Common Stock and
Warrants priced at $10.00 per share, $6.00 per share and $.10 per Warrant,
respectively. For information regarding the factors considered in determining
the initial public offering prices of the Securities and the terms of the
Convertible Preferred Stock and Warrants, see "Risk Factors" and
"Underwriting." Application has been made to include the Convertible
Preferred Stock, the Common Stock and the Warrants on the Nasdaq Small-Cap
Market ("Nasdaq") under the symbols "CXOTP," "CXOT" and "CXOTW,"
respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND
"DILUTION."
------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=============================================================================================================
Price to Public Underwriting Discount (1) Proceeds to Company (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Unit ...................... $10.10 $.808 $9.29
- -------------------------------------------------------------------------------------------------------------
Per share of Convertible Preferred Stock $10.00 $ .80 $9.20
- -------------------------------------------------------------------------------------------------------------
Per Warrant ............................ $ .10 $.008 $.092
- -------------------------------------------------------------------------------------------------------------
Per Common Unit ......................... $6.10 $.488 $5.61
- -------------------------------------------------------------------------------------------------------------
Per share of Common Stock .............. $6.00 $ .48 $5.52
- -------------------------------------------------------------------------------------------------------------
Per Warrant ............................ $ .10 $.008 $.092
- -------------------------------------------------------------------------------------------------------------
Total (3) ............................... $24,300,000 $1,944,000 $22,356,000
==============================================================================================================
</TABLE>
(see footnotes on following page)
The Securities are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify this Offering and to reject any order in whole or in part.
It is expected that delivery of the Securities will be made against payment
at the offices of National Securities Corporation, Seattle, Washington, on or
about , 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
(continued from cover page)
- -----------
(1) Does not include additional compensation payable to National Securities
Corporation, the representative of the several Underwriters (the
"Representative"), in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification
and contribution arrangements with the Underwriters and other
compensation payable to the Representative.
(2) Before deducting estimated expenses of $533,500 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within
45 days after the date of this Prospectus to purchase up to 225,000
additional shares of Convertible Preferred Stock, up to 225,000
additional shares of Common Stock and/or up to 450,000 additional
Warrants, all upon the same terms and conditions as set forth above,
solely to cover over-allotments, if any (the "Over-allotment Option").
The Over-allotment Option may be exercised to purchase shares of
Convertible Preferred Stock, shares of Common Stock and Warrants, solely
shares of Convertible Preferred Stock or shares of Common Stock or
Warrants, or any combination thereof. If such Over-allotment Option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $27,945,000, $2,235,600 and $25,709,400,
respectively. See "Underwriting."
------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF THE SECURITIES TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and make
available such other periodic reports as the Company may deem to be
appropriate or as may be required by law.
------
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by, and must be read in conjunction
with, the more detailed information and financial statements and notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated,
all references in the Prospectus to (a) share and per share information
reflects a 150,000-for-one stock split effected on September 5, 1996 and a
one-for-1.5 reverse stock split effected on November 26, 1996, and (b) the
Company's authorized and outstanding securities give effect to the filing
prior to the date of this Prospectus of a Certificate of Designation,
Preferences and Rights amending the Company's Certificate of Incorporation to
authorize the Convertible Preferred Stock, and does not give effect to (i)
any exercise of the Underwriters' Over-allotment Option, (ii) the issuance of
up to 2,000,000 shares of Common Stock upon conversion of the Convertible
Preferred Stock, (iii) the issuance of up to 3,000,000 shares of Common Stock
upon exercise of the Warrants, (iv) the issuance of up to 150,000 shares of
Convertible Preferred Stock, 150,000 shares of Common Stock and/or 300,000
Warrants upon exercise of the Representative's Warrants, (v) the issuance of
up to 500,000 shares of Common Stock upon conversion of the Convertible
Preferred Stock and exercise of the Warrants included in the Representative's
Warrants, (vi) the issuance of up to 766,689 shares of Common Stock upon
exercise of stock options outstanding as of the date of this Prospectus, and
(vii) the issuance of up to 583,311 additional shares of Common Stock
reserved for issuance upon exercise of additional stock options that may be
granted under the Company's 1996 Stock Option Plan. See "Executive
Compensation -- Stock Options" and "Underwriting." The Company is a
development stage company which has had no commercial operations to date.
THE COMPANY
Commodore Separation Technologies, Inc. (the "Company") has developed and
intends to commercialize its membrane separation and recovery system called
CST. Based on the results of more than 100 laboratory and other tests to
date, the Company believes that CST can separate and recover chrome,
chromium, cadmium, silver, mercury, platinum, lead, zinc, nickel,
trichlorethylene, polychlorinated biphenyls, methylene chloride, amino acids,
antibiotics, radionuclides, and other organic and inorganic targeted
substances from liquid or gaseous feedstreams. CST utilizes a process whereby
a contaminated liquid or gaseous feedstream is introduced into a fibrous
membrane unit or module containing a proprietary chemical solution, the
composition of which is customized depending on the types and concentrations
of compounds in the feedstream. As the feedstream enters the membrane, the
targeted substance reacts with CST's proprietary chemical solution and is
extracted through the membrane into a strip solution where it is then stored.
The remaining feedstream is either recycled or discharged as non-toxic
effluent. In some instances, additional treatment may be required prior to
disposal.
CST is distinguishable from other existing forms of membrane filtration
technology in that it:
o requires low initial capital costs and low operating costs;
o has the capability of treating a wide variety of elements and compounds
in a wide variety of industrial settings at great speed and with a high
degree of effectiveness, regardless of contaminant concentrations,
volume requirements and other variables;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional post-treatment
prior to disposal;
o can selectively extract target substances, while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less than 40 square feet of space
for the entire system;
o can extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which permit their reuse; and
o has the capability, in a single process application, of selectively
extracting multiple elements or compounds from a mixed process stream.
5
<PAGE>
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of chromium-contaminated groundwater at the Port of
Baltimore, Maryland. During this demonstration, a CST unit, in a single
feedstream pass-through, reduced the contamination level of chromium from
more than 400 parts per million (ppm) to less than one ppm. The results of
this test were verified by Artesian Laboratories, Inc., an independent
testing laboratory. The Company has since completed additional on-site
demonstrations of CST at the Port of Baltimore with similar results. Due to
the success of such demonstrations, in February 1997 the State of Maryland
informed the Company that it will recommend including the CST process as an
eligible technology in the bid specifications to remediate the groundwater at
the Port of Baltimore. Based on management studies and discussions with
metals industry executives, the Company believes that CST represents a
significant technological advancement in the area of environmental
remediation as the only technology capable of on-site chromium removal and
recovery that enables effluent discharge without additional treatment.
In September 1996, the Company installed a commercial scale CST unit at a
Columbus, Ohio metal plating company. DLZ Laboratories, Inc., an independent
testing laboratory, verified that the CST unit processed the initial batch of
process effluent stream and reduced nickel and zinc contamination from 900
ppm to 2 ppm in one hour. The Company has continued to operate this CST unit
to process nickel and zinc effluent streams containing concentrations of 200
to 400 ppm, and the unit has consistently reduced the contaminant levels to 1
to 5 ppm. The decontaminated process effluent stream is being recycled into
the plating line rinse tanks, saving the plating company its normal
consumption of make-up water at a rate of five gallons per minute. The
recovered nickel and zinc solution is currently being analyzed by the plating
company for reuse in its plating operations.
In January 1997, the Company entered into a license agreement with
Lockheed Martin Energy Research Corporation ("Lockheed Martin"), manager of
the Oak Ridge National Laboratory, a U.S. Department of Energy national
laboratory ("Oak Ridge"). Under the terms of the agreement, the Company
received the exclusive worldwide license, subject to a government use
license, to use and develop the technology related to the separation of the
radionuclides technetium and rhenium from mixed wastes containing radioactive
materials. Based on tests conducted at Oak Ridge since May 1994, the Company
believes that this technology is capable of selectively extracting and
recovering technetium, rhenium and other radioactive isotopes as a
concentrated aqueous solution which can be reused in various scientific
applications or disposed of by government-approved techniques including
long-term storage. The Company believes that this technology can be used to
remediate nuclear waste tanks stored at the U.S. Department of Energy's
atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho, Paducah,
Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos, New
Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and
Hanford, Washington, and intends to pursue such opportunities. According to
Department of Energy sources, there are approximately 100 million gallons of
mixed radioactive and hazardous chemical waste stored at these plants.
The Company will market its technology to industries engaged in
metallurgical processing, metal plating and mining, as well as companies
producing organic chemicals and biochemicals and those engaged in gas
separation. The Company is also targeting governmental agencies that have
sites which require remediation, and has already completed an on-site
demonstration at the Port of Baltimore.
The Company intends to pursue collaborative joint working and marketing
arrangements with, or acquisitions of or investments in, companies that have
a presence in target markets and those that focus on obtaining environmental
remediation projects, including clean-up of harbors, groundwater and nuclear
waste sites. Although the Company has entered into memorandums of
understanding for proposed working arrangements with Teledyne Brown
Engineering, Inc., a subsidiary of Allegheny Teledyne Inc. ("Teledyne
Brown"), and Sverdrup Environmental, Inc. ("Sverdrup"), and is bidding on
certain projects, there can be no assurance that any of these activities will
result in definitive collaborative agreements or project awards. Even if
project contracts are awarded to the Company, CST has never been utilized on
a large-scale basis, and there is no assurance that this technology will
perform successfully on a large-scale commercial basis, or that it will be
profitable to the Company. There can also be no assurance that this
technology will not be superseded by other competing technologies.
6
<PAGE>
The Company was incorporated in the State of Delaware in November 1995,
and is a wholly-owned subsidiary of Commodore Applied Technologies, Inc.
("Applied"), which, in turn, is a 69.3%-owned subsidiary of Commodore
Environmental Services, Inc. ("Commodore"). To date, Commodore and Applied
have financed the Company's development through direct equity investments and
loans. The principal executive offices of the Company are located at 8000
Towers Crescent Drive, Suite 1350, Vienna, Virginia 22182, and its telephone
number is (703) 748-0200.
THE OFFERING
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Securities Offered .................... 1,500,000 Preferred Units, each unit consisting of one share of Convertible
Preferred Stock and one Warrant, and 1,500,000 Common Units, each unit consisting
of one share of Common Stock and one Warrant.
Offering Prices:
Preferred Units ..................... $10.10 per unit.
Convertible Preferred Stock ........ $10.00 per share.
Warrants ........................... $.10 per Warrant.
Common Units ........................ $6.10 per unit.
Common Stock ....................... $6.00 per share.
Warrants ........................... $.10 per Warrant.
Securities outstanding prior to the
Offering ............................ 10,000,000 shares of Common Stock, no shares of Convertible Preferred Stock,
and no Warrants.
Securities to be outstanding after the
Offering:
Prior to conversion of the
Convertible Preferred Stock and
exercise of Warrants ............. 11,500,000 shares of Common Stock, 1,500,000 shares of Convertible Preferred
Stock, and 3,000,000 Warrants.
Giving effect to full conversion of
the Convertible Preferred Stock
and full exercise of Warrants .... 16,500,000 shares of Common Stock.
Terms of Convertible
Preferred Stock:
Dividend Rate and Payment Dates ..... Cumulative dividends are payable at the rate of $1.00 per share per annum,
quarterly on the last business day of March, June, September and December
of each year, commencing June 30, 1997, when, as and if declared by the Board
of Directors, before any dividends are declared or paid on the Common Stock
or any capital stock ranking junior to the Convertible Preferred Stock. Failure
to pay any quarterly dividend will result in a reduction of the conversion
price. See "Dividend Policy" and "Description of Securities -- Convertible
Preferred Stock."
7
<PAGE>
Conversion Rights ................... Convertible into Common Stock at any time prior to redemption at a conversion
rate of 1.33 shares of Common Stock for each share of Convertible Preferred
Stock (an effective conversion price of $7.50 per share or 125% of the initial
public offering price per share of Common Stock), subject to adjustment under
certain circumstances including in the event of the failure of the Company
to pay a dividend on the Convertible Preferred Stock within 30 days of a
dividend payment date, which will result in each instance in a reduction
of $.50 per share in the conversion price but not below $3.75 per share.
See "Description of Securities -- Convertible Preferred Stock."
Optional Cash Redemption ........... Redeemable, in whole but not in part, by the Company upon 30 days' prior
written notice after March , 2000 at $10.00 per share, plus accumulated
and unpaid dividends, provided the closing bid price of the Common Stock
for at least 20 consecutive trading days ending not more than 10 trading
days prior to the date of the notice of redemption equals or exceeds $11.25
per share or, after March , 2001, at the cash redemption prices set forth
herein, plus accumulated and unpaid dividends. See "Description of Securities
-- Convertible Preferred Stock."
Voting Rights ...................... The holders of Convertible Preferred Stock have the right, voting as a class,
to approve or disapprove of the issuance of any class or series of stock
ranking senior to or on a parity with the Convertible Preferred Stock with
respect to declaration and payment of dividends or the distribution of assets
on liquidation, dissolution or winding-up. In addition, if the Company fails
to pay dividends on the Convertible Preferred Stock for four consecutive
quarterly dividend payment periods, holders of Convertible Preferred Stock
voting separately as a class will be entitled to elect one director; such
voting right will be terminated as of the next annual meeting of stockholders
of the Company following payment of all accrued dividends. See "Description
of Securities -- Convertible Preferred Stock."
Liquidation Preference ............. Upon liquidation, dissolution or winding up of the Company, holders of
Convertible Preferred Stock are entitled to receive liquidation distributions
equivalent to $10.00 per share (plus accumulated and unpaid dividends) before
any distribution to holders of the Common Stock or any capital stock ranking
junior to the Convertible Preferred Stock. See "Description of Securities
-- Convertible Preferred Stock."
Priority ........................... The Convertible Preferred Stock will be senior to and have priority over
the Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company.
8
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Terms of Warrants ................... Each Warrant entitles the holder thereof to purchase, at any time commencing
one year after the date of this Prospectus until five years after the date
of this Prospectus, one share of Common Stock at a price of $8.40 per share,
subject to adjustment. Commencing 18 months after the date of this Prospectus,
the Warrants are subject to redemption by the Company, in whole but not in
part, at $.10 per Warrant on 30 days' prior written notice provided that
the average closing sale price of the Common Stock equals or exceeds $18.00
per share, subject to adjustment, for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the
date of the notice of redemption. See "Description of Securities -- Warrants."
Use of Proceeds ..................... The Company intends to apply the net proceeds of this Offering to conduct
ongoing development of its technology; acquire manufacturing equipment;
establish its Atlanta facility; finance potential acquisitions; fund proposed
collaborative arrangements; purchase CST components; and for working capital
and general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq Symbols:(1)
Common Stock ..................... CXOT
Convertible Preferred Stock ....... CXOTP
Warrants .......................... CXOTW
Risk Factors ........................ An investment in the Securities offered hereby involves a high degree of
risk and immediate and substantial dilution, and should be made only by investors
who can afford the loss of their entire investment. See "Risk Factors" and
"Dilution."
</TABLE>
- ------
(1) There can be no assurance that the Securities will be accepted for
quotation on Nasdaq.
9
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data included in the following table as of June 30,
1996 and for the period from November 15, 1995 (date of inception) to June
30, 1996 are derived from the audited Financial Statements appearing
elsewhere herein. The summary financial data as of December 31, 1996, for the
six months then ended and for the period from November 15, 1995 (date of
inception) to December 31, 1996 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data. Financial data
for the periods through December 31, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
June 30, 1997. The summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
November 15, 1995 November 15, 1995
(date of Six Months (date of inception)
inception) Ended to December 31,
Statement of Operations Data(1) to June 30, 1996 December 31, 1996 1996
----------------- ----------------- -------------------
<S> <C> <C> <C>
Revenue ...................................... $ 0 $ 7,758 $ 7,758
----------------- ----------------- -------------------
Costs and expenses:
Research and development ................ 50,080 412,340 462,420
General and administrative .............. 9,720 443,423 453,143
Amortization ............................ 101 1,199 1,300
----------------- ----------------- -------------------
Loss before interest and taxes ............... (59,901) (849,204) (909,105)
Interest expense ............................. 1,035 4,600 5,635
----------------- ----------------- -------------------
Net loss ..................................... $(60,936) $(853,804) $(914,740)
================= ================= ===================
Net loss per share(2) ........................ (.01) (.08) (.09)
Ratio of earnings to preferred stock dividends --(3) --(3) --(3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
--------------- -----------------------------
As
Balance Sheet Data: Actual Adjusted(4)
------------ -------------
<S> <C> <C> <C>
Working capital (deficit) .................. $(81,630) $(134,677) $20,958,823
Total assets ............................... 23,327 530,644 21,624,144
Total current liabilities .................. 84,163 454,184 454,184
Deficit accumulated during development stage (60,936) (914,740) (914,740)
Stockholders' equity (deficit) ............. (60,836) 76,460 21,169,960
</TABLE>
- ------
(1) The Company is in the development stage, and has had no commercial
operations to date. See Note 1 of Notes to Financial Statements.
(2) Net loss per share is calculated on the basis of 10,000,000 shares of
Common Stock being outstanding for the period presented. See Note 1 of
Notes to Financial Statements.
(3) The Company's operating results are not sufficient to cover the
Convertible Preferred Stock cash dividends. See "Risk Factors --
Inadequate Dividend Coverage" and "Dividend Policy."
(4) Gives effect on an as adjusted basis to the sale by the Company of the
Units offered hereby at an assumed initial public offering price of
$10.10 per Preferred Unit, consisting of one share of Convertible
Preferred Stock at $10.00 per share and one Warrant at $.10 per Warrant,
and $6.10 per Common Unit, consisting of one share of Common Stock at
$6.00 per share and one Warrant at $.10 per Warrant, and the initial
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
10
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk and should be made only by investors who can afford the loss of their
entire investment. Prospective investors should carefully review and consider
the risk factors described below and the other information in this Prospectus
before purchasing the Securities.
NO OPERATING HISTORY; ACCUMULATED AND WORKING CAPITAL DEFICITS; INITIAL
COMMERCIALIZATION STAGE; GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITORS'
REPORT
The Company was organized in November 1995 and has had no commercial
operations to date. Since its inception, the Company has been engaged
principally in organizational activities, including developing a strategic
operating plan, entering into contracts, hiring personnel, developing test
modules and installing and operating modules on a limited basis for
demonstration or test purposes. The Company is considered a development stage
company for accounting purposes because it has not generated any material
revenues to date. Accordingly, the Company has no relevant operating history
upon which an evaluation of its performance and prospects can be made. The
Company is subject to all of the business risks associated with a new
enterprise, including, but not limited to, risks of unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages as against larger and more
established companies. The report of the independent auditors with respect to
the Company's financial statements included in this Prospectus includes a
"going concern" qualification, indicating that the Company's significant
operating losses and deficits in working capital and stockholders' equity
raise substantial doubt about its ability to continue as a going concern. See
Financial Statements.
The Company has generated nominal revenues to date, and will not generate
any material revenues until after the Company successfully completes the
installation of modules in a significant number of industrial companies, of
which no assurance can be given. As of December 31, 1996 and June 30, 1996,
the Company had working capital deficits of $(134,677) and $(81,630),
respectively, and stockholders' equity and deficit of $76,460 and $(60,836),
respectively. During the period from November 15, 1995 (date of inception) to
December 31, 1996, the Company has incurred operating losses of $(914,740),
and anticipates that it may continue to incur significant operating losses
for the foreseeable future. There can be no assurance as to whether or when
the Company will generate material revenues or achieve profitable operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and Financial Statements.
INADEQUATE DIVIDEND COVERAGE
The annual dividend requirement on the Convertible Preferred Stock is
$1,500,000 ($1,725,000 if the Over-allotment Option is exercised in full).
The future earnings of the Company, if any, will not initially be adequate to
pay the dividends on the Convertible Preferred Stock, and, although the
Company will pay quarterly dividends out of available capital surplus, there
can be no assurance that the Company will maintain sufficient capital surplus
or that future earnings, if any, will be adequate to pay the dividends on the
Convertible Preferred Stock. Under the Delaware General Corporation Law,
dividends may be paid only out of legally available funds. Failure to pay any
quarterly dividend will result in a reduction in the conversion price and
failure to pay a total of four consecutive quarterly dividends will entitle
the holders of the Convertible Preferred Stock, voting separately as a class,
to elect one director. In addition, no dividends or distributions may be
declared, paid or made if the Company is or would be rendered insolvent by
virtue of such dividend or distribution. See "Dividend Policy" and
"Description of Securities -- Convertible Preferred Stock."
UNPROVEN ON LARGE-SCALE COMMERCIAL BASIS
CST has never been utilized on a large-scale commercial basis. All of the
tests conducted to date by the Company with respect to CST have been
performed on limited quantities of process streams, and there can be no
assurance that the same or similar results could be obtained on a large-scale
commercial basis or on any specific project. The Company has never utilized
CST under the conditions and in the volumes that will be required to be
profitable and cannot predict all of the difficulties that may arise. In
addition, most of the results of more than 100 laboratory and other tests
conducted by the Company have not been verified by an independent testing
laboratory. Thus, it is possible that the Company's CST unit may require
further research, development,
11
<PAGE>
design and testing, as well as regulatory clearances, prior to larger-scale
commercialization. Additionally, the Company's ability to operate its
business successfully will depend on a variety of factors, many of which are
outside the Company's control, including competition, cost and availability
of strategic components, changes in governmental initiatives and
requirements, changes in regulatory requirements, and the costs associated
with equipment repair and maintenance. See "Business."
DEPENDENCE ON STRATEGIC COMPONENTS FROM SUPPLIERS; LIMITED MANUFACTURING
OPERATIONS
The Company currently has a limited number of sources of supply for some
CST components, such as fibers and membrane casings. Business disruptions or
financial difficulties of suppliers, or raw material shortages or other
causes beyond the Company's control, could adversely affect the Company by
increasing the cost of goods sold or reducing the availability of such
components. In its development to date, the Company has been able to obtain
adequate supplies of these strategic components. However, as it commences
commercial activities, the Company expects to experience a rapid and
substantial increase in its requirements for these components. If the Company
were unable to obtain a sufficient supply of required components, the Company
could experience significant delays in the manufacture of CST equipment,
which could result in the loss of orders and customers, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company plans to use a portion of the net
proceeds of this Offering to build its own manufacturing plant for these
strategic components, there can be no assurance as to whether or when such
plant will be completed, that it will be able to manufacture components more
inexpensively than the cost of current sources of supply or that, prior to
the completion of such plant, the Company will not require alternative
sources of such components or experience delays in obtaining adequate CST
components. The occurrence of any of such events would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if the cost of raw materials or finished components
were to increase, there can be no assurance that the Company would be able to
pass such increases to its customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Dependence on
Suppliers" and "Business -- Proposed Manufacturing Operations."
UNCERTAINTY OF MARKET ACCEPTANCE
Many prospective users of CST have committed substantial resources to
other forms of process stream treatments or technologies. The Company's
growth and future financial performance will depend on its ability to
demonstrate to prospective users the technical and economic advantages of CST
over these alternatives. There can be no assurance that the Company will be
successful in this effort. Furthermore, it is possible that competing
alternatives may be perceived to have, or may actually have, certain
advantages over CST for certain industries or applications. See "Business."
RISK OF INTERNATIONAL OPERATIONS
The Company intends to market CST in international markets, including both
industrialized and developing countries. International operations entail
various risks, including political instability, economic instability and
recessions, exposure to currency fluctuations, difficulties of administering
foreign operations generally, and obligations to comply with a wide variety
of foreign import and United States export laws, tariffs and other regulatory
requirements. The Company's competitiveness in overseas markets may be
negatively impacted when there is a significant increase in the value of the
dollar against the currencies of the other countries in which the Company
does business. In addition, the laws of certain foreign countries may not
protect the Company's proprietary rights to the same extent as the laws of
the United States and there may be no legal recourse for the Company in
certain adverse circumstances as United States companies may not have
jurisdiction in other countries. See "Business -- Environmental Matters," "--
Intellectual Property" and "-- Competition."
UNSPECIFIED ACQUISITION-RELATED RISKS
As part of its growth strategy, the Company will seek to acquire or invest
in complementary (including competitive) businesses, products or
technologies. The Company has allocated $1,250,000 (or 5.9%) of the net
proceeds of this Offering for financing such possible acquisitions or
investments. See "Use of Proceeds." The process of integrating such acquired
assets into the Company's operations may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of the
Company's business. There can be no assurance that the anticipated benefits
of any acquisitions will be realized. In addition, future acquisitions by the
Company could result in potentially
12
<PAGE>
dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and
other intangible assets, any of which could materially adversely affect the
Company's operating results and financial position. Acquisitions also involve
other risks, including entering markets in which the Company has no or
limited prior experience. The Company currently has no commitments or
agreements with respect to any possible acquisitions or investments.
EFFECT OF ACQUISITIONS ON PERSONNEL
As noted above, future acquisitions by the Company could also result in
the possibility of changing current Company management with no opportunity
for the Company's stockholders to evaluate new key personnel.
UNPREDICTABILITY OF PATENT PROTECTION AND PROPRIETARY TECHNOLOGY
The Company currently has one United States utility patent application
pending and two United States provisional patent applications pending and may
in the future file foreign patent applications. The Company's success
depends, in part, on its ability to obtain patents, maintain trade secrecy,
and operate without infringing on the proprietary rights of third parties.
There can be no assurance that the patents of others will not have an adverse
effect on the Company's ability to conduct its business, that any of the
Company's pending patent applications will be approved, that the Company will
develop additional proprietary technology which is patentable or that any
patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by third parties. Furthermore, there can
be no assurance that others will not independently develop similar or
superior technologies, duplicate elements of CST, or design around CST.
The Company's liquid membrane technology patent applications are based on
the selective combination of different known solvents, supports, diluents,
carriers and other components to separate a variety of metals, chemicals and
other targeted substances. While the Company believes that its technology
covers all separation applications, third parties may have developed, or may
subsequently assert claims to, certain of these solvents, supports, diluents,
carriers or other components for one or more specific applications. In such
event, the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. There can
be no assurance that any license acquired under such patents would be made
available to the Company on acceptable terms, if at all, or that the Company
would prevail in any such contest. In addition, the Company could incur
substantial costs in defending itself in suits brought against the Company
for alleged infringement of another party's patents or in defending the
validity or enforceability of the Company's patents, or in bringing patent
infringement suits against other parties based on the Company's patents.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect, in
part, by confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others. See "Business -- Intellectual Property."
ROYALTY OBLIGATIONS
Pursuant to an assignment of technology agreement between the Company and
Srinivas Kilambi, Ph.D., the Company's Vice President-Technology, the Company
agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2% of
the Company's revenues actually received and attributed to the commercial
application of the technology acquired from Dr. Kilambi, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes). Pursuant to the Company's license agreement with Lockheed Martin, the
Company made an initial cash payment of $50,000 upon the execution of the
agreement and is obligated to pay, commencing in the third year of the
agreement, a royalty to Lockheed Martin of 2% of net sales (less allowances
for returns, discounts, commissions, freight, and excise or other taxes) up
to total net sales of $4,000,000 and 1% of net sales thereafter. In addition,
the Company has agreed to guarantee Lockheed Martin, commencing in the third
year of the agreement, an annual minimum royalty of $15,000. See "Business --
Commercialization and Marketing Strategy -- Radionuclide/Mixed Waste
Separation." Payments of such royalties to Dr. Kilambi and Lockheed Martin
are based on Company revenues and are not related to or contingent upon the
Company attaining profitability or positive cash flow. As a result, such
payments will adversely
13
<PAGE>
affect operating results and divert cash resources from use in the Company's
business, and possibly at times when the Company's liquidity and access to
funding may be limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Business -- Intellectual Property" and "Certain Relationships
and Related Transactions -- Organization and Capitalization of the Company."
RISK OF ENVIRONMENTAL LIABILITY; POSSIBLE INADEQUACY OF INSURANCE COVERAGE
The Company's operations, as well as the use of the specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers,
there is always the risk of the mishandling of such materials or
technological or equipment failures, which could result in significant claims
against the Company. Any such claims against the Company could materially
adversely affect the Company's business, financial condition and results of
operations.
As CST is commercialized, the Company may be required to obtain
environmental liability insurance in the future in amounts greater than it
currently maintains. There can be no assurance that such insurance will
provide coverage against all claims, and claims may be made against the
Company (even if covered by the Company's insurance policy) for amounts
substantially in excess of applicable policy limits. Any such event could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Environmental Matters."
POTENTIAL NEED FOR ADDITIONAL FINANCING
Prior to this Offering, financing for all of the Company's activities had
been provided in the form of direct equity investments and loans by Commodore
and Applied. Although the Company anticipates that the net proceeds of this
Offering will be sufficient to sustain its operations for approximately 24
months following the date of this Prospectus, the Company's future capital
requirements could vary significantly and will depend on certain factors,
many of which are not within the Company's control. These include the ongoing
development and testing of CST as a remediation and industrial waste
management technology; the nature and timing of remediation and clean-up
projects and permits required; and the availability of financing.
In the environmental remediation market, the Company may not be able to
enter into favorable business collaborations and might thus be required to
bid upon projects for its own account. If such bids were successful, the
Company would be required to make significant expenditures on personnel and
capital equipment which would require significant financing in amounts
substantially in excess of the net proceeds of this Offering. In addition,
the Company's lack of operational experience and limited capital resources
could make it difficult, if not highly unlikely, to successfully bid on major
reclamation or clean-up projects. In such event, the Company's business
development could be limited to remediation of smaller commercial and
industrial sites with significantly lower potential for profit.
The expansion of the Company's business will require the commitment of
significant capital resources toward the hiring of technical and operational
support personnel, the development of a manufacturing and testing facility
for CST equipment, and the building of equipment to be used both for on-site
test demonstrations and the remediation of contaminated elements. In the
event the Company is presented with one or more significant reclamation or
clean-up projects, individually or in conjunction with collaborative working
partners, it may require additional capital to take advantage of such
opportunities. There can be no assurance that such financing will be
available or, if available, that it will be on favorable terms. If adequate
financing is not available, the Company may be required to delay, scale back
or eliminate certain of its development programs, to relinquish rights to
certain of its technologies, or to license third parties to commercialize
technologies that the Company would otherwise seek to develop itself. To the
extent the Company raises additional capital by issuing equity securities,
investors in this Offering will be diluted. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
MANAGEMENT'S BROAD DISCRETION IN APPLICATION OF PROCEEDS
Approximately 48.1% of the net proceeds of this Offering has been
allocated for working capital and general corporate purposes. The Company may
use a portion of the net proceeds of this Offering allocated for working
capital and general corporate purposes for loans to Commodore and such
proceeds may not be avail-
14
<PAGE>
able for other corporate purposes. In addition, approximately 5.9% and 4.7%
of the net proceeds of this Offering, respectively, has been allocated for
potential acquisitions and proposed collaborative arrangements for which the
Company has no binding agreements as of the date of this Prospectus.
Accordingly, the Company will have broad discretion as to the application of
a significant portion of the net proceeds of this Offering. See "Use of
Proceeds."
COMPETITION AND TECHNOLOGICAL ALTERNATIVES
The Company anticipates that CST's primary market will be for industrial
by-products treatment and disposal. The Company has had limited experience in
marketing CST and has not previously had any employees or personnel whose
primary responsibilities for the Company consisted of sales or marketing
functions. Other participants in both the private and public sectors include
several large domestic and international companies and numerous small
companies, many of whom have substantially greater financial and other
resources and more manufacturing, marketing and sales experience than the
Company. In addition, as membrane separation technology evolves, there exists
the possibility that CST may be rendered obsolete by one or more competing
technologies. Any one or more of the Company's competitors, or one or more
other enterprises not presently known to the Company, may develop
technologies which are superior to CST or other technologies utilized by the
Company. To the extent that the Company's competitors are able to offer more
cost-effective separation technology alternatives, the Company's ability to
compete could be materially and adversely affected. See "Business."
NO ASSURANCE OF COLLABORATIVE AGREEMENTS OR PROJECT AWARDS
In addition to its direct marketing efforts, the Company proposes to
pursue opportunities in the environmental remediation market through
collaborative joint working arrangements with companies that have a
significant presence in well-established industries or markets, and that can
introduce CST as an enabling technology to industry participants. However,
neither the Company nor any of its prospective collaborative joint working
partners have been awarded any project contracts. There can be no assurance
that the Company will enter into any definitive joint project arrangements
with its prospective working partners or others, or that any such definitive
arrangements will be on terms and conditions that will enable the Company to
generate profits. Furthermore, even if the Company is successful in obtaining
one or more project awards, such projects may be curtailed or eliminated, or
other problems may arise, which could materially adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY MANAGEMENT AND OTHER PERSONNEL
The Company is dependent on the efforts of its senior management and
scientific staff, including Edwin L. Harper, Ph.D., Chairman of the Board and
Chief Executive Officer, Kenneth J. Houle, President and Chief Operating
Officer, James M. DeAngelis, Senior Vice President, Srinivas Kilambi, Ph.D.,
Vice President -- Technology, Michael D. Kiehnau, Vice President --
Operations and Andrew P. Oddi, Vice President -- Finance. Messrs. Houle,
DeAngelis, Kilambi and Kiehnau have employment agreements with the Company.
Dr. Harper has an employment agreement with Commodore which requires him to
serve from time to time in senior executive positions with one or more of
Commodore's subsidiaries, including the Company. The proceeds of key man life
insurance policies on the lives of certain of such individuals may not be
adequate to compensate the Company for the loss of any of such individuals.
The loss of the services of any one or more of such persons may have a
material adverse effect on the Company. See "Executive Compensation --
Employment Agreements." Alan R. Burkart, who had served as the Company's
President and Chief Executive Officer since August 1996, resigned from such
positions in December 1996 for health reasons. Although Mr. Burkart had
previously been listed as a key employee, the loss of whom would materially
adversely affect the Company, the Company believes that the loss of the
services of Mr. Burkart will not have a material adverse effect on the
Company.
The Company's future success will depend in large part upon its ability to
attract and retain skilled scientific, management, operational and marketing
personnel. Prior to this Offering, the Company has not had any employees or
personnel whose responsibilities for the Company were focused primarily on
sales or marketing. The Company faces competition for hiring such personnel
from other companies, government entities and other organizations. There can
be no assurance that the Company will continue to be successful in attracting
and retaining such personnel. See "Use of Proceeds," "Management" and
"Executive Compensation."
15
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
Edwin L. Harper, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer, also serves as the President and Chief Operating Officer
of both Commodore and Applied and devotes a portion of his business and
professional time and efforts to the respective businesses of Commodore and
Applied. In addition, Paul E. Hannesson, Bentley J. Blum, Kenneth L. Adelman,
Ph.D. and David L. Mitchell (the "Commodore Directors"), all of whom are
directors of the Company, also serve as directors of Commodore and/or
Applied. While the Company believes that its business and technologies are
distinguishable from those of Commodore and Applied, and that it does not
compete in the markets in which Commodore and Applied compete, Dr. Harper and
the Commodore Directors may have potential conflicts of interest with respect
to, among other things, potential corporate opportunities, business
combinations, joint ventures and/or other business opportunities that may
become available to them, the Company, Commodore and/or Applied. Moreover,
while Dr. Harper has agreed to devote a majority of his business and
professional time and efforts to the Company, potential conflicts of interest
also include the amount of time and effort devoted by him to the affairs of
Commodore and Applied. The Company may be materially adversely affected if
Dr. Harper and/or the Commodore Directors choose to place the interests of
Commodore and/or Applied before those of the Company. Each of Dr. Harper and
the Commodore Directors has agreed that, to the extent such opportunities
arise, he will carefully consider a number of factors, including whether such
opportunities were presented to him in his capacity as an officer or director
of the Company, whether such opportunities are within the Company's line of
business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunities. In addition,
the Company's Board of Directors has adopted a policy whereby any future
transactions between the Company and any of its subsidiaries, affiliates,
officers, directors, principal stockholders or any affiliates of the
foregoing will be on terms no less favorable to the Company than could
reasonably be obtained in "arm's length" transactions with independent third
parties, and any such transactions will also be approved by a majority of the
Company's disinterested outside directors. Dr. Harper and the Commodore
Directors also owe fiduciary duties of care and loyalty to the Company under
Delaware law. However, the failure of the Company's management to resolve any
conflicts of interest in favor of the Company could materially adversely
affect the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health
and environmental controls, including without limitation, the Resource
Conservation and Recovery Act, as amended ("RCRA"), and the Occupational
Safety and Health Act of 1970 ("OSHA"), which may require the Company, its
prospective working partners or its customers to obtain permits or approvals
to utilize CST and related equipment on certain job sites. In addition, if
the Company begins to market CST internationally, the Company will be
required to comply with laws and regulations and, when applicable, obtain
permits or approvals in those other countries. There is no assurance that
such required permits and approvals will be obtained. Furthermore,
particularly in the environmental remediation market, the Company may be
required to conduct performance and operating studies to assure government
agencies that CST and its by-products do not pose environmental risks. There
is no assurance that such studies, if successful, will not be more costly or
time-consuming than anticipated. Further, if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended,
or are interpreted or enforced differently, the Company, its prospective
working partners and/or its customers may be required to meet stricter
standards of operation and/or obtain additional operating permits or
approvals. There can be no assurance that the Company will meet all of the
applicable regulatory requirements. Failure to obtain such permits, or
otherwise to comply with such regulatory requirements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
DILUTION
Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $4.16 per share (based on an assumed
initial public offering price of $6.00 per share of Common Stock in this
Offering), or approximately 69.3%, in the net tangible book value of the
shares of Common Stock purchased by them in this Offering. Additional
dilution to future net tangible book value per share may occur upon
16
<PAGE>
exercise of outstanding stock options and warrants (including the Warrants
and the Representative's Warrants) and may occur, in addition, if the Company
issues additional equity securities in the future, including issuances of
Common Stock pursuant to the conversion of the Convertible Preferred Stock.
Applied acquired its shares of Common Stock for cash consideration which was
substantially less than the initial public offering price of the shares of
Common Stock offered hereby. As a result, new investors will bear
substantially all of the risks inherent in an investment in the Company. See
"Dilution" and "Certain Relationships and Related Transactions."
CONTROL BY PRINCIPAL STOCKHOLDER; LOAN TO COMMODORE
Applied is currently the sole stockholder of the Company and, after
completion of this Offering, will own approximately 87.0% of the outstanding
Common Stock of the Company (approximately 60.6% assuming conversion of all
Convertible Preferred Stock and exercise of all Warrants). Applied is a
public company whose shares are traded on the American Stock Exchange.
Commodore, which owns 69.3% of the common stock of Applied, is also a public
company whose shares are quoted on the OTC Bulletin Board. Accordingly,
events or circumstances having an adverse effect on either or both of
Commodore or Applied, including fluctuations in their respective market
prices, could have a material adverse effect on the market prices of the
Securities.
Bentley J. Blum, a director of the Company, beneficially owned, directly
and through entities controlled by him, approximately 51.8% of the
outstanding common stock of Commodore as of December 31, 1996. Paul E.
Hannesson, a director of the Company, beneficially owned approximately 11.6%
of the outstanding Commodore common stock as of such date. Accordingly,
through his indirect beneficial ownership of a controlling stock interest in
Applied, Mr. Blum will be able to control the voting of Applied's shares at
all meetings of stockholders of the Company and, because the Common Stock
does not have cumulative voting rights, will be able to determine the outcome
of the election of all of the Company's directors and determine corporate and
stockholder action on other matters. Messrs. Blum and Hannesson are also
directors of both Commodore and Applied. See "-- Potential Conflicts of
Interest," "Management," "Principal Stockholders" and "Certain Relationships
and Related Transactions."
In the event the Over-allotment Option is exercised, the Company intends
to enter into a two-year revolving credit agreement with Commodore. Pursuant
to such agreement, the Company may lend the net proceeds, if any, from the
exercise of the Over-allotment Option (estimated to be up to approximately
$3,250,000) to Commodore for its working capital needs. To the extent of such
borrowings, cash resources will be diverted from use in the Company's
business, and possibly at times when the Company's liquidity and access to
funding may be limited. There can be no assurance that Commodore will
promptly repay any outstanding amounts under the revolving credit agreement
or not otherwise default under such agreement. In the event of any such
default, the collateral held by the Company under the agreement may not be
sufficient to adequately compensate the Company for any loans made
thereunder. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions -- Loan
Agreement with Commodore."
RISK OF PRODUCT LIABILITY
The Company proposes initially to license CST equipment and, upon
completion of its proposed Atlanta facility, to manufacture all or a
substantial portion of that equipment. The equipment will be utilized in a
variety of industrial and other settings, and will be used to handle
materials resulting from pressurized and chemical processes. Accordingly, the
equipment will be subject to risks of breakdowns and malfunctions, and there
exists the possibility of claims for personal injury and business losses
arising out of such breakdowns and malfunctions. There can be no assurance
that the Company's product liability insurance will provide coverage against
all claims, and claims may be made against the Company (even if covered by
the Company's insurance policy) for amounts substantially in excess of
applicable policy limits. Any such event could have a material adverse effect
on the Company's business, financial condition and results of operations.
NO DIVIDENDS ON COMMON STOCK
The Company has never paid any dividends on its Common Stock, and has no
plans to pay dividends on its Common Stock in the foreseeable future.
Furthermore, pursuant to the terms governing the Convertible Pre-
17
<PAGE>
ferred Stock, the Company's Board of Directors may not declare dividends
payable to holders of Common Stock unless and until all accrued cash
dividends through the most recent past annual dividend payment date have been
paid in full to holders of the Convertible Preferred Stock. See "Dividend
Policy."
POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF SECURITIES FROM FUTURE SALES OF
COMMON STOCK
Future sales of Common Stock by Applied or other stockholders (including
option holders) under Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"), or through outstanding registration rights granted to the
holders of the Representative's Warrants, could have an adverse effect on the
market prices of the Securities. The Company and Applied, as well as all
holders of outstanding securities exercisable for or convertible into Common
Stock, have agreed not to, directly or indirectly, issue, agree or offer to
sell, sell, transfer, assign, distribute, grant an option for purchase or
sale of, pledge, hypothecate or otherwise encumber or dispose of any
beneficial interest in such securities for a period of 13 months following
the date of this Prospectus without the prior written consent of the
Representative. Sales of substantial amounts of Common Stock or the
perception that such sales could occur could adversely affect prevailing
market prices for the Convertible Preferred Stock, the Common Stock and/or
the Warrants. All of the shares of Convertible Preferred Stock, shares of
Common Stock and Warrants, and all shares of Common Stock issuable upon
conversion or exercise of such Securities, will have been registered under
the Securities Act and may be immediately converted into or exercised for up
to 6,250,000 additional shares of Common Stock, all of which are immediately
salable. Such sales may further adversely affect the market price of the
Common Stock. See "Shares Eligible For Future Sale."
NO ASSURANCE OF PUBLIC TRADING MARKET; ARBITRARY DETERMINATION OF PUBLIC
OFFERING PRICES
Prior to this Offering, there has been no public market for the
Convertible Preferred Stock, the Common Stock or the Warrants, and there can
be no assurance that an active trading market for any of the Securities will
develop or, if developed, be sustained after the Offering. The initial public
offering prices of the Securities offered hereby and the terms of the
Convertible Preferred Stock and Warrants have been arbitrarily determined by
negotiations between the Company and the Representative, and do not
necessarily bear any relationship to the Company's assets, book value,
results of operations or any other generally accepted criteria of value. See
"Underwriting."
POSSIBLE VOLATILITY OF MARKET PRICES
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performances of
specific companies. Announcements of new technologies and changing policies
and regulations of the federal government and state governments and other
external factors, as well as potential fluctuations in the Company's
financial results, may have a significant impact on the prices of the
Securities.
CERTAIN ANTI-TAKEOVER PROVISIONS AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
OF SECURITIES FROM ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation and By-Laws contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their Convertible Preferred Stock, Common Stock and/or Warrants in
such transactions. The Certificate of Incorporation authorizes the Board of
Directors to issue one or more series of preferred stock without stockholder
approval. Such preferred stock could have voting and conversion rights that
adversely affect the voting power of the holders of Convertible Preferred
Stock and/or Common Stock, or could result in one or more classes of
outstanding securities that would have dividend, liquidation or other rights
superior to those of the Convertible Preferred Stock and/or Common Stock.
Issuance of such preferred stock may have an adverse effect on the then
prevailing market price of the Convertible Preferred Stock, Common Stock
and/or Warrants. Additionally, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an inter-
18
<PAGE>
ested stockholder, unless the business combination is approved in a
prescribed manner. Section 203 could have the effect of delaying or
preventing a change of control of the Company. See "Description of Securities
- -- Preferred Stock" and "-- Section 203 of the Delaware Law."
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation includes provisions to
eliminate, to the full extent permitted by the DGCL as in effect from time to
time, the personal liability of directors of the Company for monetary damages
arising from a breach of their fiduciary duties as directors. The Certificate
of Incorporation also includes provisions to the effect that (subject to
certain exceptions) the Company shall, to the maximum extent permitted from
time to time under the law of the State of Delaware, indemnify, and upon
request shall advance expenses to, any director or officer to the extent that
such indemnification and advancement of expenses is permitted under such law,
as it may from time to time be in effect. In addition, the Company's By-Laws
(the "By-Laws") require the Company to indemnify, to the full extent
permitted by law, any director, officer, employee or agent of the Company for
acts which such person reasonably believes are not in violation of the
Company's corporate purposes as set forth in the Certificate of
Incorporation. As a result of such provisions in the Certificate of
Incorporation and the By-Laws, stockholders may be unable to recover damages
against the directors and officers of the Company for actions taken by them
which constitute negligence, gross negligence or a violation of their
fiduciary duties, which may reduce the likelihood of stockholders instituting
derivative litigation against directors and officers and may discourage or
deter stockholders from suing directors, officers, employees and agents of
the Company for breaches of their duty of care, even though such action, if
successful, might otherwise benefit the Company and its stockholders. See
"Executive Compensation -- Limitation of Directors' and Officers' Liability
and Indemnification."
POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK SENIOR TO THE CONVERTIBLE
PREFERRED STOCK
In addition to the Convertible Preferred Stock, the Company will have
approximately 3,125,000 shares of Preferred Stock authorized after the
designation of Convertible Preferred Stock which may be issued with dividend,
liquidation, voting and redemption rights senior to the Convertible Preferred
Stock; provided, however, that any such issuance of senior preferred stock
must be approved by the holders of a majority of the outstanding shares of
Convertible Preferred Stock. See "Description of Securities -- Convertible
Preferred Stock."
SPECULATIVE NATURE OF THE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but merely
represent the right to acquire shares of Common Stock at a fixed price for a
limited period of time. Specifically, commencing one year after the date of
this Prospectus, holders of the Warrants may exercise their right to acquire
Common Stock and pay an exercise price of $8.40 per share, subject to
adjustment upon the occurrence of certain events, until five years after the
date of this Prospectus, after which date any unexercised Warrants will
expire and have no further value. Moreover, following the completion of this
Offering, the market value of the Warrants is uncertain and there can be no
assurance that the market value of the Warrants will equal or exceed their
initial public offering price. There can be no assurance that the market
price of the Common Stock will ever equal or exceed the exercise price of the
Warrants, and consequently, whether it will ever be profitable for holders of
the Warrants to exercise the Warrants.
Commencing 18 months after the date of this Prospectus, the Warrants are
subject to redemption at $.10 per Warrant on 30 days' prior written notice
provided that the average closing sale price of the Common Stock equals or
exceeds $18.00 per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. If the Warrants are redeemed, holders of the
Warrants will lose their right to exercise the Warrants after the expiration
of the 30-day notice period. Upon receipt of a notice of redemption, holders
will be required to: (i) exercise the Warrants and pay the exercise price at
a time when it may be disadvantageous for them to do so, (ii) sell the
Warrants at the then-prevailing market price, if any, when they might
otherwise wish to hold the Warrants, or (iii) accept the redemption price
which is likely to be substantially less than the market value of the
Warrants at the time of redemption. In the event that holders of the Warrants
elect not to exercise their Warrants upon notice of redemption, the unexer-
19
<PAGE>
cised Warrants will be redeemed prior to exercise, and the holders thereof
will lose the benefit of the appreciated market price of the Warrants, if
any, and/or the difference between the market price of the underlying Common
Stock as of such date and the exercise price of such Warrants, as well as any
possible future price appreciation in the Common Stock. See "Description of
Securities -- Warrants."
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF PREFERRED STOCK
Commencing March , 2000 and extending through March , 2001, the
Convertible Preferred Stock may be redeemed by the Company in whole but not
in part, provided certain market conditions are met or alternatively, after
March , 2001 may be redeemed by the Company in whole or in part at any time
at specified premiums in excess of the initial public offering price of the
Convertible Preferred Stock. The Company may choose to redeem the Convertible
Preferred Stock rather than incur the cost of keeping a registration
statement current with the Securities and Exchange Commission (the
"Commission") for the shares of Common Stock underlying the Convertible
Preferred Stock. Redemption or automatic conversion of the Convertible
Preferred Stock could force the holders to convert the Convertible Preferred
Stock at a time when it may be disadvantageous for the holders to do so, to
sell the Convertible Preferred Stock at the then current market price when
they might otherwise wish to hold the Convertible Preferred Stock for
possible additional appreciation and receipt of dividends, or to accept the
redemption price, which is likely to be substantially less than the market
value of the Convertible Preferred Stock at the time of redemption.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified
or deemed to be exempt under the securities or "blue sky" laws of the state
of residence of the exercising holder of the Warrants. There can be no
assurance that the Company will be able to have all of the shares of Common
Stock issuable upon exercise of the Warrants registered or qualified on or
before the exercise date and will be able to maintain a current prospectus
relating thereto until the expiration of the Warrants. The value of the
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Warrants is not kept effective or if
such Common Stock is not qualified or exempt from qualification in the states
in which the holders of the Warrants reside. The Warrants will be separately
tradeable immediately after this Offering. In the event investors purchase
the Warrants in the secondary market or move to a jurisdiction in which the
shares underlying the Warrants are not registered or qualified during the
period that the Warrants are exercisable, the Company will be unable to issue
shares to those persons desiring to exercise their Warrants unless and until
the shares are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Warrants will have no choice but to attempt to sell the
Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised. See "Description of Securities -- Warrants."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public offering price of $10.10 per Preferred
Unit, consisting of one share of Convertible Preferred Stock at $10.00 per
share and one Warrant at $.10 per Warrant, and $6.10 per Common Unit,
consisting of one share of Common Stock at $6.00 per share and one Warrant at
$.10 per Warrant), after deduction of underwriting discounts and other
estimated offering expenses, are estimated to be approximately $21,093,500
(approximately $24,337,550 if the Over-allotment Option is exercised in
full). The Company intends to utilize such net proceeds as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Dollar Amount Net Proceeds
--------------- ---------------
<S> <C> <C>
Technology and development costs (1) ............. $ 3,000,000 14.2%
Acquisition of manufacturing equipment (2) ....... 2,500,000 11.9
Atlanta facility (3) ............................. 2,000,000 9.5
Potential acquisitions (4) ....................... 1,250,000 5.9
CST module systems (5) ........................... 1,200,000 5.7
Funding of proposed collaborative arrangements (6) 1,000,000 4.7
Working capital and general corporate purposes (7) 10,143,500 48.1
--------------- ---------------
Total ......................................... $21,093,500 100.0%
=============== ===============
</TABLE>
- ------
(1) Includes the hiring of additional personnel (including marketing
personnel) and the costs associated with conducting ongoing tests,
demonstrations and enhancements of CST. See "Business -- Research and
Development."
(2) Consists of costs anticipated to be incurred in connection with
purchasing the equipment or licensing technology necessary to manufacture
the modules and produce the proprietary chemicals used in CST. See
"Business -- Proposed Manufacturing Operations."
(3) Consists of costs anticipated to be incurred in connection with equipping
a new facility of approximately 20,000 square feet near Atlanta, Georgia,
which the Company has leased and began occupying in March 1997 and which
will comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Business -- Proposed
Manufacturing Operations" and "-- Properties."
(4) Represents funds which the Company intends to utilize to finance the
possible acquisitions of, or investments in, complementary (including
competitive) businesses, products or technologies. The Company currently
has no commitments or agreements with respect to any such acquisitions or
investments. See "Risk Factors -- Unspecified Acquisition-Related Risks."
(5) Consists of costs anticipated to be incurred in connection with
purchasing CST components for use in connection with initial
demonstrations and/or installations of CST at customer sites.
(6) Expenditures in respect of collaborative arrangements will include
salaries and benefits of personnel, equipment design and procurement
costs, costs of leasing or otherwise obtaining additional operating
facilities, analytical and other testing costs, professional fees,
insurance and other administrative expenses. In each arrangement,
personnel expenses may be expected to account for at least 50% of the
costs of each collaborative arrangement, and equipment costs are likely
to constitute the next largest component of expenditures. As of the date
of this Prospectus, the Company has not determined the amount of net
proceeds of this Offering to be applied to any one particular proposed
collaborative arrangement because the Company is currently in
negotiations with a number of companies involving, among other issues,
the level of its proposed funding commitment. The estimated allocation of
the net proceeds for funding of proposed collaborative arrangements is on
an aggregate basis. In addition, in the event a definitive agreement is
not entered into by the Company and Teledyne Brown or Sverdrup,
respectively, on or before August 31, 1997, such memorandum of
understanding may be terminated by either company upon written notice.
See "Risk Factors -- No Assurance of Collaborative Agreements or Project
Awards" and "Business -- Collaborative Working Arrangements."
21
<PAGE>
(7) Working capital and general corporate purposes include amounts required
to pay officers' salaries, professional fees, ongoing public reporting
costs, ongoing license fees and royalties, office-related expenses and
other corporate expenses, including interest and overhead. In the event
the Over-allotment Option is exercised, the Company intends to enter into
a two-year revolving credit agreement with Commodore. Pursuant to such
agreement, the Company may lend the net proceeds, if any, from the
exercise of the Over-allotment Option (estimated to be up to
approximately $3,250,000) to Commodore for its working capital needs. In
the event that the Company does not consummate the revolving credit
agreement, such funds will be utilized by the Company for working capital
and general corporate purposes. See "Risk Factors -- Control by Principal
Stockholder; Loan to Commodore," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions -- Loan
Agreement with Commodore."
The Company believes that the net proceeds of this Offering will be
sufficient to meet its cash, operational and liquidity requirements for a
minimum of 24 months after the date of this Prospectus. While the initial
allocation of the net proceeds of this Offering represents the Company's best
estimates of their use, the amounts actually expended for these purposes may
vary significantly from the specific allocation of the net proceeds set forth
above, depending on numerous factors, including changes in the general
economic and/or regulatory climate, and the progress and market acceptance of
the Company's technology. See "Risk Factors -- Broad Discretion in
Application of Proceeds." However, there can be no assurance that the net
proceeds of the Offering will satisfy the Company's requirements for any
particular period of time. The Company anticipates that, after 24 months from
the receipt of the net proceeds of this Offering, additional funding may be
needed. No assurance can be given that such additional financing will be
available on terms acceptable to the Company, if at all. See "Risk Factors --
Potential Need for Additional Financing." Pending specific allocation of the
net proceeds of this Offering, the net proceeds will be invested in
short-term, investment grade, interest-bearing obligations.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
December 31, 1996 and (b) at December 31, 1996, as adjusted giving effect to
the sale by the Company of the Securities offered hereby (at an assumed
initial public offering price of $10.10 per Preferred Unit, consisting of one
share of Convertible Preferred Stock at $10.00 per share and one Warrant at
$.10 per Warrant, and $6.10 per Common Unit, consisting of one share of
Common Stock at $6.00 per share and one Warrant at $.10 per Warrant) and the
initial application of the estimated net proceeds therefrom. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
Securities." This table should be read in conjunction with the Company's
Financial Statements and the notes thereto which are included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------
Actual As Adjusted
----------- -------------
<S> <C> <C>
Short-term debt of sole stockholder ............................ $ 273,600 $ 273,600
=========== =============
Stockholders' equity:
Preferred Stock, $.001 per value; authorized 5,000,000
shares; no shares issued and outstanding; 1,500,000
shares issued and outstanding, as adjusted .............. $ -- $ 1,500
Common Stock, $.001 par value; authorized 50,000,000
shares; 10,000,000 shares issued and outstanding;
11,500,000 shares issued and outstanding, as adjusted ... 10,000 11,500
Additional paid-in capital ................................ 981,200 22,071,700
Accumulated deficit ....................................... (914,740) (914,740)
----------- -------------
Total stockholders' equity ..................................... $ 76,460 $21,169,960
----------- -------------
Total capitalization ....................................... $ 76,460 $21,169,960
=========== =============
</TABLE>
23
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends, and does not intend
to pay any dividends in the foreseeable future on its shares of Common Stock.
Pursuant to the terms governing the Convertible Preferred Stock, the
Company's Board of Directors may not declare dividends payable to holders of
Common Stock unless and until all accrued cash dividends through the most
recent past annual payment date have been paid in full to holders of the
Convertible Preferred Stock. Earnings of the Company, if any, not paid as
dividends to holders of the Convertible Preferred Stock are expected to be
retained for use in expanding the Company's business. The payment of
dividends on the Common Stock is within the discretion of the Board of
Directors of the Company and will depend upon the Company's earnings, if any,
capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time. The
Company's future earnings, if any, will not initially be adequate for the
payment of dividends on the Convertible Preferred Stock, in which event such
dividends will be paid out of the Company's then capital surplus (the
Company's net assets minus the aggregate par or stated value of the
outstanding shares of the Company's capital stock), if any. On an as adjusted
basis, after giving effect to this Offering, the Company's capital surplus as
of December 31, 1996 was $22,071,700. The payment of dividends and any future
operating losses will reduce such capital surplus, which may adversely affect
the Company's ability to continue to pay dividends on the Convertible
Preferred Stock. The failure to pay quarterly dividends will result in a
reduction of the conversion price on the Convertible Preferred Stock and may
give rise to voting rights to the holders of such Convertible Preferred
Stock. See "Risk Factors -- Inadequate Dividend Coverage" and "Description of
Securities -- Convertible Preferred Stock."
24
<PAGE>
DILUTION
At December 31, 1996, the Company's negative net tangible book value was
$(164,160), or $(.02) per share of Common Stock. The net tangible book value
of the Company is the tangible assets less total liabilities. After giving
effect to the sale by the Company of the Securities offered hereby (assuming
an initial public offering price of $10.10 per Preferred Unit, consisting of
one share of Convertible Preferred Stock at $10.00 per share and one Warrant
at $.10 per Warrant, and $6.10 per Common Unit, consisting of one share of
Common Stock at $6.00 per share and one Warrant at $.10 per Warrant) and the
initial application of the estimated net proceeds therefrom, the pro forma
net tangible book value of the Company as of December 31, 1996 would have
been approximately $21,148,804, or $1.84 per share. This represents an
increase in net tangible book value per share of $1.86 to the Company's
existing stockholders and an immediate dilution of $4.16 per share (or 69.3%)
to new stockholders purchasing Common Stock and Convertible Preferred Stock
in this Offering. The following table illustrates this dilution on a per
share basis:
<TABLE>
<CAPTION>
Assumed initial public offering price per share ......... $6.00
<S> <C> <C> <C>
Negative net tangible book value per share before
the Offering ..................................... $(.02)
Increase per share attributable to payments by new
stockholders ..................................... $1.86
--------
Pro forma net tangible book value per share after the
Offering .............................................. $1.84
-------
Dilution per share to new stockholders .................. $4.16
=======
</TABLE>
In the event the Over-allotment Option is exercised in full, the net
tangible book value at December 31, 1996 would have been approximately
$24,392,854 and the dilution of net tangible book value per share to new
stockholders would have been approximately $3.92.
The following table sets forth the number of shares of Common Stock
purchased from the Company by its existing stockholder, the number of shares
of Common Stock to be purchased by investors in this Offering at an assumed
initial public offering price of $6.00 per share and the total consideration
paid and to be paid to the Company, and the average price paid per share.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration per Share
------------------------- ---------------------------- ---------------
Number Percent Amount Percent
------------ --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
New investors ...... 1,500,000 13.0% $9,000,000 90.1% $ 6.00
Existing stockholder 10,000,000 87.0% 991,200(1) 9.9% $ .10
------------ --------- --------------- --------- ---------------
Total ........... 11,500,000 100.0% $9,991,200(2) 100.0%
============ ========= =============== =========
</TABLE>
- ------
(1) Includes a total Capital Contribution by Commodore of $976,200 of Company
notes, representing advances made by Commodore to the Company from its
inception through November 26, 1996, which notes were purchased by
Applied as of December 2, 1996. See "Certain Relationships and Related
Transactions -- Organization and Capitalization of the Company" and Note
1 of Notes to Financial Statements. For these purposes, no value is
attributed to the shares of common stock of Commodore issued by Commodore
to enable the Company to acquire certain intellectual property rights
relating to CST from Srinivas Kilambi, Ph.D., the Company's Vice
President - Technology. See "Business -- Intellectual Property."
(2) Does not include $15,000,000 paid by new investors for 1,500,000 shares
of Convertible Preferred Stock and $300,000 paid for 3,000,000 Warrants.
25
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data included in the following table as of June 30,
1996 and for the period from November 15, 1995 (date of inception) to June
30, 1996 are derived from the audited Financial Statements appearing
elsewhere herein. The selected financial data as of December 31, 1996, for
the six months then ended and for the period from November 15, 1995 (date of
inception) to December 31, 1996 are unaudited and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data. Financial data
for the periods through December 31, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
June 30, 1997. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
November 15, 1995 Six Months November 15, 1995
(date of Ended (date of inception)
inception) December 31, to December 31,
Statement of Operations Data:(1) to June 30, 1996 1996 1996
----------------- ---------------- -------------------
<S> <C> <C> <C>
Revenue ............................ $ 0 $ 7,758 $ 7,758
----------------- ---------------- -------------------
Costs and expenses:
Research and development ......... 50,080 412,340 462,420
General and administrative ....... 9,720 443,423 453,143
Amortization. .................... 101 1,199 1,300
----------------- ---------------- -------------------
Loss before interest and taxes ..... (59,901) (849,204) (909,105)
Interest expense ................... 1,035 4,600 5,635
----------------- ---------------- -------------------
Net loss ........................... $(60,936) $(853,804) $(914,740)
================= ================ ===================
Net loss per share(2) .............. (.01) (.08) (.09)
Ratio of earnings to preferred stock
dividends ........................ -- (3) -- (3) -- (3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
--------------- -----------------------------
As
Balance Sheet Data: Actual Adjusted(4)
------------ -------------
<S> <C> <C> <C>
Working capital (deficit) .................. $(81,630) $(134,677) $20,958,823
Total assets ............................... 23,327 530,644 21,624,144
Total current liabilities .................. 84,163 454,184 454,184
Deficit accumulated during development stage (60,936) (914,740) (914,740)
Stockholders' equity (deficit) ............. (60,836) 76,460 21,169,960
</TABLE>
- ------
(1) The Company is in the development stage, and has had no commercial
operations to date. See Note 1 of Notes to Financial Statements.
(2) Net loss per share is calculated on the basis of 10,000,000 shares of
Common Stock being outstanding for the period presented. See Note 1 of
Notes to Financial Statements.
(3) The Company's operating results are not sufficient to cover the
Convertible Preferred Stock cash dividends. See "Risk Factors --
Inadequate Dividend Coverage" and "Dividend Policy."
(4) Gives effect on an as adjusted basis to the sale by the Company of the
Units offered hereby at an assumed initial public offering price of
$10.10 per Preferred Unit, consisting of one share of Convertible
Preferred Stock at $10.00 per share and one Warrant at $.10 per Warrant,
and $6.10 per Common Unit, consisting of one share of Common Stock at
$6.00 per share and one Warrant at $.10 per Warrant, and the initial
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in November 1995 and has had no commercial
operations to date. Since its inception, the Company has been engaged
principally in organizational activities, including developing a strategic
operating plan, entering into contracts, hiring personnel, developing test
modules and installing and operating modules on a limited basis for
demonstration or test purposes. Accordingly, the Company has no relevant
operating history upon which an evaluation of its performance and prospects
can be made. The Company is subject to all of the business risks associated
with a new enterprise, including, but not limited to, risks of unforeseen
capital requirements, failure of market acceptance, failure to establish
business relationships, and competitive disadvantages as against larger and
more established companies. The report of the independent auditors with
respect to the Company's financial statements included in this Prospectus
includes a "going concern" qualification, indicating that the Company's
significant losses and deficits in working capital and stockholders' equity
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company has generated nominal revenues to date, and will not generate
any material revenues until after the Company successfully completes the
installation of modules in a significant number of industrial companies, of
which no assurance can be given. During the period from November 15, 1995
(date of inception) to June 30, 1996, the Company incurred a net loss of
$(60,936). From July 1, 1996 to December 31, 1996, the Company incurred
additional operating losses of $(853,804), and anticipates that it may
continue to incur significant operating losses for the foreseeable future.
There can be no assurance as to whether or when the Company will generate
material revenues or achieve profitable operations. See "Business" and
Financial Statements.
DEPENDENCE ON SUPPLIERS
The Company has not to date conducted any manufacturing operations, but
has relied on unaffiliated suppliers to provide fibers, membrane casings and
other materials and components utilized in CST. The Company has not
previously experienced any delays or difficulties in obtaining any of these
items, although there can be no assurance that such difficulties may not be
encountered in the future. The Company has allocated a portion of the net
proceeds of this Offering to the establishment of a facility in Atlanta, part
of which will be dedicated to operations related to the manufacturing of
chemicals, fibers, membrance casings and other materials and components
utilized in CST. See "Risk Factors -- Dependence on Strategic Components" and
"Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
The Company has to date financed its development efforts through direct
equity investments and loans from Commodore and Applied. From November 15,
1995 (date of inception) to December 31, 1996, the Company has purchased or
constructed equipment totalling $201,109 and has incurred patent filing and
maintenance costs of $22,456. As of December 31, 1996, the Company's
aggregate indebtedness to Applied was $273,600. Effective December 1, 1996,
Commodore sold 100% of the Company's capital stock and the capital stock of
another subsidiary to Applied and assigned the Company's $976,200 of notes to
Applied in consideration of $3,000,000 and, subject to any applicable
stockholder approval and notification requirements, shall issue a seven-year
warrant to purchase 7,500,000 shares of Applied common stock at $15.00 per
share. Applied has agreed to contribute the entire amount of such $976,200
Company indebtedness to the Company's equity prior to completion of this
Offering. See "Certain Relationships and Related Transactions."
The Company has sustained losses of $(853,804) and $(60,936) for the six
month period ended December 31, 1996 and for the period from November 15,
1995 (date of inception) to June 30, 1996, respectively. The Company had no
revenues during the period from November 15, 1995 (date of inception) to June
30, 1996 and had revenues of $7,758 for the six-month period ended December
31, 1996 as a result of billings from the Port of Baltimore field test of the
CST process. Substantially all of the Company's losses are attributable to
the expenses detailed above. At December 31, 1996 and June 30, 1996, the
Company had working capital deficits
27
<PAGE>
of $(134,677) and $(81,630), respectively, and stockholders' equity and
deficit of $76,460 and $(60,836), respectively. The Company has received
significant advances in working capital from Commodore and Applied which has
allowed it to continue its operations. There can be no assurance that it will
continue to receive such financial assistance.
The Company believes that the net proceeds of the Offering will be
sufficient to meet its cash, operational and liquidity requirements for a
minimum of 24 months after the date of this Prospectus.
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. It is anticipated that
approximately $2,000,000 of the net proceeds of this Offering will be
required with respect to leasing such facility and related leasehold
improvements. Additionally, it is anticipated that approximately $2,500,000
of the net proceeds of this Offering will be required to purchase the
equipment necessary to manufacture the modules and produce the proprietary
chemicals used in CST. Prior to the Company's facility becoming operational
for manufacturing, the Company anticipates spending approximately $1,200,000
of the net proceeds of this Offering to purchase CST components for use in
connection with initial demonstrations and/or installations of CST at
customer sites. The Company is continuing to further the development of CST
through additional testing, demonstrations and enhancements which will
require the hiring of additional personnel and additional research and
development costs. See "Use of Proceeds" and "Business -- Proposed
Manufacturing Operations" and "-- Properties."
The Company has also allocated $1,250,000 of the net proceeds of this
Offering to finance possible acquisitions of, or investments in,
complementary (including competitive) businesses, products or technologies.
The Company currently has no commitments or agreements with respect to any
such acquisitions or investments. See "Risk Factors -- Unspecified
Acquisition-Related Risks."
The Company has allocated $1,000,000 of the net proceeds of this Offering
for the funding of proposed collaborative arrangements. These costs include,
but are not limited to, salaries and benefits of personnel, equipment design
and procurement costs, cost of leasing or otherwise obtaining additional
operating facilities, analytical and other testing costs, professional fees,
insurance and other administrative expenses. As of the date of this
Prospectus, the Company has not determined the amount of net proceeds of this
Offering to be applied to any one particular proposed collaborative
arrangement because the Company is currently in negotiations with a number of
companies involving, among other issues, the level of its proposed funding
commitment. The estimated allocation of the net proceeds for funding of
proposed collaborative arrangements is on an aggregate basis. In addition, in
the event a definitive agreement is not entered into by the Company and
Teledyne Brown or Sverdrup, respectively, on or before August 31, 1997, such
memorandum of understanding may be terminated by either company upon written
notice. See "Risk Factors -- No Assurance of Collaborative Agreements or
Project Awards," "Use of Proceeds" and "Business -- Collaborative Working
Arrangements."
In the event the Over-allotment Option is exercised, the Company intends
to enter into a two-year revolving credit agreement with Commodore. Pursuant
to such agreement, the Company may lend the net proceeds, if any, from the
exercise of the Over-allotment Option (estimated to be up to approximately
$3,250,000) to Commodore for its working capital needs. Borrowings under the
agreement will be secured by Commodore's pledge of 2,000,000 shares of
Applied common stock held by it and will bear interest at the rate of 10% per
annum, with interest payable quarterly on outstanding amounts. The principal
balance outstanding will be due on the second anniversary of the date of such
agreement. The Company's obligation to lend such funds to Commodore is
subject to a number of conditions, including review by the Company of the
proposed use of such funds by Commodore. See "Risk Factors -- Control by
Principal Stockholder; Loan to Commodore," "Use of Proceeds" and "Certain
Relationships and Related Transactions -- Loan Agreement with Commodore."
Pursuant to an assignment of technology agreement between the Company and
Srinivas Kilambi, Ph.D., the Company's Vice President-Technology, the Company
agreed to pay Dr. Kilambi a royalty through December 3, 2002 equal to 2% of
the Company's revenues actually received and attributed to the commercial
application of the technology acquired from Dr. Kilambi, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes). Pursuant to the license agreement with Lockheed
28
<PAGE>
Martin, the Company made an initial cash payment of $50,000 upon the
execution of the agreement and is obligated to pay, commencing in the third
year of the agreement, a royalty to Lockheed Martin of 2% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes) up to total net sales of $4,000,000 and 1% of net sales thereafter. In
addition, the Company has agreed to guarantee Lockheed Martin, commencing in
the third year of the agreement, an annual minimum royalty of $15,000. See
"Business -- Commercialization and Marketing Strategy -- Radionuclide/Mixed
Waste Separation." Payment of such royalties to Dr. Kilambi and Lockheed
Martin is based on Company revenues and is not related to or contingent upon
the Company attaining profitability or positive cash flow. As a result, such
payments will adversely affect operating results and divert cash resources
from use in the Company's business, and possibly at times when the Company's
liquidity and access to funding may be limited. See "Business -- Intellectual
Property" and "Certain Relationships and Related Transactions -- Organization
and Capitalization of the Company."
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement No. 121, "Accounting for Long Lived
Assets" and No. 123, "Accounting and Disclosure of Stock-Based Compensation."
Statement No. 121 is effective for years beginning after December 15, 1995.
The effect of adoption of Statement No. 121 will not have a material effect
on the Company's financial statements. Statement No 123 is effective for
years beginning after December 15, 1995. The effect of adoption of Statement
No. 123 is not expected to have a material effect on the Company's financial
statements as the Company has adopted only the disclosure requirements of
Statement No. 123.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1996, the Company had net operating loss carryforwards
of approximately $914,000, which expire in the year 2011. The amount of net
operating loss carryforward that can be used in any one year will be limited
by the applicable tax laws which are in effect at the time such carryforward
can be utilized. A valuation allowance of $311,000 has been established to
offset any benefit from the net operating loss carryforward as it cannot be
determined when or if the Company will be able to utilize the net operating
losses.
29
<PAGE>
BUSINESS
GENERAL
The Company has developed and intends to commercialize its membrane
separation and recovery system called CST. Based on the results of more than
100 laboratory and other tests to date, the Company believes that CST can
separate and recover chrome, chromium, cadmium, silver, mercury, platinum,
lead, zinc, nickel, trichlorethylene, polychlorinated biphenyls, methylene
chloride, amino acids, antibiotics, radionuclides, and other organic and
inorganic targeted substances from liquid or gaseous feedstreams. CST
utilizes a process whereby a contaminated liquid or gaseous feedstream is
introduced into a fibrous membrane unit or module containing a proprietary
chemical solution, the composition of which is customized depending on the
types and concentrations of compounds in the feedstream. As the feedstream
enters the membrane, the targeted substance reacts with CST's proprietary
chemical solution and is extracted through the membrane into a strip solution
where it is then stored. The remaining feedstream is either recycled or
discharged as non-toxic effluent. In some instances, additional treatment may
be required prior to disposal.
CST is distinguishable from other existing forms of membrane filtration
technology in that it:
o requires low initial capital costs and low operating costs;
o has the capability of treating a wide variety of elements and compounds
in a wide variety of industrial settings at great speed and with a high
degree of effectiveness, regardless of contaminant concentrations,
volume requirements and other variables;
o is environmentally safe, in most instances producing no sludges or
other harmful by-products which would require additional post-treatment
prior to disposal;
o can selectively extract target substances, while extracting
substantially fewer unwanted substances;
o can typically operate on-site and in less than 40 square feet of space
for the entire system;
o can extract metals, organic chemicals and other elements and compounds
in degrees of concentration and purity which permit their reuse; and
o has the capability, in a single process application, of selectively
extracting multiple elements or compounds from a mixed process stream.
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of chromium-contaminated groundwater at the Port of
Baltimore, Maryland. During this demonstration, a CST unit, in a single
feedstream pass-through, reduced the contamination level of chromium from
more than 400 parts per million (ppm) to less than one ppm. The results of
this test were verified by Artesian Laboratories, Inc., an independent
testing laboratory. The Company has since completed additional on-site
demonstrations of CST at the Port of Baltimore with similar results. Due to
the success of such demonstrations, in February 1997 the State of Maryland
informed the Company that it will recommend including the CST process as an
eligible technology in the bid specifications to remediate the groundwater at
the Port of Baltimore. Based on management studies and discussions with
metals industry executives, the Company believes that CST represents a
significant technological advancement in the area of environmental
remediation as the only technology capable of on-site chromium removal and
recovery that enables effluent discharge without additional treatment.
In September 1996, the Company installed a commercial scale CST unit at a
Columbus, Ohio metal plating company. DLZ Laboratories, Inc., an independent
testing laboratory, verified that the CST unit processed the initial batch of
process effluent stream and reduced nickel and zinc contamination from 900
ppm to 2 ppm in one hour. The Company has continued to operate this CST unit
to process nickel and zinc effluent streams containing concentrations of 200
to 400 ppm, and the unit has consistently reduced the contaminant levels to 1
to 5 ppm. The decontaminated process effluent stream is being recycled into
the plating line rinse tanks, saving the plating company its normal
consumption of make-up water at a rate of five gallons per minute. The
recovered nickel and zinc solution is currently being analyzed by the plating
company for reuse in its plating operations.
In January 1997, the Company entered into a license agreement with
Lockheed Martin, manager of Oak Ridge. Under the terms of the agreement, the
Company received the exclusive worldwide license, subject to a government use
license, to use and develop the technology related to the separation of the
radionuclides technetium and rhenium from mixed wastes containing radioactive
materials. Based on tests conducted at Oak Ridge
30
<PAGE>
since May 1994, the Company believes that this technology is capable of
selectively extracting and recovering technetium, rhenium and other
radioactive isotopes as a concentrated aqueous solution which can be reused
in various scientific applications or disposed of by government-approved
techniques including long-term storage. The Company believes that this
technology can be used to remediate nuclear waste tanks stored at the U.S.
Department of Energy's atomic energy plants in Rocky Flats, Colorado, Idaho
Falls, Idaho, Paducah, Kentucky, Weldon Springs, Missouri, Frenchman Flat,
Nevada, Los Alamos, New Mexico, Aiken, South Carolina, Oak Ridge, Tennessee,
Pantex, Texas and Hanford, Washington, and intends to pursue such
opportunities. According to Department of Energy sources, there are
approximately 100 million gallons of mixed radioactive and hazardous chemical
waste stored at these plants.
The Company will market its technology to industries engaged in
metallurgical processing, metal plating and mining, as well as companies
producing organic chemicals and biochemicals and those engaged in gas
separation. The Company is also targeting governmental agencies that have
sites which require remediation, and has already completed an on-site
demonstration at the Port of Baltimore.
The Company intends to pursue collaborative joint working and marketing
arrangements with, or acquisitions of or investments in, companies that have
a presence in target markets and those that focus on obtaining environmental
remediation projects, including clean-up of harbors, groundwater and nuclear
waste sites. Although the Company has entered into memorandums of
understanding for proposed working arrangements with Teledyne Brown and
Sverdrup, and is bidding on certain projects, there can be no assurance that
any of these activities will result in definitive collaborative agreements or
project awards. Even if project contracts are awarded to the Company, CST has
never been utilized on a large-scale basis, and there is no assurance that
this technology will perform successfully on a large-scale commercial basis,
or that it will be profitable to the Company. There can also be no assurance
that this technology will not be superseded by other competing technologies.
MARKET OVERVIEW
Based on market data compiled by the Company, the Company estimates that,
as of August 1, 1996, there were approximately 7,500 companies operating
metal plating and metal finishing facilities in the United States, and an
additional 1,500 such facilities in Canada. Based on estimated sales by these
facilities, the Company believes that on average each of these facilities
could utilize four to ten CST membrane units. The Company estimates that, as
of such date, there were approximately 50 companies in the United States
involved in industrial gas separation, and based on these companies'
estimated sales, the Company believes that on average each of these companies
could utilize two to four membrane units operating at significant volumes.
Further, as of August 1, 1996, based on market data compiled by the Company,
the potential market from organic chemical companies is in excess of 10,000
companies in the United States. Based on these companies' estimated sales,
the Company believes that on average each of these companies could utilize
two to four membrane units operating at significant volumes. Additionally, as
of such date, there were more than 5,000 biochemical, bulk drug manufacturing
and pharmaceutical companies operating in the United States and Canada, and
based on these companies' estimated sales, the Company believes that on
average the typical such company could utilize two to four membrane units
operating at substantial volumes. The Company believes that the potential
international market for each of the above applications could be twice the
size of the North American market. Federal, state and local government
entities are also a potential market for the Company, particularly in the
area of environmental remediation and clean-up.
As with any new technology or process, or a significant advancement of an
existing technology or process, there may be initial resistance to the use of
CST on a large scale, and certain prospective projects for the Company may
have already been committed to other forms of technology. In each case, the
Company expects to introduce its process on a test basis through the
introduction of sample membrane units to demonstrate the efficacy of the
technology, with the aim of full installation and/or project awards based on
the performance of the sample units.
ALTERNATIVE SEPARATION TECHNOLOGIES
Membrane separation and extraction technologies have been utilized
commercially for several decades. Prior to the development of CST, membrane
separation and extraction capabilities were broken into four subranges,
consisting of microfiltration, ultrafiltration, nanofiltration and reverse
osmosis (hyperfiltration), each distinguished and defined by the relative
particle size which the particular process was capable of separating from
31
<PAGE>
the feedstream, and by whether the compounds were suspended or dissolved in
the feedstream. Existing technologies currently in use for the treatment of
solubilized feedstreams (in which the containment is dissolved, rather than
suspended, in the feedstream) include: (i) ion exchange (wherein electrically
charged ions that are electrochemically held by ion exchange resin beads are
exchanged for ions of similar charge in a solution in which the beads are
immersed), (ii) reverse osmosis (wherein solutions are desalted or
concentrated by driving them through membranes using relatively high
hydraulic pressure, resulting in contaminants being excluded or rejected by
the membranes), (iii) precipitation (wherein chemicals are used to
precipitate out the contaminants for eventual off-site disposal), (iv)
ultrafiltration (wherein moderate hydraulic pressure is used to transfer
water and low molecular weight species through a membrane while blocking
relatively large-sized contaminants such as suspended solids, colloids and
large organic molecules) and (v) chromatography (wherein mixtures are
separated into their constituents by preferential adsorption on solids).
CST
Although CST uses the same basic principles as other membrane separation
technologies, the Company believes that CST represents a significant advance
in membrane separation technology in the treatment of solubilized
feedstreams. In contrast to the five alternative separation technologies
described above, CST acts by separating and extracting the targeted
material(s) from the feedstream, rather than extracting the feedstream from
the targeted material(s). As a result, for the first time, a single process
is capable of treating a wide variety of elements and compounds in a wide
variety of industrial settings, and doing so at great speed and with a high
degree of effectiveness regardless of particle size, volume requirements and
other variables. The Company also believes that CST is the first membrane
separation technology which is capable, in a single process application, of
selectively extracting multiple elements or compounds from a mixed process
stream. The CST membrane modules can also be configured in various sizes and
numbers and for varying capacities, and operate on the manufacturing site at
ambient temperatures and pressures.
CST involves injecting a contaminated liquid or gaseous feedstream into
the Company-designed fibrous membrane unit or module. This module is
continuously fed with a recycled stream of proprietary chemical solution
whose composition will vary depending on the types of compounds in the
feedstream. As the feedstream enters the membrane unit, the metal or other
substance to be extracted reacts with the proprietary chemical solution in
the fibrous membrane, and the metallic or other ions are extracted through
the membrane into a strip solution which is concentrated and gathered in a
separate storage container. The balance of the feedstream is either recycled
or simply discharged as normal effluent. In some instances, additional
treatment may be required prior to disposal, or disposal may need to be made
in a regulated manner. The Company believes that CST can be utilized for the
separation and recovery of chrome, chromium, cadmium, silver, mercury,
platinum, lead, zinc, nickel, trichlorethylene, polychlorinated biphenyls,
methylene chloride, amino acids, antibiotics, radionuclides, and other
organic and inorganic substances.
The typical CST module is cylindrical in shape and can be situated on a
surface or in an area the size of a desktop. The module casing is constructed
of either steel or plastic (depending on the required durability for the
particular process application), and contains the microporous fiber membrane
through which the target element or compound is separated from the
contaminated feedstream. At one end of the module, there is attached a set of
pumps and tubing that feeds the contaminated feedstock from its point of
origin (such as a metal plating tank or bath) into the module. Additional
pumps and tubing are attached to feed and recycle the chemical solution which
is the active element in the membrane, and discharge tubing or piping is
attached at the other end of the module, to carry away the separated
concentrated metal solution or other compound, and the wastewater and other
non-reusable by-product. The Company plans to produce a range of modules that
will precisely conform to the customer's requirements for volume and
capacity, and thus accommodate the available space in the customer's
facility. The Company also formulates the active chemical compound for the
process in each customer application, and performs the initial installation
of the equipment at the customer site. The customer will operate the
equipment and, by computer hook-up, the Company will monitor the equipment
and process while in operation.
32
<PAGE>
LABORATORY AND OTHER TEST RESULTS
In more than 100 laboratory and other tests to date, CST has demonstrated
the ability to successfully separate a variety of metals and other substances
from liquid and gaseous process streams. In each instance, the process stream
was reduced to levels approaching federal guidelines under the Federal Clean
Water Act for the disposal of the reacted process stream as normal wastewater
effluent, and the recovered materials were of sufficient quantity and purity
as to economically permit the reuse thereof in most commercial applications.
Test results included the following:
<TABLE>
<CAPTION>
Applicable
Material Before Treatment After Treatment Federal Guideline
------------------ -------------------- ---------------------------------------- ---------------------
<S> <C> <C> <C>
Metals:
Zinc 1,000 ppm Less than 2 ppm (after 30 minutes) Less than 2 ppm
Nickel 3,200 ppm Less than 1.6 ppm (after 30 minutes) Less than 2 ppm
Chromium 430 ppm 0.49 ppm (field test) 5 ppm
Aluminum 195 ppm 100 ppm (after 15 minutes) 30 ppm
Silver 177 ppm 1 ppm Less than 2 ppm
Organics:
Phenol 10,000 ppm Less than 10 ppm Less than 30 ppm
Nitrophenol 10,000 ppm Less than 10 ppm Less than 30 ppm
Biochemicals:
Phenylalanine 5,000 ppm Less than 10 ppm Less than 30 ppm
Radionuclides:
Cesium 10 ppm Less than 5 parts per billion (ppb) Less than 10 ppb
Rhenium 5 ppm Less than 5 ppb Less than 10 ppb
Anions:
Nitrates 62,000 ppm Less than 100 ppm Less than 10 ppm
</TABLE>
All of these tests were performed on limited quantities of process
streams, and there can be no assurance that the same or similar results would
or could be obtained on a large-scale commercial basis or on any specific
project. Other than with respect to the Company's tests involving the
separation and recovery of zinc, nickel and chromium, no other tests
conducted by the Company have been independently verified. See "Risk Factors
- -- Unproven on Large-Scale Commercial Basis."
33
<PAGE>
COMPETITIVE AND OPERATIONAL ASPECTS OF CST
The following chart highlights certain of the salient differences which
the Company believes, based on the limited quantities of process streams
tested, distinguish CST from other membrane separation technologies. As shown
below, the Company believes that CST has substantially broader applications
than most of the other technologies, and is generally capable of superior
results in less time. Other than with respect to the Company's tests
involving the separation and recovery of zinc, nickel and chromium, no other
independent tests have been conducted by the Company to verify the accuracy
of the specifications shown below.
<TABLE>
<CAPTION>
CST PROCESS ION EXCHANGE
----------------------------------------------- -----------------------
<S> <C> <C>
Process Description Reaction-diffusion membrane transport Ionic exchange
- --------------------------------------------------------------------------------------------------------
Process Temperatures Ambient-80|SDC Ambient-80|SDC
- --------------------------------------------------------------------------------------------------------
Process Pressure 15-20 pounds per square inch (psi) 20-30 psi
- --------------------------------------------------------------------------------------------------------
Target Compounds Metals, Organics, Volatile organic Metals, Anions
compounds, Gases, Biochemicals,
Radionuclides, Anions
- --------------------------------------------------------------------------------------------------------
Target Metals Electroplating, Metal Finishing, Petroleum, Electroplating,
Petrochemical, Paper, Organics, Food Metal Finishing
Process, Biotechnology, Textile
- --------------------------------------------------------------------------------------------------------
Reaction Time Instantaneous 1-2 seconds
- --------------------------------------------------------------------------------------------------------
Process Selectivity Greater than 1,000:1 Less than 70:1
(Desired: Undesired)
- --------------------------------------------------------------------------------------------------------
Product Recovery Greater than 99.9% Greater than 99.9%
- --------------------------------------------------------------------------------------------------------
Loading Limitations None Operates only at
low feed velocities
- --------------------------------------------------------------------------------------------------------
Process Speed Very high Low to medium
- --------------------------------------------------------------------------------------------------------
Post-Treatment Required No Yes
- --------------------------------------------------------------------------------------------------------
Comments; Limitations Readily integrated into other processes; Readily integrated
may need prefiltration to remove suspened into other processes
or heavier particles
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
REVERSE
OSMOSIS/
ULTRA-
PRECIPITATION CHROMATOGRAPHY FILTRATION
- ------------------------- ----------------------- ------------------------------------
<S> <C> <C>
Precipitation as metal Adsorption High pressure transport of
hydroxides water across a membrane
- ------------------------------------------------------------------------------------------
Ambient Ambient Ambient-80|SDC
- ------------------------------------------------------------------------------------------
15-25 psi 25 psi 100-1,000 psi
- ------------------------------------------------------------------------------------------
Heavy Metals Biochemicals Water
- ------------------------------------------------------------------------------------------
Electrochemicals, Biotechnology Electroplating, Metal Finishing,
Metal Finishing Petroleum, Petrochemical,
Paper, Organics, Food Process,
Biotechnology, Textile
- ------------------------------------------------------------------------------------------
2-10 seconds Several minutes Not applicable
- ------------------------------------------------------------------------------------------
0:1 2-5:1 0:1
- ------------------------------------------------------------------------------------------
None Greater than 90% Greater than 90%
- ------------------------------------------------------------------------------------------
None Operates only at Cannot produce large throughput
very low flow rates without clogging
- ------------------------------------------------------------------------------------------
High Very low Medium
- ------------------------------------------------------------------------------------------
Yes Yes Yes
- ------------------------------------------------------------------------------------------
Non-selective; most Limited to low feed Energy intensive; non-selective;
labor intensive; no concentration; non- needs prefiltration;
product recovery selective; slow relatively expensive
process
</TABLE>
35
<PAGE>
COMMERCIALIZATION AND MARKETING STRATEGY
During the initial commercialization phase, the Company expects to lease
the CST modules to customers, with the lease payments being due and payable
after installation and successful start-up of the equipment. When replacement
modules are required, the Company expects to supply these modules at a
reasonable mark-up over their cost. As new patents are filed and issued, the
Company may, for certain applications, determine to make a direct sale of the
equipment with additional long-term royalty payment provisions. The Company
also expects to obtain revenues through servicing the CST equipment,
including periodic replacement of the membrane component. In addition to
leasing and selling its equipment, the Company intends to charge its
customers based on a percentage of the customer's actual cost savings derived
from reduced disposal costs and recovered reusable materials. In applications
in which reusable materials are not recovered, the Company's ongoing charges
may be based on the volume of materials processed. Although the Company plans
to focus its initial marketing efforts on domestic businesses, the Company
will also be prepared to pursue international opportunities, which may arise
from successful presentations to multinational corporations or from overseas
referrals by domestic entities.
In specific industries and for specific applications, the Company intends
to emphasize and exploit the following attributes of CST.
Metals Separation and Recovery
The Company's initial marketing efforts will be in the industrial sector,
in which the separation and recovery of metal-bearing liquid solutions
present a substantial market. Primary among the potential customers in this
area are metal plating and metal finishing operations, which generate
substantial volumes of mixed metals process streams for which no previous
technology was available to effect proper separation.
In September 1996, the Company installed a commercial scale CST unit
on-line at Plating Technology Inc., a Columbus, Ohio metal plating company
("PTI"). The unit is currently operating on a continuous mode and, based on
operating data results to date, is successfully separating and recovering
nickel and zinc effluent streams with concentrations varying from 100 to
1,000 ppm. DLZ Laboratories, Inc., an independent testing laboratory,
verified that the CST unit processed the initial batch of process effluent
stream and reduced nickel and zinc contamination from 900 ppm to 2 ppm in one
hour. The Company's own data indicate that, in ongoing use on effluent
streams containing nickel and zinc concentrations of 200 to 400 ppm, this CST
unit has consistently reduced the level of contaminants to 1 to 5 ppm. The
decontaminated process effluent stream is being recycled into PTI's plating
line rinse tanks, saving PTI its normal consumption of make-up water at a
rate of five gallons per minute. The recovered nickel and zinc solution is
currently being analyzed by PTI for reuse in its plating operations.
Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technology in
this area is precipitation, which generates a metallic sludge by-product
requiring further treatment prior to landfill disposal. By contrast, CST does
not generate harmful metallic sludges, and instead enables close to 100%
process water recycling, while also enabling recovery of valuable raw
materials. As costs of environmental compliance continue to mount, the
Company expects CST to become a preferred alternative to existing metals
separation methods.
Gas Separation
The CST equipment and technology can also be utilized to separate and
recover valuable gases (such as nitrogen) from mixed gaseous and liquid
compounds. For example, nitrogen is used for a wide variety of process
applications, including oil recovery, food processing, metal heat treatment,
and pharmaceutical testing and development.
Nitrogen is typically obtained by separating it from oxygen, using
processes such as cryogenic distillation, adsorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has drawbacks, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas.
The CST process overcomes these drawbacks by yielding relatively pure
nitrogen in a low-energy, low capital cost process conducted at ambient
temperature and pressure. The Company has prepared a proposal for a prototype
unit for the production of high-purity nitrogen for use in food processing,
but has not otherwise developed a strategy or targeted a market for
commercialization of the gas separation application.
36
<PAGE>
Organics Separation and Recovery
As of August 1, 1996, based on market data compiled by the Company, there
were more than 10,000 organic chemical industry companies operating in the
United States. These companies generate significant volumes of waste process
streams, including mixed organic/non-organic streams. CST has been
demonstrated to have significant capabilities in the separation and recovery
of a variety of contaminants, including phenol and nitrophenol (a phenolic
derivative), and the Company believes that such capabilities, although
untested, extend to other organic chemicals such as volatile organic
compounds, petrochemicals, other phenolic derivatives, olefin alkanes and
acid gases.
Currently, the primary technology utilized in this area is activated
carbon treatment. Like the other slow biological treatment processes utilized
in this area, the by-products are often more toxic than the original
compound. The Company intends to demonstrate to chemical manufacturers that
CST is effective in dealing with the wide variety of contaminants generated
by these businesses, and that use of CST will substantially reduce the
environmental risks and costs associated with traditional separation methods.
Biochemicals Separation and Recovery
CST has also been demonstrated to have significant capabilities in the
separation and recovery of biochemicals, including phenylalanine (an amino
acid), and the Company believes that such capabilities, although untested,
extend to other biochemicals such as proteins, other amino acids,
antibiotics, glycerides, fatty acids, drug delivery vehicles and other
pharmaceuticals. Mixed wastes containing these materials are generated in
both research and development functions and in manufacturing functions. These
materials have substantial value, and the Company intends to emphasize both
the value of the recovered materials and the enhanced and speedier
environmental compliance attributes of CST.
Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat
significant volumes of material, and is substantially less selective in the
types of materials that can be separated from the liquid feedstream.
Environmental Remediation and Restoration
The Company believes that CST has significant potential for application to
environmental remediation and restoration. The Company is currently involved
in pilot projects for the decontamination of water in the Port of Baltimore,
and for clean-up of trichlorethylene-contaminated groundwater on Cape Cod,
Massachusetts. In the case of a project such as the Port of Baltimore
project, it is expected that the remediating technology will be applied
continuously over a period of many years, until the subject contamination (in
the case of Baltimore, chromium leaching from underlying soil into the
aquifer) has been demonstrated to have been abated for a significant period
of time.
In contrast to other remediation technologies, the Company believes that
CST has the attributes of low initial capital costs, low operating costs and
the ability to recover heavy metals, organic chemicals and varied volatile
organic compounds for reuse.
In August 1996, the Company completed an on-site demonstration of CST for
the decontamination of water in the Port of Baltimore. During seven hours of
operation, a single CST unit, in a single pass-through of feedstream,
processed 90 gallons of water containing more than 400 ppm of chromium, and
reduced the contamination level to 0.49 ppm. This reduced level of
contamination was below the federal guideline (5 ppm) for the unregulated
discharge of water. The results of this test were verified by Artesian
Laboratories, Inc., an independent testing laboratory. The Company has since
completed additional on-site demonstrations of CST at the Port of Baltimore
with similar results. Due to the success of such demonstrations, in February
1997 the State of Maryland informed the Company that it will recommend
including the CST process as an eligible technology in the bid specifications
to remediate the groundwater at the Port of Baltimore. The Company believes
that compliance with the federal guideline can be achieved either by
refinement of chemical formulation or process procedure, by dilution of the
processed water with a small amount of uncontaminated water, or by passing
the processed water through a larger or supplemental CST unit. The Company
believes that the same process is capable of achieving comparable results in
the same time period on substantially greater volumes of contaminated water,
either by increasing the flow of feedstream into the membrane, by configuring
and utilizing a larger module, or by installing and operating additional
modules. As indicated above, this demonstration was performed on limited
quantities of process streams, and there can be no assurance that the same or
similar results would or could be obtained on a larger scale.
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To speed its entry in this market, the Company intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and
credibility. Although the Company has entered into memorandums of
understanding with several such companies, the Company has not to date
entered into any definitive agreements or received any firm contract awards.
See "-- Collaborative Working Arrangements."
Radionuclide/Mixed Waste Separation
In the United States, there are numerous sites operated or maintained by
the Department of Energy ("DOE") and/or the Department of Defense at which
there are present "mixed wastes" containing radionuclides intermingled with
other hazardous wastes. These sites are also contaminated with other
compounds associated with nuclear weapons, testing and energy. CST has been
demonstrated to have significant capabilities in the separation of
radionuclides such as cesium, technetium and rhenium, and the Company
believes that such capabilities, although untested, extend to most of the
other compounds found at such sites. The United States government estimates
that potential government expenditures in this market could be between $234
billion and $389 billion over the course of the next 75 years.
This element of the market is a significant subcategory of the general
environmental remediation that can be undertaken with CST. In addition to low
initial capital costs and low operational costs, CST has the advantage of
cost-effectively separating both dissolved mixed waste and radionuclides, and
allowing separate handling and disposal of both hazardous waste types. The
Company anticipates pursuing this market area in collaboration with
established engineering and environmental service organizations, who can
provide technical and professional expertise, market presence and
credibility. Neither the Company nor any of its collaborative partners have
been awarded any contracts to use CST, and there can be no assurance as to
whether or when any such contracts may be obtained.
In January 1997, the Company entered into a license agreement with
Lockheed Martin, manager of Oak Ridge (the "Lockheed License Agreement").
Under the terms of the Lockheed License Agreement, the Company received the
exclusive worldwide license, subject to a government use license, to use and
develop the technology related to the separation of the radionuclides
technetium and rhenium from mixed wastes containing radioactive materials.
The Company also received under the Lockheed License Agreement the right to
exploit the technology for other commercial applications. Pursuant to the
Lockheed License Agreement, the Company made an initial cash payment of
$50,000 upon the execution of the agreement and is obligated to pay,
commencing in the third year of the Lockheed License Agreement, a royalty to
Lockheed Martin of 2% of net sales (less allowances for returns, discounts,
commissions, freight, and excise or other taxes) up to total net sales of
$4,000,000 and 1% of net sales thereafter. In addition, the Company has
agreed to guarantee Lockheed Martin, during the term of the Lockheed License
Agreement, an annual minimum royalty of $15,000 commencing in the third year
of the Lockheed License Agreement. The Lockheed License Agreement, which may
be terminated at any time solely by the Company, has a term which will last
until the end of the life of all patents or patentable claims described in or
ultimately arising out of the provisional patent recently filed jointly by
the Company and three of Dr. Kilambi's colleagues who worked with him at Oak
Ridge, covering their inventions related to radionuclides. See "--
Intellectual Property" below.
Based on tests conducted at Oak Ridge since May 1994, the Company believes
that this technology is capable of selectively extracting and recovering
technetium, rhenium and other radioactive isotopes as a concentrated aqueous
solution which can be reused in various scientific applications or disposed
of by government-approved techniques including long-term storage. The
Company believes that this technology can be used to remediate nuclear waste
tanks stored at the DOE's atomic energy plants in Rocky Flats, Colorado,
Idaho Falls, Idaho, Paducah, Kentucky, Weldon Springs, Missouri, Frenchman
Flat, Nevada, Los Alamos, New Mexico, Aiken, South Carolina, Oak Ridge,
Tennessee, Pantex, Texas and Hanford, Washington, and intends to pursue such
opportunities. According to DOE sources, there are approximately 100 million
gallons of mixed radioactive and hazardous chemical waste stored at these
plants.
The DOE has reported that better methods of separating radionuclides could
lead to reduced volumes of high-level waste and lower ongoing costs.
Radionuclides in high-level wastes are a small fraction (.001% or less)
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of DOE's waste volume. Each disposal canister for high-level waste is
expected to cost approximately $1,000,000 to build and maintain. The Company
believes that concentrating the radionuclides in these wastes could reduce
the number of canisters needed by at least tenfold, and save significant sums
in ongoing costs. The Company currently does not have, nor can there be any
assurance that it will be awarded, any contract with the DOE to use its
separation technology at DOE plants.
PROPOSED MANUFACTURING OPERATIONS
The Company currently has a limited number of outside sources of supply
for some strategic components used in CST, including chemicals, fibers and
membrane casings. Business disruptions or financial difficulties of such
suppliers, or raw material shortages or other causes beyond the Company's
control, could adversely affect the Company by increasing their cost of goods
sold or reducing the availability of such components. The use of outside
suppliers also entails risks of quality control and disclosure of proprietary
information.
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. It is anticipated that
approximately $2,000,000 of the net proceeds of this Offering will be
required with respect to leasing such facility and related leasehold
improvements. Additionally, it is anticipated that approximately $2,500,000
of the net proceeds of this Offering will be required to purchase the
equipment necessary to manufacture the modules and produce the proprietary
chemicals used in CST. Prior to the Company's facility becoming operational
for manufacturing, the Company anticipates spending approximately $1,200,000
of the net proceeds of this Offering to purchase CST components for use in
connection with initial demonstrations and/or installations of CST at
customer sites. Once the plant is fully operational, the Company expects to
benefit from greater quality control, increased assurance of product
availability, and greater protection of proprietary information and
technology. See "Risk Factors -- Dependence on Strategic Components" and from
suppliers; Limited Manufacturing Operations "-- Unpredictability of Patent
Protection and Proprietary Technology" and "Use of Proceeds."
COLLABORATIVE WORKING ARRANGEMENTS
As of the date of this Prospectus, the Company has entered into
memorandums of understanding with Teledyne Brown and Sverdrup for various
uses and applications of CST, principally in connection with large-scale
clean-ups of governmental facilities.
Pursuant to separate memorandums of understanding with each of Teledyne
Brown and Sverdrup, the Company and each of Teledyne Brown and Sverdrup,
respectively, have agreed to negotiate, on a non-exclusive basis, the
formation of one or more mutually agreeable business arrangements concerning
the marketing, application and commercialization of CST. In addition to
conducting due diligence with respect to each company's technology in
accordance with the confidentiality provisions contained in the memorandums
of understanding, the Company and each of Teledyne Brown and Sverdrup,
respectively, are currently negotiating the scope, covered applications and
geographical territory encompassed by the proposed joint marketing and
commercialization activities. It is expected that the Company's relationship
with Teledyne Brown will focus on Department of Energy sites such as Hanford,
Washington and Mound, Ohio, and that the Company's initial opportunities with
Sverdrup will focus on Department of Defense sites such as Cape Cod,
Massachusetts. In the event a definitive agreement is not entered into by the
Company and Teledyne Brown or Sverdrup, respectively, on or before August 31,
1997, such memorandum of understanding may be terminated by either company
upon written notice and, except for the survival of the confidentiality
provisions, without any further liability to the other company. As of the
date of the Prospectus, the Company has not determined the amount of net
proceeds of this Offering to be applied to these or any other particular
proposed collaborative working arrangement. See "Use of Proceeds." Although
the Company believes that it will enter into definitive joint working
agreements with Teledyne Brown, Sverdrup and other potential collaborative
partners, there can be no assurance that these memorandums of understanding
or other future discussions will result in any definitive joint ventures or
related agreements, or, even if such agreements are executed, that the
Company and its prospective collaborators will be awarded any projects that
will ultimately result in revenues and earnings for the Company.
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<PAGE>
CFC SERVICES AGREEMENT
Effective upon completion of this Offering, the Company will enter into a
services agreement (the "Services Agreement") with Commodore CFC
Technologies, Inc., a wholly-owned subsidiary of Applied ("CFC
Technologies"), which has developed and patented a process which, based on
test applications of limited quantities of chlorofluorocarbons ("CFCs"), may
be able to separate mixtures of refrigerants so that they can be returned to
productive use at purity levels meeting industry standards. Pursuant to the
Services Agreement, the Company will provide advice, assistance and guidance,
and, where necessary, personnel to implement the same, in connection with,
among others, administrative, financial and related matters, product design,
development and promotion, and marketing, sales and related operations to CFC
Technologies in connection with its business and operations in exchange for
which the Company will be paid an annual fee equal to 75% of the net income
of CFC Technologies, if any, and reimbursement of expenses incurred in
furnishing such services. The Services Agreement may be terminated by either
party at any time upon not less than 90 days' prior notice.
GOVERNMENT REGULATION
The Company and its customers are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health
and environmental controls including, without limitation, RCRA and OSHA,
which may require the Company, its prospective working partners or its
customers to obtain permits or approvals to utilize CST and related equipment
on certain job sites. In addition, if the Company begins to market CST
internationally, the Company will be required to comply with laws and
regulations and, when applicable, obtain permits or approvals in those other
countries. There is no assurance that such required permits and approvals
will be obtained. Furthermore, particularly in the environmental remediation
market, the Company may be required to conduct performance and operating
studies to assure government agencies that CST and its by-products do not
pose environmental risks. There is no assurance that such studies, if
successful, will not be more costly or time-consuming than anticipated.
Further, if new environmental legislation or regulations are enacted or
existing legislation or regulations are amended, or are interpreted or
enforced differently, the Company, its prospective working partners and/or
its customers may be required to meet stricter standards of operation and/or
obtain additional operating permits or approvals.
ENVIRONMENTAL MATTERS
The Company's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although the Company's role is generally limited to the
leasing of its specialized technical equipment for use by its customers,
there is always the risk of the mishandling of such materials or
technological or equipment failures, which could result in significant claims
against the Company. Any such claims against the Company could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company maintains environmental liability insurance with limits of
$1,000,000 per occurrence and $1,000,000 in the aggregate. The Company may be
required to obtain environmental liability insurance in greater amounts in
the future as CST is commercialized. There can be no assurance that such
insurance will provide coverage against all claims, and claims may be made
against the Company (even if covered by the Company's insurance policy) for
amounts substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY
The basic principles underlying the CST technology were developed by
Srinivas Kilambi, Ph.D., the Company's Vice President - Technology. Effective
February 29, 1996, pursuant to an assignment of technology agreement between
the Company and Dr. Kilambi, the Company acquired rights to the CST
technology from Dr. Kilambi, together with associated patent rights,
confidential know-how and other property rights created or obtained by Dr.
Kilambi, whether then existing or thereafter created, relating to the
construction, design, development and exploitation of the processes,
equipment and technology related to CST and any other product or development
resulting from the acquired patent rights.
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In consideration for his assignment of the CST technology, the Company
transferred to Dr. Kilambi 200,000 shares of common stock of Commodore, which
had been contributed to the Company by Commodore to effect the transaction,
and the Company agreed to pay Dr. Kilambi a royalty through December 3, 2002
equal to 2% of its revenues actually received and attributed to the
commercial application of the acquired technology, except for applications
related to the radionuclides technetium and rhenium, for which Dr. Kilambi is
entitled to receive a royalty of .66% of net sales (less allowances for
returns, discounts, commissions, freight and excise or other taxes). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions -- Organization and Capitalization of the Company."
The Company has filed one United States utility patent application and two
United States provisional patent applications covering the principal features
of its CST technology. One provisional patent application covers the joint
inventions of Dr. Kilambi and Lockheed Martin, and a corresponding utility
patent application containing the specific patent claims is expected to be
filed in the near future. The Company may also pursue foreign patent
protection where it deems appropriate.
The Company's liquid membrane technology patent applications are based on
the selective combination of different known solvents, supports, diluents,
carriers and other components to separate a variety of metals, chemicals and
other targeted substances. While the Company believes that its technology
covers all separation applications, third parties may have developed, or may
subsequently assert claims to, certain of these solvents, supports, diluents,
carriers or other components for one or more specific applications. In such
event, the Company may need to acquire licenses to, or to contest the
validity of, issued or pending patents or claims of third parties.
To protect its trade secrets and the unpatented proprietary information in
its development activities, the Company requires its employees, consultants
and contractors to enter into agreements providing for the confidentiality
and the Company's ownership of such trade secrets and other unpatented
proprietary information originated by such persons while in the employ of the
Company. The Company also requires potential collaborative partners to enter
into confidentiality and non-disclosure agreements.
There can be no assurance that any patents which may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure
agreements, will provide meaningful protection of the Company's confidential
or proprietary information in the case of unauthorized use or disclosure. In
addition, there can be no assurance that the Company will not incur
significant costs and expenses, including the costs of any future litigation,
to defend its rights in respect of any such intellectual property.
COMPETITION
The most common alternative methods for metals separation from solubilized
process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration and chromatography. The Company believes that
most of these methods have certain drawbacks, including lack of selectivity
in the separation process, inability to handle certain metals in the process
streams, and the creation of sludges and other harmful by-products which
require further post-treatment prior to disposal. For example, reverse
osmosis and ultrafiltration are incapable of separating chrome and chromium
materials from wastewater streams, and precipitation results in the
production of sludge which requires dewatering, drying and disposal in a
landfill. Certain of these other technologies also entail long process times,
and are relatively expensive.
By contrast, CST is capable of handling a broad range of compounds in a
faster and relatively inexpensive manner. Furthermore, the by-products of the
CST process consist primarily of wastewater, which can be discharged as
normal wastewater effluent, and to a substantially lesser extent and in only
rare circumstances, materials requiring landfill disposal.
Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies
having substantially greater financial and other resources than the Company.
Although the Company believes that CST has substantial advantages over all
other known separation technologies, any one or more of the Company's
competitors, or other enterprises not presently known, may develop
technologies which are superior to CST. To the extent the Company's
competitors are able to offer comparable
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services at lower prices or of higher quality, or more cost-effective
alternatives, the Company's ability to compete effectively could be
materially adversely affected. The Company believes that its ability to
compete in both the commercial and governmental sectors is dependent upon CST
being a superior, more cost-effective method to achieve separation and/or
recovery of a variety of materials in varying amounts and configurations. In
the event that the Company is unable to demonstrate that CST is a technical
and cost-effective alternative to other separation technologies on a
commercial scale, the Company may not be able to successfully compete.
RESEARCH AND DEVELOPMENT
The Company continues to perform research and development activities with
respect to CST, utilizing its internal technical staff as well as independent
consultants. Such activities have to date been entirely Company-sponsored.
Research and development expenditures were $412,340 and $462,420 for the six
month period ended December 31, 1996 and the period from November 15, 1995
(date of inception) to December 31, 1996, respectively.
The Company intends to expand its research and development efforts
following this Offering. In addition to conducting ongoing tests,
demonstrations and enhancements of CST, the Company's efforts are expected to
focus on the optimization of performance and design for module manufacturing,
development of new carriers and diluents, and investigation of additional
process applications. The Company will use a portion of the net proceeds of
this Offering for such ongoing development costs, which will include the
hiring of additional personnel. See "Use of Proceeds."
EMPLOYEES
As of December 31, 1996, the Company had 12 full-time employees, including
five with advanced scientific degrees. The Company believes that it has been
successful in attracting experienced and capable personnel. All of the
Company's employees have entered into agreements with the Company requiring
them not to disclose the Company's proprietary information, assigning to the
Company all rights to inventions made during their employment, and
prohibiting them from competing with the Company. The Company's employees are
not represented by any labor union. The Company believes that relations with
its employees are satisfactory.
PROPERTIES
The Company currently leases approximately 7,000 square feet of space in
Columbus, Ohio from an unaffiliated third party under a lease expiring on
June 30, 1997, which the Company uses as its laboratory and administrative
offices. The Company shares such space with Commodore and certain of its
other subsidiaries. As of July 1, 1996, the Company pays an allocable share
of the rent equal to $750 per month for such space.
The Company's principal executive offices are located in approximately
1,000 square feet of office space in Vienna, Virginia under a lease expiring
in December 1997. The Company pays approximately $5,000 per month for rent
and related office support services. Such office also serves as the principal
executive offices of Applied. The Company also maintains offices located in
approximately 2,000 square feet of office space in New York, New York, which
also serves as the principal executive offices of Commodore, Applied, certain
of their affiliates, and Bentley J. Blum and Paul E. Hannesson, directors of
each of the Company, Commodore and Applied. The Company does not pay any rent
with respect to such offices. An allocable share of such rent would not be
material. See "Certain Relationships and Related Transactions -- Offices."
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Use of Proceeds." Upon
commencement of full occupancy at such facility, the Company, together with
Commodore, may elect to terminate the existing lease in Columbus, Ohio.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
its properties is subject.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The names and ages of the executive officers, key employees and directors
of the Company, and their positions with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------------------------- ----- -------------------------------------
<S> <C> <C>
Edwin L. Harper, Ph.D .... 55 Chairman of the Board
and Chief Executive Officer
Kenneth J. Houle ......... 57 President and Chief Operating Officer
James M. DeAngelis ....... 36 Senior Vice President
Srinivas Kilambi, Ph.D. .. 32 Vice President -- Technology
Michael D. Kiehnau, P.E. . 35 Vice President -- Operations
Andrew P. Oddi ........... 35 Vice President -- Finance
Bentley J. Blum .......... 55 Director
Paul E. Hannesson ........ 56 Director
Kenneth L. Adelman, Ph.D. 49 Director(1)
David L. Mitchell ........ 74 Director(1)
William R. Toller ........ 66 Director(1)
</TABLE>
- ------
(1) Positions will be assumed upon completion of this Offering.
Edwin L. Harper, Ph.D. was appointed Chairman of the Board and Chief
Executive Officer of the Company effective January 1, 1997, and also served
as President of the Company for an interim period from January 1, 1997
through January 27, 1997. Dr. Harper has been the President and Chief
Operating Officer of both Commodore and Applied since November 18, 1996. Dr.
Harper had been the President and Chief Executive Officer of the Association
of American Railroads, a trade association for the major railroads in North
America, since January 1992. Prior to such appointment, Dr. Harper was the
Co-Chief Executive Officer of Campbell Soup Company from November 1989 to
January 1990, and its Executive Vice President and Chief Financial Officer
from 1986 to 1991. Dr. Harper has held several other senior executive officer
positions in the past, with Dallas Corporation (1983 to 1986), Emerson
Electric Company (1978 to 1981) and CertainTeed Corporation (1975 to 1978),
and served in the White House as Assistant to the President, Deputy Director
of the Office of Management and Budget and Chairman of the President's
Council on Integrity and Efficiency in Government from 1981 to 1983. Dr.
Harper holds a Ph.D. degree from the University of Virginia. Dr. Harper has
agreed to devote a majority of his business and professional time to the
Company.
Kenneth J. Houle was appointed President and Chief Operating Officer of
the Company effective January 27, 1997. Mr. Houle previously served as the
President of The Hall Chemical Company, a manufacturer of inorganic metal
catalysts and compounds, from April 1995 to September 1996. Prior to such
time, Mr. Houle had served as Vice President and Business Director of the
Personal Care Business Unit of International Specialty Products, Inc., a
producer of specialty chemicals, from April 1992 to March 1995, and the
President and Chief Executive Officer of Ruetgers - Nease Chemical Company, a
manufacturer of organic chemical intermediates and surfactants, from February
1990 to January 1991. Mr. Houle was an independent consultant in the chemical
industry from October 1996 to January 1997. Mr. Houle is a graduate of Siena
College, with a Bachelor's degree in Chemistry, and the Accounting and
Financial Management Program at Columbia University. Mr. Houle also
participated in the Masters degree program in Organic Chemistry at Iowa State
University. He is a board member of the Chemist's Club (New York, New York)
and a member of the American Chemical Society, American Institute of Chemical
Engineers and Societe de Chemie Industrielle (American section). Mr. Houle is
also a trustee and board member of the Ohio Center of Science and Industry.
James M. DeAngelis was appointed Senior Vice President of the Company
effective September 1, 1996. He served prior to such time as Vice President
- -- Marketing of Commodore and President of CFC Technologies since January
1993. Prior to January 1993, Mr. DeAngelis was completing M.B.A. and Masters
in International Management degrees from the American Graduate School of
International Management. Mr. DeAngelis holds B.S. degrees in Biology and
Physiology from the University of Connecticut.
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Srinivas Kilambi, Ph.D. has served as Vice President -- Technology of the
Company since February 1996, and was a part-time consultant to the Company
from December 1995 to the time he became an officer of the Company. Prior to
joining the Company, Dr. Kilambi was a graduate student at the University of
Tennessee, where he received a Ph.D. in Chemical Engineering in January 1996.
During the course of his graduate studies, Dr. Kilambi also performed
research at Clarkson University, Potsdam, New York (from August 1991 to June
1993) and Oak Ridge National Laboratory, Oak Ridge, Tennessee (from September
1993 to June 1996), and briefly served as an environmental consultant to
Jacobs Engineering Group, Inc. from December 1993 to May 1994. Prior to his
graduate studies in the United States, Dr. Kilambi served as the President
and Managing Director of Chemopol Complex India, Pvt. Ltd., a developer of
chemical and biochemical products, from 1987 to August 1991.
Michael D. Kiehnau, P.E. was appointed Vice President --Operations of the
Company effective January 1, 1997, after having served as its Chief Financial
Officer since September 1996. From 1992 to August 1996, Mr. Kiehnau served as
a manager for Brown & Root, Inc. (an engineering and construction firm), and
from 1983 to 1990, Mr. Kiehnau served in various engineering capacities with
the U.S. Army Corps of Engineers in the United States, Europe and Central
America. From 1990 to 1992, Mr. Kiehnau was a full-time student. Mr. Kiehnau
holds a B.S. degree from the United States Military Academy, an M.A. in
International Relations from Boston University, and an M.B.A. from the
Harvard Graduate School of Business Administration. He is a licensed
professional engineer.
Andrew P. Oddi was appointed Vice President -- Finance of the Company
effective January 1, 1997. Mr. Oddi has been the Vice President -- Finance
and Administration and Chief Financial Officer of Commodore since 1987, and
had been the Vice President of Finance, Chief Financial Officer and Secretary
of Applied from March to November 1996. From 1982 to 1987, he was employed as
an auditor with Ernst & Young, independent accountants. Mr. Oddi is a
certified public accountant.
Bentley J. Blum has been a director of the Company since August 1996. Mr.
Blum has been a director of Commodore since 1984 and a director of Applied
since July 1996. For more than 15 years, Mr. Blum has been a private investor
and currently is the sole stockholder and director of a number of
corporations which hold real estate interests, oil drilling interests and
other corporate interests. Mr. Blum is a director of Lanxide Corporation, a
research and development company developing metal and ceramic materials
("Lanxide"); Federal Resources Corporation, a company formerly engaged in
manufacturing, retail distribution and natural resources development;
Specialty Retail Services, Inc., a former distributor of professional beauty
products; and North Valley Development Corp., an inactive real estate
development company. Mr. Blum is the controlling stockholder of Commodore,
and is the brother-in-law of Paul E. Hannesson, a director of the Company.
Paul E. Hannesson has been a director of the Company since its inception
and served as its Chairman of the Board until January 1, 1997. Mr. Hannesson
has been a director of Commodore since February 1993 and currently serves as
its Chairman, and served as its President and Chief Executive Officer until
July 1996. Mr. Hannesson has also been a director of Applied and its Chief
Executive Officer since March 1996 and currently serves as its Chairman, and
was its President from March to September 1996. Mr. Hannesson was a private
investor and business consultant from 1990 to 1993. He currently serves as
Chairman of the Board of Lanxide, where he also serves on its Compensation
Committee. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a director
of the Company.
Kenneth L. Adelman, Ph.D. has agreed to join the Board of Directors of the
Company upon completion of this Offering. Dr. Adelman has been a member of
the Board of Directors of Applied and Commodore since July 1996. Since 1987,
Dr. Adelman has been an independent consultant on international issues to
various corporations, including Lockheed Martin Marietta Corporation and
Loral Corporation. Previously, Dr. Adelman held positions of responsibility
in arms control during most of the Reagan Administration. From 1983 to the
end of 1987, he was Director of the United States Arms Control and
Disarmament Agency. Dr. Adelman was a Professor at Georgetown University and
a writer for Washingtonian Magazine from 1987 to 1991. Dr. Adelman
accompanied President Reagan on summits with Mikhail Gorbachev, and
negotiated with Soviet diplomats on nuclear and chemical weapons control
issues, from 1985 to 1987. He also headed the United States team on
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<PAGE>
annual arms control discussions with top-level officials of the People's
Republic of China from 1983 through 1986. From 1981 to 1983, he served as
Deputy United States Representative to the United Nations with the rank of
Ambassador Extraordinary and Plenipotentiary. Dr. Adelman holds M.A. and
Ph.D. degrees from Georgetown University.
David L. Mitchell has agreed to join the Board of Directors of the Company
upon completion of this Offering. Mr. Mitchell has been a member of the Board
of Directors of Applied and Commodore since July 1996. For the past 13 years,
Mr. Mitchell has been President and co-founder of Mitchell & Associates,
Inc., a banking firm providing financial advisory services in connection with
corporate mergers, acquisitions and divestitures. Prior to forming Mitchell &
Associates in 1982, Mr. Mitchell was a Managing Director of Shearson/American
Express Inc. from 1979 to 1982, a Managing Director of First Boston
Corporation from 1976 to 1978, and a Managing Director of the investment
banking firm of S.G. Warburg & Company from 1965 to 1976. Mr. Mitchell holds
a bachelor's degree from Yale University.
William E. Toller has agreed to join the Board of Directors of the Company
upon completion of this Offering. Mr. Toller is a director and the former
Chairman and Chief Executive Officer of Witco Corporation, a New York Stock
Exchange-traded manufacturer of quality specialty chemical and petroleum
products ("Witco"). Mr. Toller had been the Chairman and Chief Executive
Officer of Witco since October 1990 and recently retired in July 1996. Mr.
Toller joined Witco in 1984 as an executive officer when it acquired the
Continental Carbon Company of Conoco, Inc., where he had been its President
and an officer since 1955. Mr. Toller is a graduate of the University of
Arkansas with a bachelor's degree in economics, and the Stanford University
Graduate School Executive Program. He serves on the board of directors of the
Chemical Manufacturers Association and is a member of the National Advisory
Board of First Commercial Bank in Arkansas, the American Petroleum Institute
and the American Chemical Society.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee, a Compensation
Committee and a Stock Option Committee. The responsibilities of the Audit
Committee (which, upon completion of this Offering, will consist of Messrs.
Mitchell (Chairman) and Toller) include recommending to the Board of
Directors the firm of independent accountants to be retained by the Company,
reviewing with the Company's independent accountants the scope and results of
their audits, and reviewing with the independent accountants and management
the Company's accounting and reporting principles, policies and practices, as
well as the Company's accounting, financial and operating controls and staff.
The Compensation Committee (which, upon completion of this Offering, will
consist of Messrs. Toller (Chairman), Mitchell and Hannesson) has
responsibility for establishing and reviewing employee compensation. The
Stock Option Committee (which, upon completion of this Offering, will consist
of Messrs. Adelman (Chairman), Mitchell and Blum) has responsibility for
administering and interpreting the Company's 1996 Stock Option Plan (the
"Plan"), and determining the recipients, amounts, and other terms (subject to
the requirements of the Plan) of options which may be granted under the Plan
from time to time.
COMPENSATION OF DIRECTORS
Non-management directors of the Company will receive directors' fees of
$500 per meeting for attendance at Board of Directors meetings, and are
reimbursed for actual expenses incurred in respect of such attendance. The
Company does not intend to separately compensate employees for serving as
directors.
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<PAGE>
EXECUTIVE COMPENSATION
The Company was organized in November 1995. No salaries were paid by the
Company at any time through June 30, 1996, except for approximately $33,000
paid to Dr. Kilambi in the six months ended June 30, 1996 pursuant to his
employment agreement. The Company has entered into employment agreements with
its executive officers, as more fully described below. Except for Dr.
Kilambi, whose employment agreement commenced on February 29, 1996, and Mr.
Houle, whose employment agreement commenced on January 27, 1997, the
employment agreements for the other executive officers commenced on August 1,
1996. To date, the salaries of the Company's executive officers have been
paid from the proceeds of advances made to the Company by Commodore. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
EMPLOYMENT AGREEMENTS
Each of Kenneth J. Houle, James M. DeAngelis, Srinivas Kilambi, Ph.D. and
Michael D. Kiehnau, P.E. has entered into an employment agreement with the
Company for a term expiring on December 31, 1999. Pursuant to these
employment agreements, Messrs. Houle, DeAngelis, Kilambi and Kiehnau have
agreed to devote substantially all of their business and professional time
and efforts to the business of the Company as its President and Chief
Operating Officer, Senior Vice President, Vice President -- Technology, and
Vice President -- Operations, respectively. The employment agreements provide
that Messrs. Houle, DeAngelis, Kilambi and Kiehnau shall receive a fixed base
salary at an annual rate of $180,000, $145,000, $110,000 and $88,000,
respectively, for services rendered in such positions, and each may be
entitled to receive, at the sole discretion of the Board of Directors of the
Company or a committee thereof, bonuses and/or stock options based on the
achievement (in whole or in part) by the Company of its business plan and by
the employee of fixed personal performance objectives. Each of Messrs. Houle,
DeAngelis, Kilambi and Kiehnau are entitled to participate in the Company's
Stock Option Plan and Executive Bonus Plan. See "-- Stock Options" and "--
Executive Bonus Plan" below.
The employment agreements also provide for termination by the Company upon
death or disability (defined as three aggregate months of incapacity during
any 365-consecutive day period) or upon conviction of a felony crime of moral
turpitude or a material breach of their obligations to the Company. In the
event any of the employment agreements are terminated by the Company without
cause, such executive will be entitled to compensation for the balance of the
term. The Company intends to obtain commitments for $1,000,000 key-man life
insurance policies in respect of each of Messrs. Houle, DeAngelis and
Kilambi.
The employment agreements also contain covenants (a) restricting the
executive from engaging in any activities competitive with the business of
the Company during the terms of such employment agreements and one year
thereafter, (b) prohibiting the executive from disclosure of confidential
information regarding the Company at any time, and (c) confirming that all
intellectual property developed by the executive and relating to the business
of the Company constitutes the sole and exclusive property of the Company.
Edwin L. Harper, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer, entered into an employment agreement with Commodore in
October 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Dr. Harper agreed to devote his business and
professional time and efforts to the business of Commodore as its President
and Chief Operating Officer, and to serve in senior executive positions with
one or more of Commodore's subsidiaries, including the Company. The
employment agreement provides that Dr. Harper shall receive a fixed base
salary at an annual rate of $375,000 for services rendered as President and
Chief Operating Officer of Commodore, as well as options to purchase an
aggregate of 2,000,000 shares of Commodore common stock, exercisable in
installments over a period of five years commencing on the date of his
employment agreement, but shall not receive any additional compensation for
services rendered in senior executive positions with any of Commodore's
subsidiaries, including the Company. Dr. Harper is also eligible to receive
options to purchase common stock of each publicly-traded subsidiary of
Commodore in the amount of .75% of such subsidiary's total outstanding shares
of common stock on the date of grant. The employment agreement also provides
that Dr. Harper shall be entitled to receive bonuses based on the achievement
(in whole or in part) by Commodore of its business plan and by Dr. Harper of
fixed personal performance objectives. In addition, Dr. Harper shall be
eligible to participate in Commodore's group health, life and other benefit
plans made available by Commodore to its employees. Dr. Harper's employment
agreement contains covenants (a) restricting him from engaging in any
activities competitive with the business of Commodore or
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<PAGE>
any of its subsidiaries during the term of such employment agreement and one
year thereafter, (b) prohibiting him from disclosure of confidential
information regarding Commodore or any of its subsidiaries at any time and
(c) confirming that all intellectual property developed by him and relating
to the business of Commodore or any of its subsidiaries constitutes the sole
and exclusive property of Commodore or its subsidiaries.
Pursuant to an assignment of technology agreement between the Company and
Dr. Kilambi, effective February 29, 1996, the Company agreed to pay to Dr.
Kilambi a royalty through December 3, 2002 equal to 2% of the Company's
revenues actually received and attributed to the commercial application of
the acquired technology, except for applications related to the radionuclides
technetium and rhenium, for which Dr. Kilambi is entitled to receive a
royalty of .66% of net sales (less allowances for returns, discounts,
commissions, freight, and excise or other taxes). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Business -- Intellectual Property" and
"Certain Relationships and Related Transactions -- Organization and
Capitalization of the Company."
STOCK OPTIONS
On September 5, 1996, Commodore (as sole stockholder of the Company)
approved the Company's 1996 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "Plan"), pursuant to which officers,
directors, and/or key employees and/or consultants of the Company can receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 1,350,000 shares of the Company's Common Stock (of which no more
than 1,147,500 shares may be issued pursuant to non-qualified stock options).
On September 5, 1996, December 18, 1996 and January 27, 1997, the Company's
Board of Directors awarded, effective upon completion of this Offering,
non-qualified stock options under the Plan to certain key executive officers
entitling them to purchase an aggregate of 630,000 shares of Common Stock,
all of which provide for an exercise price equal to the initial public
offering price of the Common Stock, are exercisable at the rate of 20% of the
number of options granted in each of calendar 1996 (1997 in the case of Mr.
Houle) through 2000, inclusive, beginning on the closing date of this
Offering and, unless exercised, expire on December 31, 2001 (subject to prior
termination in accordance with the applicable stock option agreements). In
addition, non-qualified options to purchase an aggregate of 136,689 shares of
Common Stock were awarded, effective upon completion of this Offering, to
members of the Board of Directors who are not employed or otherwise
affiliated with the Company, all of which are exercisable at an exercise
price equal to the initial public offering price of the Common Stock, are
exercisable at the rate of 33 1/3 % of the number of options granted in each
of calendar 1996 through 1998, inclusive, beginning on the closing date of
this Offering, and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
The exercise price applicable to all outstanding stock options represents not
less than 100% of the fair market value of the underlying Common Stock as of
the date that such options were granted, as determined by the Board of
Directors of the Company on the date that such options were granted. In
December 1996 and January 1997, Applied, as purchaser of 100% of the capital
stock of the Company, ratified the Plan and all issuances thereunder.
With respect to incentive stock options, the Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock),
and requires that all such options have an expiration date not later than
that date which is one day before the tenth anniversary of the date of the
grant of such options (or the fifth anniversary of the date of grant in the
case of 10% stockholders). However, with certain limited exceptions, in the
event that the option holder ceases to be associated with the Company, or
engages in or is involved with any business similar to that of the Company,
such option holder's incentive options immediately terminate. Pursuant to the
provisions of the Plan, the aggregate fair market value, determined as of the
date(s) of grant, for which incentive stock options are first exercisable by
an option holder during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the Plan requires that the
exercise price of all such options be at least equal to 100% of the fair
market value of the Common Stock on the date such option is granted, provided
that non-qualified options may be issued at a lower exercise price (but in no
event less than 85% of fair market value) if the net pre-tax income of the
Company in the full fiscal year immediately preceding the date
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<PAGE>
of the grant of such option (the "Prior Year") exceeded 125% of the mean
annual average net pre-tax income of the Company for the three fiscal years
immediately preceding such Prior Year. Non-qualified options must have an
expiration date not later than that date which is the day before the eighth
anniversary of the date of the grant of the subject option. However, with
certain limited exceptions, in the event that the option holder ceases to be
associated with the Company, or engages in or becomes involved with any
business similar to that of the Company, such option holder's non-qualified
options immediately terminate.
The following table lists information on stock options granted to each of
the Company's executive officers and directors and to all executive officers
and directors as a group. All of such stock options were granted on September
5, 1996, December 18, 1996 and January 27, 1997, and (i) with respect to all
stock options other than those in favor of Messrs. Adelman, Mitchell and
Toller, are exercisable at the rate of 20% per calendar year in each of 1996
(1997 in the case of Mr. Houle) through 2000, inclusive (subject to prior
termination under the terms of the applicable option agreements), or (ii)
with respect to the stock options granted to Messrs. Adelman, Mitchell and
Toller, subject to their election as directors of the Company, are
exercisable at the rate of 33 1/3 % per calendar year in each of 1996 through
1998, inclusive (subject to prior termination under the terms of the
applicable option agreements), and, to the extent not exercised, expire on
December 31, 2001. As of the date of this Prospectus, none of such options
have been exercised.
<TABLE>
<CAPTION>
Number of Percentage of
Shares Total
Name of Underlying Type of Options Exercise
Officer or Options Option Granted Price per
Director Granted Granted Under Plan Share
------------------------------------ ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C>
Edwin L. Harper, Ph.D. ............. 125,000 Non-Qualified 16.3% *
Paul E. Hannesson .................. 135,000 Non-Qualified 17.6% *
Kenneth J. Houle ................... 100,000 Non-Qualified 13.0% *
James M. DeAngelis ................. 101,250 Non-Qualified 13.2% *
Srinivas Kilambi, Ph.D. ............ 67,500 Non-Qualified 8.8% *
Michael D. Kiehnau ................. 50,625 Non-Qualified 6.7% *
Andrew P. Oddi ..................... 50,625 Non-Qualified 6.7% *
Kenneth L. Adelman, Ph.D. .......... 45,563 Non-Qualified 5.9% *
David L. Mitchell .................. 45,563 Non-Qualified 5.9% *
William R. Toller .................. 45,563 Non-Qualified 5.9% *
------------ --------------- -----------
All executive officers and directors
as a group (eleven persons) ....... 766,689 100.0%
============ ===============
</TABLE>
- ------
* To be equal to the initial public offering price per share of the Common
Stock in this Offering.
EXECUTIVE BONUS PLAN
On September 5, 1996, the Company's Board of Directors established a
five-year Executive Bonus Plan (the "Bonus Plan") to reward executive
officers and other key employees based upon the Company achieving certain
performance levels. Under the Bonus Plan, commencing with the Company's 1997
fiscal year and for each of the four fiscal years thereafter, the Company
will have discretion to award bonuses in an aggregate amount in each fiscal
year equal to 1% of the Company's consolidated net revenues for such fiscal
year, provided and on the condition that the Company achieves a consolidated
net profit before taxes of not less than 5% of consolidated net sales in each
year, and provided that the aggregate bonuses in each year (out of the
maximum amount of 1% of annual net sales) shall not be in excess of the
proportion by which the Company's consolidated net profit before taxes is
greater than 5% of consolidated net sales but less than 15% of consolidated
net sales. The Compensation Committee of the Board of Directors of the
Company will determine the allocable amounts or percentages of the bonus pool
which may be paid annually to participants. Bonuses under the Bonus Plan are
not exclusive of other bonuses that may be awarded by the Board of Directors
or the Compensation Committee from time to time.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company has included in its Certificate of Incorporation and By-Laws
provisions to (i) eliminate the personal liability of its directors and
officers for monetary damages resulting from breaches of their fiduciary duty
(provided that such provisions do not eliminate liability for breaches of the
duty of loyalty, acts or omis-
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sions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the Delaware General
Corporation Law (the "Delaware Law"), or for any transaction from which the
director and/or officer derived an improper personal benefit), and (ii)
indemnify its directors and officers to the fullest extent permitted by the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to (i) the beneficial ownership of the Common Stock
of the Company by each beneficial owner of more than 5% of the outstanding
shares of Common Stock of the Company, each director, each executive officer
and all executive officers and directors of the Company as a group, and (ii)
the number of shares of Common Stock owned by each such person and group.
Unless otherwise indicated, the owners have sole voting and investment power
with respect to their respective shares.
<TABLE>
<CAPTION>
Percentage of Outstanding
Common Stock
Number of Shares Beneficially Owned
of Common Stock -----------------------------------
Name and Address of Beneficially After
Beneficial Owner(1) Owned(2) Before Offering Offering(15)
----------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
Commodore Applied
Technologies, Inc. ..................... 10,000,000 100.0% 87.0%
Commodore Environmental Services,
Inc.(3) ................................ 10,000,000 100.0% 87.0%
Bentley J. Blum(4) ...................... 10,000,000 100.0% 87.0%
Paul E. Hannesson(5) .................... 947,059 9.5% 8.2%
Edwin L. Harper, Ph.D.(6) ............... 101,177 1.0% *
Kenneth J. Houle(7) ..................... 20,000 * *
James M. DeAngelis(8) ................... 97,092 * *
Srinivas Kilambi, Ph.D.(9) .............. 39,996 * *
Michael D. Kiehnau(10) .................. 10,125 * *
Andrew P. Oddi(11) ...................... 40,035 * *
Kenneth L. Adelman, Ph.D(12) ............ 15,188 * *
David L. Mitchell(13) ................... 15,188 * *
William R. Toller(14) ................... 15,188 * *
All executive officers and directors as a
group (eleven persons) ................. 10,000,000 100.0% 87.0%
</TABLE>
- ------
*Percentage ownership is less than 1%.
(1) The addresses of each of Commodore Applied Technologies, Inc., Commodore
Environmental Services, Inc., Bentley J. Blum, Paul E. Hannesson, Andrew
P. Oddi, Kenneth L. Adelman, Ph.D., David L. Mitchell and William R.
Toller is 150 East 58th Street, Suite 3400, New York, New York 10155.
The address of Edwin L. Harper, Ph.D. is 8000 Towers Crescent Drive,
Suite 1350, Vienna, Virginia 22182. The address of Kenneth J. Houle is
26500 Amhearst Circle, Beachwood, Ohio 44122. The address of James M.
DeAngelis and Srinivas Kilambi, Ph.D. is 1487 Delashmut Avenue,
Columbus, Ohio 43212. The address of Michael D. Kiehnau is 215 Prairie
Street, Concord, Massachusetts 01742. Bentley J. Blum and Paul E.
Hannesson are brothers-in-law.
(2) As used herein, the term beneficial ownership with respect to a security
is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition of) with
respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire
such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment
rights.
(3) Represents all of the shares of Common Stock held by Applied, its
69.3%-owned subsidiary.
(4) Represents all of the shares of Common Stock held indirectly by
Commodore, based upon Mr. Blum's beneficial ownership of 28,224,050
shares and his spouse's ownership of 2,000,000 shares of common stock of
Commodore, representing together 51.8% of the outstanding shares of
Commodore common stock. As of December 31, 1996, there were 58,299,368
outstanding shares of Commodore common stock. Does not include 440,000
shares of Commodore common stock owned by Simone Blum, the mother of Mr.
Blum, and 395,000 shares of Commodore common stock owned by Samuel Blum,
the father of Mr. Blum. Mr. Blum disclaims any beneficial interest in
the shares of Commodore common stock owned by his spouse, mother and
father.
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(5) Consists of (a) 27,000 shares of Common Stock, representing 20% of the
135,000 stock options granted to Mr. Hannesson under the Plan, which are
currently exercisable, and (b) Mr. Hannesson's indirect beneficial
interest in the shares of Common Stock, based upon an aggregate of (i)
2,650,000 shares of Commodore common stock owned by Suzanne Hannesson,
the spouse of Mr. Hannesson, (ii) 2,650,000 shares of Commodore common
stock owned by the Hannesson Family Trust (Suzanne Hannesson and John D.
Hannesson, trustees) for the benefit of Mr. Hannesson's spouse, (iii)
currently exercisable options to purchase 500,000 and 950,000 shares of
Commodore common stock at $.53 per share and $1.12 per share,
respectively, representing collectively 11.6% of the outstanding shares
of Commodore common stock, and (iv) 80,000 shares of Applied common
stock, representing 20% of the 400,000 stock options granted to Mr.
Hannesson under Applied's 1996 Stock Option Plan, which are currently
exercisable. Does not include 1,000,000 shares of Commodore common stock
owned by each of Jon Paul and Krista Hannesson, the adult children of
Mr. Hannesson and additional stock options to purchase 2,500,000 shares
of Commodore common stock at $1.12 per share, which vest and become
exercisable ratably on November 18 of each of 1997 through 2001. Mr.
Hannesson disclaims any beneficial interest in the shares of Commodore
common stock owned by or for the benefit of his spouse and children.
(6) Consists of (a) Dr. Harper's indirect beneficial interest in the shares
of Common Stock, based upon his ownership of 375,000 shares of Commodore
common stock, and currently exercisable options to purchase 200,000
shares of Commodore common stock at $1.12 per share, of which additional
options to purchase 1,800,000 shares of Commodore common stock vest and
become exercisable ratably on November 18 of each of 1997 through 2001,
and (b) 25,000 shares of common stock, representing 20% of the 125,000
stock options granted to Dr. Harper under the Plan, which are currently
exercisable.
(7) Consists of 20,000 shares of Common Stock, representing 20% of the
100,000 stock options granted to Mr. Houle under the Plan, which are
currently exercisable.
(8) Consists of (a) Mr. DeAngelis' indirect beneficial interest in the
shares of Common Stock, based upon his ownership of 480,000 shares of
Commodore common stock, and currently exercisable options to purchase
100,000 shares of Commodore common stock at $.03 per share, and (b)
20,250 shares of Common Stock, representing 20% of the 101,250 stock
options granted to Mr. DeAngelis under the Plan, which are currently
exercisable.
(9) Consists of (a) Dr. Kilambi's indirect beneficial interest in the shares
of Common Stock, based upon his ownership of 200,000 shares of Commodore
common stock, and (b) 13,500 shares of Common Stock, representing 20% of
the 67,500 stock options granted to Dr. Kilambi under the Plan, which
are currently exercisable.
(10) Consists of 10,125 shares of Common Stock, representing 20% of the
50,625 stock options granted to Mr. Kiehnau under the Plan, which are
currently exercisable.
(11) Consists of (a) Mr. Oddi's indirect beneficial interest in the shares of
Common Stock, based upon his ownership of 250,000 shares of Commodore
common stock, and (b) 10,125 shares of Common Stock, representing 20% of
the 50,625 stock options granted to Mr. Oddi under the Plan, which are
currently exercisable.
(12) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Dr. Adelman under the Plan, which are
currently exercisable.
(13) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Mr. Mitchell under the Plan, which are
currently exercisable.
(14) Consists of 15,188 shares of Common Stock, representing 33 1/3 % of the
45,563 stock options granted to Mr. Toller under the Plan, which are
currently exercisable.
(15) Assuming the full conversion of the Convertible Preferred Stock and the
exercise of the Warrants offered hereby, the percentage of outstanding
common stock beneficially owned by Applied, Commodore and Mr. Blum would
be 60.6% and by Mr. Hannesson would be 5.7%.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Company was organized in November 1995 as a wholly-owned subsidiary of
Commodore. Effective February 29, 1996, pursuant to an assignment of
technology agreement between the Company and Srinivas Kilambi, Ph.D., the
Company's Vice President--Technology, the Company acquired rights to the CST
technology from Dr. Kilambi. In consideration for such technology, the
Company transferred to Dr. Kilambi 200,000 shares of common stock of
Commodore, which had been contributed to the Company by Commodore to effect
the transaction, and the Company agreed to pay Dr. Kilambi a royalty through
December 3, 2002 equal to 2% of the Company's revenues actually received and
attributed to the commercial application of the acquired technology, except
for applications related to the radionuclides technetium and rhenium, for
which Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight, and excise or other
taxes). In exchange for Commodore's issuance of such shares to the Company,
as well as Commodore's funding and support of the Company, the Company issued
to Commodore 10,000,000 shares of Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Business -- Intellectual Property."
Since the Company's inception, Commodore has financed the research and
development activities of the Company through direct equity investments and
loans to the Company. As of September 30, 1996, the Company's aggregate
indebtedness to Commodore was approximately $408,000. As of December 2, 1996,
$568,000 in additional funds had been advanced by Commodore to the Company.
Commodore has agreed to contribute the entire amount of such intercompany
debt to the Company's equity, without requirement of the issuance of any
additional shares of capital stock.
Effective as of December 2, 1996, as part of a corporate restructuring to
consolidate all of its current environmental technology businesses within
Applied (its 69.3%-owned, publicly-traded subsidiary), Commodore transferred
to Applied 100% of the capital stock of the Company and 100% of the capital
stock of CFC Technologies, another subsidiary of Commodore.
In addition, Commodore assigned to Applied outstanding Company notes
aggregating $976,200 at December 2, 1996, representing advances previously
made by Commodore to the Company. Such advances have been capitalized by
Applied prior to the date of this Offering as its Capital Contribution to the
Company. In consideration for such transfers, Applied paid Commodore
$3,000,000 in cash and, subject to any applicable stockholder approval and
notification requirements, shall issue to Commodore a warrant expiring
December 1, 2003 to purchase 7,500,000 shares of Applied common stock at an
exercise price of $15.00 per share.
LOAN AGREEMENT WITH COMMODORE
In the event the Over-allotment Option is exercised, the Company intends
to enter into a two-year revolving credit agreement with Commodore. Pursuant
to such agreement, the Company may lend the net proceeds, if any, from the
exercise of the Over-allotment Option (estimated to be up to approximately
$3,250,000) to Commodore for its working capital needs. Borrowings under the
agreement will be secured by Commodore's pledge of 2,000,000 shares of
Applied common stock held by it and will bear interest at the rate of 10% per
annum, with interest payable quarterly on outstanding amounts. The principal
balance outstanding will be due on the second anniversary of the date of such
agreement. The Company's obligation to lend such funds to Commodore is
subject to a number of conditions, including review by the Company of the
proposed use of such funds by Commodore. See "Risk Factors -- Control by
Principal Stockholder; Loan to Commodore," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OFFICES
The Company's principal executive offices are located in approximately
1,000 square feet of office space in Vienna, Virginia under a lease expiring
in December 1997. The Company pays approximately $5,000 per month
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for rent and related office support services. Such office also serves as the
principal executive offices of Applied. The Company also maintains offices
located in approximately 2,000 square feet of office space in New York, New
York, which also serves as the principal executive offices of Commodore,
Applied, certain of their affiliates, and Messrs. Bentley J. Blum and Paul E.
Hannesson, directors of each of the Company, Commodore and Applied. The
Company does not pay any rent with respect to such offices. In addition, the
Company currently shares facilities in Columbus, Ohio with Commodore and
certain of its other subsidiaries. The Company pays an allocable share of
rent equal to $750 per month for such space. See "Business - Properties."
The Company has leased a new facility of approximately 20,000 square feet
near Atlanta, Georgia, which it began occupying in March 1997 and which will
comprise the Company's administrative offices, research and testing
laboratories and CST manufacturing plant. See "Use of Proceeds." Upon
commencement of full occupancy at such facility, the Company, together with
Commodore, may elect to terminate the existing lease in Columbus, Ohio.
FUTURE TRANSACTIONS
In connection with the Offering, the Company's Board of Directors has
adopted a policy whereby any future transactions between the Company and any
of its subsidiaries, affiliates, officers, directors, principal stockholders
or any affiliates of the foregoing will be on terms no less favorable to the
Company than could reasonably be obtained in "arm's length" transactions with
independent third parties, and any such transactions will also be approved by
a majority of the Company's disinterested outside directors.
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DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 50,000,000 shares of Common Stock, par value $.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"), which Preferred Stock may be issued with such rights,
designations and privileges (including redemption and voting rights) as the
Board of Directors may, from time to time, determine.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed
below), to receive dividends when and as declared by the Board of Directors,
and to share ratably in the assets of the Company legally available for
distribution in the event of the liquidation, dissolution or winding up of
the Company. The Board of Directors may not declare dividends payable to
holders of Common Stock unless and until all accrued cash dividends through
the most recent past annual dividend payment date have been paid in full to
holders of the Convertible Preferred Stock. Holders of the Common Stock do
not have subscription, redemption or conversion rights, nor do they have any
preemptive rights. In the event the Company were to elect to sell additional
shares of its Common Stock following this Offering, investors in this
Offering would have no right to purchase such additional shares. As a result,
their percentage equity interest in the Company would be diluted. The shares
of Common Stock offered hereby will be, when issued and paid for, fully-paid
and not liable for further call or assessment. Holders of the Common Stock do
not have cumulative voting rights, which means that the holders of more than
half of the outstanding shares of Common Stock (subject to the rights of the
holders of the Preferred Stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares
would not be able to elect any directors. The Board is empowered to fill any
vacancies on the Board. Except as otherwise required by the Delaware Law, all
stockholder action is taken by vote of a majority of the outstanding shares
of Common Stock voting as a single class present at a meeting of stockholders
at which a quorum (consisting of a majority of the outstanding shares of the
Company's Common Stock) is present in person or by proxy.
PREFERRED STOCK
The Company is authorized by its Certificate of Incorporation to issue a
maximum of 5,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
conversion privileges and/or redemption rights, as may, from time to time, be
determined by the Board of Directors of the Company. Preferred Stock may be
issued in the future in connection with acquisitions, financings or such
other matters as the Board of Directors deems to be appropriate. In the event
that any such shares of Preferred Stock shall be issued, a Certificate of
Designation, setting forth the series of such Preferred Stock and the
relative rights, privileges and limitations with respect thereto, shall be
filed with the Secretary of State of the State of Delaware. The effect of
such Preferred Stock is that the Company's Board of Directors alone, within
the bounds and subject to the federal securities laws and the Delaware Law,
may be able to authorize the issuance of Preferred Stock which could have the
effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may also adversely affect
the voting power of the holders of Common Stock, including the loss of voting
control to others.
CONVERTIBLE PREFERRED STOCK
The issuance of 1,875,000 shares of Convertible Preferred Stock has been
authorized by resolutions adopted by the Board of Directors and set forth in
a Certificate of Designation, Preferences and Rights of 10% Senior
Convertible Redeemable Preferred Stock filed with the Secretary of State of
the State of Delaware, which contains the designations, rights, powers,
preferences, qualifications and limitations of the Convertible Preferred
Stock. Upon issuance, the shares of Convertible Preferred Stock offered
hereby will be fully paid and non-assessable.
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Dividends. The holders of the Convertible Preferred Stock are entitled to
receive if, when and as declared by the Board of Directors out of funds
legally available therefor, cumulative dividends at the rate of $1.00 per
share per annum, payable quarterly on the last business day of March, June,
September and December of each year, commencing June 30, 1997 (each a
"Dividend Payment Date"), to the holders of record as of a date, not more
than 60 days prior to the Dividend Payment Date, as may be fixed by the Board
of Directors. Dividends accrue from the first day of the year in which such
dividend may be payable, except with respect to the first annual dividend
which shall accrue from the date of issuance of the Convertible Preferred
Stock.
Dividends on the Convertible Preferred Stock will accrue whether or not
the Company has earnings, whether or not there are funds legally available
for the payment of such dividends and whether or not such dividends are
declared. Dividends accumulate to the extent they are not paid on the
Dividend Payment Date to which they relate. Accumulated unpaid dividends will
not bear interest. Under Delaware Law, the Company may declare and pay
dividends or make other distributions on its capital stock only out of
capital surplus, as defined in the Delaware Law. On December 31, 1996, the
Company had available surplus of $981,200 (or $22,071,700 after giving effect
to this Offering). The payment of dividends and any future operating losses
will reduce such surplus of the Company, which may adversely affect the
ability of the Company to continue to pay dividends on the Convertible
Preferred Stock. In addition, no dividends or distributions may be declared,
paid or made if the Company is or would be rendered insolvent by virtue of
such dividend or distribution.
No dividends may be paid on any shares of capital stock ranking junior to
the Convertible Preferred Stock (including the Common Stock) unless and until
all accumulated and unpaid dividends on the Convertible Preferred Stock have
been declared and paid in full.
Conversion. At the election of the holder thereof, each share of
Convertible Preferred Stock will be convertible into Common Stock at any time
on or after the date of issuance and prior to redemption at a conversion rate
of 1.33 shares of Common Stock for each share of Convertible Preferred Stock
(an effective conversion price of $7.50 per share or 125% of the initial
public offering price per share of Common Stock) (the "Conversion Price").
The Conversion Price is subject to adjustment from time to time in the event
of (i) the issuance of Common Stock as a dividend or distribution on any
class of capital stock of the Company; (ii) the combination, subdivision or
reclassification of the Common Stock; (iii) the distribution to all holders
of Common Stock of evidences of the Company's indebtedness or assets
(including securities, but excluding cash dividends or distributions paid out
of earned surplus); (iv) the failure of the Company to pay a dividend on the
Convertible Preferred Stock within 30 days of a Dividend Payment Date, which
will result in each instance in a reduction of $.50 per share in the
Conversion Price but not below $3.75 per share, or 50% of the initial per
share Conversion Price of the shares of Common Stock issuable upon conversion
of the Convertible Preferred Stock; or (v) the sale of Common Stock at a
price, or the issuance of options, warrants or convertible securities with an
exercise or conversion price per share, less than the lower of the then
current Conversion Price or the then current market price of the Common Stock
(except upon exercise of options outstanding on the date of this Prospectus
and options thereafter granted to employees, officers, directors,
stockholders or consultants pursuant to existing stock option plans). No
adjustment in the Conversion Price will be required until cumulative
adjustments require an adjustment of at least 5% in the Conversion Price. No
fractional shares will be issued upon conversion, but any fractions will be
adjusted in cash on the basis of the then current market price of the Common
Stock. Payment of accumulated and unpaid dividends will be made upon
conversion to the extent of legally available funds. The right to convert the
Convertible Preferred Stock terminates on the date fixed for redemption.
In case of any consolidation or merger to which the Company is a party
(other than a consolidation or merger in which the Company is the surviving
party and the Common Stock is not changed or exchanged), or in case of any
sale or conveyance of all or substantially all the property and assets of the
Company, each share of Convertible Preferred Stock then outstanding will be
convertible from and after such merger, consolidation or sale or conveyance
of property and assets into the kind and amount of shares of stock or other
securities and property receivable as a result of such consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock could have been converted
immediately prior to such merger, consolidation, sale or conveyance.
Optional Cash Redemption. The Company may, at its option, redeem the
Convertible Preferred Stock, in whole but not in part, upon 30 days prior
written notice at any time after March , 2000 at a redemption price
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of $10.00 per share, plus accumulated and unpaid dividends, if the Market
Price of the Common Stock (as defined below) equals or exceeds $11.25 per
share for at least 20 consecutive trading days ending not more than 10
trading days prior to the date of the notice of redemption. The term "Market
Price" means the closing bid price as reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by
Nasdaq or, if not traded thereon, the high bid price as reported by Nasdaq
or, if not quoted thereon, the high bid price on the OTC Bulletin Board or in
the National Quotation Bureau sheet listing for the Common Stock, or, if not
listed therein, as determined in good faith by the Board of Directors.
In addition, the Company may, at its option, redeem the Convertible
Preferred Stock in whole but not in part, at any time after March , 2001 at
the redemption prices set forth below, plus accumulated and unpaid dividends:
<TABLE>
<CAPTION>
Redemption Price
Date of Redemption Per Share
-------------------------------- --------------------
<S> <C>
March , 2001 to March , 2002 ....................... $
March , 2002 to March , 2003 .......................
March , 2003 to March , 2004 .......................
March , 2004 and thereafter .......................
</TABLE>
Provisions Relating to Optional Cash Redemption. Notice of redemption must
be mailed to each holder of Convertible Preferred Stock to be redeemed at his
last address as it appears upon the Company's registry books at least 30 days
prior to the date fixed for redemption (the "Redemption Date"). On and after
the Redemption Date, dividends will cease to accumulate on shares of
Convertible Preferred Stock called for redemption.
On or after the Redemption Date, holders of Convertible Preferred Stock
which have been redeemed shall surrender their certificates representing such
shares to the Company at its principal place of business or as otherwise
specified in the notice of redemption or exchange and thereupon either (i)
the redemption price of such shares shall be payable to the order of, or (ii)
the shares of Common Stock shall be issued to, the person whose name appears
on such certificate or certificates as the owner thereof; provided, that a
holder of Convertible Preferred Stock may elect to convert such shares into
Common Stock at any time prior to the Redemption Date.
From and after the Redemption Date, all rights of the holders of redeemed
shares shall cease with respect to such shares and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever.
Voting Rights. The holders of Convertible Preferred Stock are not entitled
to vote, except as set forth below and as provided by applicable law. On
matters subject to a vote by holders of Convertible Preferred Stock, the
holders are entitled to one vote per share.
The affirmative vote of at least a majority of the shares of Convertible
Preferred Stock, voting as a class, shall be required to authorize, effect or
validate the creation and issuance of any class or series of stock ranking
superior to or on parity with the Convertible Preferred Stock with respect to
the declaration and payment of dividends or distribution of assets on
liquidation, dissolution or winding-up. In the event that the Company has the
right to redeem the Convertible Preferred Stock, no such vote is required if,
prior to the time such class is issued, provision is made for the redemption
of all shares of Convertible Preferred Stock and such Convertible Preferred
Stock is redeemed on or prior to the issuance of such class.
In the event that the Company fails to pay any dividends for four
consecutive quarterly dividend payment periods, the holders of the
Convertible Preferred Stock, voting separately as a class, shall be entitled
to elect one director. Such right will be terminated as of the next annual
meeting of stockholders of the Company following payment of all accrued
dividends.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, before any payment or distribution
of the assets of the Company (whether capital or surplus), or the proceeds
thereof, may be made or set apart for the holders of Common Stock or any
stock ranking junior to Convertible Preferred Stock, the holders of
Convertible Preferred Stock will be entitled to receive, out of the assets of
the Company available for distribution to stockholders, a liquidating
distribution of $10.00 per share,
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plus any accumulated and unpaid dividends. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the assets
of the Company are insufficient to make the full payment of $10.00 per share,
plus all accumulated and unpaid dividends on the Convertible Preferred Stock
and similar payments on any other class of stock ranking on a parity with the
Convertible Preferred Stock upon liquidation, then the holders of Convertible
Preferred Stock and such other shares will share ratably in any such
distribution of the Company's assets in proportion to the full respective
distributable amounts to which they are entitled.
A consolidation or merger of the Company with or into another corporation
or sale or conveyance of all or substantially all the property and assets of
the Company will not be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary, of the Company for purposes of the
foregoing. See " Conversion."
Miscellaneous. The Company is not subject to any mandatory redemption or
sinking fund provision with respect to the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock are not entitled to preemptive
rights to subscribe for or to purchase any shares or securities of any class
which may at any time be issued, sold or offered for sale by the Company.
Shares of Convertible Preferred Stock redeemed or otherwise reacquired by the
Company shall be retired by the Company and shall be unavailable for
subsequent issuance as any class of the Company's Preferred Stock.
WARRANTS
The following is a brief summary of certain provisions of the Warrants.
Reference is made to the actual text of the Warrant Agreement between the
Company, the Representative and The Bank of New York (the "Warrant Agent"), a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part, for a more complete description of the
Warrants. See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time during the four year period commencing one
year after the date of this Prospectus, one share of Common Stock at a price
of $8.40 per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below. The holder of any
Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the
exercise price. No fractional shares will be issued upon the exercise of the
Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company
of shares of its Common Stock or other securities convertible into Common
Stock (exclusive of options and shares under the Plan, and other limited
exceptions) at a price below the then-applicable exercise price of the
Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation (other than a consolidation or
merger in which the Company is the surviving corporation) or sale of all or
substantially all of the assets of the Company, in order to enable
warrantholders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might have been purchased upon the exercise of
the Warrant.
Redemption Provisions. Commencing 18 months after the date of this
Prospectus, the Warrants are subject to redemption at $.10 per Warrant on 30
days' prior written notice provided that the average closing sale price of
the Common Stock equals or exceeds $18.00 per share (subject to adjustment
for stock dividends, stock splits, combinations or reclassifications of the
Common Stock), for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date of the notice
of redemption. In the event the Company exercises the right to redeem the
Warrants, such Warrants will be exercisable until the close of business on
the business day immediately preceding the date for redemption fixed in such
notice. If any Warrant called for redemption is not exercised by such time,
it will cease to be exercisable and the holder will be entitled only to the
redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at
any time on or prior to their expiration date five years from the
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date of this Prospectus, at which time the Warrants become wholly void and of
no value. If a market for the Warrants develops, the holder may sell the
Warrants instead of exercising them. There can be no assurance, however, that
a market for the Warrants will develop or continue.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do
not adversely affect the interests of the warrantholders. The Company may, in
its sole discretion, lower the exercise price of the Warrants for a period of
not less than 30 days on not less than 30 days' prior written notice to the
warrantholders and the Representative. Modification of the number of
securities purchasable upon the exercise of any Warrant, the exercise price
and the expiration date with respect to any Warrant requires the consent of
two-thirds of the warrantholders. No other modifications may be made to the
Warrants, without the consent of two-thirds of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered,
qualified or deemed to be exempt under the securities laws of the state of
residence of the exercising holder of the Warrants. Although the Company will
use its best efforts to have all of the shares of Common Stock issuable upon
exercise of the Warrants registered or qualified on or before the exercise
date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to
do so.
The Warrants are separately transferable immediately upon issuance.
Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the aftermarket or may
move to jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable.
In this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and holders of Warrants would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.
SECTION 203 OF THE DELAWARE LAW
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the
date of the business combination, the transaction is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock, or
(iii) on or after such date, the business combination is approved by the
board of directors and by the affirmative vote of at least 66 2/3 % of the
outstanding voting stock that is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person, who, together with affiliates and associates, owns
(or within three years, did own) 15% or more of the corporation's voting
stock.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Convertible Preferred Stock and
the Common Stock and the Warrant Agent for the Warrants is The Bank of New
York, 101 Barclay Street, New York, New York 10286.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 11,500,000 shares
of Common Stock outstanding, of which (i) the 1,500,000 shares of Common
Stock offered hereby, (ii) the 1,500,000 shares of Convertible Preferred
Stock, (iii) the 3,000,000 Warrants, (iv) the maximum of 2,000,000 shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock and
(v) the maximum of 3,000,000 shares of Common Stock issuable upon exercise of
the Warrants will be transferable without restriction under the Securities
Act. The other 10,000,000 outstanding shares of Common Stock, all of which
are owned by Applied, are "restricted securities" (as that term is defined in
Rule 144 promulgated under the Securities Act) which may be publicly sold
only if registered under the Securities Act or if sold in accordance with an
applicable exemption from registration, such as Rule 144. In general, under
Rule 144 as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled
to sell (together with any person with whom such individual is required to
aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on Nasdaq or another national
securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements, and the availability
of current public information regarding the Company. A person who has not
been an affiliate of the Company for at least three months, and who has
beneficially owned restricted securities for at least two years, is entitled
to sell such restricted shares under Rule 144 without regard to any of the
limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus
pursuant to written compensatory benefit plans such as the Plan and written
contracts such as option agreements. Rule 701 is also available for sales of
shares acquired by persons pursuant to the exercise of options granted prior
to the effective date of this Prospectus, regardless of whether the option
exercise occurs before or after the effective date of this Prospectus.
Securities issued in reliance on Rule 701 are "restricted securities" within
the meaning of Rule 144 and, beginning 90 days after the date of this
Prospectus, may be sold by persons other than affiliates of the Company
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirement.
Options granted under the Plan to purchase a total of 766,689 shares of
Common Stock are currently outstanding, and options to purchase an additional
583,311 shares of Common Stock are reserved for future issuance under the
Plan. Of the options granted under the Plan, 171,563 of such options are
currently exercisable, with the remaining outstanding options to become
exercisable at the rate of 171,563 options in each of December 1997 and 1998,
and 126,000 options in each of December 1999 and 2000. Shares of Common Stock
issued upon the exercise of outstanding options will be "restricted
securities" and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available. Potential
exemptions include those available under Rule 144 and Rule 701.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Common Stock, the Convertible Preferred
Stock and the Warrants prevailing from time to time. The Company and Applied,
as well as all officers and directors of the Company and all holders of
outstanding securities exercisable for or convertible into Common Stock
(other than the Representative's Warrants), have agreed not to, directly or
indirectly, issue, agree or offer to sell, sell, transfer, assign,
distribute, grant an option for purchase or sale of, pledge, hypothecate or
otherwise encumber or dispose of any beneficial interest in such securities
for a period of 13 months following the date of this Prospectus without the
prior written consent of the Representative. The sale or issuance, or the
potential for sale or issuance, of Common Stock after such 13-month period
could have an adverse impact on the market prices of the Convertible
Preferred Stock, the Common Stock and/or the Warrants. Sales of substantial
amounts of Common Stock or the perception that such sales could occur could
adversely affect prevailing market prices for the Convertible Preferred
Stock, the Common Stock and/or the Warrants. All of the shares of Convertible
Preferred Stock to be outstanding will have been registered under the
Securities Act. See "Underwriting."
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
counsel to the Company, the material federal income tax consequences of
acquiring, owning and disposing of the Convertible Preferred Stock, the
Common Stock and the Warrants are as follows, subject to the qualifications
set forth in the two immediately following paragraphs.
This discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, and Internal Revenue Service (the
"IRS") rulings and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action; any
such changes could be retroactively applied in a manner that could adversely
affect a holder of the Convertible Preferred Stock, Common Stock and/or
Warrants. The following does not discuss all of the tax consequences that may
be relevant to a purchaser in light of particular circumstances or to
purchasers subject to special rules, such as foreign investors, retirement
trusts, and life insurance companies. No information is provided with respect
to foreign, state or local tax laws, estate or gift tax considerations, or
other tax laws that may be applicable to particular categories of investors.
The discussion assumes that purchasers of the Convertible Preferred Stock,
Common Stock and/or Warrants will hold the Convertible Preferred Stock,
Common Stock and/or Warrants as a "capital asset" within the meaning of Code
Section 1221. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO
ANY FEDERAL, STATE, LOCAL AND FOREIGN OR OTHER TAX CONSIDERATIONS RELEVANT TO
THEM.
DIVIDENDS
Distributions with respect to the Convertible Preferred Stock and the
Common Stock will be treated as dividends and taxable as ordinary income to
the extent that the distributions are made out of the Company's current or
accumulated earnings and profits. To the extent that a distribution is not
made out of the Company's current or accumulated earnings and profits, the
distribution will constitute a non-taxable return of capital reducing the
holder's adjusted tax basis in the shares of Convertible Preferred Stock or
Common Stock held and, to the extent the distribution exceeds such basis,
will result in capital gain. At December 31, 1996, the Company had a deficit
in accumulated earnings and profits. Accordingly, the treatment of
distributions with respect to the Convertible Preferred Stock will be
determined by the Company's earnings and profits, if any, subsequent to
December 31, 1996.
Dividend income of individuals, certain closely held corporations and
personal service corporations (as defined in Code Section 469(j) may not be
offset by losses or credits from "passive activities," such as losses or
credits incurred in connection with certain rental activities or the
ownership of limited partnership interests.
Corporate stockholders will be eligible to claim a dividends-received
deduction (currently 70% of the amount of the dividend for most corporate
stockholders) with respect to distributions that are treated as dividends on
the Convertible Preferred Stock and Common Stock in calculating their taxable
income.
Under Code Section 246(c), the dividends-received deduction will not be
available with respect to any dividend on the shares of Convertible Preferred
Stock and Common Stock if such shares have been held for 45 days or less (or
90 days or less if the holder of the shares of Convertible Preferred Stock
received dividends with respect to the shares of Convertible Preferred Stock
which are attributable to a period or periods aggregating in excess of 366
days). The holding period of the shares of Convertible Preferred Stock for
this purpose is determined in accordance with certain specific rules set
forth in Code Section 246(c), which reduces the holding period for any period
where the holder's risk of loss, as to such stock, is diminished by certain
arrangements, such as the holding of an option to sell the same, or
substantially identical, securities. Regulations issued on May 26, 1993 also
reduce the holding period for any period in which a holder of Convertible
Preferred Stock has outstanding a short sale of Common Stock.
Code Section 246A provides a further restriction on the availability of
the dividends-received deduction on the shares of Convertible Preferred Stock
and Common Stock if the shares are classified as "debt-financed portfolio
stock." The shares of Convertible Preferred Stock will be classified as
debt-financed portfolio stock when
60
<PAGE>
the holder incurs indebtedness directly attributable to the investment in the
shares of Convertible Preferred Stock. In that event, the dividends-received
deduction would be reduced to take into account the average amount of such
indebtedness. Also, the United States Treasury Department is authorized to
issue regulations that (i) would reduce the interest deductions attributable
to indebtedness in certain cases in which the obligor of such indebtedness is
a person other than the recipient of the dividend, and (ii) would provide
that any reduction in the dividends-received deduction cannot exceed the
amount of any interest deduction allocable to such dividend.
A corporate shareholder will be required to reduce its basis in shares of
the Convertible Preferred Stock and Common Stock (but not below zero) by the
amount of any "extraordinary dividend" which is not taxed because of the
dividends-received deduction if such holder is not considered to have held
such stock for more than two years before the "dividend announcement date,"
within the meaning of Code Section 1059. The amount, if any, by which such
reduction exceeds the corporate shareholder's basis in such shares will be
treated as gain on the subsequent sale or disposition of the stock. With
respect to the Convertible Preferred Stock, an "extraordinary dividend" would
be a dividend that (i) equals or exceeds 5% of the holder's adjusted basis in
the Convertible Preferred Stock or 10% in the Common Stock (treating all
dividends having ex-dividend dates within an 85-day period as a single
dividend) or (ii) exceeds 20% of the holder's adjusted basis in the stock
(treating all dividends having ex-dividend dates within a 365-day period as a
single dividend). If an election is made by the holder, under certain
circumstances the fair market value of the stock as of the day before the
ex-dividend date may be substituted for the holder's basis in applying these
tests. An "extraordinary dividend" would also include any amount treated as a
dividend in the case of a redemption of the Convertible Preferred Stock and
the Common Stock that is non-pro rata as to all shareholders, without regard
to the period the holder held the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no
less often than annually and (ii) is not in arrears as to dividends when
acquired, provided the actual rate of return as determined under Section
1059(e) (3) of the Code, on such stock does not exceed 15%. Where a qualified
preferred dividend exceeds the 5% or 20% limitation described above, (1) the
extraordinary dividend rules will not apply if the taxpayer holds the stock
for more than five years, and (2) if the taxpayer disposes of the stock
before it has been held for more than five years, the aggregate reduction in
basis will not exceed the excess of the qualified preferred dividends paid on
such stock during the period held by the taxpayer over the qualified
preferred dividends which would have been paid during such period on the
basis of the stated rate of return as determined under Section 1059(e) (3) of
the Code. The length of time that a taxpayer is deemed to have held stock for
purposes of the extraordinary dividend rules is determined under principles
similar to those applicable for purposes of the dividends-received deduction
discussed above.
A corporate holder may be required to include in determining its
alternative minimum taxable income an amount equal to a portion of any
dividends-received deduction allowed in computing regular taxable income.
Under certain circumstances, the operation of the conversion price
adjustment provisions of the Convertible Preferred Stock may result in the
holders being deemed to have received a constructive distribution, which may
be taxable as a dividend, even though the holders do not actually receive
cash or property.
REDEMPTION PREMIUM
If the redemption price of preferred stock that is subject to optional
redemption by the issuer exceeds the issue price and if such excess is not
considered "reasonable," the entire amount of the redemption premium will be
treated as being distributed to the holders of such stock, taxable as
described above, on an economic accrual basis over the period from issuance
of the preferred stock until the date the stock is first redeemable. A
premium is considered to be reasonable if it is in the nature of a penalty
for a premature redemption and if such premium does not exceed the amount
which the issuer would be required to pay for such redemption right under
market conditions existing at the time of issuance of the preferred stock. If
the redemption premium payable on the Convertible Preferred Stock is
considered unreasonable under the foregoing rules, a holder of the
Convertible Preferred Stock would take the amount of such premium into income
over the period during which the stock cannot be called for redemption under
an economic accrual method. The Revenue Reconciliation Act of 1990
61
<PAGE>
authorized the Treasury Department to promulgate new regulations regarding
the federal income tax treatment of redemption premiums with respect to
preferred stock. No such regulations have been issued and no assurance can be
given as to the treatment of the redemption premium with respect to the
Convertible Preferred Stock under any such regulations.
CONVERSION
Conversion of the Convertible Preferred Stock into Common Stock will not
result in the recognition of gain or loss (except with respect to cash
received in lieu of fractional shares). The holder's adjusted tax basis in
the Common Stock received upon conversion would be equal to the holder's tax
basis in the shares of Convertible Preferred Stock converted, reduced by the
portion of such basis allocable to the fractional share interest exchanged
for cash. The holding period for the Common Stock received upon conversion
would include the holding period of the Convertible Preferred Stock
converted. The tax basis for the Convertible Preferred Stock will equal its
cost, which is $10.00 per share at the initial public offering price,
assuming the allocation of the purchase price between the Convertible
Preferred Stock and the Warrants included in the Preferred Units is
respected. See "-- Warrants" below.
OPTIONAL CASH REDEMPTION
In the event the Company exercises its right to redeem the Convertible
Preferred Stock the surrender of the Convertible Preferred Stock for the
redemption proceeds by the holders will be treated as a sale or exchange and
the surrendering holder will recognize capital gain or loss equal to the
difference between the redemption proceeds (other than proceeds attributable
to declared but unpaid dividends, which will be taxed as dividends as
described above) and the holder's adjusted tax basis in the Convertible
Preferred Stock, provided the redemption (1) results in a "complete
termination" of the holder's stock interest in the Company (inclusive of any
Common Stock owned) under Section 302(b)(3) of the Code, (2) is
"substantially disproportionate" with respect to the holder under Section
302(b)(2) of the Code, (3) is "not essentially equivalent to a dividend" with
respect to the holder under Section 302(b)(1) of the Code, or (4) is from a
noncorporate holder in partial liquidation of the Company under Section
302(b)(4) of the Code. The constructive ownership rules of the Code must be
taken into consideration in determining whether any of these tests has been
met. If a redemption of the Convertible Preferred Stock does not meet any of
these tests, then the gross proceeds received would be treated as a
distribution taxable to the holder in the manner described under "Dividends"
above.
DISPOSITION
Except as described above, the holder of any of the Convertible Preferred
Stock or Common Stock will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of such securities measured by
the difference between (a) the amount of cash and the fair market value of
property received and (b) the holder's adjusted tax basis in the security
disposed of. Any gain or loss on such sale, exchange, redemption, retirement
or other disposition will be capital gain provided the security disposed of
is held as a capital asset and will be long-term capital gain if the holding
period exceeds one year. For corporate taxpayers, long-term capital gains
are taxed at the same rate as ordinary income. For individual taxpayers, net
capital gains (the excess of the taxpayer's net long-term capital gains over
his net short-term capital losses) are subject to a maximum tax rate of 28%.
The deductibility of capital losses are restricted and, in general, may only
be used to reduce capital gains to the extent thereof. However, individual
taxpayers may deduct $3,000 of capital losses in excess of their capital
gains. Capital losses which cannot be utilized because of the aforementioned
limitation are, for corporate taxpayers carried back three years and, in most
circumstances, carried forward for five years; for individual taxpayers,
capital losses may only be carried forward but without a time limitation.
BACKUP WITHHOLDING
A holder of any of the Convertible Preferred Stock or Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends
thereon unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides
a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder who does not provide
the Company with a
62
<PAGE>
correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable against the
holder's Federal income tax liability. Holders should consult their tax
advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining any applicable exemption.
WARRANTS
A holder's basis in the Warrants will be equal to the purchase price paid
therefor. However, there can be no assurance that the Internal Revenue
Service will not allocate the aggregate purchase price for such securities in
a different manner than as set forth on the cover page of this Prospectus for
purposes of determining the respective adjusted bases for the Convertible
Preferred Stock, Common Stock and/or Warrants of a purchaser, if any or all
of such securities are purchased.
Upon a sale or exchange of the Warrants (including the receipt of cash in
lieu of a fractional share of Common Stock issuable upon exercise of the
Warrants), a holder of the Warrants will recognize capital gain or loss equal
to the difference between the amount realized upon such sale or exchange and
the holder's basis in the Warrants (as determined above). Such gain or loss
will be long-term if, at the time of the sale or exchange, the Warrants were
held for more than one year. Adjustments to the exercise price or conversion
ratio, or the failure to make adjustments, may result in the receipt of a
constructive dividend by the holder.
Upon exercise of the Warrants, a holder's tax basis in the Common Stock
acquired upon such exercise will be equal to its tax basis in the Warrants
plus the exercise price of the Warrants. The holding period with respect to
such Common Stock will commence on the date of exercise. If the Warrants
expire without being exercised, a holder will have a capital loss equal to
its tax basis in the Warrants as if the Warrants had been sold on such date
for no consideration.
63
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the "Underwriting Agreement"), to purchase
from the Company and the Company has agreed to sell to the Underwriters on a
firm commitment basis, the respective number of shares of Convertible
Preferred Stock, shares of Common Stock and Warrants set forth opposite their
names:
<TABLE>
<CAPTION>
Number of Shares Number of Number
of Convertible Shares of
Underwriters Preferred Stock of Common Stock Warrants
----------------------------------- -------------------- ------------------- -------------
<S> <C> <C> <C>
National Securities
Corporation ................
-------------------- ------------------- -------------
Total. ....................... 1,500,000 1,500,000 3,000,000
==================== =================== =============
</TABLE>
The Underwriters are committed to purchase all the shares of Convertible
Preferred Stock, shares of Common Stock and Warrants offered hereby, if any
of such Securities are purchased. The Underwriting Agreement provides that
the obligations of the several Underwriters are subject to conditions
precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per share of
Convertible Preferred Stock, $ per share of Common Stock and $ per
Warrant. Such dealers may reallow a concession not in excess of $ per share
of Convertible Preferred Stock, $ per share of Common Stock and $ per
Warrant to certain other dealers. After the commencement of the Offering, the
public offering price, concession and reallowance may be changed by the
Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Representative a non-accountable expense allowance
equal to 3% of the gross proceeds derived from the sale of the Securities
underwritten.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase from the Company up to 225,000 additional shares of Convertible
Preferred Stock, up to 225,000 additional shares of Common Stock and/or up to
450,000 additional Warrants, at the initial public offering prices per share
of Convertible Preferred Stock, per share of Common Stock and per Warrant,
respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or
in part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate
to its initial commitment.
All officers, directors and stockholders of the Company and all holders of
any options, warrants or other securities convertible, exercisable or
exchangeable for Common Stock have agreed not to, directly or indirectly,
offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for the purchase or sale of, pledge or otherwise dispose of any
beneficial interest in such securities for a period of 13 months following
the date of this Prospectus without the prior written consent of the
Representative. An appropriate legend shall be marked on the face of
certificates representing all such securities.
The Company has agreed not to, without the prior written consent of the
Representative, issue, sell, agree or offer to sell, grant an option for the
purchase or sale of, or otherwise transfer or dispose of any of its
securities for a period of 13 months following the effective date of the
Registration Statement of which this Prospectus is a part, except pursuant to
the conversion of the Convertible Preferred Stock, the exercise of the
Warrants and the exercise of those options existing on the date of this
Prospectus.
64
<PAGE>
In connection with this Offering, the Company has agreed to sell to the
Representative, for $.0001 per warrant, warrants to purchase from the Company
up to 150,000 shares of Convertible Preferred Stock, 150,000 shares of Common
Stock and/or 300,000 Warrants (the "Representative's Warrants"). The
Representative's Warrants are initially exercisable at a price of $12.00 per
share of Convertible Preferred Stock [120% of the initial public offering
price per share of Convertible Preferred Stock], $7.20 per share of Common
Stock [120% of the initial public offering price per share of Common Stock]
and $.12 per Warrant [120% of the initial public offering price per Warrant],
for a period of four years, commencing one year after the date of this
Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of 12 months from the date of this Prospectus,
except to officers of the Representative. The Representative's Warrants
provide for adjustment in the number of securities issuable upon the exercise
thereof as a result of certain subdivisions and combinations of the Common
Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
The Company has agreed for a period of five years after the date of this
Prospectus, if requested by the Representative, to use its best efforts to
nominate for election to the Company's Board of Directors one person
designated by the Representative. In addition, the Representative may also
designate a person to receive all notices of meetings of the Company's Board
of Directors and all other correspondence and communications sent by the
Company to its Board of Directors and to attend all such meetings of the
Company's Board of Directors. The Company has agreed to reimburse designees
of the Representative for their out-of-pocket expenses incurred in connection
with their attendance of meetings of the Company's Board of Directors.
Prior to this Offering, there has been no public market for the
Securities. Consequently, the initial public offering prices of the
Securities and the terms of the Convertible Preferred Stock have been
determined by negotiation between the Company and the Representative and do
not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in such
negotiations (without one factor being materially more important than
another) were prevailing market conditions, the history of and prospects for
the industry in which the Company competes, an assessment of the Company's
management and technology, the prospects of the Company, its capital
structure, Commodore's ownership interest in the Company, the market for
initial public offerings and market prices of similar securities of
comparable publicly-traded companies.
Upon the exercise of any Warrants more than one year after the date of
this Prospectus, which exercise was solicited by the Representative, and to
the extent not inconsistent with the guidelines of the National Association
of Securities Dealers, Inc. and the Rules and Regulations of the Securities
and Exchange Commission (the "Commission"), the Company has agreed to pay the
Representative a commission of 5% of the aggregate exercise price of such
Warrants. However, no compensation will be paid to the Representative in
connection with the exercise of the Warrants if (a) the market price of the
Common Stock is lower than the exercise price, (b) the Warrants are held in a
discretionary account, or (c) the Warrants are exercised in an unsolicited
transaction where the holder of the Warrant has not stated in writing that
the transaction was solicited and has not designated in writing the
Representative as soliciting agent. Unless granted an exemption by the
Commission from Rule 101 under the Securities Act, the Representative and any
soliciting broker-dealers will be prohibited from engaging in any
market-making activities or solicited brokerage activities with regard to the
Company's securities for the periods prescribed by Rule 101 before the
solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative and any soliciting broker-dealers may have to
receive a fee for the exercise of the Warrants following such solicitation.
As a result, the Representative and any soliciting broker-dealers may be
unable to continue to provide a market for the Convertible Preferred Stock,
Common Stock or Warrants during certain periods while the Warrants are
exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 101 during the periods described above, the Representative
has undertaken to waive unconditionally its rights to receive a commission on
the exercise of such Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Securities.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock or Warrants for the purpose of sta-
65
<PAGE>
bilizing their respective market prices. The Underwriters also may create a
short position for the account of the Underwriters by selling more Securities
in connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Securities in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position by exercising the Over-allotment Option referred to above. In
addition, the Representative, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby
it may reclaim from an Underwriter (or dealer participating in the Offering)
for the account of other Underwriters, the selling concession with respect to
Securities that are distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Securities at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above. Reference is made to a copy of each such agreement which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part for a more complete description thereof. See "Additional Information."
In July 1996, the Representative acted as the managing underwriter in
connection with the initial public offering by Applied, the Company's sole
stockholder, pursuant to which Applied sold to the public 5,000,000 shares of
common stock and 5,000,000 redeemable common stock purchase warrants, at a
price of $6.00 per share and $.10 per warrant. In addition, the
Representative exercised an over-allotment option granted to it by Applied to
purchase an additional 750,000 shares and 750,000 warrants.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, New York, New York, as counsel to the Company in
connection with this Offering. Orrick, Herrington & Sutcliffe LLP, New York,
New York, has acted as counsel to the Underwriters in connection with this
Offering. A shareholder of Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel is the holder of 100,000 shares of Commodore common stock and stock
options to purchase 300,000 shares of Commodore common stock, representing
together less than 1% of Commodore's outstanding common stock.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement of which this Prospectus is a part have been audited
by Tanner + Co., independent certified public accountants, to the extent and
for the period set forth in the report of such firm contained herein and in
the Registration Statement of which this Prospectus is a part. All such
financial statements have been included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington D.C., a
Registration Statement under the Securities Act with respect to the
Securities offered hereby. This Prospectus, filed as a part of the
Registration Statement, does not contain certain information set forth in or
annexed as exhibits to the Registration Statement. For further information
regarding the Company and the Securities offered hereby, reference is made to
the Registration Statement and to the exhibits filed as a part thereof, which
may be inspected at the office of the Commission without charge or copies of
which may be obtained therefrom upon request to the Commission and payment of
the prescribed fee. With respect to each contract, agreement or other
document referred to in this Prospectus and filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved.
66
<PAGE>
The Registration Statement and such exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048, and Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Registration Statement may
also be accessed on the World Wide Web through the Commission's Internet
address at "http://www.sec.gov."
67
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Independent Auditors' Report ................................................................... F-2
Balance Sheet as of June 30, 1996 and December 31, 1996 (unaudited) ............................ F-3
Statements of Operations for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) ................................................... F-4
Statement of Stockholders' Deficit for the period from November 15, 1995 (date of inception)
through December 31, 1996 (unaudited) ......................................................... F-5
Statement of Cash Flows for the period from November 15, 1995 (date of inception) to June 30,
1996, for the period from November 15, 1995 (date of inception) to December 31, 1995
(unaudited), the six months ended December 31, 1996 (unaudited) and November 15, 1995 (date of
inception) to December 31, 1996 (unaudited) ................................................... F-6
Notes to Financial Statements. ................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Commodore Separation Technologies, Inc.
We have audited the accompanying balance sheet of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for
the period from November 15, 1995 (date of inception) to June 30, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commodore Separation
Technologies, Inc. (a development stage company) as of June 30, 1996, and the
results of its operations and its cash flows for the period from November 15,
1995 (date of inception) to June 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 4, the
Company's significant operating losses and deficits in working capital and
stockholders' equity raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in note 4. The accompanying financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
August 1, 1996 except notes 2 and 3
which are dated October 14, 1996 and
notes 1, 4, 5 and 7, which are dated February 4, 1997
F-2
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1996
----------------------------------------------------------------------------------- ---------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash ............................................................................ $ 2,533 $ 99,285
Accounts receivable ............................................................. -- 758
Deferred offering costs ......................................................... -- 219,464
---------- -------------
Total current assets ....................................................... 2,533 319,507
---------- -------------
Property and equipment:
Technical equipment ............................................................. 7,498 201,109
Office equipment ................................................................ 3,142 7,205
---------- -------------
10,640 208,314
Less accumulated depreciation ................................................ 52 18,333
---------- -------------
Net property and equipment ................................................... 10,588 189,981
---------- -------------
Intangible assets, net of accumulated amortization of $101 and $1,300 ............. 10,206 21,156
---------- -------------
$ 23,327 $ 530,644
========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................................ $ 18,254 $ 59,849
Accrued liabilities ............................................................. 12,276 116,536
Due to related party ............................................................ 1,033 4,199
Note payable to stockholder ..................................................... 52,600 273,600
---------- -------------
Total current liabilities .................................................. 84,163 454,184
---------- -------------
Commitments and contingencies: .................................................... -- --
Stockholders' deficit;
Preferred stock, $.001 par value, 5,000,000 shares authorized, and no shares
issued ....................................................................... -- --
Common stock, $.001 par value, 50,000,000 shares authorized, 10,000,000 shares
issued and outstanding ....................................................... 10,000 10,000
Additional paid in capital ...................................................... 5,000 981,200
Subscription receivable ......................................................... (14,900) --
Deficit accumulated during the development stage ................................ (60,936) (914,740)
---------- -------------
Total stockholders' deficit ................................................ (60,836) 76,460
---------- -------------
$ 23,327 $ 530,644
========== =============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Period from Period from Amounts Since
November 15, November 15, November 15,
1995 1995 Six 1995
(Date of (Date of Months (Date of
inception) to Inception) to Ended Inception) to
June 30, December 31, December 31, December 31,
1996 1995 1996 1996
-------------- -------------- ------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ..................... $ -- $ -- $ 7,758 $ 7,758
-------------- -------------- ------------- ---------------
Costs and expenses:
Research and development .. 50,080 -- 412,340 462,420
Amortization .............. 101 -- 1,199 1,300
General and administrative 9,720 -- 443,423 453,143
-------------- -------------- ------------- ---------------
Total costs and expenses 59,901 -- 856,962 916,863
-------------- -------------- ------------- ---------------
Loss from operations ........ (59,901) -- (849,204) (909,105)
Interest expense ............ (1,035) -- (4,600) (5,635)
-------------- -------------- ------------- ---------------
Net loss before income
taxes ................ (60,936) -- (853,804) (914,740)
Provision for income taxes .. -- -- -- --
-------------- -------------- ------------- ---------------
Net loss ............... $(60,936) $ -- $(853,804) $(914,740)
============== ============== ============= ===============
Net loss per share ..... $ (.01) $ -- $ (.08) $ (.09)
============== ============== ============= ===============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM NOVEMBER 15, 1995 (DATE OF
INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the Stockholders'
Common Stock Subscription Paid in Development Equity
-------------------------- -------------- ------------ ------------- ---------------
Shares Amount Receivable Capital Stage (Deficit)
------------- --------- -------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 15, 1995 ....... -- $ -- $ -- $ -- $ --
Common stock issued for cash on
November 15, 1995 at $1 per share 100 100 -- -- 100
Forward stock split of 150,000
shares for one share on September
5, 1996 ......................... 14,999,900 14,900 (14,900) -- --
Reverse stock split of 1.50 shares
for one share on November 26,
1996 ............................ (5,000,000) (5,000) -- $ 5,000 -- --
Net loss ......................... -- -- -- -- (60,936) (60,936)
------------- --------- -------------- ------------ ------------- ---------------
Balance, June 30, 1996 ........... 10,000,000 $10,000 $(14,900) $ 5,000 $ (60,936) $ (60,836)
============= ========= ============== ============ ============= ===============
Payment of subscription receivable
(unaudited) ..................... -- -- 14,900 -- -- 14,900
Contributed capital (unaudited) .. -- -- -- 976,200 -- 976,200
Net loss (unaudited) ............. -- -- -- -- (853,804) (853,804)
------------- --------- -------------- ------------ ------------- ---------------
Balance, December 31, 1996
(unaudited) ..................... 10,000,000 $10,000 $ -- $981,200 $(914,740) $ 76,460
============= ========= ============== ============ ============= ===============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from Period from
November 15, November 15, November 15,
1995 1995 Six 1995
(Date of (Date of Months (Date of
Inception) to Inception) to Ended Inception) to
June 30, December 31, December 31, December 31,
1996 1995 1996 1996
-------------- -------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................. $(60,936) $ -- $(853,804) $ (914,740)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation and amortization .......... 153 -- 19,480 19,633
(Increase) decrease in:
Accounts receivable .................. -- -- (758) (758)
Increase (decrease) in:
Accounts payable ..................... 18,254 -- 41,595 59,849
Accrued liabilities .................. 12,276 -- 104,260 116,536
Due to related party ................. 1,033 -- 3,166 4,199
-------------- -------------- ------------- --------------
Net cash used in operating
activities ...................... (29,220) -- (686,061) (715,281)
-------------- -------------- ------------- --------------
Cash flows from investing activities:
Acquisition of intangible assets .......... (10,307) -- (12,149) (22,456)
Purchase of property and equipment ........ (3,142) -- (4,063) (7,205)
Construction of technical equipment ....... (7,498) -- (193,611) (201,109)
-------------- -------------- ------------- --------------
Net cash used in investing
activities ...................... (20,947) -- (209,823) (230,770)
-------------- -------------- ------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock ........ 100 -- 14,900 15,000
Note payable to stockholder ............... 52,600 -- 221,000 273,600
Contributed capital ....................... -- -- 976,200 976,200
Increase in deferred offering costs ....... -- -- (219,464) (219,464)
-------------- -------------- ------------- --------------
Net cash provided by financing
activities ...................... 52,700 -- 992,636 1,045,336
-------------- -------------- ------------- --------------
Increase in cash .................. 2,533 -- 96,752 99,285
Cash, beginning of period ................... -- -- 2,533 --
-------------- -------------- ------------- --------------
Cash, end of period ......................... $ 2,533 $ -- $ 99,285 $ 99,285
============== ============== ============= ==============
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest ............................... $ -- $ -- $ -- $ --
============== ============== ============= ==============
Income taxes ........................... $ -- $ -- $ -- $ --
============== ============== ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Development Stage Company
Commodore Separation Technologies, Inc. (a development stage company) (the
"Company") was incorporated on November 15, 1995, under the laws of the state
of Delaware. As part of the capitalization of the Company, Commodore
Environmental Services, Inc. ("Commodore") contributed to the Company
Commodore's rights to the separation technology and assigned to the Company a
royalty payable to Srinivas Kilambi, Ph.D., an officer of the Company, equal
to 2% of future technology revenue that the Company may realize, except for
applications related to the radionuclides technetium and rhenium, for which
Dr. Kilambi is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes). See Note 5.
Effective December 2, 1996, Commodore transferred 100% of the capital
stock of the Company and Company notes aggregating $976,200 to its 69.3%
subsidiary, Commodore Applied Technologies, Inc. ("Applied"), together with
the stock of another Commodore subsidiary. Applied paid Commodore $3,000,000
and, subject to any applicable stockholder approval and notification
requirements, shall issue Commodore a warrant to purchase 7,500,000 shares of
Applied common stock for such stock and note. Applied capitalized the
$976,200 of Company notes.
The Company is a process technology company which has developed and
intends to commercialize its separation technology and recovery system, known
as CST. The Company believes that CST is capable of effectively separating
and extracting various solubilized materials, including metals, organic
chemicals, biochemicals, radionuclides and other targeted substances, from
liquid and gaseous process streams. The Company has not commenced planned
principal operations. As such, the Company is considered a development stage
company as defined in SFAS No.7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Financial
instruments subject to possible material market variations from the recorded
book value are a note payable to a stockholder and a note due to a related
party. There are no material differences in instruments from the recorded
book value as of June 30, 1996.
USE OF ACCOUNTING 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOSS PER SHARE
Loss per share is computed based on the average number of shares
outstanding of 10,000,000 shares for the period November 15, 1995 (date of
inception) to June 30, 1996, for the period November 15, 1995 to December 31,
1995 (unaudited), the six months ended December 31, 1996 (unaudited) and
cumulative amounts since November 15, 1995 through December 31, 1996
(unaudited).
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and
improvements are capitalized while minor replacements, maintenance and
repairs which do not increase the useful lives of the assets are expensed as
F-7
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(1) Summary of Significant Accounting Policies - (Continued)
incurred. Depreciation and amortization have been provided using a
straight-line method over estimated useful lives of the assets, which vary
from three to seven years. Research equipment has been constructed by the
Company and management anticipates it will be placed in service in 1996. In
connection with the construction, the Company has not capitalized interest as
part of the asset cost as it is not material.
INTANGIBLE ASSETS
The Company has incurred costs associated with applying for certain
patents. These costs are amortized over 17 years. Accumulated amortization
was $101 and $1,300 at June 30, 1996 and December 31, 1996 (unaudited),
respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are charged to operations as
incurred except for those costs relating to the design or construction of an
asset having an economic useful life which are then capitalized and
depreciated over the estimated life.
INCOME TAXES
Deferred income taxes are provided, when material, in amounts sufficient
to give effect to timing differences between financial and tax reporting.
DEFERRED OFFERING COSTS
The Company is currently in the process of drafting and preparing a
Securities and Exchange Commission registration statement for a public
offering. Costs related to the public offering including legal, accounting,
printing, travel and other related costs are capitalized. Upon completion of
the offering these costs will be netted against the offering proceeds. Should
the offering be aborted or terminated those costs will be charged to
operations.
UNAUDITED FINANCIAL INFORMATION
The unaudited financial statements include the accounts of the Company and
include all adjustments (consisting of normal recurring items) which are, in
the opinion of management, necessary to present fairly the financial position
as of December 31, 1996 and the results of operations and cash flows for the
period from November 15, 1995 (date of inception) to December 31, 1995, for
the six months ended December 31, 1996 and the period from November 15, 1995
to December 31, 1996. The results of operations for the six months ended
December 31, 1996 are not necessarily indicative of the results to be
expected for the entire year.
(2) RELATED PARTY TRANSACTIONS
The Company owes unsecured advances of $52,600 as of June 30, 1996 to its
then sole stockholder, Commodore, and $273,600 to its current sole
stockholder, Applied, as of December 31, 1996. The Company owes interest on
the advances at the rate of 8 percent per annum. Accrued interest payable at
June 30, 1996 and December 31, 1996 is $1,035 and $0, respectively.
Effective December 2, 1996, Commodore transferred 100% of the capital
stock of the Company and Company notes aggregating $976,200 to its 69.3%
subsidiary, Applied, together with the stock of another Commodore subsidiary.
Applied paid Commodore $3,000,000 and, subject to any applicable stockholder
approval and notification requirements, shall issue Commodore a warrant to
purchase 7,500,000 shares of Applied common stock for such stock and note.
Applied capitalized the $976,200 of Company notes.
F-8
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(2) Related Party Transactions - (Continued)
The Company has unsecured non-interest bearing advances from a related
entity that has the same principal stockholder as the Company. The amount
owed to the related party at June 30, 1996 and December 31, 1996 is $1,033
and $4,199, respectively.
Through June 30, 1996, the Company had an unwritten agreement in which its
sole stockholder provided space for the Company's New York offices at no
cost, and another company under common control provided the Ohio facility
space to the Company at no cost. Subsequent to June 30, 1996, the Company is
paying a monthly rent of $750 for the Ohio space. Rent expense for the six
month period ended December 31, 1996 was $4,500.
(3) INCOME TAXES
The difference between the income tax benefit at statutory rates for the
periods ended June 30, 1996 and December 31, 1996, respectively, and the
amount presented in the financial statements are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
----------- -------------
(unaudited)
<S> <C> <C>
Tax benefit at statutory rates $(21,000) $(290,000)
Valuation allowance 21,000 290,000
----------- -------------
$ -- $ --
=========== =============
Deferred tax asset at June 30, 1996 and December 31,
1996 are as follows:
Net operating loss carryforward $(21,000) $(311,000)
Valuation allowance 21,000 311,000
------------ -------------
Net deferred tax asset $ -- $ --
============ =============
</TABLE>
At June 30, 1996 and December 31, 1996, the Company had tax loss
carryforwards of approximately $61,000 and $914,000, respectively. The amount
of and ultimate realization of benefit from the net operating loss for income
tax purposes is dependent, in part, upon the tax laws in effect, future
earnings of the Company, and other future events, the effects of which cannot
be determined. A change in ownership of the Company may reduce the amount of
loss allowable. These net operating carryforwards begin to expire in 2011.
A valuation allowance has been established to reduce any potential tax
benefit as it is not known when or if the Company will realize the benefit of
net operating losses.
(4) GOING CONCERN
The Company has sustained significant operating losses. In addition, the
Company has significant deficits in working capital and stockholders' equity.
These factors create an uncertainty about the Company's ability to continue
as a going concern. The Company has received advances in working capital from
its parent company to fund operations to date. There can be no assurance that
it will continue to receive such assistance.
The Company commenced drafting and preparing a Securities and Exchange
Commission registration statement for a public offering of (i) 1,500,000
Preferred Units, each unit consisting of one share of 10% Senior Convertible
Redeemable Preferred Stock and one Redeemable Common Stock Purchase Warrant,
and (ii) 1,500,000 Common Units, each unit consisting of one share of Common
Stock and one Redeemable Common Stock Purchase Warrant. If the proposed
public offering is consummated, it will provide funds for continuing
operations. There is no assurance that the Company will be successful in
raising the needed working capital and equity through the proposed public
offering. The ability of the Company to continue as a going concern is
dependent on the Company obtaining external funding and attaining future
profitable operations. The financial statements do not include any adjustment
that might be necessary if the Company is unable to continue as a going
concern.
F-9
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(5) ROYALTY AGREEMENTS
The Company has an agreement with an officer of the Company whereby the
officer is to receive a royalty of 2% of collected revenues from the
Company's membrane separation technology through December 3, 2002, except for
applications related to the radionuclides technetium and rhenium, for which
the officer is entitled to receive a royalty of .66% of net sales (less
allowances for returns, discounts, commissions, freight and excise or other
taxes).
The Company also has a license agreement with Lockheed Martin Energy
Research Corporation, manager of the Oak Ridge National Laboratory, a U.S.
Department of Energy national laboratory, whereby Lockheed Martin is to
receive a royalty of 2% of net sales of the Company's products or processes
covered under the agreement (less allowances for returns, discounts,
commissions, freight, and excise or other taxes) up to total net sales of
$4,000,000 and 1% of net sales thereafter. In addition, the Company has
agreed to guarantee Lockheed Martin, commencing in the third year of the
agreement, an annual minimum royalty of $15,000.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement No. 121, "Accounting for Long Lived
Assets" and No. 123, "Accounting and Disclosure of Stock-Based Compensation."
Statement No. 121 is effective for years beginning after December 15, 1995.
The effect of adoption of Statement No. 121 will not have a material effect
on the Company's financial statements. Statement No. 123 is effective for
awards granted after December 31, 1994, and has required financial
presentation for years beginning after December 15, 1995. The effect of
adoption of Statement 123 is not expected to have a material effect on the
Company's financial statements.
(7) SUBSEQUENT EVENTS
Public Stock Offering
Subsequent to June 30, 1996, the Company commenced drafting and preparing
a Securities and Exchange Commission registration statement for a public
offering of (i) 1,500,000 Preferred Units, each unit consisting of one share
of 10% Senior Convertible Redeemable Preferred Stock and one Redeemable
Common Stock Purchase Warrant, and (ii) 1,500,000 Common Units, each unit
consisting of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant.
EMPLOYMENT AGREEMENTS
On August 1 and September 1, 1996, and January 27, 1997, the Company
entered into employment agreements with certain officers of the Company.
Commitments under the employment agreements are as follows:
<TABLE>
<CAPTION>
Annual
Year Compensation
------ --------------
<S> <C>
1997 $ 676,000
1998 898,000
1999 898,000
2000 449,000
--------------
$2,921,000
==============
</TABLE>
Stock Option Plan
On September 5, 1996, Commodore (as sole stockholder of the Company)
approved the Company's 1996 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "Plan"), pursuant to which officers,
directors, and/or key employees and/or consultants of the Company can receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 1,350,000 shares of the Company's Common Stock (of which no more
than 1,147,500 shares may be issued pursuant to non-qualified stock options).
On
F-10
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(7) Subsequent Events - (Continued)
September 5, 1996, December 18, 1996, and January 27, 1997, the Company's
Board of Directors awarded, effective upon completion of this Offering,
non-qualified stock options under the Plan to certain key executive officers
entitling them to purchase an aggregate of 630,000 shares of Common Stock,
all of which provide for an exercise price equal to the initial public
offering price of the Common Stock, are exercisable at the rate of 20% of the
number of options granted in each of calendar 1996 (1997 in the case of one
executive officer) through 2000, inclusive, beginning on the closing date of
this Offering and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
In addition, non-qualified options to purchase an aggregate of 136,689 shares
of Common Stock were awarded, effective upon completion of this Offering, to
members of the Board of Directors who are not employed or otherwise
affiliated with the Company, all of which are exercisable at an exercise
price equal to the initial public offering price of the Common Stock, are
exercisable at the rate of 33 1/3 % of the number of options granted in each
of calendar 1996 through 1998, inclusive, beginning on the closing date of
this Offering, and, unless exercised, expire on December 31, 2001 (subject to
prior termination in accordance with the applicable stock option agreements).
The exercise price applicable to all outstanding stock options represents not
less than 100% of the fair market value of the underlying Common Stock as of
the date that such options were granted, as determined by the Board of
Directors of the Company on the date that such options were granted. In
December 1996 and January 1997, Applied, as purchaser of 100% of the capital
stock of the Company, ratified the Plan and all issuances thereunder.
As of January 27, 1997, the Company had granted options for 766,689
shares, of which none had been exercised.
BASIS OF PRESENTATION
On September 5, 1996, the Company amended its Certificate of Incorporation
which changed the preferred and common stock to the following:
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, $.001 par value.
Common Stock
The Company is authorized to issue up to 50,000,000 shares of common
stock, $.001 par value.
The Company also effected a forward stock split of 150,000 shares for one
share. This increased the total number of shares of Common Stock issued and
outstanding to 15,000,000 shares, which were all held by Commodore. On
November 26, 1996, the outstanding shares were reduced to 10,000,000 based on
a 1-for-1.50 reverse stock split.
The financial statements have been prepared as though the above changes in
stockholders' equity had occurred at November 15, 1995.
CAPITAL CONTRIBUTION
As of December 31, 1996, the Company had received $976,200 of advances
from Commodore, which have been reflected in the financial statements as a
contribution to equity. See Note 1.
OWNERSHIP CHANGE
Effective December 2, 1996, Commodore sold the shares of the Company to
its 69.3%-owned subsidiary, Applied. See Note 1.
F-11
<PAGE>
=============================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any date subsequent to
the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so
or to any person to whom it is unlawful to make such offer or solicitation.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ............................... 5
Risk Factors ..................................... 11
Use of Proceeds .................................. 21
Capitalization ................................... 23
Dividend Policy .................................. 24
Dilution ......................................... 25
Selected Financial Data .......................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 27
Business ......................................... 30
Management ....................................... 43
Executive Compensation ........................... 46
Principal Stockholders ........................... 49
Certain Relationships and Related Transactions ... 52
Description of Securities ........................ 54
Shares Eligible for Future Sale .................. 59
Certain Federal Income Tax Considerations ........ 60
Underwriting ..................................... 64
Legal Matters .................................... 66
Experts .......................................... 66
Additional Information ........................... 66
Index to Financial Statements .................... F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
=============================================================================
<PAGE>
=============================================================================
COMMODORE SEPARATION
TECHNOLOGIES, INC.
UNITS CONSISTING OF 1,500,000 SHARES
OF 10% SENIOR CONVERTIBLE
REDEEMABLE PREFERRED STOCK AND
1,500,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
UNITS CONSISTING OF 1,500,000 SHARES
OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
------
PROSPECTUS
------
NATIONAL SECURITIES
CORPORATION
, 1997
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Securities being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq listing
fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ....................................... $ 41,874
NASD filing fee ............................................ 12,644
Nasdaq listing fee ......................................... 50,000
Registrar and Transfer Agent's fees ......................... 10,000
Printing and engraving expenses ............................ 100,000
Blue Sky fees and expenses ................................. 25,000
Legal fees and expenses .................................... 225,000
Accountant's fees and expenses ............................. 60,000
Miscellaneous. ............................................. 8,982
----------
Total .................................................... $533,500
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and By-laws of the registrant provide
that the Company shall indemnify officers and directors to the fullest extent
allowed by the Delaware General Corporation Law, as it now exists and as may
be amended.
The Underwriting Agreement between the Company and National Securities
Corporation, as representative of the several Underwriters (the
"Representative"), provides for indemnification of the officers and directors
of the registrant under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) In November 1995, the registrant issued 100 shares of its Common Stock
to its then corporate parent, Commodore Environmental Services, Inc.
("Commodore"). On September 5, 1996, the Company effected a 150,000-for-one
stock split, and issued a new stock certificate to Commodore representing
15,000,000 shares of the registrant's Common Stock. On November 26, 1996, the
registrant effected a one-for-1.50 reverse stock split, and issued a new
stock certificate to Commodore representing 10,000,000 shares of the
registrant's Common Stock. Effective December 2, 1996 Commodore transferred
100% of the registrant's Common Stock to Commodore Applied Technologies,
Inc., a 69.3%-owned subsidiary of Commodore.
In September and December 1996, and January 1997, the registrant issued to
officers and directors, effective upon completion of this Offering, pursuant
to the registrant's 1996 Stock Option Plan, options to purchase an aggregate
of 766,689 shares of the registrant's Common Stock.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth in Item 15(a).
(c) The issuances described in Item 15(a) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public
offering. In addition, certain of the issuances described in Item 15(a) were
deemed exempt from registration under the Securities Act in reliance upon
Rule 701 promulgated under the Securities Act. The recipients of securities
in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with the registrant, to
information about the registrant.
The registrant has not otherwise issued any securities exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
--------------- --------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement between the Company and the Representative.
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
**3.3 Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable Preferred
Stock of the Company.
4.1 Specimen Common Stock Certificate.
*4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.
4.3 Specimen Warrant Certificate.
*4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including
form of Representative's Warrant therein.
4.5 Specimen Convertible Preferred Stock Certificate.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel as to the legality of the Securities
being offered.
10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.
10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.
10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.
10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi,
Ph.D.
10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.
10.6 1996 Stock Option Plan of the Company.
10.7 Executive Bonus Plan of the Company.
*10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering,
a Division of Teledyne Industries, Inc., as amended.
*10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc., as amended.
10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies,
Inc.
10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company (formerly
Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.
10.12 Employment Agreement, dated as of October 31, 1996, between Commodore and Edwin L. Harper, Ph.D.
10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed
Martin Energy Research Corporation and the Company.
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Commodore and Applied.
*10.15 Form of Revolving Credit Agreement between the Company and Commodore.
10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.
22.1 Subsidiaries of the Company.
*23.1 Consent of Tanner + Co.
23.2 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion filed
as Exhibit 5.1).
23.5 Consent of DLZ Laboratories Inc.
23.6 Consent of Artesian Laboratories, Inc.
23.7 Consent of Kenneth L. Adelman, Ph.D.
23.8 Consent of David L. Mitchell.
23.9 Consent of William R. Toller.
25.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules.
None required.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment(s) to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities
Act if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change in such information in the
Registration Statement.
(b) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 14, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(e) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(f) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in New
York, New York on March 12, 1997.
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: /s/ Edwin L. Harper
---------------------------------------------
Edwin L. Harper, Ph.D., Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
-------------------------- ---------------------------------- -----------------
<S> <C> <C>
/s/ Edwin L. Harper Chairman of the Board and Chief March 12, 1997
------------------------- Executive Officer
Edwin L. Harper, Ph.D. (principal executive officer)
/s/ Paul E. Hannesson Director March 12, 1997
-------------------------
Paul E. Hannesson
/s/ Andrew P. Oddi Vice President -- Finance March 12, 1997
------------------------- (principal financial and
Andrew P. Oddi accounting officer)
/s/ Bentley J. Blum Director March 12, 1997
-------------------------
Bentley J. Blum
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
--------------- --------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement between the Company and the Representative.
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
**3.3 Certificate of Designation, Preferences and Rights of 10% Senior Convertible Redeemable Preferred
Stock of the Company.
4.1 Specimen Common Stock Certificate.
*4.2 Form of Warrant Agreement among the Company, the Representative and the Bank of New York.
4.3 Specimen Warrant Certificate.
*4.4 Form of Representative's Warrant Agreement between the Company and the Representative, including
form of Representative's Warrant therein.
4.5 Specimen Convertible Preferred Stock Certificate.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel as to the legality of the Securities
being offered.
10.1 Employment Agreement, dated as of August 1, 1996, between the Company and Alan R. Burkart.
10.2 Employment Agreement, dated as of September 1, 1996, between the Company and Carl O. Magnell.
10.3 Employment Agreement, dated as of September 1, 1996, between the Company and James M. DeAngelis.
10.4 Employment Agreement, dated as of September 1, 1996, between the Company and Srinivas Kilambi,
Ph.D.
10.5 Employment Agreement, dated as of September 1, 1996, between the Company and Michael D. Kiehnau.
10.6 1996 Stock Option Plan of the Company.
10.7 Executive Bonus Plan of the Company.
*10.8 Memorandum of Understanding, dated August 30, 1996, between the Company and Teledyne Brown Engineering,
a Division of Teledyne Industries, Inc., as amended.
*10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc., as amended.
10.10 Services Agreement, dated August 31, 1996, between the Company and Commodore CFC Technologies,
Inc.
10.11 Assignment of Technology Agreement, dated as of December 4, 1995, by and between the Company (formerly
Commodore Membrane Technologies, Inc.) and Srinivas Kilambi, Ph.D.
10.12 Employment Agreement, dated as of October 31, 1996, between Commodore and Edwin L. Harper, Ph.D.
10.13 Undivided Rights (Sole Commercial) License Agreement, dated January 5, 1997, between Lockheed
Martin Energy Research Corporation and the Company.
10.14 Stock Purchase Agreement, dated as of December 2, 1996, by and between Commodore and Applied.
*10.15 Form of Revolving Credit Agreement between the Company and Commodore.
10.16 Employment Agreement, dated as of January 27, 1997, between the Company and Kenneth J. Houle.
22.1 Subsidiaries of the Company.
*23.1 Consent of Tanner + Co.
23.2 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion filed
as Exhibit 5.1).
23.5 Consent of DLZ Laboratories Inc.
23.6 Consent of Artesian Laboratories, Inc.
23.7 Consent of Kenneth L. Adelman, Ph.D.
23.8 Consent of David L. Mitchell.
23.9 Consent of William R. Toller.
25.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
** To be filed by amendment.
<PAGE>
Exhibit 1.1
[Form of Underwriting Agreement - Subject to Additional Review]
Units consisting of 1,500,000 Shares of
10% Senior Convertible Redeemable Preferred Stock
and 1,500,000 Redeemable Warrants and
Units consisting of 1,500,000 Shares of Common Stock
and 1,500,000 Redeemable Warrants
COMMODORE SEPARATION TECHNOLOGIES, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the
Several Underwriters listed on Schedule A hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), confirms its agreement with National Securities Corporation
("National") and each of the underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 11), for whom National is acting
as representative (in such capacity, National shall hereinafter be referred to
<PAGE>
as "you" or the "Representative"), with respect to the sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective number of shares ("Preferred Shares") of the Company's 10% Senior
Convertible Redeemable Preferred Stock, par value $.001 per share ("Convertible
Preferred Stock"), shares ("Common Shares") of the Company's common stock, par
value $.001 per share ("Common Stock"), and redeemable common stock purchase
warrants (the "Redeemable Warrants"), each to purchase one share of Common
Stock, set forth in Schedule A hereto. The aggregate 1,500,000 Preferred Shares,
1,500,000 Common Shares and 3,000,000 Redeemable Warrants will initially be sold
as units consisting of 1,500,000 Preferred Shares and 1,500,000 Redeemable
Warrants and units consisting of 1,500,000 Common Shares and 1,500,000
Redeemable Warrants but will be separately tradeable upon issuance and are
hereinafter referred to as the "Firm Securities." Each Redeemable Warrant is
exercisable commencing on ____________, 1998 [12 months from the date of this
Agreement] until ____________, 2002 [60 months from the date of this Agreement],
unless previously redeemed by the Company, at an initial exercise price of
$_______ [140% of the initial public offering price per Common Share] per share
of Common Stock. The Redeemable Warrants may be redeemed by the Company at a
redemption price of $.10 per Redeemable Warrant at any time after _____________,
1998 [18 months from the date of this Agreement] on thirty (30) days' prior
written notice, provided that the closing bid price of the Common Stock equals
or exceeds 300% of the initial public offering price per Common Share, for any
twenty (20) trading days within a period of thirty (30) consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption,
all in accordance with the terms and conditions of the Warrant Agreement (as
hereinafter defined).
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 225,000 shares of Convertible Preferred Stock,
225,000 shares of Common Stock and/or 450,000 Redeemable Warrants for the
purpose of covering over-allotments, if any. Such 225,000 shares of Convertible
Preferred Stock, 225,000 shares of Common Stock and/or 450,000 Redeemable
Warrants are hereinafter collectively referred to as the "Option Securities."
The Company also proposes to issue and sell to you warrants (the
"Representative's Warrants") pursuant to the Representative's Warrant Agreement
(the "Representative's Warrant Agreement") for the purchase of an additional
150,000 shares of Convertible Preferred Stock, 150,000 shares of Common Stock
and/or 300,000 Redeemable Warrants. The shares of Convertible Preferred Stock,
shares of Common Stock and Redeemable Warrants issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (hereinafter collectively referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, each
of the Underwriters as of the date hereof, and as of the Closing Date (as
hereinafter defined) and each Option Closing Date (as hereinafter defined), if
any, as follows:
- 2 -
<PAGE>
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-11813), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities, the
Representative's Warrants and the Representative's Securities under the
Securities Act of 1933, as amended (the "Act"), which registration
statement and amendment or amendments have been prepared by the Company
in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration
statement in the form heretofore delivered to the Underwriters and will
not file any other amendment thereto to which the Underwriters shall
have objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed
as a part thereof or incorporated therein (including, but not limited
to those documents or information incorporated by reference therein)
and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430(A) of the Regulations), is
hereinafter called the "Registration Statement", and the form of
prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(ii) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement or any of the Company's
securities have been instituted or are pending or threatened. Each of
the Preliminary Prospectus, the Registration Statement and Prospectus
at the time of filing thereof conformed with the requirements of the
Act and the Rules and Regulations, and none of the Preliminary
Prospectus, the Registration Statement or Prospectus at the time of
filing thereof contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to
the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
(iii) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date (as defined herein)
and each Option Closing Date (as defined herein), if any, and during
such longer period as the Prospectus may
- 3 -
<PAGE>
be required to be delivered in connection with sales by the
Underwriters or a dealer, the Registration Statement and the Prospectus
will contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and will conform
to the requirements of the Act and the Rules and Regulations; neither
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided,
however, that this representation and warranty does not apply to
statements made or statements omitted in reliance upon and in strict
conformity with information furnished to the Company in writing by or
on behalf of any Underwriter expressly for use in the Preliminary
Prospectus, Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
(iv) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the state
of its incorporation. Except as set forth in the Prospectus, the
Company does not own an interest in any corporation, partnership,
trust, joint venture or other business entity. The Company is duly
qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties
or the character of its operations requires such qualification or
licensing. The Company has all requisite power and authority (corporate
and other), and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of
and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and
has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and
all applicable federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, value,
operation, properties, business or results of operations of the
Company. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as
contemplated are correct in all material respects and do not omit to
state a material fact required to be stated therein or necessary to
make the statements contained therein not misleading in light of the
circumstances under which they were made.
(v) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization"
and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and each Option
Closing Date, if any, based upon the assumptions set forth therein, and
the Company is
- 4 -
<PAGE>
not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement, the
Warrant Agreement, the Representative's Warrant Agreement and as
described in the Prospectus. The Securities and all other securities
issued or issuable by the Company conform or, when issued and paid for,
will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued
and outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable and the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company or similar contractual
rights granted by the Company. The Firm Securities, the Option
Securities, the Representative's Warrants and the Representative's
Securities are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and will conform
to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders;
all corporate action required to be taken for the authorization, issue
and sale of the Firm Securities, the Option Securities, the
Representative's Warrants and the Representative's Securities has been
duly and validly taken; and the certificates representing the Firm
Securities, the Option Securities, the Representative's Warrants and
the Representative's Securities will be in due and proper form. Upon
the issuance and delivery pursuant to the terms hereof of the Firm
Securities, the Option Securities, the Representative's Warrants and
the Representative's Securities to be sold by the Company hereunder,
the Underwriters or the Representative, as the case may be, will
acquire good and marketable title to such Firm Securities, Option
Securities, Representative's Warrants and Representative's Securities
free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind
whatsoever.
(vi) The financial statements of the Company, together with
the related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly
present the financial position, income, changes in cash flow, changes
in stockholders' equity and the results of operations of the Company at
the respective dates and for the respective periods to which they apply
and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved and such financial
statements as are audited have been examined by Tanner + Co., who are
independent certified public accountants within the meaning of the Act
and the Rules and Regulations, as indicated in their reports filed
therewith. There has been no adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or
in the earnings, position, prospects, value, operation, properties,
business, or results of operations of the Company, whether or not
arising in the ordinary course of business, since the date of the
financial statements
- 5 -
<PAGE>
included in the Registration Statement and the Prospectus and the
outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus. Financial information (including, without limitation, any
pro forma financial information) set forth in the Prospectus under the
headings "Summary Financial Data", "Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," fairly present, on the
basis stated in the Prospectus, the information set forth therein, and
have been derived from or compiled on a basis consistent with that of
the audited financial statements included in the Prospectus; and, in
the case of pro forma financial information, if any, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions and
circumstances referred to therein. The amounts shown as accrued for
current and deferred income and other taxes in such financial
statements are sufficient for the payment of all accrued and unpaid
federal, state, local and foreign income taxes, interest, penalties,
assessments or deficiencies applicable to the Company, whether disputed
or not, for the applicable period then ended and periods prior thereto;
adequate allowance for doubtful accounts has been provided for
unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or
nonrecurring income not earned in the ordinary course of business,
except as specified in the notes thereto.
(vii) The Company (i) has paid all federal, state, local, and
foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of
the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to
the Code, (ii) has established adequate reserves for such taxes which
are not due and payable, and (iii) does not have any tax deficiency or
claims outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the
issuance by the Company of the Firm Securities, the Option Securities,
the Representative's Warrants or the Representative's Securities, (ii)
the purchase by the Underwriters of the Firm Securities and the Option
Securities from the Company and the purchase by the Representative of
the Representative's Warrants from the Company, (iii) the consummation
by the Company of any of its obligations under this Agreement, or (iv)
resales of the Firm Securities and the Option Securities in connection
with the distribution contemplated hereby.
(ix) The Company maintains insurance policies, including, but
not limited to, general and product liability, environmental and
property insurance, which insures the Company and its employees against
such losses and risks generally insured against by comparable
businesses. The Company (A) has not failed to give notice or present
any insurance claim with respect to any matter, including but not
limited to the Company's business, property or employees, under any
insurance policy or surety bond in a due and
- 6 -
<PAGE>
timely manner, (B) does not have any disputes or claims against any
underwriter of such insurance policies or surety bonds or has failed to
pay any premiums due and payable thereunder, or (C) has not failed to
comply with all conditions contained in such insurance policies and
surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(x) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same),
or involving the properties or business of, the Company which (i)
questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement or the Representative's Warrant
Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with this Agreement, the Warrant Agreement
or the Representative's Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise,
or the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the
Company.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Firm Securities, the Option
Securities, the Representative's Warrants and the Representative's
Securities, enter into this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement and to consummate the transactions
provided for in this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement; and this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement have each been
duly and properly authorized, executed and delivered by the Company.
Each of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its
terms, and none of the Company's issue and sale of the Firm Securities,
the Option Securities, the Representative's Warrants and the
Representative's Securities, execution or delivery of this Agreement,
the Warrant Agreement or the Representative's Warrant Agreement, its
performance hereunder and thereunder, its consummation of the
transactions contemplated herein and therein, or the conduct of its
business as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms of
(i) the certificate of incorporation or by-laws of the Company, (ii)
any license, contract,
- 7 -
<PAGE>
collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the
Company is a party or by which the Company is or may be bound or to
which either of its properties or assets (tangible or intangible) is or
may be subject, or any indebtedness, or (iii) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of its activities
or properties, which in any event could have a material adverse effect
on the condition (financial or otherwise), business, properties,
financial position or results of operations of the Company.
(xii) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other
body, domestic or foreign, is required for the issuance of the Firm
Securities, the Option Securities, the Representative's Warrants and
the Representative's Securities pursuant to the Prospectus and the
Registration Statement, the performance of this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby, including without
limitation, any waiver of any preemptive, first refusal or other rights
that any entity or person may have for the issue and/or sale of any of
the Firm Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities, except such as have been
or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters'
purchase and distribution of the Firm Securities and the Option
Securities, and the Representative's Warrants to be sold by the Company
hereunder.
(xiii) All executed agreements, contracts or other documents
or copies of executed agreements, contracts or other documents filed as
exhibits to the Registration Statement to which the Company is a party
or by which it may be bound or to which its assets, properties or
business may be subject have been duly and validly authorized, executed
and delivered by the Company and constitute the legal, valid and
binding agreements of the Company enforceable against the Company in
accordance with their respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with
respect thereto by Form S-1, and there are no contracts or other
documents which are required by the Act to be described in the
Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required, and the
exhibits which have been filed are complete and correct copies of the
documents of which they purport to be copies.
(xiv) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus,
and except as may otherwise be indicated or
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contemplated herein or therein, the Company has not (i) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other
than in the ordinary course of business, or (iii) declared or paid any
dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital
stock, or any change in the debt (long or short term) or liabilities or
material adverse change in or affecting the general affairs,
management, financial operations, stockholders' equity or results of
operations of the Company.
(xv) No default exists in the due performance and observance
of any term, covenant or condition of any license, contract, collective
bargaining agreement, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders agreement,
partnership agreement, note, loan or credit agreement, purchase order,
or any other agreement or instrument evidencing an obligation for
borrowed money, or any other material agreement or instrument to which
the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is
subject or affected.
(xvi) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance
in all material respects with all federal, state, local, and foreign
laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement
of such federal, state, local, or foreign laws and regulations. There
is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any lockout,
strike, picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company, or any predecessor entity,
and none has ever occurred. No representation question exists
respecting the employees of the Company, and no collective bargaining
agreement or modification thereof is currently being negotiated by the
Company. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements of the Company. No
labor dispute with the employees of the Company exists, or, to its
knowledge, is imminent.
(xvii) The Company does not maintain, sponsor or contribute to
any program or arrangement that is an "employee pension benefit plan,"
an "employee welfare benefit plan," or a "multiemployer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in
Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder)
has engaged in a "prohibited transaction" within the meaning of Section
406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which
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<PAGE>
has not adequately been corrected. Each ERISA Plan is in compliance
with all reporting, disclosure and other requirements of the Code and
ERISA as they relate to any such ERISA Plan. Determination letters have
been received from the Internal Revenue Service with respect to each
ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified
thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(xviii) Neither the Company nor any of its employees,
directors, stockholders, partners, or affiliates (within the meaning of
the Rules and Regulations) of any of the foregoing has taken or will
take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the
Exchange Act, or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(xix) Except as otherwise disclosed in the Prospectus, none of
the patents, patent applications, trademarks, service marks, trade
names and copyrights, and licenses and rights to the foregoing
presently owned or held by the Company are in dispute so far as known
by the Company or are in any conflict with the right of any other
person or entity. The Company (i) owns or has the right to use, free
and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, trademarks, service marks, trade names
and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or
proposed to be conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii)
except as disclosed in the Prospectus, is not obligated or under any
liability whatsoever to make any payment by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any
patent, trademark, service mark, trade name, copyright, know-how,
technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise, except
where failure to obtain any such patents, trademarks, service marks,
trade names, copyrights, know how, technology or other intangible
assets would not have a material adverse effect on the financial
condition, business or results of operations of the Company.
(xx) The Company owns and has the unrestricted right to use
all trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), inventions, designs, processes, works of authorship,
computer programs and technical data and information (collectively
herein "intellectual property") that are material to the development,
manufacture, operation and sale of all products and services sold or
proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that
the possibility exists that other persons or entities, completely
independently of the Company, or its employees or agents, could have
developed trade secrets or items of technical information similar or
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identical to those of the Company. The Company is not aware of any such
development of similar or identical trade secrets or technical
information by others.
(xxi) The Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of its intellectual
property in all material respects.
(xxii) The Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens
for taxes not yet due and payable.
(xxiii) Tanner + Co., whose report is filed with the
Commission as a part of the Registration Statement, are independent
certified public accountants as required by the Act and the Rules and
Regulations.
(xxiv) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which each of the
Company's officers, directors, stockholders and holders of securities
exchangeable or exercisable for or convertible into shares of Common
Stock has agreed (i) not to, directly or indirectly, issue, offer,
offer to sell, sell, grant any option for the sale or purchase of,
assign, transfer, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144
of the Rules and Regulations or otherwise) or dispose of any beneficial
interest therein for a period of not less than thirteen (13) months
following the effective date of the Registration Statement without the
prior written consent of the Representative and the Company and (ii) to
waive all rights to request or demand the registration pursuant to the
Act of any securities of the Company which are registered in the name
of or beneficially owned by any such holder. During the 13 month period
commencing on the effective date of the Registration Statement, the
Company shall not, without the prior written consent of the
Representative, sell, contract or offer to sell, issue, transfer,
assign, pledge, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or
warrants with respect to any shares of Common Stock. The Company will
cause the Transfer Agent (as hereinafter defined) to mark an
appropriate legend on the face of stock certificates representing all
of such securities and to place "stop transfer" orders on the Company's
stock ledgers.
(xxv) There are no claims, payments, issuances, arrangements
or understandings, whether oral or written, for services in the nature
of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company or any
of its officers, directors, stockholders, partners, employees or
affiliates, that may affect the
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<PAGE>
Underwriters' compensation, as determined by the National Association
of Securities Dealers, Inc. ("NASD").
(xxvi) The Convertible Preferred Stock, Common Stock and
Redeemable Warrants have been approved for quotation on the Nasdaq
SmallCap Market ("Nasdaq"), subject to official notice of issuance.
(xxvii) Neither the Company nor any of its officers,
employees, agents or any other person acting on behalf of the Company
has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate
for office (domestic or foreign) or other person who was, is, or may be
in a position to help or hinder the business of the Company (or assist
the Company in connection with any actual or proposed transaction)
which (a) might subject the Company, or any other such person to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign), (b) if not given in the past, might
have had a material adverse effect on the assets, business or
operations of the Company, or (c) if not continued in the future, might
adversely affect the assets, business, condition, financial or
otherwise, earnings, position, properties, value, operations or
prospects of the Company. The Company's internal accounting controls
are sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
(xxviii) Except as set forth in the Prospectus, no officer,
director, stockholder or partner of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or entities
has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company
any goods or services, or (ii) a beneficiary interest in any contract
or agreement to which the Company is a party or by which it may be
bound or affected. Except as set forth in the Prospectus under "Certain
Relationships and Related Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater
securityholder of the Company, or any partner, affiliate or associate
of any of the foregoing persons or entities.
(xxix) Any certificate signed by any officer of the Company,
and delivered to the Underwriters or to Underwriters' Counsel (as
defined herein) shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
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<PAGE>
(xxx) The minute books of the Company have been made available
to the Underwriters and contain a complete summary of all meetings and
actions of the directors (including committees thereof) and
stockholders of the Company, since the time of its incorporation, and
reflect all transactions referred to in such minutes accurately in all
material respects.
(xxxi) Except and to the extent described in the Prospectus,
no holders of any securities of the Company or of any options, warrants
or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the
Company or to require the Company to file a registration statement
under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company.
(xxxii) (A) The Company is in compliance in all material
respects with all federal, state, local or foreign laws, common law,
rules, codes, administrative orders or regulations relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including without limitation
all laws, common law, rules, codes, administrative orders and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws") and (B) to the best of
the Company's knowledge, there are no events or circumstances that
could form the basis of an order for clean-up or remediation, or an
action, suit or proceeding by any private party or governmental body or
agency, against or affecting the Company relating to any Hazardous
Materials or the violation of any Environmental Laws, which order or
action, suit or proceeding could have a material adverse effect on the
condition (financial or otherwise), business, properties, financial
position or results of operations of the Company. The Company has no
reason to believe that it will not receive all necessary and required
approvals, authorizations, validations and certifications from
applicable regulatory authorities to enable the Company to commence
full operations as contemplated in the Registration Statement and the
Prospectus.
(xxxiii) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company, in the course of
which it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly
or in the aggregate, have a material adverse effect on the Company.
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<PAGE>
(xxxiv) The Company has as of the effective date of the
Registration Statement (i) entered into an employment agreement with
each of Carl O. Magnell, James M. DeAngelis, Srinivas Kilambi, Ph.D.
and Michael D. Kiehnau in the forms filed as Exhibits 10.2, 10.3, 10.4
and 10.5, respectively, to the Registration Statement and Commodore
Environmental Services, Inc., a Delaware corporation and the majority
stockholder of the Parent (as hereinafter defined) ("Commodore"), has
entered into an employment agreement with Edwin L. Harper in the form
filed as Exhibit 10.6 to the Registration Statement and (ii) purchased
term key person insurance on the lives of Messrs. Magnell, DeAngelis
and Kilambi in the amount of $1 million each, which policies name the
Company as the sole beneficiary thereof.
(xxxv) As of the date hereof, the Company does not have more
than 10,000,000 shares of Common Stock issued and outstanding
(including securities with equivalent rights as the Common Stock and
shares of Common Stock, or such equivalent securities, issuable upon
exercise of any and all options, warrants and other contract rights and
securities convertible directly or indirectly into shares of Common
Stock or such equivalent securities, but excluding up to 1,177,250
shares of Common Stock issuable upon the exercise of options granted
under the Company's 1996 Stock Option Plan at prices not less than the
initial public offering price per Common Share).
(xxxvi) The Company confirms as of the date hereof that it is
in compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business with
Cuba, and the Company further agrees that if it or any affiliate
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with
the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported or incorporated
by reference in the Prospectus, if any, concerning the Company's, or
any affiliate's, business with Cuba or with any person or affiliate
located in Cuba changes in any material way, the Company will provide
the Department notice of such business or change, as appropriate, in a
form acceptable to the Department.
(xxxvii) The Company has furnished the Representative and
Underwriters' Counsel with a true and complete copy of the Commodore
SEC Documents. As used herein, the "Commodore SEC Documents" shall mean
all documents (other than preliminary material) that Commodore has
filed or has been required to file with the Commission since January 1,
1994. As of its filing date (and, with respect to any registration
statement, the date on which it or any post-effective amendment was
declared effective) other than with respect to changes that may be
necessitated by virtue of comments made by the Commission related to
the Registration Statement that may be applicable to Commodore, each
Commodore SEC Document was in compliance, in all material respects,
with the applicable requirements of the Act and the Exchange Act,
contained no untrue statement of a material fact and did not omit any
statement of a material fact required to be stated therein or necessary
to make the statements therein,
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<PAGE>
in light of the circumstances under which they were made, not
misleading. The financial statements of Commodore included in the
Commodore SEC Documents complied, at the time of filing with the
Commission (and, with respect to any registration statement, at the
time it was declared effective), as to form, in all material respects,
with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto, were prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved and fairly present, in all
material respects, the consolidated financial position of Commodore and
its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations for the periods presented.
Since January 1, 1996, there has not been any change in the business,
assets, condition, financial or otherwise, or results of operations of
Commodore or any of its subsidiaries which might materially and
adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company.
(xxxviii) The Company is not, and upon the issuance and sale
of the Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus under the caption
"Use of Proceeds" will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xxxix) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparations of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xl) The Company has entered into a warrant agreement
substantially in the form filed as Exhibit 4.2 to the Registration
Statement (the "Warrant Agreement") with the Representative and The
Bank of New York, as Warrant Agent, in form and substance satisfactory
to the Representative, with respect to the Redeemable Warrants and
providing for the payment of the commission contemplated by Section
4(a)(xxii).
(xli) None of the directors or officers of the Company have
ever been an officer of Wico Holding Corp., Wico Corp., Wico Gaming
Supply Corp. or Conquest Industries.
(b) Commodore Applied Technologies, Inc., a Delaware corporation
and the sole stockholder of the Company ("Parent"), represents and warrants to,
and agrees with, each of the
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Underwriters as of the date hereof, and as of the Closing Date and each Option
Closing Date, if any, as follows:
(i) Parent has full legal right, power and authority to enter
into this Agreement, and to consummate the transactions provided for in
this Agreement; and this Agreement has been duly and properly
authorized, executed and delivered by the Parent. This Agreement
constitutes a legal, valid and binding agreement of Parent enforceable
against Parent in accordance with its terms, and none of the Parent's
execution or delivery of this Agreement, its performance hereunder, or
its consummation of the transactions contemplated herein, conflicts
with or will conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Parent pursuant to
the terms of (i) the certificate of incorporation or by-laws of the
Parent, (ii) any license, contract, collective bargaining agreement,
indenture, mortgage, deed of trust, lease, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Parent is a party or by which the
Parent is or may be bound or to which either its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or
(iii) any statute, judgment, decree, order, rule or regulation
applicable to the Parent of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the
Parent or any of its activities or properties which in any event could
have a material adverse effect on the condition (financial or
otherwise), business, properties, financial position or results of
operations of the Parent.
(ii) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other
body, domestic or foreign, is required for the delivery and sale of the
Securities pursuant to the Prospectus and the Registration Statement,
the performance of this Agreement, and the transactions contemplated
hereby, including without limitation, any waiver of any preemptive,
first refusal or other rights that any entity or person may have for
the delivery and sale of any of the Securities, except such as have
been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters'
purchase and distribution of the Firm Securities and the Option
Securities.
(iii) The Parent has not breached any of the representations
and warranties contained in Section 1 of the Underwriting Agreement
dated June 28, 1996 by and among the Parent, National and Bentley J.
Blum (the "Parent Underwriting Agreement"), and is in compliance with
all covenants and agreements contained in Section 4 of the Parent
Underwriting Agreement.
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<PAGE>
(iv) At the time when the Registration Statement becomes or
became effective, and at all times subsequent thereto up to and
including the Closing Date and the Option Closing Date, the
Registration Statement and any amendments thereto will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, and the Prospectus (and any
supplements thereto) (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(v) Neither the Parent nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules
and Regulations) of any of the foregoing has taken or will take,
directly or indirectly, any action designed to or which has constituted
or which might be expected to cause or result in, under the Exchange
Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(vi) There is not pending or, to the Parent's knowledge,
threatened against the Parent any action, suit or proceeding which (A)
questions the validity of this Agreement or of any action taken or to
be taken by the Parent pursuant to or in connection with this
Agreement, or (B) is required to be disclosed in the Registration
Statement which is not so disclosed, and such actions, suits or
proceedings as are summarized in the Registration Statement, if any,
are accurately summarized.
(vii) The Parent has furnished the Representative and
Underwriters' Counsel with a true and complete copy of the Parent SEC
Documents. As used herein, the "Parent SEC Documents" shall mean all
documents (other than preliminary material) that the Parent has filed
or has been required to file with the Commission since January 1, 1996.
As of its filing date (and, with respect to any registration statement,
the date on which it or any post-effective amendment was declared
effective) other than with respect to changes that may be necessitated
by virtue of comments made by the Commission related to the
Registration Statement that may be applicable to the Parent, each
Parent SEC Document was in compliance, in all material respects, with
the applicable requirements of the Act and the Exchange Act, contained
no untrue statement of a material fact and did not omit any statement
of a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of the Parent
included in the Parent SEC Documents complied, at the time of filing
with the Commission (and, with respect to any registration statement,
at the time it was declared effective), as to form, in all material
respects, with applicable accounting requirements and the published
rules and regulations of the Commission with respect thereto, were
prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved and fairly
present, in all material respects, the consolidated financial position
of the
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Parent and its consolidated subsidiaries as of the dates thereof and
the consolidated results of their operations for the periods presented.
Since January 1, 1996, there has not been any change in the business,
assets, condition, financial or otherwise, or results of operations of
the Parent or any of its subsidiaries which might materially and
adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company.
(viii) The Parent does not have any registration rights or
other similar rights with respect to any securities of the Company; and
the Parent does not have any right of first refusal or other similar
right to purchase any securities of the Company upon the issuance or
sale thereof by the Company or upon the sale thereof by any other
stockholder of the Company.
(ix) The Parent has not since the filing of the initial
Registration Statement (i) sold, bid for, purchased, attempted to
induce any person to purchase, or paid anyone any compensation for
soliciting purchases of Common Stock, or (ii) paid or agreed to pay to
any person any compensation for soliciting another to purchase any
securities of the Company (except as otherwise permitted by law).
(x) Any certificate signed by or on behalf of the Parent and
delivered to the Underwriters shall be deemed a representation and
warranty by the Parent to the Underwriters as to the matters covered
thereby.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$_______ [92% of the public offering price] per Preferred Share, $_______ [92%
of the public offering price] per Common Share and $_______ [92% of the public
offering price] per Redeemable Warrant, that number of Firm Securities set forth
in Schedule A opposite the name of such Underwriter, subject to such adjustment
as the Representative in its sole discretion shall make to eliminate any sales
or purchases of fractional shares, plus any additional number of Firm Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 225,000 shares of Convertible Preferred Stock at a price of $_______
[92% of the public offering price] per share of Convertible Preferred Stock,
225,000 shares of Common Stock at a price of $_______ [92% of the public
offering price] per share of Common Stock and/or 450,000 Redeemable Warrants at
a price of $______ [92% of the
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<PAGE>
public offering price] per Redeemable Warrant. The option granted hereby will
expire forty-five (45) days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Rules and Regulations, or (ii) the date of this Agreement if the Company has
elected to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than three (3) full business days after the exercise of said option,
nor in any event prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of the Representative at
1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154, or at such other
place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time)
on ______________, 1997 or at such other time and date as shall be agreed upon
by the Representative and the Company, but not less than three (3) nor more than
five (5) full business days after the effective date of the Registration
Statement (such time and date of payment and delivery being herein called the
"Closing Date"). In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be made at the
above-mentioned office of the Representative or at such other place as shall be
agreed upon by the Representative and the Company on each Option Closing Date as
specified in the notice from the Representative to the Company. Delivery of the
certificates for the Firm Securities and the Option Securities, if any, shall be
made to the Underwriters against payment by the Underwriters, severally and not
jointly, of the purchase price for the Firm Securities and the Option
Securities, if any, to the order of the Company for the Firm Securities and the
Option Securities, if any, by New York Clearing House funds. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Securities then
being purchased which the number of Firm Securities set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total number of Firm
Securities, subject in each case to such adjustments as the Representative in
its discretion shall make to eliminate any sales or purchases of fractional
shares. Certificates for the Firm Securities and the Option Securities, if any,
shall be in definitive, fully registered form, shall bear no restrictive legends
and shall be in such denominations and registered in such names as the
Underwriters may request in writing at least two (2) business days prior to the
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as the
Representative may designate for inspection, checking and packaging no later
than 9:30
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a.m. on the last business day prior to the Closing Date or the relevant Option
Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which Representative's Warrants shall entitle the holders thereof to
purchase an aggregate of 150,000 shares of Convertible Preferred Stock, 150,000
shares of Common Stock and/or 300,000 Redeemable Warrants. The Representative's
Warrants shall be exercisable for a period of four (4) years commencing one (1)
year from the effective date of the Registration Statement at a price equaling
one hundred twenty percent (120%) of the respective initial public offering
price of the Preferred Shares, the Common Shares and the Redeemable Warrants.
The Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4.4 to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Preferred Shares, Common Shares and
Redeemable Warrants. As soon after the Registration Statement becomes effective
as the Representative deems advisable, the Underwriters shall make a public
offering of the Preferred Shares, the Common Shares and the Redeemable Warrants
(other than to residents of or in any jurisdiction in which qualification of the
Preferred Shares, the Common Shares and the Redeemable Warrants is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
respective public offering price after distribution of the Preferred Shares, the
Common Shares and the Redeemable Warrants has been completed to such extent as
the Representative, in its sole discretion, deems advisable. The Underwriters
may enter into one of more agreements as the Underwriters, in each of their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
4. Covenants and Agreements of the Company and the Parent.
(a) The Company covenants and agrees with each of the Underwriters
as follows:
(i) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective
as promptly as practicable and will not at any time, whether before or
after the effective date of the Registration Statement, file any
amendment to the Registration Statement or supplement to the Prospectus
or file any document under the Act or Exchange Act before termination
of the offering of the Preferred Shares, the Common Shares and the
Redeemable Warrants by the Underwriters of which the Representative
shall not previously have been advised and furnished with a copy, or to
which the Representative shall have reasonably objected or which is not
in compliance with the Act, the Exchange Act or the Rules and
Regulations.
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the
notice in writing (i) when the
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Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A
and when any post-effective amendment to the Registration Statement
becomes effective; (ii) of the issuance by the Commission of any stop
order or of the initiation, or the threatening, of any proceeding
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution
of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for
the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose; (iv) of the receipt of
any comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional
information. If the Commission or any state securities commission shall
enter a stop order or suspend such qualification at any time, the
Company will use its best efforts to obtain promptly the lifting of
such order.
(iii) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) or transmit the
Prospectus by a means reasonably calculated to result in filing with
the Commission pursuant to Rule 424(b)(1) (or, if applicable and if
consented to by the Representative, pursuant to Rule 424(b)(4)) not
later than the Commission's close of business on the earlier of (i) the
second business day following the execution and delivery of this
Agreement and (ii) the fifth business day after the effective date of
the Registration Statement.
(iv) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration
Statement (including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus which
the Company proposes for use by the Underwriters in connection with the
offering of the Securities which differs from the corresponding
prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representative with copies of any
such amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such
prospectus to which the Representative or Orrick, Herrington &
Sutcliffe LLP ("Underwriters' Counsel") shall reasonably object.
(v) The Company shall endeavor in good faith, in cooperation
with the Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the Securities for offering and
sale under the securities laws of such jurisdictions as the
Representative may designate to permit the continuance of sales and
dealings therein for as long as may be necessary to complete the
distribution, and shall make such applications, file such documents and
furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a
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<PAGE>
foreign corporation or file a general or limited consent to service of
process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the
Representative agrees that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements
or reports at such times as are or may reasonably be required by the
laws of such jurisdiction to continue such qualification.
(vi) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts
to comply with all requirements imposed upon it by the Act and the
Exchange Act, as now and hereafter amended and by the Rules and
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and the Prospectus, or any
amendments or supplements thereto. If at any time when a prospectus
relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the reasonable
opinion of counsel for the Company or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the
Representative promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of
the Act, each such amendment or supplement to be reasonably
satisfactory to Underwriters' Counsel, and the Company will furnish to
the Underwriters copies of such amendment or supplement as soon as
available and in such quantities as the Underwriters may reasonably
request.
(vii) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during which
the effective date of the Registration Statement occurs (ninety (90)
days in the event that the end of such fiscal quarter is the end of the
Company's fiscal year), the Company shall make generally available to
its security holders, in the manner specified in Rule 158(b) of the
Rules and Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration
Statement.
(viii) During a period of seven (7) years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and unaudited quarterly reports of earnings, and
will deliver to the Representative:
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(A) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(B) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the
Commission, the NASD or any securities exchange;
(C) every press release and every material news item or
article of interest to the financial community in respect of
the Company, or its affairs, which was released or prepared by
or on behalf of the Company; and
(D) any additional information of a public nature
concerning the Company (and any future subsidiary) or its
businesses which the Representative may reasonably request.
During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and
any of its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is
not so consolidated.
(ix) The Company will maintain a transfer agent and warrant
agent ("Transfer Agent") and, if necessary under the jurisdiction of
incorporation of the Company, a Registrar (which may be the same entity
as the Transfer Agent) for its Convertible Preferred Stock, Common
Stock and Redeemable Warrants.
(x) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the
Representative may designate, copies of each Preliminary Prospectus,
the Registration Statement and any pre-effective or post-effective
amendments thereto (two of which copies will be signed and will include
all financial statements and exhibits), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared
after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may
reasonably request.
(xi) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true
original copies of duly executed, legally binding and enforceable
agreements pursuant to which, for a period of thirteen (13) months from
the effective date of the Registration Statement, each of the Company's
stockholders and holders of securities exchangeable or exercisable for
or convertible into shares of Common Stock agrees that it or he or she
(i) will not, directly or indirectly, issue, offer to sell, sell, grant
an option for the sale or purchase of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common
Stock or securities convertible into, exercisable or exchangeable for
or evidencing any right to purchase or subscribe for any shares of
Common Stock (either pursuant to Rule 144 of
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<PAGE>
the Rules and Regulations or otherwise) or dispose of any beneficial
interest therein without the prior consent of the Representative
(collectively, the "Lock-up Agreements") and (ii) waives, during such
thirteen (13) month period, any and all rights to request or demand the
registration pursuant to the Act, of any securities of the Company
which are registered in the name of or beneficially owned by it or he
or she, respectively. During the thirteen (13) month period commencing
on the effective date of the Registration Statement, the Company shall
not, without the prior written consent of the Representative, sell,
contract or offer to sell, issue, transfer, assign, pledge, distribute,
or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any options, rights or warrants with respect to any shares of
Common Stock. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate
legends on the certificates representing the securities subject to the
Lock-up Agreements and to place appropriate stop transfer orders on the
Company's ledgers.
(xii) Neither the Company nor any of its officers, directors,
stockholders, nor any of its affiliates (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
securities of the Company.
(xiii) The Company shall apply the net proceeds from the sale
of the Firm Securities and the Option Securities, if any, in the
manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be
used, directly or indirectly, to acquire any securities issued by the
Company or any of its Affiliates (as defined herein).
(xiv) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a
Form SR as may be required pursuant to Rule 463 under the Act) from
time to time, under the Act, the Exchange Act, and the Rules and
Regulations, and all such reports, forms and documents filed will
comply as to form and substance with the applicable requirements under
the Act, the Exchange Act, and the Rules and Regulations.
(xv) The Company shall furnish to the Representative as early
as practicable prior to each of the date hereof, the Closing Date and
each Option Closing Date, if any, but no later than two (2) full
business days prior thereto, a copy of the latest available unaudited
interim financial statements of the Company (which in no event shall be
as of a date more than thirty (30) days prior to the date of the
Registration Statement) which have been read by the Company's
independent public accountants, as stated in their letters to be
furnished pursuant to Sections 6(l) and 6(m) hereof.
(xvi) The Company shall cause the Convertible Preferred Stock,
the Common Stock and the Redeemable Warrants to be quoted on Nasdaq or
listed on a comparable
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<PAGE>
national securities exchange and, for a period of seven (7) years from
the date hereof, use its best efforts to maintain the Nasdaq quotation
or other such exchange listing of the Convertible Preferred Stock, the
Common Stock and the Redeemable Warrants to the extent outstanding.
(xvii) For a period of five (5) years from the Closing Date,
the Company shall furnish to the Representative at the Representative's
reasonable request and at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Convertible Preferred
Stock, the Common Stock and the Redeemable Warrants (ii) the list of
holders of all of the Company's securities and (iii) a Blue Sky
"Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.
(xviii) As soon as practicable, (i) but in no event more than
five (5) business days before the effective date of the Registration
Statement, file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Securities and (ii) but in
no event more than thirty (30) days after the effective date of the
Registration Statement, take all necessary and appropriate actions to
be included in Standard and Poor's Corporation Records and Moody's OTC
Manual and to continue such inclusion for a period of not less than
seven (7) years.
(xix) The Company hereby agrees that it will not, without the
prior written consent of the Representative for a period of thirteen
(13) months from the effective date of the Registration Statement,
adopt, propose to adopt or otherwise permit to exist any employee,
officer, director, consultant or compensation plan or similar
arrangement permitting (i) the grant, issue, sale or entry into any
agreement to grant, issue or sell any option, warrant or other contract
right (x) at an exercise price that is less than the greater of the
initial public offering price of the Common Shares set forth herein and
the fair market value on the date of grant or sale or (y) to any of its
executive officers or directors or to any holder of 5% or more of the
Common Stock, except as provided in subsection (ii) of this
subparagraph; (ii) the maximum number of shares of Common Stock or
other securities of the Company purchasable at any time pursuant to
options or warrants issued by the Company to exceed the aggregate
1,700,000 shares reserved for future issuance under the Company's 1996
Stock Option Plan described in the "Executive Compensation-Stock
Options" section of the Prospectus; (iii) the payment for such
securities with any form of consideration other than cash; or (iv) the
existence of stock appreciation rights, phantom options or similar
arrangements.
(xx) Until the completion of the distribution of the
Securities, the Company shall not, without the prior written consent of
the Representative and Underwriters' Counsel, issue, directly or
indirectly, any press release or other communication or hold any press
conference with respect to the Company or its activities or the
offering contemplated hereby, other than trade releases issued in the
ordinary course of the Company's business consistent with past
practices with respect to the Company's operations.
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<PAGE>
(xxi) For a period equal to the lesser of (i) seven (7) years
from the date hereof, and (ii) the sale to the public of the
Representative's Securities, the Company will not take any action or
actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration under the Act of the
Representative's Securities. The Company further agrees to use its best
efforts to file such post-effective amendments to the Registration
Statement, as may be necessary, in order to maintain its effectiveness
and to keep such Registration Statement effective while any of the
shares of Convertible Preferred Stock, Redeemable Warrants or
Representative's Warrants remain outstanding.
(xxii) Commencing one year and one day from the date hereof,
if the Company engages the Representative as a warrant solicitation
agent under the terms of the Warrant Agreement, the Company shall pay
the Representative a commission equal to five percent (5%) of the
exercise price of the Redeemable Warrants, payable on the date of the
exercise thereof on the terms provided in the Warrant Agreement;
provided, however, the Representative shall be entitled to receive the
commission contemplated by this Section 4(a)(xxii) only if: (i) the
Representative has provided actual services in connection with the
solicitation of the exercise of a Redeemable Warrant by a Warrantholder
and (ii) the Warrantholder exercising a Redeemable Warrant
affirmatively designates in writing on the exercise form on the reverse
side of the Redeemable Warrant Certificate that the exercise of such
Warrantholder's Redeemable Warrant was solicited by the Representative.
(xxiii) Prior to the Closing Date, the Company shall have
converted all short-term debt payable to the Parent (including any
additional cash advances made by the Parent to the Company prior to the
Closing Date which are not (or would not be) reflected as debt on the
Company's balance sheet) into equity as partial consideration for the
Company's previous issuance of 10,000,000 shares of Common Stock to the
Parent.
(xxiv) The Company will not, and will not permit any of its
future subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, but not
limited to, the sale, purchase, exchange, lease, transfer or other
disposition of any properties, assets or services to, or the purchase
of any property, assets or services from, or the entry into any
contract, agreement, undertaking, loan, advance or guarantee) with, or
for the benefit of, an Affiliate (an "Affiliate Transaction"), or
extend, renew, waive or otherwise modify the terms of any Affiliate
Transaction entered into prior to the date of issuance of the
Securities unless (i) such Affiliate Transaction is between or among
the Company and its wholly-owned subsidiaries, or (ii) the terms of
such Affiliate Transaction are fair and reasonable and at least as
favorable to the Company or such subsidiary, as the case may be, as
those that could have been obtained in a comparable arm's length
transaction by the Company or such subsidiary with an unrelated person,
and such Affiliate Transaction is entered into in the ordinary course
of business of the parties thereto; provided, however, notwithstanding
anything to the contrary contained herein, the Company may issue
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<PAGE>
securities pursuant to the exercise of outstanding options and warrants
on the terms in effect and described in the Prospectus relating to the
Securities. All Affiliate Transactions must be approved in good faith
by the Board of Directors of the Company and a minimum of three
disinterested and independent outside directors thereof, and such
approval evidenced by a Board Resolution that such transaction meets
the criterion set forth in (i) or (ii) above. Affiliate includes
Commodore and the Parent, each of their respective principal
stockholders and subsidiaries, Bentley J. Blum and Paul E.
Hannesson.
(b) The Parent covenants and agrees with each of the Underwriters
as follows:
(i) The Parent will not, directly or indirectly, without the
prior written consent of the Company and the Representative, offer,
offer to sell, sell, grant an option for the sale or purchase of,
assign, transfer, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or any securities convertible into,
exchangeable or exercisable for, or evidencing any right to purchase or
subscribe for, any shares of Common Stock (either pursuant to Rule 144
of the Rules and Regulations or otherwise) or dispose of any beneficial
interest therein for a period of thirteen (13) months after the date
hereof, except pursuant to this Agreement, and neither the Parent nor
any of its officers, directors, stockholders, nor any of its affiliates
(within the meaning of the Rules and Regulations) will take, directly
or indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(ii) The Parent consents to the use of the Prospectus and any
amendment or supplement thereto by the Underwriters and all dealers to
whom the Securities may be sold, both in connection with the offering
or sale of the Securities and for such period of time thereafter as the
Prospectus is required by law to be delivered in connection therewith.
(iii) The Parent will review the Prospectus and will comply
with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement at or prior to
any Closing Date or Option Closing Date, if any, and will advise the
Company and the Representative prior to any Closing Date or Option
Closing Date, if any, if any statement to be made on behalf of the
Parent in the certificates contemplated by Section 6(j) hereof would be
inaccurate if made as of such Closing Date or Option Closing Date, if
any.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date
and the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company and
the Parent under this Agreement, the Warrant Agreement and
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<PAGE>
the Representative's Warrant Agreement, including, without limitation, (i) the
fees and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, the Warrant Agreement, the Representative's Warrant
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the Securities including, but not
limited to, (x) the purchase by the Underwriters of the Firm Securities and the
Option Securities from the Company, and the purchase by the Representative of
the Representative's Warrants from the Company, (y) the consummation by each of
the Company and the Parent of any of its obligations under this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement, and (z) resale of
the Firm Securities and the Option Securities by the Underwriters in connection
with the distribution contemplated hereby, (iv) the qualification of the
Securities under state or foreign securities or "Blue Sky" laws and
determination of the status of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum", the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and reasonable disbursements and fees of counsel in connection
therewith, (v) sales and marketing costs and expenses, including but not limited
to costs and expenses in connection with the "road show", information meetings
and presentations, bound volumes and prospectus memorabilia and "tomb-stone"
advertisement expenses, (vi) costs and expenses in connection with due diligence
investigations, including but not limited to the reasonable fees of any
independent counsel, expert or consultant retained, (vii) fees and expenses of
the Transfer Agent and registrar and all issue and transfer taxes, if any,
(viii) applications for assignment of a rating of the Securities by qualified
rating agencies, (ix) the reasonable fees payable to the Commission and the
NASD, and (x) the fees and expenses incurred in connection with the quotation of
the Securities on Nasdaq and any other exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6 or Section 12, the Company shall
reimburse and indemnify the Underwriters for all of their actual out-of-pocket
expenses, including the reasonable fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities, $50,000 of which has been paid to date. In the event the
Representative elects to exercise the
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<PAGE>
over-allotment option described in Section 2(b) hereof, the Company agrees to
pay to the Representative on the Option Closing Date (by certified or bank
cashier's check or, at the Representative's election, by deduction from the
proceeds of the offering) a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company and the Parent herein as of the
date hereof and as of the Closing Date and each Option Closing Date, if any, as
if they had been made on and as of the Closing Date or each Option Closing Date,
as the case may be; the accuracy on and as of the Closing Date or each Option
Closing Date, if any, of the statements of the officers of the Company and the
Parent made pursuant to the provisions hereof; and the performance by each of
the Company and the Parent on and as of the Closing Date and each Option Closing
Date, if any, of its covenants and obligations hereunder and to the following
further conditions:
(a) The Registration Statement shall have become effective not
later than 12:00 P.M., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Representative,
and, at the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Preferred
Shares, the Common Shares and the Redeemable Warrants and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period and, prior to the Closing Date, the Company shall have
provided evidence reasonably satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's reasonable opinion, is material, or omits
to state a fact which, in the Representative's reasonable opinion, is material
and is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's reasonable opinion, is
material, or omits to state a fact which, in the Representative's reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
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(c) On or prior to each of the Closing Date and each Option Closing
Date, if any, the Representative shall have received from Underwriters' Counsel,
such opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
counsel to the Company, dated the Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel, to the effect
that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations requires
such qualification or licensing, and (C) has all requisite corporate
power and authority, and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and
has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and
all federal, state and local laws, rules and regulations; and, the
Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially adversely affect the business, operations,
condition, financial or otherwise, or the earnings, business affairs,
position, prospects, value, operation, properties, or results of
operations of the Company. The disclosures in the Registration
Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's business as currently conducted
and as contemplated are correct in all material respects and do not
omit to state a fact required to be stated therein or necessary to make
the statements contained therein not misleading in light of the
circumstances in which they were made.
(ii) the Company does not own an interest in any other
corporation, partnership, joint venture, trust or other business
entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "CAPITALIZATION", and, to the
knowledge of such counsel, the Company is not a party to or bound by
any instrument, agreement or other arrangement providing for it to
issue, sell, transfer, purchase or redeem any capital stock, rights,
warrants, options or
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other securities, except for this Agreement, the Warrant Agreement and
the Representative's Warrant Agreement and as described in the
Prospectus. The Securities and all other securities issued or issuable
by the Company conform in all material respects to all statements with
respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of
the Company or any similar rights granted by the Company. The
Securities to be sold by the Company hereunder and under the Warrant
Agreement and the Representative's Warrant Agreement are not and will
not, to the knowledge of such counsel, be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized and,
when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and
conform to the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities are in
due and proper form. The Representative's Warrants and the Redeemable
Warrants constitute valid and binding obligations of the Company to
issue and sell, upon exercise thereof and payment therefor, the number
and type of securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement of the Firm Securities
and the Option Securities and the Representative's Warrants to be sold
by the Company, the Underwriters and the Representative, respectively,
will acquire good and marketable title to the Firm Securities and the
Option Securities and the Representative's Warrants free and clear of
any pledge, lien, charge, claim, encumbrance, pledge, security
interest, or other restriction or equity of any kind whatsoever. No
transfer tax is payable by or on behalf of the Underwriters in
connection with (A) the issuance by the Company of the Securities, (B)
the purchase by the Underwriters of the Firm Securities and the Option
Securities from the Company, and the purchase by the Representative of
the Representative's Warrants from the Company (C) the consummation by
the Company of any of its obligations under this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Firm Securities and the Option Securities in connection with the
distribution contemplated hereby.
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and, to the best of such
counsel's knowledge, no stop order suspending the use of the
Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened or contemplated under the Act;
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(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto
(other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
(vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in
the Registration Statement (or required to be filed under the Exchange
Act if upon such filing they would be incorporated, in whole or in
part, by reference therein) and the Prospectus and filed as exhibits
thereto, and the exhibits which have been filed are correct copies of
the documents of which they purport to be copies; (B) the descriptions
in the Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other documents to which the Company
is a party or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by reference
into the Prospectus and any supplement or amendment thereto, are
accurate and fairly represent the information required to be shown by
Form S-1; (C) there is not pending or threatened against the Company
any action, arbitration, suit, proceeding, inquiry, investigation,
litigation, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the
properties or business of the Company which (x) is required to be
disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (y) questions the validity of
the capital stock of the Company or this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with
any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is
not described as required; and (E) there is no action, suit or
proceeding pending, or threatened, against or affecting the Company
before any court or arbitrator or governmental body, agency or official
(or any basis thereof known to such counsel) in which there is a
reasonable possibility of a decision which may result in a material
adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company, which
could adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement or which in any
manner draws into question the validity or enforceability of this
Agreement, the Warrant Agreement or the Representative's Warrant
Agreement;
(vii) the Company has full legal right, power and authority to
enter into each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement,
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and to consummate the transactions provided for therein; and each of
this Agreement, the Warrant Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement, assuming due authorization,
execution and delivery by each other party thereto constitutes a legal,
valid and binding agreement of the Company enforceable against the
Company in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law),
and none of the Company's execution or delivery of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement, its
performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
business as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms
of, (A) the certificate of incorporation or by-laws of the Company, (B)
any license, contract, collective bargaining agreement, indenture,
mortgage, deed of trust, lease, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be
bound or to which any of its properties or assets (tangible or
intangible) is or may be subject, or any indebtedness, or (C) any
statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other
body (other than such as may be required under Blue Sky laws, as to
which no opinion need be rendered) is required in connection with the
issuance of the Firm Securities and the Option Securities pursuant to
the Prospectus and the Registration Statement, the issuance of the
Representative's Warrants, the performance of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement, and the
transactions contemplated hereby and thereby;
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the Company has good and
marketable title to, or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to be
owned or leased by it, in each case free and clear of all liens,
charges, claims, encumbrances, pledges,
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security interests, defects or other restrictions or equities of any
kind whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable;
(x) to the best of such counsel's knowledge, the Company is
not in breach of, or in default under, any term or provision of any
license, contract, collective bargaining agreement, indenture,
mortgage, installment sale agreement, deed of trust, lease, voting
trust agreement, stockholders' agreement, partnership agreement, note,
loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may
be bound or to which the properties or assets (tangible or intangible)
of the Company is subject or affected; and the Company is not in
violation of any term or provision of its Articles of Incorporation or
By-Laws or in violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation;
(xi) the statements in the Prospectus under "RISK FACTORS,"
"BUSINESS," "MANAGEMENT," "EXECUTIVE COMPENSATION," "PRINCIPAL
STOCKHOLDERS," "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,"
"DESCRIPTION OF SECURITIES," "SHARES ELIGIBLE FOR FUTURE SALE" and
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions
of statutes, licenses, rules or regulations or legal conclusions, are
correct in all material respects;
(xii) the Securities have been accepted for quotation on
Nasdaq, subject to official notice of issuance;
(xiii) the persons listed under the caption "PRINCIPAL
STOCKHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
(xiv) neither the Company nor any of its officers,
stockholders, employees or agents, nor any other person acting on
behalf of the Company has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or
official or employee of any governmental agency or instrumentality of
any government (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who is or
may be in a position to help or hinder the business of the Company (or
assist it in connection with any actual or proposed transaction) which
(A) might subject the Company to any damage or penalty in any civil,
criminal or governmental litigation or proceeding, (B) if not given in
the past, might have had an adverse effect on the assets, business or
operations of the Company, as reflected in any of the financial
statements
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<PAGE>
contained in the Registration Statement, or (C) if not continued in the
future, might adversely affect the assets, business, operations or
prospects of the Company;
(xv) to the knowledge of such counsel, no person, corporation,
trust, partnership, association or other entity has the right to
include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
(xvi) except as described in the Prospectus, to the knowledge
of such counsel, there are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or
financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriters' compensation, as determined by the NASD;
(xvii) assuming due execution by the parties thereto other
than the Company, the Lock-up Agreements are legal, valid and binding
obligations of the parties thereto, enforceable against the party and
any subsequent holder of the securities subject thereto in accordance
with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law);
(xviii) except as described in the Prospectus, the Company
does not (A) maintain, sponsor or contribute to any ERISA Plans, (B)
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA, and (C) has never
completely or partially withdrawn from a "multiemployer plan";
(xix) the minute books of the Company have been made available
to the Underwriters and contain a complete summary of all meetings and
actions of the directors and stockholders of the Company since the time
of its incorporation and reflect all transactions referred to in such
minutes accurately in all material respects;
(xx) the Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus under the caption
"USE OF PROCEEDS" will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act");
(xxi) the Company has furnished the Representative and
Underwriters' Counsel with a true and complete copy of the Affiliate
SEC Documents. As used herein, the "Affiliate SEC Documents" shall mean
all documents (other than preliminary material) that each of Commodore
Applied Technologies, Inc., a Delaware corporation and the
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<PAGE>
sole stockholder and parent corporation of the Company (the "Parent"),
and Commodore Environmental Services, Inc., a Delaware corporation and
the majority stockholder of Parent ("Commodore"), has filed or has been
required to file with the Commission since January 1, 1994. As of its
filing date (and, with respect to any registration statement, the date
on which it or any post-effective amendment was declared effective),
each Affiliate SEC Document was in compliance, in all material
respects, with the applicable requirements of the Act and the Exchange
Act, contained no untrue statement of a material fact and did not omit
any statement of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial statements of
the Parent or Commodore, as the case may be, included in the Affiliate
SEC Documents complied, at the time of filing with the Commission (and,
with respect to any registration statement, at the time it was declared
effective), as to form, in all material respects, with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto, were prepared in accordance with
generally accepted accounting principles applied on a consistent basis
during the periods involved and fairly present, in all material
respects, the consolidated financial position of the Parent or
Commodore, as the case may be, and its consolidated subsidiaries as of
the dates thereof and the consolidated results of their operations for
the periods presented. Since January 1, 1996, there has not been any
change in the business, assets, condition, financial or otherwise, or
results of operations of the Parent or Commodore, as the case may be,
or any of its subsidiaries which might materially and adversely affect
the condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties, business
or results of operations of the Company.
(xxii) except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of the
Company, or any "affiliate" or "associate" (as these terms are defined
in Rule 405 promulgated under the Rules and Regulations) of any of the
foregoing persons or entities has or has had, either directly or
indirectly, (A) an interest in any person or entity which (x) furnishes
or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (y) purchases from
or sells or furnishes to the Company any goods or services, or (B) a
beneficial interest in any contract or agreement to which the Company
is a party or by which it may be bound or affected. Except as set forth
in the Prospectus under "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any
officer, director, or 5% or greater securityholder of the Company, or
any affiliate or associate of any such person or entity;
(xxiii) the Company is in compliance with all provisions of
Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to
Disclosure of Doing Business with Cuba;
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<PAGE>
(xxiv) to the best of such counsel's knowledge, (A) the
Company is in compliance with all federal, state, local or foreign
laws, common law, rules, codes, administrative orders or regulations
relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including
without limitation all laws, common law, rules, codes, administrative
orders and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws") and (B) there are no
events or circumstances that could form the basis of an order for
clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company relating to any Hazardous Materials or the violation of any
Environmental Laws;
(xxv) to the knowledge of such counsel, the Company has
obtained all necessary and required approvals, authorizations,
franchises, licenses, orders, permits, validations and certifications
from regulatory authorities to permit the commencement of its
commercial operations as contemplated in the Prospectus, and none of
such approvals, authorizations, franchises, licenses, orders, permits,
validations and certifications have been revoked, restricted or limited
in any manner and all of such approvals, authorizations, franchises,
licenses, orders, permits, validations and certifications are in full
force and effect; and
(xxvi) to the best of such counsel's knowledge, there is no
action, suit, proceeding, inquiry, investigation, litigation or
governmental proceeding, domestic or foreign, pending or threatened (or
circumstances that may give rise to the same) involving the Company's
production, use, testing, manufacturing or marketing of any products or
services, which (i) questions the authority of the Company to produce,
use, test, manufacture or market any products or services as described
in the Prospectus, (ii) questions the completeness or accuracy of data
generated by any trials, tests or studies being conducted by or on
behalf of the Company, (iii) is required to be disclosed in the
Prospectus which is not so disclosed, or (iv) might materially and
adversely affect the condition, financial or otherwise, or the
earnings, prospects, value, operations or business of the Company.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel
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<PAGE>
which lead them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or amendment became
effective or the Preliminary Prospectus or Prospectus or any amendment or
supplement thereto as of the date of such opinion contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial and statistical data
included in the Preliminary Prospectus, the Registration Statement or the
Prospectus). Such counsel shall further state that its opinions may be relied
upon by Underwriters' Counsel in rendering its opinion to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative,
Underwriters' Counsel and they are each justified in relying thereon. Any
opinion of counsel for the Company shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991) or any comparable
state accord.
(e) At the Closing Date, the Underwriters shall have received the
favorable opinion of Kremblas, Foster, Millard & Pollick, special counsel to the
Company, dated the Closing Date, addressed to the Underwriters, in form and
substance satisfactory to Underwriters' Counsel, and in substantially the form
of Schedule B attached hereto.
(f) At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinions of each of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, counsel to the Company, and Kremblas, Foster, Millard &
Pollick, special counsel to the Company, dated such Option Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of such Option Closing Date the statements
made by each of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel and
Kremblas, Foster, Millard & Pollick in their respective opinions delivered on
the Closing Date.
(g) On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness
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<PAGE>
or satisfaction of any of the representations, warranties or conditions of the
Company or the Parent, or herein contained.
(h) Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
earnings, position, value, properties, results of operations, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company; (iii) the Company shall not be in default
under any material provision of any instrument relating to any outstanding
indebtedness; (iv) the Company shall not have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any material
change in the capital stock or any material change in the debt (long or short
term) or liabilities or obligations of the Company (contingent or otherwise);
(v) no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or, to the knowledge of the Company, threatened (or circumstances giving rise to
same) against the Company or affecting any of its properties or businesses
before or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, earnings, position, value,
properties, results of operations, prospects or financial condition or income of
the Company; and (vii) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or, to the knowledge of the
Company, threatened or contemplated by the Commission.
(i) At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on
and as of the Closing Date or the Option Closing Date, as the case may
be, and the Company has complied in all material respects with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been
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instituted or are pending or, to the best of each of such person's
knowledge, are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all statements
and information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the Preliminary
Prospectus or any supplement thereto included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(a) the Company has not incurred up to and including the Closing Date
or the Option Closing Date, as the case may be, other than in the
ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock; (c)
the Company has not entered into any transactions not in the ordinary
course of business; (d) there has not been any material change in the
capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-term borrowings in the
ordinary course of business) of the Company; (e) the Company has not
sustained any material loss or damage to its properties or assets,
whether or not insured; (f) there is no litigation which is pending or,
to the knowledge of the Company, threatened (or circumstances giving
rise to same) against the Company or any affiliated party of any of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (g) there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the date of
such certificate.
(j) At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate from the Parent, dated
the Closing Date, to the effect that the Parent has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(A) The representations and warranties of the Parent in this
Agreement are true and correct in all material respects, as if made at
and as of the Closing Date or the Option Closing Date, as the case may
be, and the Parent has complied in all material respects with all
agreements and covenants and satisfied all conditions contained in this
Agreement to be performed or satisfied by the Parent at or prior to the
Closing Date or the Option Closing Date, as the case may be; and
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(B) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and neither the Preliminary
Prospectus or any supplement thereto included any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
References to the Registration Statement and the Prospectus in this
subsection (j) are to such documents as amended and supplemented at the date of
such certificate.
(k) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(l) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Tanner + Co.:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Representative may rely upon the
opinion of Tanner + Co. with respect to the financial statements and
supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of
the stockholders and board of directors and the various committees of
the boards of directors of the Company, consultations with officers and
other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A) the
unaudited financial statements and supporting schedules of the Company
included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Rules and Regulations or are not fairly presented in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement, or
(B) at a
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specified date not more than five (5) days prior to the effective date
of the Registration Statement, there has been any change in the capital
stock or long-term debt of the Company, or any decrease in the
stockholders' equity or net current assets or net assets of the Company
as compared with amounts shown in the September 30, 1996 balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change
or decrease, setting forth the amount of such change or decrease;
(iv) setting forth, at a date not later than five (5) days
prior to the date of the Registration Statement, the amount of
liabilities of the Company (including a break-down of commercial paper
and notes payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter and found them to be in agreement;
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
(m) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Tanner + Co. a letter, dated as of the
Closing Date or the Option Closing Date, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
subsection (l) of this Section, except that the specified date referred to shall
be a date not more than five (5) days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (l) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(n) On each of the Closing Date and each Option Closing Date, if
any, there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.
(o) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (a)(v) of
Section 4 hereof shall have been issued on
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either the Closing Date or the Option Closing Date, if any, and no proceedings
for that purpose shall have been instituted or shall be contemplated.
(p) On or before the Closing Date, the Company shall have executed
and delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.4 to the Registration Statement, in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(q) On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Nasdaq, subject to
official notice of issuance.
(r) On or before the Closing Date, there shall have been delivered
to the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
(s) On or before the Closing Date, the Company shall have executed
and delivered to the Representative and the Transfer Agent the Warrant Agreement
substantially in the form filed as Exhibit 4.2 to the Registration Statement, in
final form and substance satisfactory to the Representative.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
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7. Indemnification.
(a) The Company and the Parent, jointly and severally, agree to
indemnify and hold harmless each of the Underwriters (for purposes of this
Section 7 "Underwriter" shall include the officers, directors, partners,
employees, agents and counsel of the Underwriter, including specifically each
person who may be substituted for an Underwriter as provided in Section 11
hereof), and each person, if any, who controls the Underwriter ("controlling
person") within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions, proceedings, investigations,
inquiries, suits and litigation in respect thereof), whatsoever (including but
not limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any such claim, action,
proceeding, investigation, inquiry, suit or litigation, commenced or threatened,
or any claim whatsoever), as such are incurred, to which the Underwriter or such
controlling person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries, arising out of or based upon (A) any untrue statement or alleged
untrue statement of a material fact contained (i) in any Preliminary Prospectus,
the Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon written
information furnished by the Company or the Parent in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company or the Parent
contained herein or in any certificate by or on behalf of the Company or any of
its officers or the Parent delivered pursuant hereto, unless, in the case of
clause (A) or (B) above, such statement or omission was made in reliance upon
and in strict conformity with written information furnished to the Company with
respect to any Underwriter by or on behalf of such Underwriter expressly for use
in any Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be.
The foregoing indemnity with respect to any untrue statement contained
in or omission from a Preliminary Prospectus shall not inure to the benefit of
the Underwriter (or any person controlling such Underwriter) from whom the
person asserting any such loss, liability, claim, damage or expense purchased
any of the Firm Securities and/or Option Securities which are the subject
thereof if (1) the Company and/or the Parent sustains the burden of proving that
such asserting person did not receive a copy of the Prospectus (or the
Prospectus as amended or supplemented) (in each case exclusive of the documents
from which information is incorporated by reference) at or prior to the written
confirmation of the sale of such Firm Securities and/or
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Option Securities to such person and the untrue statement contained in or
omitted from such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) and (2) the Company shall have complied
with its covenant pursuant to Section 4(a)(vi) of this Agreement.
Notwithstanding anything to the contrary contained herein, the Parent
shall not be required to make any payment in respect to any indemnification
obligation hereunder unless and until and then only to the extent that the
Representative shall determine, in its sole judgment, that the Company is unable
to make the subject indemnification payment.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company or the Parent may have at common law or
otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company and the Parent to the Underwriters
but only with respect to statements or omissions, if any, made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to any Underwriter by such Underwriter expressly for use in
such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this Offering. Each of the Company and the Parent acknowledges that the
statements with respect to the public offering of the Firm Securities and the
Option Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any claim, action, suit,
investigation, inquiry, proceeding or litigation, such indemnified party shall,
if a claim in respect thereof is to be made against one or more indemnifying
parties under this Section 7, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7 except to the extent that it has been prejudiced
in any material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
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assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one claim, action, suit,
investigation, inquiry, proceeding or litigation or separate but similar or
related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim, action,
suit, investigation, inquiry, proceeding or litigation effected without its
written consent; provided, however, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above
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but also the relative fault of each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. In any
case where the Company and/or the Parent is the contributing party and the
Underwriters are the indemnified party, the relative benefits received by the
Company and/or the Parent, on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Firm Securities and the Option Securities (before deducting
expenses) bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the Cover Page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Parent, or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this subsection
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Firm Securities and the Option
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, (i) each person,
if any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company and (ii) each
person, if any, who controls an Underwriter within the meaning of the Act shall
have the same rights to contribution as such Underwriter, subject in each case
to this subsection (d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect to which a claim for contribution may be made against another
party or parties under this subsection (d), notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or otherwise than under
this subsection (d), or to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may have at
common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company or the Parent submitted
pursuant hereto, shall be deemed to be representations, warranties and
agreements at the Closing Date and the Option Closing Date, as the case may be,
and such representations, warranties and agreements of the Company and the
Parent, as the case may be, and the indemnity agreements contained in Section 7
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter,
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the Company, the Parent, any controlling person of any Underwriter or the
Company or the Parent, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriters and the
Representative, as the case may be.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has materially adversely
disrupted, or in the Representative's opinion will in the immediate future
materially adversely disrupt, the financial markets; or (ii) if any material
adverse change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, Nasdaq, the NASD, the Boston Stock
Exchange, the Commission or any governmental authority having jurisdiction over
such matters; or (iv) if trading of any of the securities of the Company shall
have been suspended, or any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; (v) if the United
States shall have become involved in a war or major hostilities, or if there
shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (vi) if a
banking moratorium has been declared by a state or federal authority; or (vii)
if a moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities; or (ix) if there shall have
been such a material adverse change in the conditions or prospects of the
Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere, that, in each case, in
the Representative's judgment, would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities or (x) if any of Paul E.
Hannesson, Carl O. Magnell, James M. DeAngelis and Srinivas Kilambi, Ph.D. shall
no longer serve the Company in their present capacity.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the reasonable fees and
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disbursements of counsel for the Underwriters (less amounts previously paid
pursuant to Section 5(c) above). Notwithstanding any contrary provision
contained in this Agreement, if this Agreement shall not be carried out within
the time specified herein, or any extension thereof granted by the
Representative, by reason of any failure on the part of the Company or the
Parent to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
Section 12 hereof) to purchase the Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within twenty-four (24) hours thereafter,
to make arrangement for one or more of the non-defaulting Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the total number of Firm Securities to be purchased on such date,
the non-defaulting Underwriters shall be obligated to purchase the full
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters (or, if such
default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters may at the
Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option
Securities from the Company on such date).
No action taken pursuant to this Section 11 shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
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In the event of any such default which does not result in a termination
of this Agreement, the Representative shall have the right to postpone the
Closing Date or the Option Closing Date, as the case may be, for a period not
exceeding seven (7) days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section 12
shall relieve the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, Chairman, with
a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New
York 10103, Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be
directed to the Company at 150 East 58th Street, Suite 3400, New York, New York
10155, Attention: Edwin L. Harper, President and Chief Executive Officer, with a
copy to Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, 153 East 53rd
Street, New York, New York 10022, Attention: Stephen A. Weiss, Esq. Notices to
the Parent shall be directed to the Parent at 150 East 58th Street, Suite 3400,
New York, New York 10155, Attention: Bentley J. Blum, Chairman, with a copy to
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, 153 East 53rd Street, New
York, New York 10022, Attention: Stephen A. Weiss, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company, the Parent and the
controlling persons, directors and officers referred to in Section 7 hereof, and
their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
- 50 -
<PAGE>
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement, the Warrant Agreement
and the Representative's Warrant Agreement constitute the entire agreement of
the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative,
the Parent and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriters, the Parent and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
COMMODORE SEPARATION
TECHNOLOGIES, INC.
By: _______________________________________
Edwin L. Harper
President and Chief Executive Officer
COMMODORE APPLIED
TECHNOLOGIES, INC.
By: _______________________________________
Paul E. Hannesson
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
NATIONAL SECURITIES CORPORATION
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By: ___________________________________
Steven A. Rothstein
Chairman
- 51 -
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Number of
Shares of Number of Number of
Convertible Shares of Redeemable
Preferred Stock Common Stock Warrants
Name of Underwriters to Be Purchased to be Purchased to be Purchased
- -------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
National Securities Corporation...............
Total......................................... 1,500,000 1,500,000 3,000,000
========= ========= =========
</TABLE>
<PAGE>
SCHEDULE B
[FORM OF INTELLECTUAL PROPERTY OPINION]
___________________, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the several
Underwriters named in Schedule A
to the Underwriting Agreement
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Re: Initial Public Offering of Units consisting of
1,500,000 Shares of 10% Senior Convertible Redeemable
Preferred Stock and 1,500,000 Redeemable Common Stock
Purchase Warrants and Units consisting of 1,500,000
Shares of Common Stock and 1,500,000 Redeemable Common
Stock Purchase Warrants of Commodore Separation
Technologies, Inc.
------------------------------------------------------
Gentlemen:
We have acted as special counsel to Commodore Separation
Technologies, Inc., a Delaware corporation (the "Company"), in connection with
the entering into by the Company of that certain Underwriting Agreement by and
among National Securities Corporation (as representative of the several
underwriters named therein) (the "Representative"), Commodore Applied
Technologies, Inc. and the Company, dated _______________, 1997 (the
"Underwriting Agreement"). This opinion is provided to you pursuant to Section
6(e) of the Underwriting Agreement.
For the purpose of rendering the opinions set forth below we
have reviewed the following (collectively, the "Documents"):
(i) the Underwriting Agreement;
(ii) that certain registration statement on Form S-1 as filed
by the Company with the Securities and Exchange Commission on
September 12, 1996, together
<PAGE>
-2- _____________, 1997
with any and all exhibits and schedules and all heretofore
filed amendments thereto (collectively, the "Registration
Statement");
(iii) the Company's prospectus dated _______________, 1997
(the "Prospectus");
(iv) a search of the United States Patent and Trademark
Office records relevant to ownership of any and all:
patents and patent applications (including, without
limitation, the patents and patent applications listed
on Schedule A annexed hereto and hereby incorporated
by reference herein (collectively, the "Patents")),
and trademarks, trademark applications, service marks
and service mark applications (collectively, the
"Marks") (including, without limitation, the Marks
listed on Schedule B annexed hereto and hereby
incorporated by reference herein (collectively, the
"Trademarks")),
owned, purportedly owned or licensed by the Company or the
Company d/b/a Commodore Membrane Technologies, Inc.
("Commodore Membrane") (including, those patents, patent
applications and Marks licensed, without limitation, pursuant
to the licenses listed on Schedule C annexed hereto and hereby
incorporated by reference herein (collectively, the
"Licenses")), conducted by ______________________________ and
certified as true and correct as of _______________________,
1997 (no earlier than 5 days prior to the effective date of
the Registration Statement);
(v) a search of the United States Copyright Office records
relevant to ownership of any and all copyrighted material
(including, without limitation, the copyright in, or license
permitting the Company's actual use of, the material licensed
or otherwise distributed by the Company or Commodore Membrane
and listed on Schedule D annexed hereto and hereby
incorporated by reference herein (collectively, the
"Copyrighted Material")), owned, purportedly owned or licensed
by the Company or Commodore Membrane conducted by
_____________________ and certified as true and correct as of
__________________, 1997 (no earlier than 5 days prior to the
effective date of the Registration Statement);
(vi) an intellectual property litigation search with respect
to all Patents, Trademarks, Licenses and Copyrighted Material,
listed on Schedules A, B, C and D, respectively;
<PAGE>
-3- _____________, 1997
(vii) a search of the Uniform Commercial Code ("UCC")
recordation offices, in the following jurisdictions --
Delaware, Tennessee, New York and Ohio, with respect to the
following two categories of general intangibles:
(a) the intellectual property general intangibles of
the Company or Commodore Membrane, including, without
limitation, the patents, patent applications,
inventions, know how, trademarks, service marks,
copyrights, service and trade names, intellectual
property licenses and other rights of the Company
and/or Commodore Membrane, and
(b) the intellectual property general intangibles
licensed to the Company or Commodore Membrane,
including, without limitation, the patents, patent
applications, inventions, know how, trademarks,
service marks, copyrights, service and trade names and
other intellectual property rights licensed to the
Company or Commodore Membrane pursuant to the Licenses
(listed on Schedule C),
said search certified to us as complete and accurate by
________________ and current through ________________________,
1997 (no earlier than 5 days prior to the effective date of
the Registration Statement) and said jurisdictions being the
only jurisdictions in which filing of UCC financing statements
or other documents may be filed to effectively evidence a
security or other interest in said general intangibles; and
(viii) any and all records, documents, instruments and
agreements in our possession or under our control relating to
the Company or Commodore Membrane.
We have also examined such corporate records, documents,
instruments and agreements, and inquired into such other matters, as we have
deemed necessary or appropriate as a basis for the opinions set forth herein.
Whenever our opinion herein is qualified by the phrase "to the best of our
knowledge" or "to the best of our knowledge, after due inquiry," such language
means that, based upon (i) our inquiries of officers of the Company, (ii) our
review of the Documents, and (iii) our review of such other corporate records,
documents, instruments and agreements described in the first sentence of this
paragraph, we believe that such opinions are factually correct.
To the best of our knowledge, as to all matters of fact
represented to you by the Company, we advise you that nothing has come to our
attention that would cause us to believe that such facts are incorrect,
incomplete or misleading or that reliance thereon is not warranted under the
circumstances. We call to your attention that our opinion is limited to such
facts as
<PAGE>
-4- _____________, 1997
they exist on the date hereof and do not take into account any change of
circumstances, fact or law subsequent thereto.
Based upon and subject to the foregoing, we are of the opinion
that:
1. To the best of our knowledge, after due inquiry,
except as described in the Prospectus, the Company owns or has
the right to use, free and clear of all liens, encumbrances,
pledges, security interests, defects or other restrictions or
equities of any kind whatsoever,
(i) all patents and patent applications (including,
without limitation, the Patents),
(ii) all trademarks and service marks (including,
without limitation, the Trademarks),
(iii) all copyrights (including, without limitation,
the Copyrighted Material),
(iv) all service and trade names, and
(v) all intellectual property licenses (including,
without limitation, the Licenses),
used in, or required for, the conduct of the Company's
business.
2. To the best of our knowledge, after due inquiry,
the Company possesses all material intellectual property
licenses or rights used in, or required for, the conduct of
its business (including, the Licenses and without limitation,
any such licenses or rights described in the Prospectus as
being owned, possessed or licensed by the Company) and such
licenses and rights are in full force and effect.
3. To the best of our knowledge, after due inquiry,
there is no claim or action, pending, threatened or potential,
which affects or could affect the rights of the Company with
respect to any trademarks, service marks, copyrights, service
names, trade names, patents, patent applications or licenses
used in, or required for, the conduct of the Company's
business.
4. To the best of our knowledge, after due inquiry,
there is no intellectual property based claim or action,
pending, threatened or potential, which affects or could
affect the rights of the Company with respect to any products,
services,
<PAGE>
-5- _____________, 1997
processes or licenses, including, without limitation, the
Licenses used in the conduct of the Company's business.
5. To the best of our knowledge, after due inquiry,
except as described in the Prospectus, the Company is not
under any obligation to pay royalties or fees to any third
party with respect to any material, technology or intellectual
properties developed, employed, licensed or used by the
Company.
6. To the best of our knowledge, after due inquiry,
the statements in the Prospectus under the headings, "Risk
Factors - Unpredictability of Patent Protection and
Proprietary Technology," "Risk Factors-Royalty Obligation" and
"Business - Intellectual Property", are accurate in all
material respects, fairly represent the information disclosed
therein and do not omit to state any fact necessary to make
the statements made therein complete and accurate.
7. To the best of our knowledge, after due inquiry,
the statements in the Registration Statement and Prospectus do
not contain any untrue statement of a material fact with
respect to the intellectual property position of the Company
or omit to state any material fact relating to the
intellectual property position of the Company which is
required to be stated in the Registration Statement and the
Prospectus or is necessary to make the statements therein not
misleading.
We call your attention to the fact that the members of this
firm are licensed to practice law in the State of ______________ and before the
United States Patent and Trademark Office as Registered Patent Attorneys.
Accordingly, we express no opinion with respect to the laws, rules and
regulations of any jurisdictions other than the State of ___________ and the
United States of America.
The opinions expressed herein are for the sole benefit of, and
may be relied upon only by, the several Underwriters named in Schedule A to the
Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP.
Very truly yours,
<PAGE>
Exhibit 4.2
[FORM OF WARRANT AGREEMENT - SUBJECT TO ADDITIONAL REVIEW]
================================================================================
COMMODORE SEPARATION TECHNOLOGIES, INC.
AND
THE BANK OF NEW YORK
AND
NATIONAL SECURITIES CORPORATION
----------
WARRANT AGREEMENT
Dated as of January __, 1997
================================================================================
<PAGE>
AGREEMENT, dated this ____ day of January, 1997, by and among
COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware corporation (the "Company"),
THE BANK OF NEW YORK, as Warrant Agent (the "Warrant Agent") and NATIONAL
SECURITIES CORPORATION, its successors and assigns (collectively, "National" or
the "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of
units consisting of 1,500,000 shares of 10% Senior Convertible Redeemable
Preferred Stock, $.001 par value (the "Convertible Preferred Stock"), and
1,500,000 redeemable common stock purchase warrants (the "Warrants"), each
Warrant entitling the holder thereof to purchase one share of Common Stock (as
defined in Section 1) at a price equal to 140% of the initial public offering
price per share of Common Stock, and units consisting of 1,500,000 shares of
Common Stock and 1,500,000 Warrants, (ii) the over-allotment option to purchase
up to an additional 225,000 shares of Convertible Preferred Stock, 225,000
shares of Common Stock and/or 450,000 Warrants from the Company (the
"Over-allotment Option"), and (iii) the sale to National of warrants (the
"Representative's Warrants") to purchase up to 150,000 shares of Convertible
Preferred Stock, 150,000 shares of Common Stock and/or 300,000 Warrants, the
Company will issue up to 3,750,000 Warrants (subject to increase as provided
herein and in the Representative's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
<PAGE>
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and redemption of the
Warrants, the issuance of certificates representing the Warrants, the exercise
of the Warrants and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the certificates representing the
Warrants and the respective rights and obligations thereunder of the Company,
National, the holders of certificates representing the Warrants and the Warrant
Agent, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as
amended.
(b) "Common Stock" shall mean the authorized stock of
the Company of any class, whether now or hereafter authorized, which has the
right to participate in the voting and in the distribution of earnings and
assets of the Company without limit as to amount or percentage, subject to the
terms of the Convertible Preferred Stock, which at the date hereof consists of
50,000,000 shares of Common Stock, $.001 par value per share.
(c) "Commission" shall mean the Securities and
Exchange Commission.
(d) "Corporate Office shall mean the office of the
Warrant Agent (or its successor) at which at any particular time its business in
New York, New York, shall be administered, which office is located on the date
hereof at 101 Barclay Street, New York, New York 10286.
2
<PAGE>
(e) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(f) "Exercise Date" shall mean, subject to the
provisions of Section 5(b) hereof, as to any Warrant, the date on which the
Warrant Agent shall have received both (i) the Warrant Certificate representing
such Warrant, with the exercise form thereon duly executed by the Registered
Holder thereof or his attorney duly authorized in writing, and (ii) payment in
cash or by official bank or certified check made payable to the Warrant Agent
for the account of the Company, of the amount in lawful money of the United
States of America equal to the applicable Purchase Price (as hereinafter
defined) in good funds.
(g) "Initial Warrant Exercise Date" shall mean
_____________ __, 1998 [12 months from the effective date of the Registration
Statement].
(h) "Initial Warrant Redemption Date" shall mean
_______________ __, 1998 [18 months from the effective date of the Registration
Statement].
(i) "NASD" shall mean the National Association of
Securities Dealers, Inc.
(j) "Nasdaq" shall mean the Nasdaq SmallCap Market.
(k) "Purchase Price" shall mean, subject to
modification and adjustment as provided in Section 8, $_____ per share of Common
Stock [140% of the initial public offering price of the Common Stock] and
further subject to the Company's right, in its sole discretion, to decrease the
Purchase Price for a period of not less than 30 days on not less than 30 days'
prior written notice to the Registered Holders and National.
3
<PAGE>
(l) "Redemption Date" shall mean the date (which may
not occur before the Initial Warrant Redemption Date) fixed for the redemption
of the Warrants in accordance with the terms hereof.
(m) "Redemption Price" shall mean the price at which
the Company may, at its option, redeem the Warrants, in accordance with the
terms hereof, which price shall be $0.10 per Warrant, subject to adjustment from
time to time pursuant to the provisions of Section 9 hereof.
(n) "Registered Holder" shall mean the person in
whose name any certificate representing the Warrants shall be registered on the
books maintained by the Warrant Agent pursuant to Section 6.
(p) "Representative's Warrant Agreement" shall mean
the agreement dated as of _______________ __, 1997 [the date of the Prospectus]
between the Company and National relating to and governing the terms and
provisions of the Representative's Warrants.
(q) "Transfer Agent" shall mean The Bank of New York,
or its authorized successor.
(r) "Underwriting Agreement" shall mean the
underwriting agreement dated ______________ __, 1997 [the date of the
Prospectus] between the Company and the several underwriters listed therein
relating to the purchase for resale to the public of the units consisting of
1,500,000 shares of Convertible Preferred Stock and 1,500,000 Warrants and the
units consisting of 1,500,000 shares of Common Stock and 1,500,000 Warrants.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
4
<PAGE>
(t) "Warrant Expiration Date" shall mean, unless the
Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:30
p.m. (New York time), on ______________ __, 2002 [60 months from the effective
date of the Registration Statement], or the Redemption Date as defined herein,
whichever date is earlier; provided that if such date shall in the State of New
York be a holiday or a day on which banks are authorized to close, then 5:30
p.m. (New York time) on the next following day which, in the State of New York,
is not a holiday or a day on which banks are authorized to close. Upon five
business days' prior written notice to the Registered Holders, the Company shall
have the right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the
Registered Holder of the Warrant Certificate representing such Warrant to
purchase at the Purchase Price therefor from the Initial Warrant Exercise Date
until the Warrant Expiration Date one share of Common Stock upon the exercise
thereof in accordance with the terms hereof, subject to modification and
adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant
Certificates representing the number of Warrants sold pursuant to the
Underwriting Agreement (subject to modification and adjustment as provided in
Section 8) shall be executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as
provided therein, Warrant Certificates representing all or a portion of 300,000
Warrants to purchase up to an aggregate of 300,000 shares of Common Stock
(subject to modification and adjustment as
5
<PAGE>
provided in Section 8 hereof and in the Representative's Warrant Agreement),
shall be countersigned, issued and delivered by the Warrant Agent upon written
order of the Company signed by its Chairman of the Board, Chief Executive
Officer, President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary.
(d) From time to time, up to the Warrant Expiration
Date or the Redemption Date, whichever date is earlier, the Warrant Agent shall
countersign and deliver Warrant Certificates in required denominations of one or
whole number multiples thereof to the person entitled thereto in connection with
any transfer or exchange permitted under this Agreement. Except as provided
herein, no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder, those issued pursuant to the exercise of the Over-
allotment Option and those issued on or after the Initial Warrant Exercise Date,
upon the exercise of fewer than all Warrants held by the exercising Registered
Holder, (ii) Warrant Certificates issued upon any transfer or exchange of
Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Representative's Warrant Agreement, and (v)
at the option of the Company, Warrant Certificates in such form as may be
approved by its Board of Directors, to reflect any adjustment or change in the
Purchase Price, the number of shares of Common Stock purchasable upon exercise
of the Warrants or the Redemption Price therefor made pursuant to Section 8
hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially
in the form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such
6
<PAGE>
letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to usage. The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates) and issued in registered form. Warrants shall be
numbered serially with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf
of the Company by its Chairman of the Board, Chief Executive Officer, President
or any Vice President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates, nevertheless,
may be countersigned by the Warrant Agent, issued and delivered with the same
force and effect as though the person who signed such Warrant Certificates had
not ceased to be such officer of the Company. After countersignature by the
Warrant Agent, Warrant
7
<PAGE>
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise provided
by Section 4(a) hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number
multiples thereof may be exercised by the Registered Holder thereof commencing
at any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder, upon exercise thereof,
as of the close of business on the Exercise Date. If Warrants in denominations
other than whole number multiples thereof shall be exercised at one time by the
same Registered Holder, the number of full shares of Common Stock which shall be
issuable upon exercise thereof shall be computed on the basis of the aggregate
number of full shares of Common Stock issuable upon such exercise. As soon as
practicable on or after the Exercise Date and in any event within five business
days after such date, if one or more Warrants have been exercised, the Warrant
Agent on behalf of the Company shall cause to be issued to the person or persons
entitled to receive the same a Common Stock certificate or certificates for the
shares of Common Stock deliverable upon such exercise, and the Warrant Agent
shall deliver the same to the person or persons entitled thereto. Upon the
exercise of any one or more Warrants, the Warrant Agent shall promptly notify
the Company in writing of such fact and of the number of securities delivered
upon such exercise and, subject to subsection (b) below, shall cause all
payments of an amount in cash or by check
8
<PAGE>
made payable to the order of the Company, equal to the Purchase Price, to be
deposited promptly in the Company's bank account.
(b) At any time upon the exercise of any Warrants
after one year and one day from the date hereof, the Warrant Agent shall, on a
daily basis, within two business days after such exercise, notify National of
the exercise of any such Warrants and shall, on a weekly basis (subject to
collection of funds constituting the tendered Purchase Price, but in no event
later than five business days after the last day of the calendar week in which
such funds were tendered), remit to National an amount equal to five percent
(5%) of the Purchase Price of such Warrants then being exercised unless National
shall have notified the Warrant Agent that the payment of such amount with
respect to such Warrant is violative of the General Rules and Regulations
promulgated under the Exchange Act, or the rules and regulations of the NASD or
applicable state securities or "blue sky" laws, or the Warrants are those
underlying the Representative's Warrants in which event, the Warrant Agent shall
have to pay such amount to the Company; provided, that the Warrant Agent shall
not be obligated to pay any amounts pursuant to this Section 4(b) during any
week that such amounts payable are less than $1,000 and the Warrant Agent's
obligation to make such payments shall be suspended until the amount payable
aggregates $1,000, and provided further, that, in any event, any such payment
(regardless of amount) shall be made not less frequently than monthly.
Notwithstanding the foregoing, National shall be entitled to receive the
commission contemplated by this Section 4(b) as Warrant solicitation agent only
if: (i) National has provided actual services in connection with the
solicitation of the exercise of a Warrant by a Registered Holder and (ii) the
Registered Holder exercising a Warrant affirmatively designates in writing on
the exercise form on the
9
<PAGE>
reverse side of the Warrant Certificate that the exercise of such Registered
Holder's Warrant was solicited by National.
(c) The Company shall not be required to issue
fractional shares on the exercise of Warrants. Warrants may only be exercised in
such multiples as are required to permit the issuance by the Company of one or
more whole shares. If one or more Warrants shall be presented for exercise in
full at the same time by the same Registered Holder, the number of whole shares
which shall be issuable upon such exercise thereof shall be computed on the
basis of the aggregate number of shares purchasable on exercise of the Warrants
so presented. If any fraction of a share would, except for the provisions
provided herein, be issuable on the exercise of any Warrant (or specified
portion thereof), the Company shall pay an amount in cash equal to such fraction
multiplied by the then current market value of a share of Common Stock,
determined as follows:
(1) If the Common Stock is quoted, listed, or admitted to
unlisted trading privileges, on Nasdaq or a national securities exchange, the
current market value of a share of Common Stock shall be the closing sale price
of the Common Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Warrants on whichever of such
exchanges had the highest average daily trading volume for the Common Stock on
such day; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, but is traded in the
over-the-counter market, the current market value of a share of Common Stock
shall be the average of the last reported bid and asked
10
<PAGE>
prices of the Common Stock reported by the National Quotation Bureau, Inc. on
the last business day prior to the date of exercise of the Warrants;
(3) If the Common Stock is not quoted, listed, admitted to
unlisted trading privileges on Nasdaq or any national securities exchange, and
bid and asked prices of the Common Stock are not reported by the National
Quotation Bureau, Inc., the current market value of a share of Common Stock
shall be an amount, not less than the book value thereof as of the end of the
most recently completed fiscal quarter of the Company ending prior to the date
of exercise, determined by the members of the Board of Directors of the Company
exercising good faith and using customary valuation methods; or
(4) No Registered Holder of Warrants shall, as such, be
entitled to vote or to receive dividends or be deemed the holder of Common Stock
that may at any time be issuable upon exercise of such Warrants for any purpose
whatsoever, nor shall anything contained herein be construed to confer upon the
Registered Holder of Warrants, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue or
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger or conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights, until such
Registered Holder shall have exercised such Warrants and been issued shares of
Common Stock in accordance with the provisions hereof.
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SECTION 5. Reservation of Shares; Listing; Payment of Taxes;
etc.
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issue upon exercise of Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall, at the time of delivery thereof, be duly
and validly issued and fully paid and nonassessable and free from all preemptive
or similar rights, taxes, liens and charges with respect to the issue thereof,
and that upon issuance such shares shall be listed on each securities exchange,
if any, on which the other shares of outstanding Common Stock of the Company are
then listed.
(b) The Company covenants that if any securities to
be reserved for the purpose of exercise of Warrants hereunder require
registration with, or approval of, any governmental authority under any federal
securities law before such securities may be validly issued or delivered upon
such exercise, then the Company will file a registration statement under the
federal securities laws or a post-effective amendment, use its best efforts to
cause the same to become effective and to keep such registration statement
current while any of the Warrants are outstanding and deliver a prospectus which
complies with Section 10(a)(3) of the Act, to the Registered Holder exercising
the Warrant (except, if in the opinion of counsel to the Company, such
registration is not required under the federal securities law or if the Company
receives a letter from the staff of the Commission stating that it would not
take any enforcement action if such registration is not effected). The Company
will use its best efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws with respect to any such
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securities. However, Warrants may not be exercised by, or shares of Common Stock
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Warrants, or the issuance or delivery of any shares of Common
Stock upon exercise of the Warrants; provided, however, that if shares of Common
Stock are to be delivered in a name other than the name of the Registered Holder
of the Warrant Certificate representing any Warrant being exercised, then no
such delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto, if
any.
(d) The Warrant Agent is hereby irrevocably
authorized as the Transfer Agent to requisition from time to time certificates
representing shares of Common Stock or other securities required upon exercise
of the Warrants, and the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of Warrants of the
same class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
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(b) The Warrant Agent shall keep, at its office,
books in which, subject to such reasonable regulations as it may prescribe, it
shall register Warrant Certificates and the transfer thereof in accordance with
customary practice. Upon due presentment for registration of transfer of any
Warrant Certificate at such office, the Company shall execute and the Warrant
Agent shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.
(c) With respect to all Warrant Certificates
presented for registration of transfer, or for exchange or exercise, the
subscription or exercise form, as the case may be, on the reverse thereof shall
be duly endorsed or be accompanied by a written instrument or instruments of
transfer and subscription, in form satisfactory to the Company and the Warrant
Agent, duly executed by the Registered Holder thereof or his attorney-in-fact
duly authorized in writing.
(d) A service charge may be imposed by the Warrant
Agent for any exchange or registration of transfer of Warrant Certificates. In
addition, the Company may require payment by such Holder of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
therewith.
(e) All Warrant Certificates surrendered for exercise
or for exchange in case of mutilated Warrant Certificates shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as Warrant Agent (in which case
such Warrant Certificates shall be delivered to any successor warrant agent in
accordance with the provisions of Section 10 hereof).
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(f) Prior to due presentment for registration of
transfer thereof, the Company and the Warrant Agent may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner thereof and
of each Warrant represented thereby (notwithstanding any notations of ownership
or writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of and the
loss, theft, destruction or mutilation of any Warrant Certificate and (in the
case of loss, theft or destruction) of indemnity satisfactory to them, and (in
case of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or the Warrant Agent that a new Warrant Certificate has been acquired by a
bona fide purchaser) countersign and deliver to the Registered Holder in lieu
thereof a new Warrant Certificate of like tenor representing an equal aggregate
number of Warrants. Applicants for a substitute Warrant Certificate shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares
of Common Stock Deliverable.
(a) Except as hereinafter provided, in the event the
Company shall, at any time or from time to time after the date hereof and prior
to the Warrant Expiration Date, issue or sell any shares of Common Stock for a
consideration per share less than the Purchase Price or issue any shares of
Common Stock as a stock dividend to the holders of Common Stock, or
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subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then, and thereafter upon each further
Change of Shares, the Purchase Price for the Warrants (whether or not the same
shall be issued and outstanding) in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable fraction of a cent
to the nearest cent) determined by dividing (i) the sum of (x) the total number
of shares of Common Stock outstanding immediately prior to such Change of
Shares, multiplied by the Purchase Price in effect immediately prior to such
Change of Shares and (y) the consideration, if any, received by the Company upon
such sale, issuance, subdivision or combination, by (ii) the total number of
shares of Common Stock outstanding immediately after such Change of Shares;
provided, however, that in no event shall the Purchase Price be adjusted
pursuant to this computation to an amount in excess of the Purchase Price in
effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance
with this Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of
Common Stock (or of other securities deemed hereunder to involve the issuance or
sale of shares of Common Stock) for a consideration part or all of which shall
be cash, the amount of the cash portion of the consideration therefor deemed to
have been received by the Company shall be (i) the subscription price, if shares
of Common Stock are offered by the Company for subscription, or (ii) the public
offering price (before deducting therefrom any compensation paid or discount
allowed in the sale, underwriting or purchase thereof by underwriters or dealers
or others
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performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than
as a dividend or other distribution on any stock of the Company, and otherwise
than on the exercise of options, rights or warrants or the conversion or
exchange of convertible or exchangeable securities) of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be other
than cash, the amount of the consideration therefor other than cash deemed to
have been received by the Company shall be the value of such consideration as
determined in good faith by the Board of Directors of the Company, using
customary valuation methods and on the basis of prevailing market values for
similar property or services.
(C) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company
other than shares of Common Stock into securities including shares of Common
Stock shall be deemed to involve the issuance of such shares of Common Stock for
a consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to
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receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in subsection (B) of this
Section 8(a).
(E) The number of shares of Common Stock at any one
time outstanding shall be deemed to include the aggregate maximum number of
shares issuable (subject to readjustment upon the actual issuance thereof) upon
the exercise of options, rights or warrants and upon the conversion or exchange
of convertible or exchangeable securities.
(b) Upon each adjustment of the Purchase Price
pursuant to this Section 8, the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall be the number derived by multiplying the
number of shares of Common Stock purchasable immediately prior to such
adjustment by the Purchase Price in effect prior to such adjustment and dividing
the product so obtained by the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in Sections
8(a) and 8(b) and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration (including the
issuance of any such securities by way of dividend or other distribution), the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of Sections 8(a) and 8(b) hereof, provided that:
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(A) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable or that may become issuable under such
options, rights or warrants (assuming exercise in full even if not then
currently exercisable or currently exercisable in full) shall be deemed to be
issued and outstanding at the time such options, rights or warrants were issued,
for a consideration equal to the minimum purchase price per share provided for
in such options, rights or warrants at the time of issuance, plus the
consideration, if any, received by the Company for such options, rights or
warrants; provided, however, that upon the expiration or other termination of
such options, rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this subsection (A) (and for the purposes of subsection (E) of
Section 8(a) hereof) shall be reduced by the number of shares as to which
options, warrants and/or rights shall have expired, and such number of shares
shall no longer be deemed to be issued and outstanding, and the Purchase Price
then in effect shall forthwith be readjusted and thereafter be the price that it
would have been had adjustment been made on the basis of the issuance only of
the shares actually issued plus the shares remaining issuable upon the exercise
of those options, rights or warrants as to which the exercise rights shall not
have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common
Stock issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the
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conversion or exchange thereof; provided, however, that upon the termination of
the right to convert or exchange such convertible or exchangeable securities
(whether by reason of redemption or otherwise), the number of shares of Common
Stock deemed to be issued and outstanding pursuant to this subsection (B) (and
for the purposes of subsection (E) of Section 8(a) hereof) shall be reduced by
the number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share
provided for in any of the options, rights or warrants referred to in subsection
(A) of this Section 8(c), or in the price per share or ratio at which the
securities referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(d) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants (other
than a change in par value, or
20
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from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or in case of any consolidation or merger of
the Company with or into another corporation (other than a merger with a
subsidiary of the Company in which merger the Company is the continuing
corporation) and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination) or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
then, as a condition of such reclassification, change, consolidation, merger,
sale or conveyance, the Company, or such successor or purchasing corporation, as
the case may be, shall make lawful and adequate provision whereby the Registered
Holder of each Warrant then outstanding shall have the right thereafter to
receive on exercise of such Warrant the kind and amount of securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance by a holder of the number of securities issuable upon
exercise of such Warrant immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and shall forthwith file at the
Corporate Office of the Warrant Agent a statement signed by its Chief Executive
Officer, President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Sections
8(a), (b) and (c). The above provisions of this Section 8(d) shall similarly
apply to successive reclassifications and
21
<PAGE>
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(e) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(d) hereof, continue to express the Purchase
Price per share and the number of shares purchasable thereunder as the Purchase
Price per share and the number of shares purchasable thereunder were expressed
in the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price
pursuant to this Section 8, the Company will promptly prepare a certificate
signed by the Chairman, Chief Executive Officer or President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary,
of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant,
after such adjustment, and (iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly file such certificate with the
Warrant Agent and cause a brief summary thereof to be sent by ordinary first
class mail to each Registered Holder at his last address as it shall appear on
the registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an officer
of the Warrant Agent or the Secretary or an Assistant
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<PAGE>
Secretary of the Company that such notice has been mailed shall, in the absence
of fraud, be prima facie evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made
as a result of or in connection with (A) the issuance or sale of shares of
Common Stock pursuant to options, warrants, stock purchase agreements and
convertible or exchangeable securities outstanding or in effect on the date
hereof and on the terms described in the final prospectus relating to the public
offering contemplated by the Underwriting Agreement; or (B) the issuance or sale
of shares of Common Stock if the amount of said adjustment shall be less than
$.10, provided, however, that in such case, any adjustment that would otherwise
be required then to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment that shall amount,
together with any adjustment so carried forward, to at least $.10. In addition,
Registered Holders shall not be entitled to cash dividends paid by the Company
prior to the exercise of any Warrant or Warrants held by them.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption
Date, the Company may, on 30 days' prior written notice, redeem all, but not
less than all, of the Warrants at ten cents ($.10) per Warrant, provided,
however, that before any such call for redemption of Warrants can take place,
the average closing sale price for the Common Stock as reported by Nasdaq, if
the Common Stock is then traded on Nasdaq (or the average closing sale price, if
the Common Stock is then traded on another national securities exchange) shall
have equalled or exceeded $_____ per share [300% of the initial public offering
price of the Common Stock] for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on
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the fifth trading day prior to the date on which the notice contemplated by
subsections (b) and (c) below is given (subject to adjustment in the event of
any stock splits or other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to
redeem any or all of the Warrants, it shall give or cause to be given notice to
the Registered Holders of the Warrants, by mailing to such Registered Holders a
notice of redemption, first class, postage prepaid, at their last address as
shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. Not less than five
(5) business days prior to the mailing to the Registered Holders of the Warrants
of the notice of redemption, the Company shall deliver or cause to be delivered
to National a similar notice telephonically and confirmed in writing together
with a list of the Registered Holders (including their respective addresses and
number of Warrants beneficially owned) to whom such notice of redemption has
been or will be given.
(c) The notice of redemption shall specify (i) the
Redemption Price, (ii) the Redemption Date, which shall in no event be less than
thirty (30) days after the date of mailing of such notice, (iii) the place where
the Warrant Certificate shall be delivered and the Redemption Price shall be
paid, (iv) if National is engaged as a Warrant solicitation agent, that National
shall receive the commission contemplated by Section 4(b) hereof, and (v) that
the right to exercise the Warrant shall terminate at 5:30 p.m. (New York time)
on the business day immediately preceding the date fixed for redemption. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such
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redemption except as to a holder (a) to whom notice was not mailed or (b) whose
notice was defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
(d) Any right to exercise a Warrant shall terminate
at 5:30 p.m. (New York time) on the business day immediately preceding the
Redemption Date. The Redemption Price payable to the Registered Holders shall be
mailed to such persons at their addresses of record. On and after the Redemption
Date, Registered Holders of Warrants shall have no further rights except to
receive, upon surrender of the Warrant Certificate(s) representing such
Warrants, the Redemption Price.
(e) The Company shall indemnify National and each
person, if any, who controls National within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from the registration statement or prospectus referred to in Section 5(b) hereof
to the same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the Company has agreed to
indemnify National contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date,
the Company shall furnish to National (i) an opinion of counsel to the Company,
dated such date and addressed to National, and (ii) a "cold comfort" letter
dated such date addressed to National, signed by the
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independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in
a ministerial capacity for the Company and National, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under
any duty or responsibility to any holder of Warrant Certificates to make or
cause to be made any adjustment of the Purchase Price or the Redemption Price
provided in this Agreement, or to determine whether any fact exists which may
require any such adjustments, or with respect to the nature or extent of any
such adjustments, when made, or with respect to the method employed in making
the same. It shall not (i) be liable for any recital or statement of fact
contained herein or for any action taken, suffered or omitted by it in reliance
on any Warrant Certificate or other document or instrument believed by it in
good faith to be genuine and to have been signed or
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presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
negligence, bad faith or willful misconduct.
(c) The Warrant Agent may at any time consult with
counsel satisfactory to it (who may be counsel for the Company or for National)
and shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request,
direction, order or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board of Directors, Chief Executive
Officer, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent
reasonable compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; the Company further agrees to indemnify the
Warrant Agent and save it harmless from and against any and all losses, expenses
and liabilities, including judgments, costs and counsel fees, for anything done
or omitted by the Warrant Agent in the execution of its duties and powers
hereunder except losses, expenses and liabilities arising as a result of the
Warrant Agent's negligence, bad faith or willful misconduct.
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(f) The Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Warrant Agent's own gross negligence or willful
misconduct), after giving 30 days' prior written notice to the Company. At least
15 days prior to the date such resignation is to become effective, the Warrant
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint in writing a new warrant agent. If the
Company shall fail to make such appointment within a period of 15 days after it
has been notified in writing of such resignation by the resigning Warrant Agent,
then the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company that is a registered transfer agent under the Exchange Act.
After acceptance in writing of such appointment by the new warrant agent is
received by the Company, such new warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act or
deed; but if for any reason it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed and
delivered by the resigning Warrant Agent. Not later than the effective date of
any such appointment the
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Company shall file notice thereof with the resigning Warrant Agent and shall
forthwith cause a copy of such notice to be mailed to the Registered Holder of
each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or
any new warrant agent may be converted or merged, any corporation resulting from
any consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and
affiliates, and any of its or their officers or directors, may buy and hold or
sell Warrants or other securities of the Company and otherwise deal with the
Company in the same manner and to the same extent and with like effect as though
it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of
two years from the date of exercise any Warrant Certificate received by it upon
such exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental
agreement make any changes or corrections in this Agreement (i) that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error
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herein contained; or (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Warrant Certificates;
provided, however, that this Agreement shall not otherwise be modified,
supplemented or altered in any respect except with the consent in writing of the
Registered Holders representing not less than 66-2/3% of the Warrants then
outstanding; provided, further, that no change in the number or nature of the
securities purchasable upon the exercise of any Warrant, or to increase the
Purchase Price therefor or to accelerate the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are presently
specifically prescribed by this Agreement as originally executed. In addition,
this Agreement may not be modified, amended or supplemented without the prior
written consent of National, other than to cure any ambiguity or to correct any
provision which is inconsistent with any other provision of this Agreement or to
make any such change that is necessary or desirable and which shall not
adversely affect the interests of National and except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class registered or certified mail, postage prepaid,
as follows: if to the Registered Holder of a Warrant Certificate, at the address
of such holder as shown on the registry books maintained by the Warrant Agent;
if to the Company at 150 East 58th Street, Suite 3400, New York, New York 10155,
Attention: Edwin L. Harper, President and Chief Executive Officer, or at such
other address as may have been furnished to the Warrant Agent in writing by the
Company; and if to
30
<PAGE>
the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall also be delivered to National Securities
Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154-1100,
Attention: General Counsel, or at such other address as may have been furnished
to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit
of the Company, National, the Warrant Agent and their respective successors and
assigns and the holders from time to time of Warrant Certificates or any of
them. Nothing in this Agreement is intended or shall be construed to confer upon
any other person any right, remedy or claim, in equity or at law, or to impose
upon any other person any duty, liability or obligation.
SECTION 15. Termination.
This Agreement shall terminate at the close of business on the
Expiration Date of all of the Warrants or such earlier date upon which all
Warrants have been exercised or redeemed, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 10
hereof shall survive such termination.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which
taken together shall constitute a single document.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
[SEAL]
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: _____________________________________
Name:
Title:
Attest:
By: ____________________
Name:
Title:
THE BANK OF NEW YORK,
As Warrant Agent
By: _____________________________________
Name:
Title:
NATIONAL SECURITIES CORPORATION
By: _____________________________________
Name:
Title:
32
<PAGE>
EXHIBIT A
No. W ________________ VOID AFTER _________, 2002
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
COMMODORE SEPARATION TECHNOLOGIES, INC.
CUSIP ____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, $.001 par
value, of Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), at any time between ___________________, 1998 (the "Initial Warrant
Exercise Date"), and the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of The Bank of
New York, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied
by payment of $_____ per share of Common Stock, [140% of the initial public
offering price of the Common Stock] subject to adjustment (the "Purchase
Price"), in lawful money of the United States of America in cash or by check
made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated ___________,
1997 [date of the Prospectus], between the Company, National Securities
Corporation ("National") and the Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price and the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional interests will be issued. In the case
of the exercise of less than all the
A-1
<PAGE>
Warrants represented hereby, the Company shall cancel this Warrant Certificate
upon the surrender hereof and shall execute and deliver a new Warrant
Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall
countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:30 p.m. (New York time)
on __________, 2002 [forty-eight (48) months after the Initial Warrant Exercise
Date]. If each such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:30 p.m. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, use its best efforts to keep such registration statement current, if
required under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant
may be redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time commencing after ______________, 1998 [18 months after the
effective date of the Registration Statement], provided that the average closing
sale price for the Common Stock as reported by the Nasdaq SmallCap Market (or
the average closing sale price, if the Common Stock is then traded on another
national securities exchange), shall have equalled or exceeded $_____ per share
[300% of the initial public offering price of the Common Stock] for any twenty
(20) trading days within a period of thirty (30) consecutive trading days ending
on the fifth trading
A-2
<PAGE>
day prior to the date of the Notice of Redemption, as defined below (subject to
adjustment in the event of any stock splits or other similar events). Notice of
redemption (the "Notice of Redemption") shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants except to receive the
$.10 per Warrant upon surrender of this Warrant Certificate.
Under certain circumstances, National may be entitled to receive
an aggregate of five percent (5%) of the Purchase Price of the Warrants
represented hereby.
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary, except as
provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
Dated:
COMMODORE SEPARATION
TECHNOLOGIES, INC.
[SEAL]
By: ___________________________
Name:
Title:
By: ___________________________
Name:
Title: Secretary
COUNTERSIGNED:
THE BANK OF NEW YORK,
as Warrant Agent
By: _____________________________
Authorized Officer
A-4
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _________________ Warrants represented by this Warrant Certificate, and
to purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
____________________________________
____________________________________
____________________________________
____________________________________
(please print or type name and address)
and be delivered to
____________________________________
____________________________________
____________________________________
____________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-5
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by
National Securities Corporation. [ ]
2. The exercise of this Warrant was solicited by [ ]
_______________________________. [ ]
3. The exercise of this Warrant was not
solicited.
Dated: _________________ X___________________________
____________________________
____________________________
____________________________
Address
____________________________
Social Security or Taxpayer
Identification Number
____________________________
Signature Guaranteed
____________________________
A-6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _________________________, hereby sells,
assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
____________________________________
____________________________________
____________________________________
____________________________________
____________________________________
(please print or type name and address)
______________________ of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints ______________________ Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: _______________________ X ________________________
Signature Guaranteed
_________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
A-7
<PAGE>
Exhibit 4.4
[Form of Representative's Warrant Agreement -
Subject to Additional Review]
- --------------------------------------------------------------------------------
COMMODORE SEPARATION TECHNOLOGIES, INC.
AND
NATIONAL SECURITIES CORPORATION
----------
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of January __, 1997
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1997
between COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), and NATIONAL SECURITIES CORPORATION (hereinafter referred to
variously as the "Holder" or the "Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative
(and/or its designees) warrants ("Warrants") to purchase up to an aggregate
150,000 shares of Convertible Preferred Stock, $.001 par value, of the Company,
150,000 shares of Common Stock, $.001 par value, of the Company and/or 300,000
redeemable common stock purchase warrants of the Company ("Redeemable
Warrants"), each Redeemable Warrant to purchase one additional share of Common
Stock, or any combination of such securities at the exercise prices set forth
herein; and
WHEREAS, the Representative has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof among the Company, Commodore Applied Technologies, Inc. and the several
Underwriters listed therein to act as the Representative in connection with the
Company's proposed public offering of units consisting of 1,500,000 shares of
Convertible Preferred Stock and 1,500,000 Redeemable Warrants ("Public
Warrants") and units consisting of 1,500,000 shares of Common Stock and
1,500,000 Public Warrants at an initial public offering price of $____ per share
of Convertible Preferred
<PAGE>
Stock, $____ per share of Common Stock and $.10 per Public Warrant (the "Public
Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Representative to the Company of an aggregate fifteen dollars ($15.00),
the agreements herein set forth and other good and valuable consideration,
hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Representative (and/or its designees) is hereby
granted the right to purchase, at any time from _______, 1998 [one year from the
effective date of the Registration Statement], until 5:30 P.M., New York time,
on _______, 2002 [five years from the effective date of the Registration
Statement], up to an aggregate of (a) 150,000 shares of Convertible Preferred
Stock (the "Preferred Shares") at an initial exercise price (subject to
adjustment as provided in Section 8 hereof) of $____ per share of Convertible
Preferred Stock [120% of the initial public offering price per share of
Convertible Preferred Stock], or in the event the Convertible Preferred Stock
has been redeemed by the Company or converted into shares of Common Stock in
accordance with the terms of the Convertible Preferred Stock, up to __________
shares (subject to adjustment as provided in Section 8 hereof) of Common Stock
(the "Conversion Shares") at an initial exercise price (subject to adjustment as
provided in
- 2 -
<PAGE>
Section 8 hereof) of $_____ per share of Common Stock [120% of the initial
public offering price per share of Convertible Preferred Stock divided by the
then current Conversion Price, as defined in and calculated pursuant to that
certain Certificate of Designation, Preferences and Rights of 10% Senior
Convertible Redeemable Preferred Stock of Commodore Separation Technologies,
Inc. (the "Certificate of Designation"), dated as of ____________, 1997 and
filed with the Secretary of State of the State of Delaware], (b) 150,000 shares
of Common Stock (the "Common Shares") at an initial exercise price (subject to
adjustment as provided in Section 8 hereof) of $____ per share of Common Stock
[120% of the initial public offering price per share of Common Stock] and/or (c)
300,000 Redeemable Warrants at an initial exercise price (subject to adjustment
as provided in Section 8 hereof) of $____ per Redeemable Warrant [120% of the
initial public offering price per Redeemable Warrant], or any combination of
such Preferred Shares, Conversion Shares, Common Shares and/or Redeemable
Warrants at such exercise prices set forth herein, all subject to the terms and
conditions of this Agreement. One Redeemable Warrant is exercisable to purchase
one additional share of Common Stock at an initial exercise price of $_____
[140% of the initial public offering price per share of Common Stock] from
_______, 1998 [one year from the effective date of the registration statement]
until 5:30 p.m. New York time on _____, 2002 [five years from the effective date
of the registration statement], at which time the Redeemable Warrants shall
expire.
It is expressly understood that this Agreement entitles the
Representative to ten percent (10%) of the number of securities offered to the
public on an as converted basis (subject to adjustment as provided in Section 8
hereof). Therefore, in the case of the Warrants to purchase shares of
Convertible Preferred Stock, each share of Convertible Preferred Stock
- 3 -
<PAGE>
purchased hereunder will reduce the number of Preferred Shares purchasable by
the Representative by ____ (__) (subject to adjustment as provided in Section 8
hereof). Similarly, each Conversion Share purchased hereunder will reduce the
number of Preferred Shares purchasable by the Representative by ____ of a share
of Convertible Preferred Stock and will reduce the number of Conversion Shares
purchasable by the Representative by one (subject to adjustment as provided in
Section 8 hereof). Except as set forth herein, the shares of Convertible
Preferred Stock, shares of Common Stock and Redeemable Warrants issuable upon
exercise of the Warrants are in all respects identical to the shares of
Convertible Preferred Stock, shares of Common Stock and Public Warrants being
purchased by the Underwriters for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement. The Preferred Shares, the Conversion
Shares, the Common Shares and the Redeemable Warrants issuable upon exercise of
the Warrants are sometimes hereinafter referred to collectively as the
"Securities."
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
Section 3.1 Method of Exercise. The Warrants initially are
exercisable at an aggregate initial exercise price (subject to adjustment as
provided in Section 8 hereof) per Preferred Share, Conversion Share, Common
Share and Redeemable Warrant set forth in Section 6 hereof payable by certified
or official bank check in New York Clearing House funds, subject to adjustment
as
- 4 -
<PAGE>
provided in Section 8 hereof. Upon surrender of a Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Preferred Shares, Conversion
Shares, Common Shares and/or Redeemable Warrants purchased at the Company's
principal executive offices in New York (presently located at 150 East 58th
Street, Suite 3400, New York, New York 10155) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the Securities so purchased. The purchase rights represented
by each Warrant Certificate are exercisable at the option of the Holder thereof,
in whole or in part (but not as to fractional shares of the Preferred Shares,
Conversion Shares, Common Shares and Redeemable Warrants underlying the
Warrants). In the event the Company redeems all of the shares of Convertible
Preferred Stock and/or Public Warrants (other than the Preferred Shares and
Redeemable Warrants underlying the Warrants), then the Warrants may only be
exercised if such exercise is accompanied by the simultaneous conversion of the
Preferred Shares and/or exercise of the Redeemable Warrants, as the case may be,
underlying the Warrants being so exercised. Warrants may be exercised to
purchase all or part of the Preferred Shares, Conversion Shares, Common Shares
and/or Redeemable Warrants purchasable thereunder. In the case of the purchase
of less than all the Securities purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Securities purchasable thereunder.
Section 3.2 Exercise by Surrender of Warrant. In addition to
the method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of
- 5 -
<PAGE>
the Warrants shall have the right at any time and from time to time to exercise
the Warrants in full or in part by surrendering the Warrant Certificate in the
manner specified in Section 3.1 in exchange for the number of shares of Common
Stock equal to the quotient derived from dividing the numerator (x) an amount
equal to the difference between (A) the sum of (1) the number of Preferred
Shares as to which the Warrants are being exercised multiplied by the per
Preferred Share Market Price, (2) the number of Conversion Shares as to which
the Warrants are being exercised multiplied by the per Conversion Share Market
Price, (3) the number of Common Shares as to which the Warrants are being
exercised multiplied by the per Common Share Market Price, (4) the number of
Redeemable Warrants as to which the Warrants are being exercised multiplied by
the per Redeemable Warrant Market Price, and (5) the number of shares of Common
Stock issuable upon exercise of the Redeemable Warrants underlying the Warrants
being exercised multiplied by the per Common Share Market Price, and (B) the sum
of (1) the number of Warrants which are being exercised multiplied by the
Exercise Price, (2) the number of Preferred Shares included in the Warrants
which are being exercised multiplied by the Conversion Rate per Preferred Share
(as calculated pursuant to the Certificate of Designation) as then in effect,
and (3) the number of Redeemable Warrants included in the Warrants which are
being exercised multiplied by the exercise price per Redeemable Warrant (as
calculated pursuant to the Redeemable Warrant Agreement (hereinafter defined))
as then in effect, by the denominator (y) the per share Market Price of the
Common Stock. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date on which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 14
- 6 -
<PAGE>
hereof ("Notice Date") or (ii) as the average of the Market Prices for each of
the five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
Section 3.3 Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be (i) when referring to
the Preferred Shares, the last reported sale price, or, in case no such reported
sale takes place on such day, the average of the last reported sale prices for
the last three (3) trading days, in either case as officially reported by the
Nasdaq SmallCap Market ("Nasdaq/SC") or the principal securities exchange on
which the Convertible Preferred Stock is listed or admitted to trading, or, if
the Convertible Preferred Stock is not listed or admitted to trading on
Nasdaq/SC or any national securities exchange or quoted by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"), the
average closing bid price as furnished by the National Association of Securities
Dealers, Inc. ("NASD") through Nasdaq or similar organization if Nasdaq is no
longer reporting such information, or if the Convertible Preferred Stock is not
quoted on Nasdaq, as determined in good faith (using customary valuation
methods) by resolution of the members of the Board of Directors of the Company,
based on the best information available to it; (ii) when referring to the
Conversion Shares or the Common Shares, the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by Nasdaq/SC or the principal securities exchange on which
the Common Stock is listed or admitted to trading, or, if the Common Stock is
not listed or admitted to trading on Nasdaq/SC or any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by the
NASD through Nasdaq or similar organization if Nasdaq is no longer reporting
such information, or if the Common Stock is not quoted on
- 7 -
<PAGE>
Nasdaq, as determined in good faith (using customary valuation methods) by
resolution of the members of the Board of Directors of the Company, based on the
best information available to it; or (iii) when referring to a Redeemable
Warrant, the last reported sale price, or, in the case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by Nasdaq/SC
or the principal securities exchange on which the Redeemable Warrants are listed
or admitted to trading, or, if the Redeemable Warrants are not listed or
admitted to trading on Nasdaq/SC or any national securities exchange or quoted
by Nasdaq, the average closing bid price as furnished by the NASD through Nasdaq
or similar organization if Nasdaq is no longer reporting such information, or if
the Redeemable Warrants are not quoted on Nasdaq or are no longer outstanding,
the Market Price of a Redeemable Warrant shall equal the difference between the
Market Price of the Common Stock and the Exercise Price of the Redeemable
Warrant.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for the Securities and/or other
securities, properties or rights underlying such Warrants and, upon the
redemption or conversion of the Preferred Shares and/or the exercise of the
Redeemable Warrants, the issuance of certificates for shares of Common Stock
and/or other securities, properties or rights underlying such Preferred Shares
and/or Redeemable Warrants, as the case may be, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to
- 8 -
<PAGE>
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
Holder, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Securities underlying the Warrants and the shares of Common Stock underlying the
Preferred Shares and Redeemable Warrants (and/or other securities, properties or
rights issuable upon the redemption or conversion of the Preferred Shares or the
exercise of the Warrants or the Redeemable Warrants) shall be executed on behalf
of the Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer or
in lieu of mutilated, lost, stolen or destroyed Warrant Certificates.
Certificates representing the Securities, and the shares of Common Stock
underlying each Preferred Share and Redeemable Warrant (and/or other securities,
properties or rights issuable upon the redemption or conversion of the Preferred
Shares or exercise of the Warrants or the Redeemable Warrants) shall be dated as
of the Notice Date (regardless of when executed or delivered) and dividend
bearing securities so issued shall accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Warrants may not be sold,
- 9 -
<PAGE>
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, for a period of one (1) year from the date hereof, except to officers of
the Representative.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as
otherwise provided in Section 8 hereof, the initial exercise price of each
Warrant shall be $____ [120% of the initial public offering price] per share of
Convertible Preferred Stock, $_____ [120% of the initial public offering price
per share of Convertible Preferred Stock divided by the then current Conversion
Price, as defined in and calculated pursuant to the Certificate of Designation]
per Conversion Share, $____ [120% of the initial public offering price] per
share of Common Stock and $_____ per Redeemable Warrant [120% of the initial
public offering price per Public Warrant]. The adjusted exercise price shall be
the price which shall result from time to time from any and all adjustments of
the initial exercise price in accordance with the provisions of Section 8
hereof. Any transfer of a Warrant shall constitute an automatic transfer and
assignment of the registration rights set forth in Section 7 hereof with respect
to the Securities or other securities, properties or rights underlying the
Warrants.
Section 6.2 Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price, depending
upon the context or unless otherwise specified.
- 10 -
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7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Warrants, the Securities issuable upon exercise of the Warrants, the shares of
Common Stock issuable upon redemption or conversion of the Preferred Shares, the
shares of Common Stock issuable upon exercise of the Redeemable Warrants
underlying the Warrants and any of the other securities issuable upon redemption
or conversion of the Preferred Shares or exercise of the Warrants or Redeemable
Warrants (collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form S-1 (Registration No. 333-11813) (the
"Registration Statement"). All of the representations and warranties of the
Company contained in the Underwriting Agreement relating to the Registration
Statement, the Preliminary Prospectus and Prospectus (as such terms are defined
in the Underwriting Agreement) and made as of the dates provided therein, are
incorporated by reference herein. The Company agrees and covenants promptly to
file post-effective amendments to such Registration Statement as may be
necessary in order to maintain its effectiveness and otherwise to take such
action as may be necessary to maintain the effectiveness of the Registration
Statement as long as any Warrants are outstanding. In the event that, for any
reason whatsoever, the Company shall fail to maintain the effectiveness of the
Registration Statement, the certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered or sold except pursuant to (i)
an effective registration statement under the Act, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule
under such Act relating to the disposition of securities), or
(iii) an opinion of
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counsel, if such opinion shall be reasonably satisfactory to
counsel to the issuer, that an exemption from registration
under such Act is available.
Section 7.2 Piggyback Registration.
(a) If, at any time commencing after the date hereof and
expiring seven (7) years thereafter, the Company proposes to register any of its
securities under the Act (other than pursuant to Form S-4, Form S-8 or a
comparable registration statement) it will give written notice by registered
mail, at least thirty (30) days prior to the filing of each such registration
statement, to the Representative and to all other Holders of the Warrants and/or
the Warrant Securities of its intention to do so. If the Representative or other
Holders of the Warrants and/or Warrant Securities notify the Company within
twenty (20) business days after receipt of any such notice of its or their
desire to include any such securities in such proposed registration statement,
the Company shall afford the Representative and such Holders of the Warrants
and/or Warrant Securities the opportunity to have any such Warrant Securities
registered under such registration statement (a "Piggyback Registration");
provided, however, that the Representative and/or such Holders of the Warrants
and/or Warrant Securities shall furnish the Company with appropriate information
in connection therewith as the Company may request in writing.
(b) If, at any time after giving written notice of its
intention to register any securities in a Piggyback Registration but prior to
the effective date of the related registration statement, the Company shall
determine for any reason not to register such securities, the Company shall give
written notice of such determination to the Representative and to each Holder of
Warrants and/or Warrant Securities and, thereupon, shall be relieved of its
obligation
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to register any Warrant Securities in connection with such Piggyback
Registration, irrespective of whether a written request for inclusion of any
such securities shall have been made. All best efforts obligations of the
Company pursuant to Section 7.4(a) shall cease if the Company determines to
terminate prior to such effective date any registration where Warrant Securities
are being registered pursuant to Section 7.2(a).
(c) If a Piggyback Registration involves an offering by or
through underwriters, then (i) the Representative and all Holders of Warrants
and/or Warrant Securities requesting to have their Warrant Securities included
in the Company's registration statement must sell their Warrant Securities to
the underwriters selected by the Company on the same terms and conditions as
apply to other selling shareholders and (ii) the Representative and any Holder
of Warrants and/or Warrant Securities requesting to have such Holder's Warrant
Securities included in such registration statement may elect in writing, not
later than three (3) business days prior to the effectiveness of the
registration statement filed in connection with such registration, not to have
such Holder's Warrant Securities so included in connection with such
registration.
(d) If a Piggyback Registration involves an offering by or
through underwriters, the Company shall not be required to include Warrant
Securities therein if and to the extent the underwriter managing the offering
reasonably believes in good faith and advises the Representative and each Holder
of Warrants and/or Warrant Securities requesting to have Warrant Securities
included in the Company's registration statement that such inclusion would
materially adversely affect such offering; provided that if other selling
shareholders, including employees, officers or directors of the Company, have
requested registration of
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securities in the proposed offering, the Company will reduce or eliminate such
other selling shareholders' securities pro rata to the Warrant Securities in
proportion to the respective number of shares they have requested to be
registered, and in such event, the Representative and such Holders of Warrants
and/or Warrant Securities may delay any offering by them of all Warrant
Securities requested to be included or that portion of such Warrant Securities
eliminated for such period, not to exceed 60 days, as the managing underwriter
shall request, and the Company shall file such supplements and post-effective
amendments and take such other action necessary under Federal and State law or
regulation as may be necessary to permit the Representative and such Holders of
Warrants and/or Warrant Securities to make their proposed offering for a period
of 90 days following such period of delay.
Section 7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring
five (5) years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion only, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representative and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other Holders
of the Warrants and/or Warrant Securities who notify the Company within ten
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(10) days after receiving notice from the Company of such request; provided,
however, the Company shall be entitled to defer such registration for a period
of up to 90 days if and to the extent that its Board of Directors shall
determine in good faith with an opinion of counsel for the Company that such
registration would interfere with a pending corporate transaction.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years thereafter, any Holder of Warrants and/or
Warrant Securities shall have the right, exercisable by written request to the
Company, to have the Company prepare and file, on one occasion only, with the
Commission a registration statement so as to permit a public offering and sale
for nine (9) consecutive months by any such Holder of its Warrant Securities
provided, however, that the provisions of Section 7.4(b) hereof shall not apply
to any such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holders making such request.
(d) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the
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Warrants and/or Warrant Securities requesting such registration, repurchase (i)
any and all Warrant Securities of such Holders at the higher of the Market Price
per Preferred Share, Conversion Share, Common Share and per Redeemable Warrant,
as the case may be, on (x) the date of the notice sent pursuant to Section
7.3(a) or (y) the expiration of the period specified in Section 7.4(a) and (ii)
any and all Warrants of such Holders at such Market Price less the Exercise
Price of such Warrant. Such repurchase shall be in immediately available funds
and shall close within two (2) days after the later of (i) the expiration of the
period specified in Section 7.4(a) or (ii) the delivery of the written notice of
election specified in this Section 7.3(d).
Section 7.4 Covenants of the Company With Respect to
Registration. In connection with any registration under Sections 7.2 or 7.3
hereof, and except as otherwise provided in this Agreement, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within thirty (30) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Warrant Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements filed pursuant
to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) whose Warrant Securities are the subject of such
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registration statement will pay all costs, fees and expenses in connection with
any registration statement filed pursuant to Section 7.3(c).
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify each of the Underwriters contained in Section 7
of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold
pursuant to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred
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in investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 7 of the
Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof, or permit any other registration
statement to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.3 hereof, without the prior written
consent of the Holders of the Warrants and Warrant Securities representing a
Majority of such securities, which consent shall not be unreasonably withheld.
(h) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting
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agreement) signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriters, copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with
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its officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder or underwriter shall reasonably
request.
(k) The Company shall enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holders holding
a Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter(s). The Holders shall be parties
to any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written
request therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Convertible Preferred Stock, Common Stock, options,
warrants or any other securities convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Securities, shall mean in excess
of fifty percent (50%) of the
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then outstanding Warrants or Warrant Securities that (i) are not held by the
Company, an affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as nominees
or in conjunction therewith and (ii) have not been resold to the public pursuant
to a registration statement filed with the Commission under the Act.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Convertible
Preferred Stock or Common Stock, the Exercise Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination.
Section 8.2 Stock Dividends and Distributions. In case the
Company shall pay a dividend in, or make a distribution of, shares of
Convertible Preferred Stock, Common Stock or of the Company's capital stock
convertible into Common Stock, the Exercise Price shall forthwith be
proportionately decreased. An adjustment made pursuant to this Section 8.2 shall
be made as of the record date for the subject stock dividend or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section 8,
the number of Warrant Securities issuable upon the exercise at the adjusted
exercise price of each Warrant shall be adjusted to the nearest full amount by
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Securities issuable upon exercise of
the Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
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Section 8.4 Definition of Common Stock and Convertible
Preferred Stock. (a) For the purpose of this Agreement, the term "Common Stock"
shall mean (i) the class of stock designated as Common Stock in the Certificate
of Incorporation of the Company as may be amended as of the date hereof, or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event that the
Company shall after the date hereof issue securities with greater or superior
voting rights than the shares of Common Stock outstanding as of the date hereof,
the Holder, at its option, may receive upon exercise of any Warrant either the
Warrant Securities or a like number of such securities with greater or superior
voting rights.
(b) For the purpose of this Agreement, the term "Convertible
Preferred Stock" shall mean the Convertible Preferred Stock purchased by the
Underwriters for resale to the public in the Public Offering pursuant to the
terms of the Underwriting Agreement, as such Convertible Preferred Stock is more
particularly described in the Certificate of Designation, as the same may be
amended from time to time. The Preferred Shares issuable upon exercise of the
Warrants shall be identical to the Convertible Preferred Stock described in the
Certificate of Designation except that such Preferred Shares cannot be redeemed.
In the event of any change after the date hereof in the Conversion Rate (as
defined in and calculated pursuant to the Certificate of Designation) or, the
time period for conversion of, or the number or class of securities issuable
upon conversion of, the Convertible Preferred Stock, the Holder of any Warrant
shall receive upon exercise thereof Preferred Shares with a conversion ratio
(and an effective conversion price) equal to the Conversion Rate (and an
effective Conversion
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Price) then in effect for, convertible for such number and class of securities
as would be issuable upon the conversion of, and convertible for such period of
time as, shares of Convertible Preferred Stock issued and outstanding on the
date hereof after giving effect to such change. In addition, in the event that
the Company grants to the holders of Convertible Preferred Stock upon the
conversion thereof any benefits or inducements not set forth in the Certificate
of Designation, the Holder shall be entitled to receive such benefit or
inducement upon the exercise by such Holder of any Warrant(s) to purchase
Preferred Shares or Conversion Shares.
Section 8.5 Merger or Consolidation. In case of any
consolidation of the Company with, or merger of the Company with, or merger of
the Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change of the outstanding
Common Stock or Convertible Preferred Stock or other securities issuable upon
exercise of the Warrants or Redeemable Warrants or redemption or conversion of
the Convertible Preferred Stock), or in the case of any sale or conveyance to
another person, corporation or other entity of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of such
consolidation, merger, sale or conveyance, the Company or such successor or
purchasing entity, as the case may be, shall execute and deliver to the Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation or merger, by a holder of the number of securities of the
Company for which such Warrant might have been exercised
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immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations, mergers, sales or
conveyances.
Section 8.6 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the
Warrant Securities issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less
than ten cents (10(cent)) per Warrant Security, provided,
however, that in such case any adjustment that would otherwise
be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried
forward, shall amount to at least ten cents (10(cent)) per
Warrant Security. Section 8.7 Form of Warrant After
Adjustments.
Section 8.7 Form of Warrant. The form of the Warrant
Certificates need not be changed because of any adjustments in the Exercise
Price or number of Warrant Securities, and warrant certificates theretofore or
thereafter issued may continue to express the same Exercise Price and number of
Warrant Securities as are stated in the respective Warrant Certificates, as
initially issued.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like
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tenor and date representing in the aggregate the right to purchase the same
number of Warrant Securities in such denominations as shall be designated by the
Holder thereof at the time of such surrender. The Company may require such
Holder to pay only those expenses which represent a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any such
exchange.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of
Convertible Preferred Stock, shares of Common Stock or Redeemable Warrants upon
the exercise of the Warrants, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Convertible Preferred Stock, shares of Common
Stock or Redeemable Warrants or other securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of
Convertible Preferred Stock and Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants and the Redeemable Warrants, such number of
shares of Convertible Preferred Stock and Common
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Stock or other securities, properties or rights as shall be issuable upon the
exercise, conversion or redemption thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Convertible Preferred Stock, shares of Common Stock, Redeemable
Warrants and other securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. The Company further covenants and agrees that upon
exercise of the Redeemable Warrants underlying the Warrants and/or redemption or
conversion of the Preferred Shares, and payment of the respective Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercise, redemption or conversion, as the case may be, shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Convertible Preferred
Stock and Common Stock issuable upon the exercise of the Warrants and Redeemable
Warrants, all shares of Common Stock issuable upon conversion or redemption of
the Preferred Shares and all Redeemable Warrants underlying the Warrants to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Convertible Preferred Stock, Common Stock and/or the Public Warrants
issued to the public in connection herewith may then be listed and/or quoted on
Nasdaq.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If,
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however, at any time prior to the expiration of the Warrants and their exercise,
any of the following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings or capital surplus
(in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice
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or any defect therein shall not affect the validity of any action taken in
connection with the declaration or payment of any such dividend, or the issuance
of any convertible or exchangeable securities, or subscription rights, options
or warrants, or any proposed dissolution, liquidation, winding up or sale.
13. Redeemable Warrants.
The form of the certificate representing Redeemable Warrants
(and the form of election to purchase shares of Common Stock upon the exercise
of Redeemable Warrants and the form of assignment printed on the reverse
thereof) shall be substantially as set forth in Exhibit "A" to the Warrant
Agreement dated as of the date hereof by and among the Company, the
Representative and The Bank of New York (the "Redeemable Warrant Agreement").
Each Redeemable Warrant issuable upon exercise of the Warrants shall evidence
the right to initially purchase a fully paid and non-assessable share of Common
Stock at an initial purchase price of $______ [140% of the initial public
offering price per share] from ______ 1998 [one year from the effective date of
the Registration Statement] until 5:30 p.m. New York time on _________ 2002 [5
years from the effective date of the Registration Statement] at which time the
Redeemable Warrants, unless the exercise period has been extended, shall expire.
The exercise price of the Redeemable Warrants and the number of shares of Common
Stock issuable upon the exercise of the Redeemable Warrants are subject to
adjustment, whether or not the Warrants have been exercised and the Redeemable
Warrants have been issued, in the manner and upon the occurrence of the events
set forth in Section 8 of the Redeemable Warrant Agreement, which is hereby
incorporated herein by reference and made a part hereof as if set forth in its
entirety herein. Subject to the provisions of this Agreement and upon issuance
of
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the Redeemable Warrants underlying the Warrants, each registered holder of such
Redeemable Warrant shall have the right to purchase from the Company (and the
Company shall issue to such registered holders) up to the number of fully paid
and non-assessable shares of Common Stock (subject to adjustment as provided
herein and in the Redeemable Warrant Agreement), free and clear of all
preemptive rights of stockholders, provided that such registered holder complies
with the terms governing exercise of the Redeemable Warrant set forth in the
Redeemable Warrant Agreement, and pays the applicable exercise price, determined
in accordance with the terms of the Redeemable Warrant Agreement. Upon exercise
of the Redeemable Warrants, the Company shall forthwith issue to the registered
holder of any such Redeemable Warrant in his name or in such name as may be
directed by him, certificates for the number of shares of Common Stock so
purchased. Except as otherwise provided in this Agreement, the Redeemable
Warrants underlying the Warrants shall be governed in all respects by the terms
of the Redeemable Warrant Agreement. The Redeemable Warrants shall be
transferable in the manner provided in the Redeemable Warrant Agreement, and
upon any such transfer, a new Redeemable Warrant Certificate shall be issued
promptly to the transferee. The Company covenants to, and agrees with, the
Holder(s) that without the prior written consent of the Holder(s), which will
not be unreasonably withheld, the Redeemable Warrant Agreement will not be
modified, amended, canceled, altered or superseded, and that the Company will
send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Redeemable Warrant Agreement to
be sent to holders of Redeemable Warrants.
- 29 -
<PAGE>
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to
the address of such Holder as shown on the books of the
Company;
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may
designate by notice to the Holders; or
(c) If to the Representative, to National Securities
Corporation, 1001 Fourth Avenue, Suite 2200, Seattle,
Washington 98154, Attention: General Counsel.
15. Supplements and Amendments. The Company and the
Representative may from time to time supplement or amend this Agreement in a
writing signed by both parties without the approval of any Holders of Warrant
Certificates (other than the Representative) in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representative may deem necessary or desirable and which the Company and the
Representative deem shall not adversely affect the interests of the Holders of
Warrant Certificates.
- 30 -
<PAGE>
16. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Representative, the Holders and their respective successors and assigns
hereunder.
17. Termination. This Agreement shall terminate at the close
of business on _______, 2004. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on _______, 2010.
18. Governing Law; Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree
that any action, proceeding or claim against it arising out of, or relating in
any way to, this Agreement shall be brought and enforced in the courts of the
State of New York or of the United States of America for the Southern District
of New York, and irrevocably submits to such jurisdiction, which jurisdiction
shall be exclusive. The Company, the Representative and the Holders hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum. Any such process or summons to be served upon any of the Company, the
Representative and the Holders (at the option of the party bringing such action,
proceeding or claim) may be served by transmitting a copy thereof, by registered
or certified mail, return receipt requested, postage prepaid, addressed to it at
the address set forth in Section 14 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company, the Representative and the Holders
agree that the
- 31 -
<PAGE>
prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies) all of its/their reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
19. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement and the Redeemable Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable by a court of competent jurisdiction, such
invalidity or unenforceability shall not affect any other provision of this
Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Representative and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole benefit of the
Company and the Representative and any other registered Holders of Warrant
Certificates or Warrant Securities.
- 32 -
<PAGE>
23. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
- 33 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: _____________________________________
Name:
Title:
Attest:
______________________
Secretary
NATIONAL SECURITIES CORPORATION
By: _____________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2002
No. W- Warrants to Purchase
____ Shares of Convertible Preferred Stock,
____ Shares of Common Stock and/or
____ Redeemable Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ___________ , or
registered assigns, is the registered holder of __________ Warrants to purchase
initially, at any time from __________, 1998 [one year from the effective date
of the Registration Statement] until 5:30 p.m. New York time on ___________,
2002 [five years from the effective date of the Registration Statement]
("Expiration Date"), up to __________ fully-paid and non-assessable shares of
10% Senior Convertible Redeemable Preferred Stock, $.001 par value ("Convertible
Preferred Stock"), of COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware
corporation (the "Company")(or in accordance with the Warrant Agreement (as
hereinafter defined), such number of shares of Common Stock, other securities
and/or property of the Company into which a share of Convertible Preferred Stock
may be converted or redeemed (collectively, "Conversion Shares")), __________
fully-paid and non-assessable shares of common stock,
A-1
<PAGE>
$.001 par value ("Common Stock"), of the Company and/or _____ redeemable common
stock purchase warrants of the Company ("Redeemable Warrants") (one Redeemable
Warrant entitling the owner to purchase one fully-paid and non-assessable share
of Common Stock) at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $______ [120% of the initial public offering
price] per share of Convertible Preferred Stock, $______ per Conversion Share
[120% of the initial public offering price per share of Convertible Preferred
Stock divided by the then current Conversion Price, as defined in and calculated
pursuant to the Certificate of Designation], $______ [120% of the initial public
offering price] per share of Common Stock and $____ [120% of the initial public
offering price] per Redeemable Warrant upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of _______, 1997 between the Company and NATIONAL SECURITIES
CORPORATION (the "Warrant Agreement"). Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company or by surrender of this Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
A-2
<PAGE>
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ___________, 1997
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: _____________________________________
Name:
Title:
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] __________ shares of Convertible Preferred Stock;
[ ] __________ shares of Common Stock;
[ ] __________ Redeemable Warrants;
[ ] __________ shares of Convertible Preferred Stock together with an equal
number of shares of Common Stock and Redeemable
Warrants; or
[ ] __________ shares of Convertible Preferred Stock together with
__________ shares of Common Stock and
__________ Redeemable Warrants.
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House funds to the order of Commodore
Separation Technologies, Inc. in the amount of $_______________________, all in
accordance with the terms of Section 3.1 of the Representative's Warrant
Agreement dated as of ______________________, 1997 between Commodore Separation
Technologies, Inc. and National Securities Corporation. The undersigned requests
that a certificate for such securities be registered in the name of ___________
___________________________ whose address is _______________________ and that
such Certificate be delivered to ______________________________ whose address is
__________.
Dated:
Signature _________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
_________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _____________ shares of Common Stock.
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of __________________, 1997 between Commodore Separation
Technologies, Inc. and National Securities Corporation. The undersigned requests
that a certificate for such securities be registered in the name of
___________________________ whose address is __________________ and that such
Certificate be delivered to ___________________________ whose address is
_____________________________.
Dated:
Signature _________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
_________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________________ hereby sells,
assigns and transfers unto
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ________________ Signature _________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
_________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-6
<PAGE>
Exhibit 10.8
AMENDMENT TO MEMORANDUM OF UNDERSTANDING
----------------------------------------
THIS AMENDMENT TO MEMORANDUM OF UNDERSTANDING (the "Amendment") is made
and entered into on this 23rd day of January, 1997, by and between TELEDYNE
BROWN ENGINEERING, a division of Teledyne Industries, Inc., a California
corporation with offices located at Huntsville, Alabama (hereinafter "TBE") and
COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware corporation with offices
located in New York, New York ("Commodore Separation").
RECITALS:
--------
WHEREAS, TBE and Commodore Membrane Technologies, Inc., the
predecessor-in-interest to Commodore Separation entered into a Memorandum of
Understanding (the "MOU") on August 30, 1996; the MOU had a term of at
least 180 days beginning on August 30, 1996, which afforded an opportunity for
the parties to negotiate a mutually agreeable business arrangement concerning
the developments, marketing and commercialization of Commodore Separation's
Separation Technology more fully described in paragraph 1 of the MOU; the
parties have engaged in negotiations since the execution and delivery of the MOU
and desire to extend the initial term of the MOU for an additional 180 days from
the date hereof.
NOW, THEREFORE, in consideration of the foregoing recitals, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound, the parties hereto agree
to amend the MOU as follows:
1. The term of the MOU is hereby extended for a period of 180 days
commencing on the day and date above written.
2. All other terms and conditions of the MOU shall remain the same.
COMMODORE SEPARATION
TECHNOLOGIES, INC.
By: /s/ Carl O. Magnell
-------------------------------------
Carl O. Magnell
TELEDYNE BROWN ENGINEERING, a
Division of Teledyne Industries, Inc.
By: /s/ Charles Fox
------------------------------------
Dr. Charles Fox
<PAGE>
Exhibit 10.9
AMENDMENT TO MEMORANDUM OF UNDERSTANDING
----------------------------------------
THIS AMENDMENT TO MEMORANDUM OF UNDERSTANDING (the "Amendment") is made
and entered into on this 23rd day of January, 1997, by and between SVERDRUP
ENVIRONMENTAL, INC., a corporation organized and existing under the laws of the
State of Missouri with offices located at Maryland Heights, Missouri
("Sverdrup") and COMMODORE SEPARATION TECHNOLOGIES, INC., a Delaware corporation
with offices located in New York, New York ("Commodore Separation").
RECITALS:
---------
WHEREAS, Sverdrup and Commodore Membrane Technologies, Inc., the
predecessor-in-interest to Commodore Separation entered into a Memorandum of
Understanding (the "MOU") on August 29, 1996; the MOU had a term of at least 180
days beginning on August 29, 1996, which afforded an opportunity for the parties
to negotiate a mutually agreeable business arrangement concerning the
developments, marketing and commercialization of Commodore Separation's
Separation Technology more fully described in paragraph 1 of the MOU; the
parties have engaged in negotiations since the execution and delivery of the MOU
and desire to extend the initial term of the MOU for an additional 180 days from
the date hereof.
NOW, THEREFORE, in consideration of the foregoing recitals, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound, the parties hereto agree
to amend the MOU as follows:
1. The term of the MOU is hereby extended for a period of 180 days
commencing on the day and date above written.
2. All other terms and conditions of the MOU shall remain the same.
COMMODORE SEPARATION
TECHNOLOGIES, INC.
By: /s/ Carl O. Magnell
-------------------------------------
Carl O. Magnell
SVERDRUP ENVIRONMENTAL, INC.
By: /s/ John T. Cookson
------------------------------------
John T. Cookson
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
150 East 58th Street, Suite 3400
New York, New York 10158
_____________, 1997
Commodore Environmental Services, Inc.
150 East 58th Street, Suite 3400
New York, New York 10158
Gentlemen:
This letter agreement sets forth the terms and conditions under which
Commodore Separation Technologies, Inc., a Delaware corporation ("CST"), agrees
to provide a $_____________ credit commitment to Commodore Environmental
Services, Inc., a Delaware corporation ("COES").
1. Credit Commitment.
(a) Subject to the terms and conditions hereof and of the Non-
Negotiable Promissory Note, of even date herewith, made by COES in favor of CST,
a copy of which is attached hereto (the "Note"), CST agrees from time to time
during the two-year period commencing on the closing date of the initial public
offering of securities of CST, to make loans (each, a "Loan") to COES up to a
maximum aggregate amount of $_____________, which amount includes any accrued
and unpaid interest on amounts advanced and loaned by CST hereunder. COES shall
use the proceeds of each Loan for its working capital needs. Interest on the
outstanding principal amount of the Note shall be twelve percent (12%) per
annum, as more fully set forth in the Note. Subject to Section 2 below, the
maximum credit commitment may be reduced under certain circumstances. COES's
obligations under the Note shall be secured by a lien and pledge in the
Collateral, as more fully set forth in the Pledge Agreement.
(b) By written request to CST, accompanied by a description of the
proposed use(s) of such loan proceeds, COES may from time to time request that
CST make a Loan in the amount specified therein and CST will make such Loan.
Subject to CST's review and approval of the written request, CST may, in its
discretion, disburse the amount of the Loan requested by wire transfer in
immediately available funds to an account or accounts designated in writing by
COES, or by check if mutually agreed, within three (3) business days following
COES's written request. Each such request for a Loan shall constitute COES's
representation and warranty to CST that no Event of Default (as such term is
defined in the Note) shall have occurred or be continuing at such time, or would
occur after giving effect to any such Loan.
<PAGE>
(c) Except as otherwise provided in Section 2 below, COES will pay
the entire principal balance then outstanding of the Note together with accrued
interest, in cash, on the second annual anniversary of the date hereof.
2. Mandatory Payments.
(a) During the term of the Note, COES will pay, in whole or in part,
the principal balance then outstanding of the Note, together with accrued
interest, with the cash proceeds in excess of $______________, from the issuance
of any note, bond, debenture, evidence of indebtedness, share of capital stock
or any other security ("securities"), other than secured financing of assets in
the ordinary course of business, issued by COES after the date hereof (a
"Financing"). The obligation of COES to pay the outstanding balance under the
Note pursuant to the preceding sentence shall be superior and first in priority
to any other use of the proceeds of a Financing, and COES agrees not to enter
into any agreement or instrument during the term of the Note which would modify
or alter the foregoing priority.
(b) In the event no amounts are outstanding under the Note at the
time of a Financing, the maximum credit commitment set forth in Section 1(a)
above will be reduced by the amount of the cash proceeds of any such Financing.
3. Change in Control. A Change in Control (as defined below) during the
term of the Note shall be considered an Event of Default, in which case COES
shall be required, unless waived by CST in whole or in part, to pay the entire
principal balance then outstanding of the Note, together with accrued interest,
on or within ten (10) days following the Change in Control. A "Change in
Control" shall be deemed to have occurred when (a) a third person, including a
"group," as such term is defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, other than CST or its affiliates, becomes (other than as a result
of a purchase from COES) the beneficial owner of shares of COES having 10% or
more of the total number of votes that may be cast for the election of directors
of COES and such beneficial owner continues for five consecutive days, or (b) as
a result of, or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election or any
combination of the foregoing transactions, the persons who were directors of
COES before such transaction shall cease for any reason to constitute at least a
majority of the Board of Directors of COES or any successor.
4. Representations. Each of the parties hereto represents severally and
as to itself only that this letter agreement has been duly authorized, executed
and delivered by it and, assuming the due authorization, execution and delivery
of this letter agreement by the other party hereto, constitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms,
except to the extent that enforceability (x) may be limited by bankruptcy,
insolvency or other similar laws affecting or relating to the enforcement of
creditors' rights generally and (y) is subject to general principles of equity
(whether such enforceability is considered in a proceeding in equity or at law).
2
<PAGE>
5. Notices. All notices, requests and demands to or upon COES or CST to
be effective shall be in writing and shall be deemed to have been duly given or
made when delivered by hand, or when sent by certified mail, postage prepaid,
addressed as follows or to such other address as may hereafter be notified by
the respective parties hereto:
CST: Commodore Separation Technologies, Inc.
150 East 58th Street, Suite 3400
New York, New York 10158
Attention: Mr. Edwin L. Harper, Ph.D., Chairman
COES: Commodore Environmental Services, Inc.
150 East 58th Street, Suite 3400
New York, New York 10158
Attention: Mr. Paul E. Hannesson, Chairman
6. Miscellaneous. This letter agreement and the Note represent the
entire agreement and understanding between CST and COES with respect to the
subject matter hereof. This letter agreement and the Note may not be amended
except by an instrument in writing executed by CST and COES. This letter
agreement shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to its choice of law rules. This letter
agreement may be executed in counterparts.
If the foregoing correctly sets forth our agreement, please acknowledge
your acceptance of the terms of this letter agreement by signing and returning a
copy of this letter agreement and the Note to the undersigned.
Very truly yours,
COMMODORE SEPARATION
TECHNOLOGIES, INC.
By:
--------------------------------------------
Name:
Title:
Agreed and Accepted
this ____ day of _________ 1997
COMMODORE ENVIRONMENTAL SERVICES, INC.
By:
-----------------------------------
Name:
Title:
3
<PAGE>
NON-NEGOTIABLE PROMISSORY NOTE
------------------------------
Dated: ______________
FOR VALUE RECEIVED, the undersigned, COMMODORE ENVIRONMENTAL SERVICES,
INC., a Delaware corporation ("Borrower"), promises to pay to COMMODORE
SEPARATION TECHNOLOGIES, INC., a Delaware corporation ("CST"), at the principal
executive offices of CST, 150 East 58th Street, Suite 3400, New York, New York
10158, or at such commercial bank within the United States of America as CST may
designate to Borrower from time to time, in lawful money of the United States of
America and in immediately available funds, the outstanding amount of all loans
made by CST to Borrower from time to time in accordance with the provisions
hereof. Borrower further agrees to pay interest in like money at such office or
commercial bank on the unpaid aggregate principal amount hereof at a rate equal
to twelve percent (12%) per annum.
1. Payment of this Note is secured by certain collateral (the
"Collateral") under the terms of the Pledge Agreement, of even date herewith,
between Borrower and CST.
2. Principal and interest shall be due and payable in the manner set
forth below:
(a) Accrued interest on the unpaid principal amount hereof shall be
paid quarterly in cash.
(b) Borrower will pay, in whole or in part, the principal balance
then outstanding of this Note, together with accrued interest, on or
within five (5) days after each date Borrower receives cash proceeds in
excess of $___________ from a Financing, as such term is defined in the
letter agreement, of even date herewith, between Borrower and CST (the
"Letter Agreement").
(c) Borrower will pay the entire principal balance then outstanding
of this Note, together with accrued interest, in cash, on the second
annual anniversary of the date hereof.
(d) All payments (including prepayments) made hereunder shall be
applied first to the payment of accrued and unpaid interest, with the
balance remaining applied to the payment of the unpaid principal balance
of this Note.
(e) This Note may, at the option of Borrower, be prepaid at any time
in whole or in part, without premium or penalty.
3. Borrower is borrowing the principal sum of this Note pursuant to the
Letter Agreement, the terms of which are incorporated herein by reference and
supersede the terms of this Note in the event of any conflict. This Note shall
be non-negotiable.
<PAGE>
4. CST is authorized to record the date and amount of each loan made by
it and the date and amount of each payment, prepayment or reduction of the
principal amount hereof on the schedule annexed hereto and made a part hereof,
and any such recordation shall constitute prima facie evidence of the accuracy
of the information so recorded.
5. Notwithstanding any provision to the contrary contained in this
Note, it is expressly agreed that the entire principal amount outstanding at any
time under this Note, and all accrued and unpaid interest, shall immediately
become due and payable (without demand for payment, notice of non-payment,
presentment, notice of dishonor, protest, notice of protest or any other notice,
all of which are hereby expressly waived by Borrower):
(a) upon the default in the payment of any interest or principal due
under this Note, which default continues uncured for a period of ten
(10) days;
(b) if Borrower shall make an assignment for the benefit of
creditors; or shall admit in writing its inability to pay its debts; or
if a receiver or trustee shall be appointed for Borrower or for
substantially all of its assets and, if appointed without its consent,
such appointment is not discharged or stayed within thirty (30) days; or
if proceedings under any law relating to bankruptcy, insolvency or the
reorganization or relief of debtors are instituted by or against the
Borrower and, if contested by it, are not dismissed or stayed within
thirty (30) days; or if any writ of attachment or execution or any
similar process is issued or levied against Borrower or any significant
part of its property and is not released, stayed, bonded or vacated
within thirty (30) days after its issue or levy; or if Borrower takes
corporate action in furtherance of any of the foregoing;
(c) after a Change in Control, as provided, and as such term is
defined, in the Letter Agreement (each, an "Event of Default"); or
(d) any event of default which results in the acceleration of
indebtedness of Borrower to any other person under any note, indenture,
agreement or undertaking and that is not cured within thirty (30) days.
6. All notices, requests and demands to or upon Borrower or CST to be
effective shall be in writing and shall be deemed to have been duly given or
made when delivered by hand, or when sent by certified mail, postage prepaid,
addressed as follows or to such other address as may hereafter be notified by
the respective parties hereto:
COES: Commodore Environmental Services, Inc.
150 East 58th Street, Suite 3400
New York, New York 10158
Attention: Mr. Paul E. Hannesson, Chairman
-2-
<PAGE>
CST: Commodore Separation Technologies, Inc.
150 East 58th Street, Suite 3400
New York, New York 10158
Attention: Mr. Edwin L. Harper, Ph.D., Chairman
7. No failure or delay on the part of CST in exercising any of its
rights, powers or privileges hereunder shall operate as a waiver thereof, nor
shall a single or partial exercise thereof preclude any other or further
exercise of any right, power or privilege. Borrower hereby waives demand for
payment, notice of non-payment, presentment, notice of dishonor, protest, notice
of protest or any other notice in connection with the delivery, acceptance,
performance or enforcement of this Note.
8. In case any one or more Events of Default shall occur and be
continuing, CST may proceed to protect and enforce its rights by an action at
law, suit in equity or other appropriate proceeding. Borrower shall pay all
reasonable costs of collection when incurred, including reasonable attorneys'
fees.
9. This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to its choice of law rules.
IN WITNESS WHEREOF, the Borrower has executed this Non-Negotiable
Promissory Note as of the date first above written.
COMMODORE ENVIRONMENTAL SERVICES, INC.
By:
-------------------------------------
Name:
Title:
-3-
<PAGE>
GRID PROMISSORY NOTE SCHEDULE
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Amount of Unpaid Principal Available
Amount of Principal Paid Amount of Credit Notation
Date Loan or Prepaid Note Commitment Made By
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<PAGE>
LOGO
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TANNER+Co.
CERTIFIED PUBLIC ACCOUNTANTS
-----------------------------------
675 East 500 South, Suite 640
Salt Lake City, Utah 84102
Telephone (801) 532-7444
Fax (801) 532-4911
A PROFESSIONAL CORPORATION
CONSENT AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement of our report
dated August 1, 1996, except for notes 2 and 3, which are dated October 14,
1996 and notes 1, 4, 5 and 7, which are dated February 4, 1997 relating to
the financial statements of Commodore Separation Technologies, Inc. (a
development stage company), and to the reference to our Firm under the
caption "Experts" in the prospectus.
TANNER + CO.
Salt Lake City, Utah
March 12, 1997
