<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997
REGISTRATION NO. 333-11813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 4
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)
<TABLE>
<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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<CAPTION>
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 JANUARY 28, 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 February , 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 [150% of
the per share conversion price], or after February , 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 March 31, 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.
<TABLE>
<CAPTION>
====================================================================================================================
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>
COMMODORE SEPARATION PROCESS
[Diagram of CST Process]
- -----------------------------------------------------------------------------
(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 or 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."
------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALL-CAP
MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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 might 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. 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.
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 sub-
6
<PAGE>
sidiary 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
<TABLE>
<CAPTION>
<S> <C>
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 11,500,000 shares of Common Stock, 1,500,000 shares of Convertible Preferred
exercise of Warrants ............ 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 March 31, 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."
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 February , 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 [150% of the per share conversion price] or, after February ,
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.
</TABLE>
8
<PAGE>
<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 September 30, 1996, for
the three months then ended and for the period from November 15, 1995 (date
of inception) to September 30, 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 September 30, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
December 31, 1996. 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
(date of Three Months November 15, 1995
inception) Ended (date of inception)
Statement of Operations Data(1) to June 30, 1996 September 30, 1996 to September 30, 1996
----------------- ------------------ ---------------------
<S> <C> <C> <C>
Revenue ..................................... $ 0 $ 7,758 $ 7,758
----------------- ------------------ ---------------------
Costs and expenses:
Research and development ............... 50,080 165,280 215,360
General and administrative ............. 9,720 128,307 138,027
Amortization ........................... 101 266 367
----------------- ------------------ ---------------------
Loss before interest and taxes .............. (59,901) (286,095) (345,996)
Interest expense ............................ 1,035 4,600 5,635
----------------- ------------------ ---------------------
Net loss .................................... (60,936) (290,695) (351,631)
================= ================== =====================
Net loss per share(2) ....................... (.01) (.03) (.04)
Ratio of earnings to preferred stock
dividends ................................. --(3) --(3) --(3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1996
--------------- -------------------------------------------
Pro Forma,
Pro as
Balance Sheet Data: Actual Forma(4) Adjusted(5)
------------ ----------- -------------
<S> <C> <C> <C> <C>
Working capital (deficit) ..... $(81,630) $(524,765) $ 451,235 $21,544,735
Total assets .................. 23,327 329,193 897,193 21,990,693
Total current liabilities ..... 84,163 665,824 257,824 257,824
Deficit accumulated during
development stage ............ (60,936) (351,631) (351,631) (351,631)
Stockholders' equity (deficit) (60,836) (336,631) 639,369 21,732,869
</TABLE>
<PAGE>
- ------
(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 a pro forma basis to the contribution by Commodore and
Applied to the equity of the Company prior to the completion of this
Offering (the "Capital Contribution") of a total of $976,000,
representing $15,000 in cash and the conversion of short-term debt of
$408,000 outstanding at September 30, 1996, and an additional $568,000 of
the Capital Contribution made by Commodore and Applied to the Company
subsequent to September 30, 1996. See "Capitalization."
(5) Gives effect on a pro forma, as adjusted basis to (i) the Capital
Contribution of $976,000 and (ii) 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" and "Certain
Relationships and Related Transactions."
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.
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 September 30, 1996 and June 30, 1996,
the Company had working capital deficits of $(524,765) and $(81,630),
respectively, and stockholders' deficits of $(336,631) and $(60,836),
respectively. During the period from November 15, 1995 (date of inception) to
September 30, 1996, the Company has incurred operating losses of $(351,631),
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
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. See "Business -- Environmental Matters," "-- Intellectual
Property" and "-- Competition."
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. 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 develop-
12
<PAGE>
ment 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 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 and the potential loss of key employees. The Company
currently has no commitments or agreements with respect to any possible
acquisitions or investments.
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
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."
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
14
<PAGE>
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. 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."
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
15
<PAGE>
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."
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 available 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."
DILUTION
Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $4.11 per share (based on an assumed
initial public offering price of $6.00 per share of Common Stock in this
Offering), or approximately 68.5%, 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."
On or immediately prior to the consummation of this Offering, the Company
intends to enter into a revolving credit agreement with Commodore pursuant to
which the Company may lend from time to time, prior to the second anniversary
of this Offering, up to $5,000,000 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 [140% of the
initial public offering price per share of Common Stock], 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 [300% of the initial public offering price 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. 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
19
<PAGE>
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 unexercised 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 February , 2000 and extending through February , 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
February , 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."
LIMITED UNDERWRITING HISTORY
The Representative has participated in only 12 public offerings as an
underwriter in the last five years. In evaluating an investment in the
Company, prospective investors in the Securities offered hereby should
consider the Representative's limited experience. See "Underwriting."
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 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 anticipates occupying in January 1997
and which will comprise the Company's executive and 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 -- 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 February 28, 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, office-related expenses and other corporate expenses, including
interest and overhead. Also includes up to $5,000,000 which the Company
may lend from time to time to Commodore, pursuant to a proposed revolving
credit agreement with Commodore, to be used by 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." Any additional
net proceeds received from the exercise of the Over-allotment Option will
be used for working capital and general corporate purposes.
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
September 30, 1996, (b) pro forma at September 30, 1996, giving effect to a
Capital Contribution of $976,000 (of which $408,000 represents the conversion
of short-term debt of sole stockholder to equity and an additional $568,000
represents stockholder advances made to the Company subsequent to September
30, 1996), and (c) pro forma at September 30, 1996, as adjusted giving effect
to the Capital Contribution of $976,000 and 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>
September 30, 1996
-------------------------------------------
Pro Forma,
Actual Pro Forma as Adjusted
------------ ----------- -------------
<S> <C> <C> <C>
Short-term debt of sole stockholder ........ $ 408,000 $ 0 $ 0
============ =========== =============
Stockholders' equity:
Preferred Stock, $.001 per value;
authorized 5,000,000 shares; no
shares issued and outstanding;
1,500,000 shares issued and
outstanding pro forma, 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 pro forma, as
adjusted ............................ 10,000 10,000 11,500
Additional paid-in capital ............ 5,000 981,000 22,071,500
Accumulated deficit ................... (351,631) (351,631) (351,631)
------------ ----------- -------------
Total stockholders' equity (deficit) ....... $(336,631) $ 639,369 $21,732,869
------------ ----------- -------------
Total capitalization ................... $(336,631) $ 639,369 $21,732,869
============ =========== =============
</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 a pro forma
basis, after giving effect to this Offering, the Company's capital surplus as
of September 30, 1996 was $22,071,500. 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 September 30, 1996, the Company's negative net tangible book value was
$(428,635), or $(.04) 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 Capital Contribution to the equity of the Company of a total of
$976,000 (of which $408,000 represents the conversion of short-term debt at
September 30, 1996 payable to Commodore by the Company to equity and $568,000
represents additional advances made to the Company subsequent to September
30, 1996) prior to the completion of this Offering, 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 September 30, 1996 would have been approximately
$21,715,158, or $1.89 per share. This represents an increase in net tangible
book value per share of $1.93 to the Company's existing stockholders and an
immediate dilution of $4.11 per share (or 68.5%) 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>
Negative net tangible book value per share before
the Offering ..................................... $(0.04)
Increase per share attributable to payments by new
stockholders ..................................... $ 1.93
---------
Pro forma net tangible book value per share after the
Offering .............................................. $1.89
-------
Dilution per share to new stockholders .................. $4.11
=======
</TABLE>
In the event the Over-allotment Option is exercised in full, the net
tangible book value at September 30, 1996 would have been approximately
$24,939,183 and the dilution of net tangible book value per share to new
stockholders would have been approximately $3.87.
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% 991,000(1) 9.9% $ .10
------------ --------- --------------- --------- ---------------
Total ........... 11,500,000 100.0% $9,991,000(2) 100.0%
============ ========= =============== =========
</TABLE>
- ------
(1) Includes a total Capital Contribution by Commodore of $976,000 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 September 30, 1996, for
the three months then ended and for the period from November 15, 1995 (date
of inception) to September 30, 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 September 30, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year ending
December 31, 1996. 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 Three Months November 15, 1995
(date of
inception) Ended (date of inception)
Statement of Operations Data:(1) to June 30, 1996 September 30, 1996 to September 30, 1996
----------------- ------------------ ---------------------
<S> <C> <C> <C>
Revenue ............................ $ 0 $ 7,758 $ 7,758
----------------- ------------------ ---------------------
Costs and expenses:
Research and development ......... 50,080 165,280 215,360
General and administrative ....... 9,720 128,307 138,027
Amortization. .................... 101 266 367
----------------- ------------------ ---------------------
Loss before interest and taxes ..... (59,901) (286,095) (345,996)
Interest expense ................... 1,035 4,600 5,635
----------------- ------------------ ---------------------
Net loss ........................... (60,936) (290,695) (351,631)
================= ================== =====================
Net loss per share(2) .............. (.01) (.03) (.04)
Ratio of earnings to preferred stock
dividends ........................ -- (3) -- (3) -- (3)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1996
--------------- -------------------------------------------
Pro Forma,
Pro as
Balance Sheet Data: Actual Forma(4) Adjusted(5)
------------ ----------- -------------
<S> <C> <C> <C> <C>
Working capital (deficit) .................. $(81,630) $(524,765) $ 451,235 $21,544,735
Total assets ............................... 23,327 329,193 897,193 21,990,693
Total current liabilities .................. 84,163 665,824 257,824 257,824
Deficit accumulated during development stage (60,936) (351,631) (351,631) (351,631)
Stockholders' equity (deficit) ............. (60,836) (336,631) 639,369 21,732,869
</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 a pro forma basis to the Capital Contribution of a total
of $976,000, representing $15,000 in cash and the conversion of
short-term debt of $408,000 outstanding at September 30, 1996, and an
additional $568,000 of the Capital Contribution made by Commodore and
Applied to the Company subsequent to September 30, 1996. See
"Capitalization."
(5) Gives effect on a pro forma, as adjusted basis to (i) the Capital
Contribution of $976,000 and (ii) 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" and "Certain
Relationships and Related Transactions."
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 September 30, 1996, the Company incurred
additional operating losses of $(290,695), 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 September 30, 1996, the Company has purchased or
constructed equipment totalling $171,982 and has incurred patent filing and
maintenance costs of $18,078. As of September 30, 1996, the Company's
aggregate indebtedness to Commodore was $408,000. As of November 26, 1996,
$568,000 in additional funds have been advanced by Commodore to the Company.
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 $976,000 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 $976,000 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 $(290,695) and $(60,936) for the three
month period ended September 30, 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 three-month period ended
September 30, 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 September 30, 1996 and June
30, 1996, the Company had working capital deficits
27
<PAGE>
of $(524,765) and $(81,630), respectively, and stockholders' deficits of
$(336,631) 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 anticipates occupying in January 1997 and
which will comprise the Company's executive and 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 -- 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 February 28, 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."
The Company intends to enter into a revolving credit agreement with Commodore
on or immediately prior to the consummation of this Offering, pursuant to which
the Company may lend from time to time, prior to the second anniversary of this
Offering, up to $5,000,000 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 this Offering. 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. The Company intends to utilize a
portion of the net proceeds of this Offering to perform its obligations under
such agreement. 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
28
<PAGE>
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
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
The Company has net operating loss carryforwards of approximately
$119,000, 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 $119,000 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. 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.
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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 believes
that compliance with such 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 anticipates occupying in January 1997 and
will comprise the Company's 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 "-- 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 February
28, 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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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 $165,280 and $215,360 for the
three month period ended September 30, 1996 and the period from November 15,
1995 (date of inception) to September 30, 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 leases approximately 7,000 square feet of space in Columbus,
Ohio from an unaffiliated third party under a lease expiring on January 31,
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. 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 anticipates occupying in January 1997 and
will comprise the Company's executive and administrative offices, research
and testing laboratories and CST manufacturing plant. See "Use of Proceeds."
Upon commencement of its 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:
Name Age Position
------------------------- ----- -----------------------------
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)
- ------
(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 interm 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 manaufacturer 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.
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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.
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 until July 1996 as its President and Chief Executive
Officer. 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
44
<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.
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
45
<PAGE>
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 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.
46
<PAGE>
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 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.
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<PAGE>
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.
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<PAGE>
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 omissions 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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<PAGE>
(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%.
51
<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 $976,000 at November 26, 1996, representing advances previously
made by Commodore to the Company. Such advances will be 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
The Company intends to enter into a revolving credit agreement with
Commodore, on or immediately prior to the consummation of this Offering,
pursuant to which the Company may lend from time to time, prior to the second
anniversary of this Offering, up to $5,000,000 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 this Offering. 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. The Company intends to
utilize a portion of the net proceeds of this Offering to perform its
obligations under such agreement. 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 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
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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 anticipates occupying in January 1997 and
will comprise the Company's executive and administrative offices, research
and testing laboratories and CST manufacturing plant. See "Use of Proceeds."
Upon commencement of its 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 March 31, 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 September 30, 1996, the
Company had available surplus of $5,000 (or $22,071,500 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 February , 2000 at a redemption
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price 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 [150% of the per share Conversion Price] 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 February , 2001
at the redemption prices set forth below, plus accumulated and unpaid
dividends:
Redemption Price
Date of Redemption Per Share
-------------------------------------- --------------------
February , 2001 to February , 2002 . $
February , 2002 to February , 2003 .
February , 2003 to February , 2004 .
February , 2004 and thereafter ......
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
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assets of the Company available for distribution to stockholders, a
liquidating distribution of $10.00 per share, 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 [140% of the initial public offering price per share of
Common Stock], 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 [300% of the initial
public offering price of the Common Stock] (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.
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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 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 two years, 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 three 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 two-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, 1995, 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, 1995.
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.
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 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.
Although the Representative has been in business for over 40 years, the
Representative has participated in only 12 public offerings as an underwriter
during the last five years. In evaluating an investment in the Company,
prospective purchasers of the Securities offered hereby should consider the
Representative's limited experience.
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 10b-6 under the Exchange 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 exemption (xi) to Rule
10b-6 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 10b-6 during the periods
described above, the Representative has undertaken to waive unconditionally
its rights to receive a commission on the exercise of such Warrants.
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.
65
<PAGE>
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.
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."
66
<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 September 30, 1996 (unaudited) .......................... F-3
Statements of Operations for the period from November 15, 1995 (date of inception) to
June 30, 1996, the three months ended September 30, 1996 (unaudited) and November 15, 1995
(date of inception) to September 30, 1996 (unaudited) ........................................ F-4
Statement of Stockholders' Deficit for the period from November 15, 1995 (date of inception)
through September 30, 1996 (unaudited) ....................................................... F-5
Statement of Cash Flows for the period from November 15, 1995 (date of inception) to
June 30, 1996, the three months ended September 30, 1996 (unaudited) and November 15, 1995
(date of inception) to September 30, 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 January 27, 1997
F-2
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
BALANCE SHEET
JUNE 30, 1996 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1996 1996
---------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash ............................................................................ $ 2,533 $ 59,008
Accounts receivable ............................................................. -- 7,758
Deferred offering costs ......................................................... -- 74,293
---------- ---------------
Total current assets ....................................................... 2,533 141,059
---------- ---------------
Property and equipment:
Technical equipment ............................................................. 7,498 171,982
Office equipment ................................................................ 3,142 4,879
---------- ---------------
10,640 176,861
Less accumulated depreciation ................................................ 52 6,438
---------- ---------------
Net property and equipment ................................................... 10,588 170,423
---------- ---------------
Intangible assets, net of accumulated amortization of $101 and $367 ............... 10,206 17,711
---------- ---------------
$ 23,327 $ 329,193
========== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................................ $ 18,254 $ 142,104
Accrued liabilities ............................................................. 12,276 114,253
Due to related party ............................................................ 1,033 1,467
Note payable to stockholder ..................................................... 52,600 408,000
---------- ---------------
Total current liabilities .................................................. 84,163 665,824
---------- ---------------
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 5,000
Subscription receivable ......................................................... (14,900) --
Deficit accumulated during the development stage ................................ (60,936) (351,631)
---------- ---------------
Total stockholders' deficit ................................................ (60,836) (336,631)
---------- ---------------
$ 23,327 $ 329,193
========== ===============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM NOVEMBER 15, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996,
THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND NOVEMBER 15, 1995 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Cumulative
Period from Amounts Since
November 15, November 15,
1995 Three 1995
(Date of Months (Date of
inception) to Ended Inception) to
June 30, September 30, September 30,
1996 1996 1996
-------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue ..................... $ -- $ 7,758 $ 7,758
-------------- --------------- ---------------
Costs and expenses:
Research and development .. 50,080 165,280 215,360
Amortization .............. 101 266 367
General and administrative 9,720 128,307 138,027
-------------- --------------- ---------------
Total costs and expenses 59,901 293,853 353,754
-------------- --------------- ---------------
Loss from operations ........ (59,901) (286,095) (345,996)
Interest expense ............ (1,035) (4,600) (5,635)
-------------- --------------- ---------------
Net loss before income
taxes ................ (60,936) (290,695) (351,631)
Provision for income taxes .. -- -- --
-------------- --------------- ---------------
Net loss ............... $(60,936) $(290,695) $(351,631)
============== =============== ===============
Loss per share ......... $ (.01) $ (.03) $ (.04)
============== =============== ===============
</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 SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
-------------------------- Subscription Paid in Development Stockholders'
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
Net loss (unaudited) ............. -- -- -- -- (290,695) (290,695)
------------- --------- -------------- ------------ ------------- ---------------
Balance, September 30, 1996
(unaudited) ..................... 10,000,000 $10,000 $ -- $5,000 $(351,631) $(336,631)
============= ========= ============== ============ ============= ===============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 15, 1995 (DATE OF
INCEPTION) TO JUNE 30, 1996, THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND
NOVEMBER 15, 1995 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Period from Period from
November 15, November 15,
1995 Three 1995
(Date of Months (Date of
Inception) to Ended Inception) to
June 30, September 30, September 30,
1996 1996 1996
-------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $(60,936) $(290,695) $(351,631)
Adjustments to reconcile net loss to net cash (used
in) operating activities:
Depreciation and amortization ................... 153 6,652 6,805
(Increase) decrease in:
Accounts receivable ........................... -- (7,758) (7,758)
Increase (decrease) in:
Accounts payable .............................. 18,254 123,850 142,104
Accrued liabilities ........................... 12,276 101,977 114,253
Due to related party .......................... 1,033 434 1,467
-------------- --------------- ---------------
Net cash used in operating activities ...... (29,220) (65,540) (94,760)
-------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of intangible assets ................... (10,307) (7,771) (18,078)
Purchase of property and equipment ................. (3,142) (1,737) (4,879)
Construction of technical equipment ................ (7,498) (164,484) (171,982)
-------------- --------------- ---------------
Net cash used in investing activities ...... (20,947) (173,992) (194,939)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock ................. 100 14,900 15,000
Note payable to stockholder ........................ 52,600 355,400 408,000
Increase in deferred offering costs ................ -- (74,293) (74,293)
-------------- --------------- ---------------
Net cash provided by financing activities .. 52,700 296,007 398,707
-------------- --------------- ---------------
Increase in cash ........................... 2,533 56,475 59,008
Cash, beginning of period ............................ -- 2,533 --
-------------- --------------- ---------------
Cash, end of period .................................. $ 2,533 $ 59,008 $ 59,008
============== =============== ===============
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 $976,000 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 will capitalize the
$976,000 of Company notes prior to the Company's proposed initial public
offering.
The Company is a process technology company which has developed and
intends to commercialize its separation technology and recovery system, known
as CST. Based on the results of more than 100 laboratory and other tests to
date, 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, the three months ended September 30, 1996
(unaudited) and cumulative amounts since November 15, 1995 through September
30, 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
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.
F-7
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(1) Summary of Significant Accounting Policies - (Continued)
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 $367 at June 30, 1996 and September 30, 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 September 30, 1996 and the results of operations and cash flows for the
three months ended September 30, 1996 and the period November 15, 1995 (date
of inception) to September 30, 1996. The results of operations for the three
months ended September 30, 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 and $408,000 as of June 30,
1996 and September 30, 1996, respectively, to its then sole stockholder,
Commodore. The Company owes interest on the advances at the rate of 8 percent
per annum. Accrued interest payable at June 30, 1996 and September 30, 1996
is $1,035 and $5,635, respectively.
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 September 30, 1996 is $1,033
and $1,467, 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 three
month period ended September 30, 1996 was $2,250.
F-8
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(3) INCOME TAXES
The difference between the income tax benefit at statutory rates for the
periods ended June 30, 1996 and September 30, 1996, respectively, and the
amount presented in the financial statements are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1996
----------- ---------------
(unaudited)
<S> <C> <C>
Tax benefit at statutory rates $(21,000) $ (98,000)
Valuation allowance 21,000 98,000
----------- ------------
$ -- $ --
=========== ============
Deferred tax asset at June 30, 1996 and September
30, 1996 are as follows:
Net operating loss carryforward $(21,000) $(119,000)
Valuation allowance 21,000 119,000
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
At June 30, 1996 and September 30, 1996, the Company had tax loss
carryforwards of approximately $21,000 and $119,000, 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.
(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).
F-9
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements - (Continued)
(5) Royalty Agreements - (Continued)
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 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,
F-10
<PAGE>
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A Development Stage Company
Notes to Financial Statements - (Continued)
(7) Subsequent Events - (Continued)
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 September 30, 1996, the Company had received $408,000 of advances
from Commodore, which have been reflected in the financial statements as a
note payable to stockholder. Upon completion of the public offering, $408,000
of the note payable and any advances will be converted to equity. As of
December 2, 1996, the Company had received an additional $568,000 of advances
from Commodore which will be converted to equity upon completion of the
public offering.
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 ........................... 45
Principal Stockholders ........................... 50
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.
10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc.
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 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. 4 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in New
York, New York on January 24, 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. 4 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 January 24, 1997
------------------------ Chief Executive Officer
Edwin L. Harper, Ph.D. (principal executive officer)
/s/ Paul E. Hannesson Vice Chairman of the Board January 24, 1997
------------------------
Paul E. Hannesson
/s/ Andrew P. Oddi Vice President -- Finance January 24, 1997
------------------------ (principal financial and
Andrew P. Oddi accounting officer)
/s/ Bentley J. Blum Director January 24, 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.
10.9 Memorandum of Understanding, dated August 29, 1996, between the Company and Sverdrup Environmental,
Inc.
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 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>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into
as of the 27th day of January 1997, by and between COMMODORE SEPARATION
TECHNOLOGIES, INC., a Delaware corporation having offices at 150 East 58th
Street, Suite 3400, New York, New York 10155 (the "Company"), and KENNETH J.
HOULE, an individual residing at 26500 Amhearst Circle, Apartment 111,
Beachwood, Ohio 44122 (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee has substantial knowledge and experience
relating to the management and operation of technology-driven developmental
businesses, and the Company desires to obtain the full-time services of the
Employee to serve in an executive capacity with the Company; and
WHEREAS, the Employee is ready, willing and able to serve as
an executive officer of the Company, all upon the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants herein contained, the parties hereto hereby agree as
follows:
Part A. Employment.
1. Duties. Subject to the terms and conditions of this
Agreement, the Company shall employ the Employee and the Employee shall render
services to the Company in the capacity and with the titles of President and
Chief Operating Officer of the Company. In addition, the Employee shall serve in
such capacities and have such titles with such of the
<PAGE>
Company's subsidiaries as may be requested from time to time by the Company,
without requirement of any additional compensation to the Employee, as long as
such duties are not inconsistent with the functions of a President and Chief
Operating Officer.
2. Full-Time Employment. Throughout the period of his
employment hereunder, the Employee shall devote all of his professional and
business time, attention, knowledge and skills to perform his duties hereunder.
It is expected that the Employee will render his services primarily from the
Company's Atlanta, Georgia office, provided that the Employee will engage in
such travelling as may be reasonably required in connection with the performance
of his duties hereunder.
3. Ability to Perform. The Employee hereby represents and
warrants to the Company that he has not and will not enter into any agreements
which in any way would limit or render the Employee incapable of performing his
obligations under this Agreement or his fiduciary duties as the President and
Chief Operating Officer of the Company. The Employee further covenants that he
will not impair his ability to carry out his obligations under this Agreement or
his fiduciary duties as the President and Chief Operating Officer of the Company
by entering into any agreement or in any way assisting others, directly or
indirectly, to enter into any agreement which will violate the confidentiality
and non-competition provisions of Part D of this Agreement. The Employee is
subject to certain non-competition agreements with other corporations (which
will be fully disclosed to the Company), but which do not prevent the Employee
from performing his duties hereunder.
- 2 -
<PAGE>
Part B. Term of Employment; Termination of Agreement.
1. Term. Subject to prior termination in accordance with the
provisions hereof, the term of this Agreement shall commence on the date hereof
and shall continue through and including December 31, 1999 (the "Term").
2. Termination For Cause. Anything contained in Section 1 of
this Part B to the contrary notwithstanding, this Agreement may be terminated at
the option of the Board of Directors of the Company (the "Board") for "Cause"
(as hereinafter defined), effective upon the giving of written notice of
termination to the Employee. As used herein, the term "Cause" shall mean and be
limited to:
(a) any act committed by the Employee against the
Company, or any of its subsidiaries or divisions, constituting: (i) fraud, (ii)
non-disclosure of conflict of interest, (iii) self-dealing, (iv) embezzlement of
funds, (v) felony conviction for conduct involving moral turpitude or other
criminal conduct which prevent the Employee from performing his duties or causes
material embarrassment to the Company, or (vi) the repeated disregard by the
Employee, after receipt of notice, of the reasonable directions of the Board; or
(b) the breach or default by the Employee in
observing his agreements and obligations set forth in Part D of this Agreement;
or
(c) alcoholism or any other form of addiction which
prevents the Employee from performing his duties hereunder.
3. Death or Disability. Anything contained in Section 1 of
this Part B to the contrary notwithstanding, this Agreement may be terminated by
the Company: (i) upon the death of the Employee, or (ii) on thirty (30) days'
prior written notice to the Employee, in the
- 3 -
<PAGE>
event that the Employee shall be physically or mentally disabled or impaired so
as to prevent him from continuing the normal and proper performance of his
duties and responsibilities hereunder, with reasonable accomodations, for a
period of three (3) consecutive months. The initial determination as to whether
the Employee is disabled or impaired shall be made by the physician regularly
treating the condition causing the disability. The Company shall have the right
to require the Employee to be examined by a physician duly licensed to practice
medicine in the State in which the Employee has his primary residence to
determine such physician's opinion as to the Employee's disability. If such
physician's opinion differs from that of the physician treating the Employee, or
a physician thereafter retained by the Employee, they shall forthwith select a
third physician so licensed whose opinion, after examination and review of
available information, shall be conclusive and binding upon all parties hereto.
All costs of the physician regularly treating or thereafter retained by the
Employee shall be paid by the Employee. All costs of the physician retained by
the Company shall be paid by the Company. If a third physician is required, then
the costs of that physician shall be paid by the Company.
4. No Further Obligations. Upon any termination of this
Agreement by the Company for "Cause" pursuant to Section 2 of this Part B,
neither the Company nor any subsidiary or division thereof shall be liable for
or be required to pay to the Employee any further remuneration, compensation or
other benefits hereunder. If such termination is a result of the Employee's
disability or death pursuant to Section 3 of this Part B, the Company shall
continue to pay the Employee or his estate the Employee's Base Salary for a
period of six (6) months and any accrued incentive compensation then due.
- 4 -
<PAGE>
5. Termination Without Cause. Anything contained in Section 1
of this Part B to the contrary notwithstanding, this Agreement may be
terminated, at the option of the Company, at any time upon written notice to the
Employee without Cause. In the event that the Company terminates this Agreement
pursuant to this Section 5 of Part B, then the Company shall continue to pay to
the Employee, as and when same would otherwise become due and payable hereunder,
the Base Salary (as such term is defined in Section 1 of Part C of the
Agreement) in an aggregate amount equal to the greater of (i) the Base Salary
then payable through December 31, 1999, or (ii) the Base Salary payable over
twelve (12) consecutive months. In addition, in the event of a change in control
of the Company, all stock options granted to the Employee shall immediately vest
and become exercisable; however, a change in control shall have no other effect
on the Agreement. The payments set forth herein shall represent full
compensation for all amounts then due the Employee under this Agreement.
Part C. Compensation; Expenses.
1. Base Salary. As compensation for his services during the
Term, the Company shall pay or cause to be paid to the Employee a fixed base
salary at the annual rate of One Hundred Eighty Thousand Dollars ($180,000).
2. Stock Options. In consideration for the Employee's entering
into this Agreement with the Company, the Company is, as of the date hereof,
granting to the Employee a stock option (the "Stock Option") to purchase an
aggregate of 100,000 shares of common stock, par value $.01 per share, of the
Company (the "Common Stock"), at an exercise price per share equal to the
initial public offering price per share of Common Stock in the Company's
proposed initial public offering. Provided that the Employee is in the full-time
employ of the
- 5 -
<PAGE>
Company on each date of exercise, such Stock Option will be exercisable as to
twenty percent (20%) of such shares commencing on the date hereof (the "Initial
Vesting Date") and as to an additional twenty percent (20%) of such shares
commencing on each of the four successive anniversaries of the Initial Vesting
Date. The other terms and conditions of the Stock Option shall be as set forth
in the Company's 1996 Stock Option Plan and in a separate Stock Option Agreement
between the Company and the Employee.
3. Annual Bonus. The Employee will be entitled to receive an
annual bonus of $30,000 promptly following December 31, 1997. Annual bonuses for
1998 and 1999 shall be mutually agreed upon by the Employee and the Company's
Board of Directors.
4. Benefits. In addition to the foregoing Base Salary and
Bonuses, the Employee shall, throughout the period of his employment hereunder,
be eligible to participate in any and all group health, group life and/or other
benefit plans generally made available by the Company to its employees, provided
that nothing herein contained shall be deemed to require the Company to maintain
or continue any particular plan or policy.
5. Vacation. The Employee shall be entitled to up to five (5)
weeks of vacation per year, to be taken at such times as shall be mutually
agreeable to the Company and the Employee, and so as not to unduly interfere
with the business of the Company. The Employee may carry over, to the next
annual period hereunder, up to two (2) weeks of unused vacation time as at the
end of each year of the term of this Agreement.
6. Expenses. In addition to the remuneration set forth above,
throughout the period of the Employee's employment hereunder, the Company shall
also reimburse the Employee or cause the Employee to be reimbursed, upon
presentment by the Employee to the
- 6 -
<PAGE>
Company of appropriate receipts and vouchers therefor, for any reasonable
business expenses incurred by the Employee in connection with the performance of
his duties and responsibilities hereunder.
Part D. Confidentiality; Non-Competition. As a material inducement to
cause the Company to enter into this Agreement, the Employee hereby covenants
and agrees that:
1. Confidential Information; Personal Relationships. The
Employee shall, at all times during and subsequent to the Term, keep secret and
retain in strictest confidence all confidential matters of the Company, and the
"know-how", trade secrets, technical processes, inventions, equipment
specifications, equipment designs, plans, drawings, research projects,
confidential client lists, details of client, subcontractor or consultant
contracts, pricing policies, operational methods, marketing plans and
strategies, project development, acquisition and bidding techniques and plans,
business acquisition plans, and new personnel acquisition plans of the Company
and its subsidiaries and divisions (whether now known or hereafter learned by
the Employee), except to the extent that (i) such information is generally
available to the public without restriction, (ii) the Employee obtains
confidentiality agreements with respect to such confidential information, (iii)
the Employee is requested by the Board of Directors of the Company or a
Committee thereof, or by the Chairman of the Company, to disclose such
confidential information, (iv) such information is provided to a customer of the
Company pursuant to a request received from such customer in the ordinary course
of business, or (v) the Employee is under compulsion of either a court order or
a governmental agency's or authority's inquiry, order or request to so disclose
such information.
- 7 -
<PAGE>
2. Property of the Company.
(a) Except as otherwise provided herein, all lists,
records and other non-personal documents or papers (and all copies thereof)
relating to the Company and/or any of its subsidiaries or divisions, including
such items stored in computer memories, on microfiche or by any other means,
made or compiled by or on behalf of the Employee, or made available to the
Employee, are and shall be the property of the Company, and shall be delivered
to the Company on the date of termination of the Employee's employment with the
Company, or sooner upon request of the Company at any time or from time to time.
(b) All inventions, including any procedures,
formulas, methods, processes, uses, apparatuses, patterns, designs, plans,
drawings, devices or configurations of any kind, any and all improvements to
them which are developed, discovered, made or produced, and all trade secrets
and information used by the Company and/or its subsidiaries and divisions
(including, without limitation, any such matters created or developed by the
Employee during the term of this Agreement), shall be the exclusive property of
the Company or the subject subsidiary, and shall be delivered to the Company or
the subject subsidiary (without the Employee retaining any copies, components or
records thereof) on the date of termination of the Employee's employment with
the Company; provided, however, that nothing herein contained shall be deemed to
grant to the Company any property rights in any inventions or other intellectual
property which may at any time be developed by the Employee which is wholly
unrelated to any business then engaged in or under development by the Company.
3. Employees of the Company. The Employee shall not, at any
time (whether during the term of this Agreement or at any time thereafter),
directly or indirectly, for or on
- 8 -
<PAGE>
behalf of any business enterprise other than the Company and/or its subsidiaries
and affiliates, solicit any employee of the Company or any of its subsidiaries
to leave his or her employment with the Company or such subsidiary, or encourage
any such employee to leave such employment, without the prior written approval
of the Company in each instance.
4. Non-Competition. For so long as the Employee shall be
receiving any compensation or remuneration under this Agreement, and for a
further period of one (1) year thereafter, the Employee shall not, directly or
indirectly, whether individually or as an employee, stockholder (other than the
passive ownership of up to 5% of the capital stock of a publicly traded
corporation), partner, joint venturer, agent or other representative of any
other person, firm or corporation, engage or have any interest in any business
(other than the Company or any of its subsidiaries or affiliates) which, in any
country in which the Company or any of its subsidiaries or divisions does or
solicits business during the Term, is engaged in or derives any revenues from
performing any functionally equivalent services or marketing any functionally
equivalent products as those services provided and products marketed by the
Company or any of its subsidiaries or divisions during the Term.
5. Severability of Covenants. The Employee acknowledges and
agrees that the provisions of this Part D are (a) made in consideration of the
premises and undertakings of the Company set forth herein, (b) made for good,
valuable and adequate consideration received and to be received by the Employee,
and (c) reasonable and necessary, in terms of the time, geographic scope and
nature of the restrictions, for the protection of the Company and the business
and good will thereof. It is intended that the provisions of this Part D be
fully severable, and in the event that any of the foregoing restrictions, or any
portion of the foregoing
- 9 -
<PAGE>
restrictions, shall be deemed contrary to law, invalid or unenforceable in any
respect by any court or tribunal of competent jurisdiction, then such
restrictions shall be deemed to be amended, modified and reduced in scope and
effect, as to duration and/or geographic area, only to that extent necessary to
render same valid and enforceable (and in such reduced form, such provisions
shall then be enforceable), and any other of the foregoing restrictions shall be
unaffected and shall remain in full force and effect.
6. Equitable Remedies. The parties hereby acknowledge that, in
the event of any breach or threatened breach by the Employee of the provisions
of this Part D, the Company will suffer irreparable harm and will not have an
adequate remedy at law. Accordingly, in the event of any such breach or
threatened breach, the Company may seek and obtain appropriate equitable relief
to restrain or enjoin such breach or threatened breach and/or to compel
compliance herewith.
Part E. Miscellaneous.
1. Binding Effect. All of the terms and conditions of this
Agreement shall be binding upon and inure to the benefit of the Employee, the
Company and their respective heirs, executors, administrators, personal
representatives, successors and permitted assigns.
2. Notices. Except as may otherwise be provided herein, any
notice, request, demand or other communication required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or when mailed by certified mail, return receipt requested,
addressed to a party at the address of such party first set forth above, or at
such other address as such party may hereafter have designated by notice. Copies
of all notices hereunder shall simultaneously be sent by first class post-paid
mail to Greenberg,
- 10 -
<PAGE>
Traurig, Hoffman, Lipoff, Rosen & Quentel, Citicorp Center, 153 East 53rd
Street, New York, New York 10022, Attn: Stephen A. Weiss, Esq.
3. Waivers. Neither this Agreement nor any of the terms or
conditions hereof may be waived, amended or modified except by means of a
written instrument duly executed by the party to be charged therewith.
4. Captions. The captions and paragraph headings used in this
Agreement are for convenience of reference only, and shall not affect the
construction or interpretation of this Agreement or any of the provisions
hereof.
5. Governing Law. This Agreement, and all matters or disputes
relating to the validity, construction, performance or enforcement hereof, shall
be governed by and construed in accordance with the laws of the State of New
York.
6. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original hereof, but all
of which together shall constitute one and the same instrument.
7. Arbitration. Except for any court action or proceeding to
obtain equitable relief in respect of the provisions of Part D above, any
dispute involving the interpretation or application of this Agreement shall be
resolved by final and binding arbitration before an arbitrator designated by,
and mutually acceptable to, the Company and the Employee. In the event that the
parties cannot agree to the appointment of a mutually acceptable arbitrator, the
subject dispute shall be resolved by final and binding arbitration before one or
more arbitrators designated by the American Arbitration Association in New York,
New York, unless mutually
- 11 -
<PAGE>
agreed to otherwise. The award of any of such arbitrator(s) may be enforced in
any court of competent jurisdiction.
8. Assignment.
(a) This Agreement is intended for the sole and
exclusive benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, successors and permitted assigns, and
no other person or entity shall have any right to rely on this Agreement or to
claim or derive any benefit herefrom absent the express written consent of the
party to be charged with such reliance or benefit.
(b) The Employee may not assign or otherwise transfer
any of his obligations or duties hereunder to any other person, firm or
corporation, it being understood and agreed that this Agreement is intended to
be for the personal services of the Employee only and of no other person.
(c) The Company shall have the right, at any time and
from time to time, to cause any payments required hereunder to be made by any
subsidiary of the Company. Furthermore, the Company may assign this Agreement to
any successor-in-interest who may acquire, whether by direct purchase, sale of
securities, merger or consolidation, the assets, business or properties of the
Company; provided, that no such assignment shall relieve the Company of its
duties and obligations to the Employee hereunder, without the prior written
consent of the Employee.
- 12 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the date first set forth above.
COMMODORE SEPARATION TECHNOLOGIES, INC.
By: /s/ Edwin L. Harper
--------------------------------------------------
Edwin L. Harper
Chairman of the Board and Chief Executive Officer
/s/ Kenneth J. Houle
--------------------------------------------------
Kenneth J. Houle
- 13 -
<PAGE>
LOGO
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 January 27, 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
January 27, 1997
<PAGE>
EXHIBIT 23.7
CONSENT
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in Amendment No. 4 (and any and all
amendments thereafter) to the Registration Statement on Form S-1 of Commodore
Separation Technologies, Inc. (the "Company") as a person about to become a
director of the Company.
Dated: January 24, 1997
/s/ Kenneth L. Adelman
-----------------------------------
Kenneth L. Adelman, Ph.D.
<PAGE>
EXHIBIT 23.8
CONSENT
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in Amendment No. 4 (and any and all
amendments thereafter) to the Registration Statement on Form S-1 of Commodore
Separation Technologies, Inc. (the "Company") as a person about to become a
director of the Company.
Dated: January 24, 1997
/s/ David L. Mitchell
-------------------------
David L. Mitchell
<PAGE>
EXHIBIT 23.9
CONSENT
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in Amendment No. 4 (and any and all
amendments thereafter) to the Registration Statement on Form S-1 of Commodore
Separation Technologies, Inc. (the "Company") as a person about to become a
director of the Company.
Dated: January 24, 1997
/s/ William R. Toller
--------------------------
William R. Toller
